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Press Release No. 04/11
January 23, 2004
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF and World Bank Support US$4.5 Billion in Debt Service Relief for Nicaragua

The International Monetary Fund (IMF) and World Bank's International Development Association (IDA) agreed this week that Nicaragua has taken the steps necessary to reach its completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. Debt relief under the enhanced HIPC Initiative from all of Nicaragua's creditors will amount to approximately US$4.5 billion over time. Nicaragua becomes the 10th country to reach its completion point under the enhanced framework of the HIPC Initiative, joining Benin, Bolivia, Burkina Faso, Guyana, Mauritania, Mali, Mozambique, Tanzania and Uganda.1

"The debt relief agreement is the result of the Nicaraguan government's steadfast pursuit of sound macroeconomic policies and structural reforms, and dedication to improve governance and fight corruption," said World Bank President James D. Wolfensohn.

"While this debt relief will no doubt help reinforce investor confidence and facilitate economic growth, even more important is the government's strong ownership of its economic program, and its commitment to preserving stable macroeconomic conditions and promoting broad-based economic growth with structural reform," IMF Deputy Managing Director Agustín Carstens added.

The International Development Association (IDA) will provide debt relief under the enhanced HIPC Initiative amounting to US$382.6 million in debt service relief (US$190.9 million in net present value (NPV) terms2), to be delivered through a 90 percent reduction in debt service on IDA credits from 2001 through 2023. The IMF will provide debt relief of approximately US$106.5 million (US$82.2 million, or SDR 63.5 million, in NPV terms) on payments falling due to the IMF during 2002-09. The remaining bilateral and multilateral creditors are also expected to provide their share of relief required under the enhanced HIPC Initiative.

In recognition of the government's satisfactory progress in implementing sound macroeconomic and structural policies under the enhanced HIPC Initiative, Nicaragua's total external debt is to be reduced by approximately 73 percent in NPV terms.

Resources made available by debt relief provided under the HIPC Initiative are being allocated to fund key pro-poor growth programs, which are outlined in Nicaragua's Poverty Reduction Strategy Paper (PRSP). Nicaragua's PRSP is the result of broad-based consultations and presents the government's objectives and priority measures for reducing poverty over the next three years.

Background

Nicaragua is one of the poorest countries in Latin America, although social and demographic indicators have been improving, they have done so at a very gradual pace. The population living in poverty has fallen steadily in the 1990s from 50.3 percent in 1993 to 45.8 percent in 2001, while the incidence of extreme poverty fell from 19.4 percent to 15.1 percent in the same period.

Following the destruction left by hurricane Mitch in 1998, Nicaragua faced a difficult economic and political environment. Weak policies in the face of political transition, along with a sharp deterioration in the terms of trade in 2000 and a slowdown of the real GDP growth, contributed to large fiscal and external deficits in 2001.

By 2002, the economy started recovering after the new government implemented a policy package that placed the public sector finances on a sustainable path. In 2003, further progress was achieved with a prudent budget, a second round of tax reform, the sale of central bank assets acquired from failed banks, and refinancing agreements on the domestic debt. As a result, the fiscal deficit was reduced to about 3 percent of GDP in 2003, and real GDP growth started to recover. Nevertheless, achieving debt sustainability and sustained growth will require continued structural reforms and prudent fiscal policies.

In addition to achieving greater macroeconomic stability and sustained growth, Nicaragua also managed to increase its share of public spending devoted to poverty reduction programs. The country has also seen an improvement of investor confidence, at least partially inspired by the current administration's anti-corruption campaign and commitment to restore the rule of law.

Steps Taken to Reach the Completion Point Under the Enhanced HIPC Initiative

Upon reaching its decision point under the enhanced framework of the HIPC Initiative in December 2000, Nicaragua committed to undertake work in three areas in order to reach the completion point and receive irrevocable debt relief under the enhanced framework:

(i) Completion of a full PRSP through a participatory process, and satisfactory assessment by the Bank and Fund;

(ii) Continued implementation of strong macroeconomic and structural policies supported by an arrangement with the IMF under the PRGF; and,

(iii) Implementation of a set of social and structural reforms that have been designed to (a) promote human capital development and social protection, especially through better health and education, (b) improve governance, strengthen public sector administration, and increase transparency, (c) introduce a fiscally sustainable pension system, and (d) expand the provision of public infrastructure services through greater private participation.

The HIPC Initiative

In 1996, the World Bank and the IMF launched the HIPC Initiative to create a framework for all creditors, including multilateral creditors, to provide debt relief to the world's poorest and most heavily indebted countries, and thereby reduce the constraint on economic growth and poverty reduction imposed by the debt build-up in these countries. The Initiative was modified in 1999 to provide three key enhancements:

Deeper and Broader Relief. External debt thresholds were lowered from the original framework. As a result, more countries have became eligible for debt relief and some countries became eligible for greater relief.

Faster Relief. A number of creditors began to provide interim debt relief immediately at the "decision point." Also, the new framework permitted countries to reach the "completion point" faster.

Stronger Link Between Debt Relief and Poverty Reduction. Freed resources were to be used to support poverty reduction strategies developed by national governments through a broad consultative process.

To date, 27 countries3 - two-thirds of the HIPCs - have reached their "decision points" and are receiving debt relief from all sources that will amount to more than US$50 billion over time, and an average NPV stock-of-debt reduction of nearly two-thirds.


1 The completion point under the HIPC Initiative is when creditors commit irrevocably to debt relief. The decision point, which precedes the completion point, is when debt relief is committed and begins on an interim basis.

2 The Net Present Value (NPV) of debt is the discounted sum of all future debt-service obligations (interest and principal). It is a measure that takes into account the degree of concessionality of a country's debt stock. Whenever the interest rate on a loan is lower than the market rate, the resulting NPV of debt is smaller than its face value, with the difference reflecting the grant element.

3 Benin, Bolivia, Burkina Faso, Cameroon, Chad, Democratic Republic of Congo, Ethiopia, The Gambia, Ghana, Guinea, Guinea-Bissau, Guyana, Honduras, Madagascar, Malawi, Mauritania, Mali, Mozambique, Nicaragua, Niger, Rwanda, São Tome & Príncipe, Senegal, Sierra Leone, Tanzania, Uganda and Zambia.




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