Nicaragua and the IMF
Press Release: IMF Completes Fourth Review of Nicaragua's PRGF-Supported Program, Completes Financing Assurances Review, and Grants Waivers
January 23, 2004
Country's Policy Intentions Documents
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Nicaragua—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding
Mr. Horst Köhler
1. We are attaching the Supplementary Memorandum of Economic and Financial Policies (SMEFP) that reviews economic developments and policy implementation through September 2003 under the PRGF arrangement approved in December 2002, and sets out specific objectives and targets for the period December 2003-June 2004. Based on the good track record and policies adopted, we request completion of the fourth review under the PRGF arrangement and the establishment of corresponding performance criteria (PCs) for end-June 2004. Moreover, Nicaragua has substantially met the conditions for reaching the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, including in a few areas where developments since the 2000 decision point have required modifications of some conditions. Therefore, we request that the Executive Boards of the Fund and the Bank approve reaching the completion point under the enhanced HIPC Initiative. We also request a waiver for the nonobservance of two PCs (paragraph 2 below).
2. Nicaragua's economic performance through September 2003 has been consistent with the program. Macroeconomic policies have been in line with the PRGF arrangement, and progress has been made on the structural agenda. However, the structural PC on concluding the asset recovery plan was completed by end-October, rather than by end-September, due to a brief delay in the completion of administrative procedures for transferring residual assets to the ministry of finance and collecting the sales proceeds. In addition, the continuous PC on the stock of arrears was missed by a small amount following a lawsuit attaching any payment on Nicaragua's indemnity bonds (BPI) made through Euroclear.
3. Extensive public consultations have been held on the National Development
Plan (NDP), including with civil society groups, business organizations,
local governments, and the international community. Taking into account
the comments we have received, we will incorporate the NDP's strategic
elements into an enhanced PRSP by mid-2004.
5. We are confident that the policies and measures set forth in the SMEFP are adequate to achieve the program's objectives under the PRGF arrangement. However, we stand ready to take, in consultation with the Fund, further measures that may be needed for the successful implementation of the program, and to ensure compliance with all required criteria necessary to reach the completion point under the HIPC Initiative by end-2003. To this end, we will continue consulting with the Fund on relevant economic and financial policies, and provide the Fund with the necessary data on a timely basis for monitoring purposes. Consistent with our intention to keep the public informed about our policies and objectives, the government will publish the SMEFP and will report on the progress of the program periodically.
6. We propose that the Fund carry out reviews under the program in March 2004, June 2004, and September 2004 and based on the observance, respectively, of end-December 2003, end-March 2004, and end-June 2004 quantitative and structural performance criteria established in Tables 1 and 2 of the attached memorandum.
7. We assure you that the government of Nicaragua remains committed to the implementation of the program, and reaching the HIPC completion point by end-2003.
1. We have made continued progress in implementing the strategy embodied in the Poverty Reduction Strategy Paper (PRSP), as updated in the 2003 PRSP progress report, and the program supported by the Poverty Reduction and Growth Facility (PRGF). This memorandum supplements the Memorandum of Economic and Financial Policies of November 19, 2002, and the associated supplements of June 3, 2003 and October 2, 2003, and outlines the key next steps envisaged in implementing our program. Moreover, Nicaragua has substantially met the conditions for reaching the completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative, including a few areas where developments since the 2000 decision point have required modifications of some conditions. Therefore, we request that the Executive Boards of the Fund and the Bank approve reaching the completion point under the enhanced HIPC Initiative.
2. Economic performance has been broadly in line with the program. Real GDP growth is projected to increase to 2.3 percent in 2003 and 3.7 percent in 2004. Twelve-month inflation through November was about 6 percent (in line with the program target of 6 percent for end-2003). Net international reserves surpassed the September performance criterion (PC) by US$39 million (about 1 percent of GDP). The deficit of the combined public sector (CPS) (after grants) narrowed to 2.3 percent of annual GDP in the first nine months of 2003, below the path envisaged in the program. In January-September 2003, poverty-reducing spending reached 7.7 percent of GDP, higher than the program target of 7.4 percent of GDP.
3. Macroeconomic policies have been in line with the PRGF arrangement, and progress has been made on the structural agenda. However, the structural PC on concluding the asset recovery plan was completed by end-October, rather than by end-September, due to a brief delay in the completion of administrative procedures for transferring residual assets to the ministry of finance and collecting the sales proceeds. In addition, the continuous PC on the stock of arrears was missed by a small amount following a lawsuit attaching any payment on Nicaragua's indemnity bonds (BPI) made through Euroclear.
