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Press Release No. 99/44
September 16, 1999
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Approves Second Annual ESAF Arrangement for Nicaragua

The International Monetary Fund (IMF) approved the second annual arrangement for Nicaragua under the Enhanced Structural Adjustment Facility (ESAF),1 in an amount equivalent to SDR 33.6 million (about US$46.1 million), to support the country's economic program. The
Executive Board of the IMF also had a preliminary discussion of the HIPC 2 document for Nicaragua and considered the country eligible, in principle, for assistance under the Iniciative. Nicaragua's three-year ESAF arrangement was approved on March 18, 1998 (see Press Release 98/7), in the amount of SDR 100.9 million (about US$138.3 million), and in February 1999, was augmented by SDR 48 million (about US$65.8 million).

In commenting on the Executive Board ESAF-related discussion on Nicaragua, Stanley Fischer, First Deputy Manager Director of the IMF, said:

"Executive Directors expressed their satisfaction with Nicaragua's macroeconomic, structural, and social policies in 1998 and thus far in 1999, which were broadly in line with the objectives of the ESAF-supported program. Despite the adverse impact of Hurricane Mitch in late 1998, economic performance had strengthened in 1999, with more rapid GDP growth, a decline in inflation, an increase in net international reserves, and a further drop in unemployment.

"Directors endorsed the authorities' new three-year program for 1999 -2001. To enhance the basis for sustained high quality growth, the program aims at further fiscal consolidation, and places renewed emphasis on structural reforms and improved governance. Directors supported the fiscal objectives of mobilizing domestic and external resources to meet priority spending needs while improving the overall public sector balance on a durable basis. They stressed that the success of the program would depend heavily on increasing public revenue and shifting spending priorities from unproductive areas to the social sector.

"Directors endorsed the authorities' strategy for poverty alleviation and social development which focused on reforms of the public health and education systems, the strengthening of the social safety net, and the promotion of rural development. Reflecting additional international aid in the wake of Hurricane Mitch and donor support for the Supplementary Social Fund, total social expenditures are expected to rise to over 15 percent of GDP during the next two years.

"Directors welcomed the authorities' intention to give renewed emphasis to structural reforms, including the privatization program in the telecommunications and electricity sectors, as well as the reforms of the financial and social security systems. They strongly endorsed the authorities' intention to improve governance, through greater transparency in the management of public sector accounts, the accelerated resolution of outstanding property claims, the strengthening of an independent judiciary, stronger local government, and the enhanced participation of civil society," Fischer said.

ANNEX

Program Summary

Over the past several years, Nicaragua has made substantial progress toward macroeconomic stabilization, external viability, and the restoration of a market-based economy. From 1994 to 1998, economic growth averaged 4 1/2% a year, private sector investment expanded markedly, inflation remained near single digits, and the unemployment rate declined from about 18% to 13%. Notwithstanding improvements in the social conditions, poverty remained widespread, however, in a fragile macroeconomic context where the external position is weak.

In 1998, under the ESAF-supported program, the fiscal position improved more than envisaged, credit policy was tightened, and progress was made in reforming the financial system, streamlining the public sector, and setting the legal framework for the privatization of public enterprises. In October 1998, however, hurricane Mitch caused significant damage to the country, displacing families and destroying infrastructure and agricultural production.

The government's medium-term strategy for the remainder of 1999 and 2000-01 attaches priority to the process of reconstruction and expansion of public spending in the social areas. The program aims at further progress toward sustainability of the public finances and the external sector, and at strengthening the process of structural reform and governance, thereby enhancing the basis for sustained growth and improvement in social conditions. The macroeconomic objectives of the program include limiting the 12-month inflation rate to 7% by end-2001; raising GDP growth to 6.5% in 2000-01; and strengthening the net international reserves position.

To these ends, the fiscal program seeks to mobilize domestic and external resources toward priority spending sectors while improving the public finances on a sustained basis. The combined public sector deficit (before grants) is to be limited to 13.6% of GDP in 1999, and to decline to 10.2% of GDP in 2000, and to 8.2% of GDP in 2001, aiming toward fiscal consolidation. Achievement of the fiscal targets is based on expenditure restraint and the strengthening of tax administration. The monetary program is based on an increase in currency in line with nominal GDP growth.

During 1999-01, the government's structural and social policies agenda contemplates the consolidation of the reforms of the financial and public sectors, while a series of "second generation reforms" are introduced in the areas of social security and governance. A major reform of the social security system is planned with the objective of strengthening the financial position of the existing pension system and introducing a fully funded system of individual, privately managed capitalized accounts.

The main elements of social policy are the reforms of the health and education system, the strengthening of the social safety net, and the promotion of rural development. In the coming months, the government will evaluate its social and poverty reduction programs in light of the results of the recently completed Living Standards Measurement Survey for Nicaragua conducted with support from the World Bank. A revised social program, to be completed in the first quarter of 2000, will include an assessment of the appropriate level of social expenditures in 2000-01, taking account of the possible assistance under the HIPC Initiative.

Nicaragua joined the IMF on March 14, 1946; its quota3 is SDR 130 million (about US$178.2 million). Its outstanding use of IMF financing currently totals SDR 101.7 million (about US$139.4 million).


Nicaragua: Selected Economic and Financial Indicators

1994-96

1997

1998

1999

2000

2001

Average

Actual

Prog.

Actual

Proj. 1/

New Prog.

New Prog.

