Press Release No. 07/224

Press Release: IMF Executive Board Approves US$111.3 Million PRGF Arrangement for Nicaragua

October 5, 2007

The Executive Board of the International Monetary Fund (IMF) today approved a three-year, SDR 71.5 million (about US$111.3 million) arrangement under the Poverty Reduction and Growth Facility (PRGF) for Nicaragua in support of the government's economic program. The decision allows an immediate disbursement to Nicaragua of an amount equivalent to SDR 11.9 million (about US$18.5 million).

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 and 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.

Following the Executive Board discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chairman, said:

"Nicaragua has made important strides over the last years. Macroeconomic stability has been strengthened, vulnerabilities reduced, and poverty-reduction spending expanded, while important progress has been made with structural reforms. With support from the IMF and the international community, including debt relief, past policies have facilitated growth and some improvement in social indicators.

"The new government's program aims to consolidate these gains, to move forward to reduce poverty in a more decisive way and achieve the Millennium Development Goals. It creates additional fiscal space to increase social spending and investment in key sectors such as energy, water, education, and health. At the same time, public debt levels are expected to fall over the medium term, while key structural challenges will be addressed, most notably in the power sector, strengthening the transparency and governance of public sector institutions, as well as developing future options for social security reform.

"The authorities' program appropriately prioritizes a multi-pronged strategy for addressing these challenges. In the case of the electricity sector this includes increasing investment in the sector and reducing distribution losses, as well as improving the regulatory framework. While poverty spending is set to increase, the authorities also recognize the importance of, and have committed to, further improving the efficiency of government expenditure. The authorities are committed to better targeting of poverty-related spending, strengthened systems of budget control and investment planning, and accounting transparently for all development assistance. Social security reform that reestablishes the balance between contributions and benefits also remains a central challenge.

"The authorities recognize the importance of steadfast implementation of the program in the face of a more difficult external environment. This will fortify the program's anchoring role in supporting confidence. They are also committed to increasing private investment and intend to continue working on strengthening the business climate," Mr. Portugal said.

ANNEX

Recent Economic Developments

Economic conditions remain stable on the back of prudent policies. Growth has resumed, inflation has been contained and macro imbalances reduced since the 2000-01 financial crisis. The fiscal position has strengthened substantially, which in combination with debt relief granted under the enhanced Highly Indebted Poor Countries initiative and Multilateral Debt Relief Initiative, has resulted in lower debt levels and some reduction in the current account deficit. At the same time, the financial sector has strengthened and fiscal reforms have advanced.

Nevertheless, poverty levels are still high and vulnerabilities remain. Half of the population lives below the poverty-line, and the reduction in poverty has slowed in recent years following earlier successes. Public debt levels and the current account deficit are still high despite fiscal consolidation and debt relief. The economy remains highly dollarized and exposed to sudden reversals of investor sentiment and external shocks, most recently from higher oil prices and natural disasters.

Program Summary

The new government's economic program builds on earlier progress made in entrenching macroeconomic stability, while providing the fiscal space necessary to reduce poverty without compromising debt sustainability. In addition, the program seeks to boost growth by improving the returns on high rates of investment and bolstering governance through the strengthening of key fiscal and financial sector institutions.

The fiscal program envisages a gradual decline in public debt ratios over the medium term. A temporary fiscal expansion is planned for 2008 to accommodate urgent spending on priority social programs and infrastructure, particularly in the energy and water sectors. To ensure meeting the Millennium Development Goals, the authorities program aims to improve the targeting of social spending while increasing access to health, education, water and sanitation, food security, housing and training opportunities for the poorest. Progress toward meeting these objectives will be monitored under the program.

The monetary program is consistent with a gradual decline in inflation and a further accumulation of international reserves. The crawling peg regime will be maintained as the authorities view this exchange rate regime as having served the country well in anchoring expectations, while maintaining competitiveness. The conduct of monetary policy will be strengthened through measures aimed at improving the finances of the central bank, as well as its independence and accountability.

The structural reform program focuses on measures aimed at boosting growth and poverty reduction while reducing vulnerabilities. The first year of the program emphasizes energy policy measures to improve electricity service and reduce fiscal risks. The second year of the program will seek to further strengthen public financial management practices, while the final year would aim at the implementation of specific steps to address medium-term challenges, including the under-funded social security system. The reform agenda has been carefully sequenced, mindful of implementation and political constraints.