4. Our key economic objectives in the macroeconomic framework for 2003-04 are the following:
Key Macroeconomic Objectives
5. We remain fully committed to the medium-term fiscal strategy outlined in the program supported by the PRGF arrangement. For 2004, our fiscal program targets a CPS deficit (after grants) of 3.2 percent of GDP. Including the revenue losses associated with the pension reform (estimated at 1.2 percent of GDP on an annual basis), the deficit target is about 3.8 percent of GDP. CPS savings are projected to rise from 0.2 percent of GDP in 2003 to 2.9 percent of GDP in 2004, about 2.0 percentage points of which reflects lower interest payments due to HIPC debt relief.
6. The 2004 budget approved by the assembly in December is in line with the PRGF-supported program and the spending priorities embodied in the PRSP. The budget is designed to support economic growth and reduce poverty, while preserving the program goals of low inflation, a strengthened external position, and attaining fiscal sustainability. It will achieve these aims through improvements in the efficiency of public expenditures and strengthened revenue collections (including through improved tax administration). Primary current expenditures at 15.2 percent of GDP will remain at about the same level as in 2003. Poverty-reducing expenditures will rise to 11.4 percent of GDP (from 11 percent of GDP in 2003), and public investment mainly in infrastructure and human capital will increase to 9.7 percent (from 9.0 percent in 2003). If foreign financing of capital spending is lower than expected, as shown in the table below, we will postpone capital spending by an equivalent amount, while making every effort to protect poverty-reducing spending.
7. A range of other fiscal reforms are underway to support medium-term fiscal consolidation. These include:
8. We will continue improving the efficiency of public enterprises. The water and sewerage company (ENACAL) is strengthening its management to improve collections of overdue accounts. A draft law sent to the assembly in October 2003 will provide the legal backing needed for this effort. In addition, more water meters are being purchased, meter-reading operations will be rationalized, and tariffs will be reviewed in mid-2004. With assistance from the IDB, we intend to develop a medium-term strategy for improving the efficiency of operations. We expect these efforts to result in higher operating surpluses in the coming years. With respect to the power sector, we are developing a plan for reforming this sector, further improving financial and operational efficiency, making government subsidies more transparent, and improving the legal framework.
9. The preliminary recommendations of the high-level public expenditure commission have been included in the 2004 budget. The recommendations focus on steps to improve the efficiency of current expenditures, estimate the recurrent costs of investment projects, increase coordination with donors, and strengthen the tracking of poverty-spending (in line with World Bank advice).
10. Monetary policy will remain guided by the objectives of maintaining low inflation and reducing domestic debt, while strengthening the central bank reserve position with a further buildup of US$20 million of NIR, plus a repayment of BCN domestic debt of US$46 million in 2004. In addition, the revised program targets a reduction of US$40 million in central government debt. We expect that the forthcoming assessment under the Financial Sector Assessment Program (FSAP) will contribute to strengthened management of monetary policy.
11. Exchange rate policy will continue to be guided by the crawling peg arrangement. The annual rate of crawl vis-à-vis the U.S. dollar will be reduced to 5 percent in 2004 (from 6 percent in 2003), in line with the end-period inflation target of 5 percent.
12. We continue to work on strengthening the financial sector. In this context:
13. Extensive public consultations have been held on the National Development Plan (NDP), including with civil society groups, business organizations, local governments, and the international community. Taking into account the comments, we will incorporate the NDP's strategic elements into an enhanced PRSP by mid 2004.
14. We have substantially met the trigger conditions for reaching the completion point under the enhanced HIPC Initiative, except for the sale of the state-owned power companies' (ENEL) remaining electricity-generating plants. However, regarding Hidrogesa, we have determined, in close consultation with the IDB, that privatization of this firm is no longer advisable, since it could result in an excessive concentration of market power in one firm. Moreover, the competitiveness of the electricity sector has been rising as a result of increased private sector participation in generation and distribution. To achieve the original goal of improving overall efficiency in the electricity sector, we are discussing with the IDB a comprehensive regulatory reform of the sector. The sale of the remaining government shares in the telecommunications company (ENITEL) has been delayed due to valuation problems, but we received a viable offer on December 17, and expect to complete the process by mid-January 2004.
15. We continue to pursue other important structural reforms envisaged in the program. The executive has met with the other branches of government to discuss ways of strengthening the judicial system. The government presented its proposal for judicial reform in September 2003 and initiated national consultations. Upon the completion of this process, we intend to present an action plan by June 2004 that will be based on the broadest possible political consensus. We also have made progress in improving governance and combating corruption. The assembly approved a new civil service law in November (taking into account the most recent round of World Bank comments). In addition, with support of the World Bank and the IDB, we are strengthening public procurement practices and the comptroller's office.
