Press Release No. 02/53

Press Release: IMF Approves In Principle a Three-Year, US$129 Million PRGF and US$2.5 Million in Interim HIPC Assistance for Nicaragua

December 4, 2002

The International Monetary Fund (IMF) today approved in principle a three-year arrangement for Nicaragua under the Poverty Reduction and Growth Facility (PRGF) in the amount of SDR 97.50 million (about US$129 million) to support the government's 2002-05 economic program. The decision entitles Nicaragua to the release of SDR 6.97 million (about US$9 million). The IMF Board's decision will become effective after the World Bank Executive Board's review of Nicaragua's Poverty Reduction Strategy Paper (PRSP) progress report, which is scheduled for December 10, 2002.

The PRGF is the IMF's concessional facility for low-income countries. It is intended that PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a PRSP. This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 ½-year grace period on principal payments.

Nicaragua was also granted in principle SDR 1.88 million (about US$2.5 million) in additional interim assistance under the Heavily Indebted Poor Countries (HIPC) Initiative. The additional interim assistance will also become effective after the World Bank Board's review of Nicaragua. Nicaragua reached the decision point under the HIPC Initiative in December 2000 and is expected to reach the completion point by the end of 2003.

In commenting on the Executive Board's discussion, Eduardo Aninat, Deputy Managing Director and Acting Chairman of the Board, said:

"Following a sharp deterioration of economic performance in recent years, the new government of Nicaragua has embarked on a three-year program, to be supported by a new PRGF arrangement, that addresses key economic vulnerabilities and barriers to growth and poverty reduction. The authorities have already demonstrated a strong commitment to appropriate policies through the important measures they have put in place, and their ownership of the program augurs well for its implementation. Given the considerable challenges that lie ahead, however, they need to work toward further broadening program ownership across the political spectrum and be forceful and vigilant in implementing their policy agenda.

"Key components of the program include the targeted reduction of the fiscal deficit while protecting poverty-related outlays, stepped-up bank supervision and tight enforcement of prudential rules, and the central bank asset recovery plan. The structural reform agenda focuses on removing constraints to growth, including through privatization, increasing budget transparency, public sector restructuring, judicial system reform, and further trade liberalization and regional integration. The government's strong anti-corruption agenda and its efforts to enhance governance and accountability in the public and private sectors is a key overarching goal of the strategy. Crucial priorities for the immediate future include early approval of the 2003 budget in line with the program, a second round of tax reform including substantial reduction of zero-rated VAT items, strict enforcement of prudential rules, and full implementation of the asset recovery plan.

"The government is to be commended for completing the PRSP Annual Progress Report, which has been prepared in a participatory process including civil society and the donor community, and provides a sound basis for Fund concessional assistance. While progress has been made in implementing the PRSP, the sizable deviations from the macroeconomic framework in 2001 did not allow the government to fully implement its poverty reduction strategy. Thus, a satisfactory track record of implementation of the PRSP still needs to be established for Nicaragua to reach the HIPC completion point.

"The Executive Board's approval of the authorities' request for a new three-year PRGF arrangement as well as for interim debt relief under the enhanced HIPC Initiative will become effective following the World Bank's endorsement of the PRSP progress report, which is expected shortly," Mr. Aninat stated.

Program Summary

Nicaragua's economic growth decelerated in the last three years from over 7 percent in 1999 to an estimated 1 percent in 2002, due to a marked weakening of the fiscal policies, a banking crisis, and a deterioration in the external environment.

The fiscal imbalances that emerged in 2000-01, as a consequence of increases in spending and weakening in tax revenues, were addressed by the government that took office in January 2002. Government spending was reined in through administrative means and a reduction in the budget. As a result, primary spending during the first three quarters of the year was contained at 26 percent of GDP, down from 28 percent during the same period of 2001. Nicaragua's assembly also approved the first round of a tax reform package, and, to reduce financial sector vulnerabilities, the authorities are about to implement a recovery plan for assets of failed banks. For 2002, real GDP growth is projected at 1 percent, followed by a gradual recovery during 2003 to 3 percent. Growth in 2003 is expected to be driven mainly by construction, agriculture and livestock activities.

The objective of the approved PRGF-supported program for 2002-05 is to promote sustained growth and poverty reduction, in an environment of low inflation and fiscal sustainability. The authorities' strategy for the next three years is to combine deficit reduction with higher and more efficient poverty-related spending.

During the first year of the program, Nicaragua will focus on making further progress in fiscal consolidation, improving the reserve position of the central bank and strengthening the financial sector. As part of the fiscal effort, the authorities intend to reduce primary spending, while protecting poverty-reducing outlays, and an increase in tax revenues. The public sector deficit is expected to be reduced to 6.3 percent of GDP in 2003, down from 14 percent in 2001. The program also targets government revenues to rise by 1¾ percent of GDP in 2003, reflecting the effects of the tax reform initiated in 2002 and the partial effects of the second stage of the tax reform to be implemented in 2003.

The monetary policy will aim to strengthen the position of the central bank in a low-inflation context. The authorities have noted that fiscal adjustment and satisfactory implementation of the asset recovery plan are critical to achieving this goal, and intend to sign shortly a contract with the selected firm to carry out the recoveries.

The external current account deficit is expected to be reduced from 28 percent of GDP in 2002 to 24 percent in 2003. This improvement is mainly due to higher exports as a result of an expected recovery in coffee and sugar prices and production, as well as better prospects for seafood exports.

Nicaragua joined the IMF on March 14, 1946; its quota is SDR 130 million (about US$172 million). Its outstanding use of IMF financing currently totals SDR 123 million (about US$163 million).