Press Release No. 04/189

Press Release: IMF Executive Board Completes Fifth and Sixth Reviews Under Nicaragua's PRGF Arrangement, Approves Disbursement Amounting to US$20 Million

September 8, 2004

Nicaragua's three-year, SDR 97.5 million (about US$142 million) PRGF arrangement was approved in principle on December 4, 2002 (see Press Release No. 02/53). Completion of the latest reviews will bring total disbursements under the arrangement to SDR 55.72 million (about US$81 million).

After the Executive Board's discussion of Nicaragua, Mr. Agustín Carstens, Deputy Managing Director and Acting Chair, issued the following statement:

"Nicaragua's performance under the PRGF arrangement continues to be favorable. Implementation of prudent macroeconomic policies and structural reforms has contributed to a strengthening economic recovery, financial stability, and a much improved external position. Based on this solid track record, Nicaragua's creditors have provided debt relief in the context of the enhanced HIPC Initiative. Notwithstanding these achievements, Nicaragua continues to face important economic vulnerabilities, in particular from high public debt and widespread financial dollarization. The favorable economic environment provides an excellent opportunity to move ahead forcefully with the reform agenda and further solidify the important gains achieved under the program.

"The authorities have continued to strengthen their poverty-reducing and growth-enhancing policy strategies, consistent with their PRSP and the PRGF-supported program. The National Development Plan, which sets forth the authorities' economic strategy, emphasizes the private sector as the main engine of growth, supported by targeted public investment, a strengthened institutional framework, and improved governance.

"Despite a difficult political environment, the authorities have kept the fiscal program broadly on track. Tax reform, strengthened tax administration, spending restraint, and a more focused public investment program have substantially improved the public finances. Nonetheless, important challenges remain: the public debt is high, and important fiscal reforms are still to be implemented. In particular, the ongoing decentralization process must ensure that revenue transfers to municipalities are matched with the devolution of spending responsibilities. The authorities are reassessing their pension reform strategy, in close consultation with the World Bank, to ensure its consistency with the medium-term fiscal program. The recently approved civil service reform is being implemented carefully to ensure sustained fiscal consolidation.

"The authorities are moving forward with reforms to strengthen the financial sector. They participated in the IMF-World Bank Financial Sector Assessment Program (FSAP), and are already incorporating many of the FSAP recommendations into their program. Important priorities in this regard are the ongoing efforts to strengthen the legal protection of bank supervisors for good faith actions taken in the course of their official duties and to amend financial sector laws to bring them in line with international best practices.

"Overall, performance under the PRGF-supported program has been favorable. The authorities are to be commended for their strong ownership of the program, which has contributed to a broader understanding in Nicaragua that a stable macroeconomic framework, structural reforms, and better governance are essential to achieving strong and lasting growth and poverty alleviation. Their efforts to fight corruption and strengthen public sector institutions deserve the strong support of the international community. In order to maintain this favorable forward momentum, the authorities need to make every effort to further strengthen the domestic consensus on the prudent policies and structural reforms needed to sustain growth and reduce poverty," Mr. Castens said.

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 Poverty Reduction Strategy Paper (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 5½-year grace period on principal payments.