16. We have implemented all of the recommendations of the Fund's 2001 safeguards assessment, with one exception. The exception relates to disclosure of the differences between International Accounting Standards and the current financial reporting practices of the BCN. We expect to disclose the differences after the comptroller's office approves the 2002 financial statement. In November 2003, the Board of the BCN approved a resolution to appoint external auditors for three-year terms. We have also agreed on an action plan for implementation of the second assessment, including the adoption of international accounting practices by the BCN.
17. Implementation of the second annual program supported by the PRGF arrangement will continue to be monitored through quarterly reviews, performance criteria, and benchmarks. Tables 1 and 2 present the quantitative PCs for end-March 2004 and end-June 2004, as well as indicative targets for September-December 2004. We continue to be firmly committed to the success of the program and stand ready to implement additional measures, as needed, to achieve its objectives.
1 The Fund and the IDB are providing technical assistance to these agencies.
2 The tax code describes the rights and obligations of taxpayers and tax officials, including sanctions for tax evasion.
1. This technical memorandum incorporates all previous understandings between the Nicaraguan authorities and the Fund relating to the monitoring of the Poverty Reduction and Growth Facility (PRGF) arrangement into one document. No substantive changes have been made relative to previous understandings.
2. For 2004, the quantitative performance criteria and indicative targets will be defined as cumulative flows from January 2004.
3. Coverage of fiscal accounts
(a) Nonfinancial public sector (NFPS) includes the central government, the Nicaraguan social security institute (INSS), the municipality of Managua, and two public sector enterprises: ENTRESA (electricity transmission) and ENACAL (water and sewage company).1
(b) Savings of the combined public sector (CPS) includes the savings of the NFPS and the operating result (quasi-fiscal balance) of the Central Bank of Nicaragua (BCN).
(c) The deficit of the CPS includes the deficit of the NFPS and the operating result of the BCN.
4. Interest on the domestic debt includes cash interest, except for the cost of the zero-coupon CENIs issued for bank resolution, which are shown on an accrual basis for 2003 (Table 1). Beginning in 2004, all interest payments will be shown on a cash basis, since the zero-coupon CENIs have either been repaid or replaced with coupon bearing BCN letras.2 For 2004 and beyond, the targets for savings and net domestic financing (NDF) of the CPS will be based entirely on cash interest payments. For 2004, this requires that the third review program targets be modified by the difference between accrued interest in the program and cash interest in the revised program (Table 2, column D)—to the extent that this difference is negative (positive), savings are adjusted upward (downward) and net domestic financing is adjusted downward (upward). Net repayment of the sum of the domestic debt of the central bank and central government will be increased (decreased) to the extent that cash interest payments in the revised program are lower (higher) than in the original program (see Table 2, column E). Tables 1 and 2 below are for illustrative purposes only; program performance will be evaluated using actual data.
5. Interest on the external debt presents cash payments and interim HIPC assistance. After reaching the HIPC completion point, and termination of interim debt relief, only cash payments will be shown.
6. Total primary expenditure of the central government is defined as the sum of wages and salaries, other goods and services, current and capital transfers, capital expenditure, and net lending.
7. Savings of the CPS is defined as the difference between current revenue and current expenditure of the nonfinancial public sector, plus the operating result of the BCN.
8. Adjusters: The floor of the CPS savings will be adjusted: (a) upward (unlimited) in the event of additional revenues associated with delays in the implementation of the privately managed pension funds, assumed to take place on July 1, 2004; (b) downward in the event of lower revenues because implementation of the privately managed pension funds occurs before July 2004; and (c) downward in the event of higher cash due interest payments in case of delays in the termination of interim HIPC arrangements.
9. Net domestic financing (NDF) of the CPS. For 2003, NDF of the CPS comprises the operating result of the BCN, the adjustment of the cost of the bank resolution CENIs from cash to accrual, and the change from their respective stocks at the end of the previous year of the sum of (a) the outstanding stock of debt of the NFPS to the domestic financial system (BCN, commercial banks, and the Fondo Nacional de Inversiones (FNI)) net of deposits (including arrears that correspond to obligations considered eligible for refinancing or rescheduling, or other debt reduction mechanisms) with the foreign currency part of the net debt to the banking system converted into córdobas at the program exchange rate (of C$15.1 per U.S. dollar for 2003 and C$15.9 per U.S. dollar for 2004); (b) the outstanding stock of domestically-issued public sector debt held by the private residents and nonresidents with the foreign currency part converted into córdobas at the program exchange rate (of C$15.1 per U.S. dollar for 2003 and C$15.9 per U.S. dollar for 2004); (c) the outstanding stock of suppliers' credits; and (d) the outstanding stock of floating debt. For 2004 onward, the same definition applies. However, since all interest is on a cash basis, the adjustment described in the first sentence of this paragraph is not applied.