(Annual percentage change, unless otherwise stated)

National income, prices, and unemployment

GDP at constant prices

4.1

5.1

4.8

4.0

6.0

6.3

6.5

6.5

Consumer prices (end-of-period)

11.9

7.3

8.0

18.5

12-14

10.0

8.0

7.0

Consumer prices (period average)

10.1

9.2

10.1

13.0

16.9

13.9

10.1

7.5

Unemployment rate (percent)

16.7

14.3

...

13.2

10.5

9.0

8.0

External sector

Exports, f.o.b.

36.1

5.0

16.8

-18.5

-2.5

-3.1

10.0

11.0

Export volume

22.2

4.3

17.3

-19.6

0.7

6.2

8.2

7.7

Imports, f.o.b.

16.2

17.6

9.9

0.9

8.4

12.4

9.0

7.5

Import volume

12.4

24.7

8.4

8.6

6.7

7.4

6.7

6.5

Terms of trade (deterioration -)

8.9

6.8

-1.8

7.1

-4.7

-11.7

-0.5

2.0

Nominal effective exchange rate end-o-period (depreciation -)

-4.3

-3.7

...

-6.8

...

...

...

...

Real effective exchange rate end-of-period
(depreciation -)

-5.2

1.7

...

2.5

...

...

...

...

Money and credit

Net domestic assets of the central bank 2/

25.6

-36.8

-102.0

27.4

-94.6

-94.3

-28.3

-12.4

Net credit to nonfinancial public sector (net) 2/

45.6

132.3

-194.6

-85.8

-126.6

-123.7

-62.1

-34.9

Net credit to financial institutions (net) 2/

-22.6

-22.3

-51.2

-4.7

-16.3

-13.4

-18.0

-19.1

Currency in circulation

20.1

26.8

9.0

22.2

11.7

11.9

10.0

8.0

Financial system liabilities to private sector 3/

39.3

65.6

30.2

21.7

22.5

28.4

23.5

18.1

Financial system credit to private sector

15.0

9.7

24.7

34.7

23.0

33.0

29.4

25.4

Money income velocity (GDP/M3)

2.5

1.6

1.6

1.6

1.5

1.4

1.4

1.3

Interest rate on deposits (percent per annum)

11.7

11.5

...

11.5

...

...

...

...

(In percent of GDP)

Public sector

Combined public sector saving 4/

1.6

4.0

4.3

5.6

5.0

4.8

5.8

5.3

Combined public sector overall balance (before grants) 4/

-14.2

-9.7

-9.0

-7.0

-11.0

-13.6

-10.2

-8.3

Combined public sector overall balance (after grants) 4/

-7.1

-4.5

-3.9

-3.3

-4.8

-5.6

-5.6

-1.9

Nonfinancial public sector saving

1.8

4.5

6.5

8.6

6.5

6.5

7.3

6.4

Nonfinancial public sector overall balance (before grants)

-13.9

-9.2

-6.8

-4.0

-9.5

-12.0

-8.8

-7.2

Central bank operational results
(deficit -)

-0.2

-0.5

-2.2

-3.0

-1.5

-1.6

-1.4

-1.1

Savings and investment

Gross domestic investment

24.7

32.2

28.0

33.4

33.2

37.0

36.0

35.0

Public

15.7

13.7

13.3

12.6

16.0

18.4

16.0

13.6

Private

8.9

18.5

14.7

20.8

17.2

18.6

20.0

21.4

National savings

0.4

6.4

7.2

5.8

5.4

6.7

7.8

7.6

Public

1.6

4.0

4.3

5.6

5.0

4.8

5.8

5.3

Private

-1.2

2.4

2.9

0.2

0.4

1.8

2.0

2.3

External savings 5/

24.3

25.8

20.8

27.6

27.8

30.3

28.2

27.4

External sector

External current account balance

-39.6

-30.3

-23.2

-32.9

-31.4

-33.9

-31.7

-29.1

(excluding interest obligations)

-19.0

-19.9

-15.9

-23.4

-23.5

-26.0

-24.0

-21.7

Trade balance (deficit -)

-20.4

-26.2

-20.5

-31.7

-32.9

-36.7

-36.5

-35.4

Outstanding external public debt (end-of-year)

496.8

296.7

289.0

280.0

...

...

...

...

(In percent of exports of goods and nonfactor services)

Contractual debt service, before future debt relief

182.4

45.8

30.1

40.0

43.5

39.6

35.4

33.6

Contractual interest obligations, before debt relief

65.6

22.8

14.2

24.5

22.1

21.5

20.8

19.5

Adjusted official reserves (in months of imports) (end-of-period) 6/

1.4

0.2

1.8

1.0

2.7

2.5

3.1

3.5

Sources: Central Bank of Nicaragua; Ministry of Finance; and IMF staff estimates.

1/ Presented in EBS/99/8, January 28, 1999, as post-hurricane projection.

2/ In relation to currency in circulation at the beginning of the year.

3/ Includes CENIS held by the private sector.

4/ Includes quasi-fiscal losses.

5/ External current account deficit, excluding interest on debt to non-Paris Club bilateral creditors that is eligible for debt rescheduling.

6/ Gross reserves net of outstanding stock of CENIS.




1 The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF arrangements carry an interest rate of 0.5 percent and are repayable over 10 years with a 5 1/2 year grace period.

2 The HIPC Initiative entails coordinated action by the international financial community, including multilateral institutions, to reduce to sustainable levels the external debt burden of heavily indebted poor countries that pursue IMF and World Bank-supported adjustment and reform programs, but for whom traditional debt relief mechanisms are insufficient.

3 A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.


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