10. Adjusters: The ceiling on the cumulative NDF of the CPS will be adjusted: (a) upward by up to US$30 million, US$35 million, and US$15 million in the last quarter of 2003, the first quarter of 2004, and the second quarter of 2004, respectively, in the event of lower disbursements of balance of payments support and/or privatization receipts than the amounts shown in Table 4; (b) downward (unlimited) in the event of higher disbursements of balance of payments support and/or privatization receipts than the amounts shown in Table 4; (c) downward (unlimited) in the event of additional revenues associated with delays in the implementation of the privately managed pension funds; and (d) upward in the event of lower revenues because implementation of the privately managed pension funds occurs before July 2004.
11. Deficit of the CPS (before grants). Defined as the savings of the combined public sector (as given in paragraph 7) plus capital revenue less capital expenditure and net lending of the nonfinancial public sector.
12. Reporting: The BCN will send to the IMF monthly electronic information on the detailed operations of the CPS. The monthly information will be provided no later than six weeks after the end of each month.
13. Net international reserves (NIR) of the BCN. For program purposes, NIR is defined as the difference between the (a) gross foreign assets of the BCN that are readily available; and (b) short-term reserve liabilities of the BCN (including purchases and credits from the IMF), plus arrears on foreign debt service, plus foreign currency reserve requirement deposits of commercial banks at the BCN.
14. Readily available foreign assets of the BCN exclude those that are pledged or otherwise encumbered, including, but not limited to, reserve assets used as collateral or guarantee for a third-party external liability.
15. Net repayment of the domestic debt of the BCN and the central government (CG).3 For program purposes, it is defined as the difference between new placements and redemptions of: (i) the BCN CENIs, TEIs, TELs, BOMEX, standardized letras and any other BCN paper held by institutions outside the CG; and (ii) the CG's treasury bonds, BPIs, and any other obligations owed to institutions or individuals outside the CG, except the BCN. It also includes all domestically placed paper held by residents and nonresidents. This amount will be converted into U.S. dollars at the program exchange rates (of C$15.1 per U.S. dollar for 2003 and C$15.9 per U.S. dollar for 2004).
16. Adjusters: The net repayment of the domestic debt of the BCN and the CG will be adjusted: (a) downward by up to US$30 million, US$35 million, and US$15 million in the last quarter of 2003, the first quarter of 2004, and the second quarter of 2004, respectively, in the event of lower disbursements of balance of payments support and/or privatization receipts than the amounts shown in Table 4; (b) upward (unlimited) in the event of higher disbursements of balance of payments support and/or privatization receipts than the amounts shown in Table 4; and (c) downward to the extent that the NIR target is exceeded.
17. Net domestic assets (NDA) of the BCN are defined as the difference between the change in the stock of currency issued and net international reserves, valued at the program exchange rate.
18. Reporting: The BCN will send to the IMF (a) daily electronic mail containing information of daily accounts of the BCN (stocks and flows) within two days after the end of the last working day; (b) monthly electronic mail with information of monthly accounts of the BCN, commercial banks and FNI (stocks and flows), within four weeks after the end of the month; and (c) quarterly accounts of the BCN, commercial banks, and FNI (stocks and flows) within five weeks after the end of the quarter.
19. The procedures to be established in the new banking supervision inspection manual will be complemented by inspection guidelines for specific areas of banking supervision in line with recommendations of the August 2003 MFD mission. The extent to which supervisory action, penalties, and regulatory actions for noncompliance with regulatory norms are enforced will be determined by the peer review of banking supervision to be conducted in the context of the FSAP mission.
20. The changes to the legal framework, which are in line with Basle Core Principles for effective banking supervision, will (a) introduce legal protection for supervisors (Principle 1); (b) establish a mechanism to review and reject any proposals to transfer significant ownership in existing banks to other parties (Principle 4); (c) grant supervisors the ability to do supervision on a consolidated basis (Principle 20); and, (d) grant supervisors adequate supervisory measures to bring about timely corrective action when, among other reasons, banks fail to meet prudential requirements (Principle 22). In addition, the revised legal framework will eliminate the Superintendency's restrictions on sharing information with similar institutions in other countries; and remove secrecy on bank assets. Finally, new legislation will be prepared to set up a banking resolution framework that would provide adequate incentives and safeguards for an effective and transparent resolution mechanism.
21. Strengthen the tax office's large taxpayers unit will be understood to mean update the database on large taxpayers and reduce the percentage of nonfilers to 3 percent of total persons required to pay taxes.
22. To address the vulnerabilities identified during the stage one safeguards assessment of the BCN and the updated review completed in August 2003 by the Fund's Finance Department (FIN), we propose the following timetable:
To adopt the IAS, the BCN will establish a task force by end-2003 to ensure adequate training for the staff of the accounting department and identify the necessary changes to the central bank law.
External Sector Targets
23. Borrowing on nonconcessional terms. For the purpose of the ceiling on the contracting of nonconcessional external debt of the NFPS and the BCN, external debt limits apply to the contracting or guaranteeing of nonconcessional external debt by the public sector4 and the BCN or any other agencies on their behalf. This limit applies not only to debt as defined in Point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted by the IMF on August 24, 2000 (see Appendix II), but also to commitments contracted or guaranteed for which value has not been received. External debt includes all current liabilities with a nonresident party, which are created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, at some future point(s) in time to discharge the principal and/or interest liabilities under the contract. This definition includes loans, suppliers' credits, and leases (operational and financial leases). The ceiling on contracting of nonconcessional external debt applies both to medium-and long-term debt defined as debt with maturity of one year or longer, as well as to short-term debt, defined as debt with maturity of less than one year. For program purposes, BCN instruments placed in the domestic market held by nonresidents, will be excluded from the ceiling on the contracting of nonconcessional external debt and included in the net repayment of the domestic debt of the BCN target.
24. Excluded from the ceiling on debt with a maturity of less than one year are import-related credits and BCN reserve liabilities. Borrowing from the Fund is excluded from the ceiling (maturities up to one year).
25. Concessionality will be based on a currency-specific discount rate based on the 10-year average of the OECD's commercial interest reference rates (CIRR) for loans or leases with maturities greater than 15 years and on the six-month average CIRR for loans or leases maturing in less than 15 years. Maturity will be determined on the basis of the original loan contract. Under this definition of concessionality, only debt with a grant element equivalent to 35 percent or more will be excluded from the debt limits.
26. New loan reporting: A loan-by-loan accounting of all new loans contracted or guaranteed by the public sector, including detailed information on the amounts, currencies, and terms and conditions, as well as relevant supporting materials, will be transmitted on a quarterly basis within four weeks of the end of each quarter by the BCN.
27. External payments arrears. External payments arrears are defined as overdue debt service obligations arising from external debt contracted or guaranteed by the public sector, except on external debt subject to rescheduling or restructuring. For purposes of this performance criterion, liabilities arising from the Bonds for the Payment of Indemnification ("Indemnity Bonds") are excluded.
28. External arrears reporting: The accounting of nonreschedulable external arrears by creditor (if any), with detailed explanations, will be transmitted by the BCN on a monthly basis within four weeks of the end of each month.
29. Domestic arrears reporting: The accounting of domestic arrears by creditor (if any), with detailed explanations, will be transmitted by the BCN on a monthly basis within four weeks of the end of each month.
30. Privatization receipts are defined as payments received by the government in connection with the sale of state assets net of any fee. The programmed amounts consistent with this definition are showing in Table 4. Privatization revenues in foreign exchange are those recorded as such in the balance of payments.
31. Balance of payments support. Official external untied financial assistance is defined as loans and grants provided by foreign official entities that are received by the government for unrestricted budgetary use. The amounts assumed in the program consistent with this definition are shown in Table 4 attached.
32. Accounting of HIPC assistance. Interim HIPC assistance from multilateral creditors is identified as grants and shown in the public sector operations under grant revenues, and in the balance of payments table under current transfers. Interim HIPC debt relief from bilateral creditors is presented as exceptional financing in the public sector and in the balance of payments tables. Following completion point, only cash payments to multilateral and bilateral creditors are shown.
1 Starting in 2005, all operations of the electricity holding company (ENEL), the telecommunications regulatory agency (TELCOR), and the port company (ENAP) will be included in the program. During 2004, they will be included on an indicative basis. As complete and timely information becomes available for other public sector entities, the government intends to expand the definition of the public sector.
2 The BCN and the central government are taking steps to improve their debt statistics in order to be able to calculate all interest on an accrual basis, as recommended by the GFS manual.
3 This definition applies starting in 2004. For 2003, the definition of net repayment of the domestic debt of the BCN remains as stated in EBS/02/194.
4 As regards external sector targets, the public sector comprises the nonfinancial public sector as defined under fiscal targets, as well as all other public sector entities and enterprises including ENITEL (as long as the government stake is at least 50 percent), the airport, the lottery, CORNAP, and ENAP.