IMF Executive Board Approves Seventh, Eighth and Ninth Reviews Under Nicaragua's PRGF Arrangement

Press Release No. 06/13
January 18, 2006

The Executive Board of the International Monetary Fund (IMF) completed today the seventh, eighth and ninth reviews of Nicaragua's performance under its Poverty Reduction and Growth Facility (PRGF) arrangement. In completing the reviews, the Executive Board approved Nicaragua's requests for a waiver of performance criteria and an extension of the arrangement from February 28, 2006 to December 12, 2006. In addition, the Executive Board completed the financing assurances review under Nicaragua's PRGF arrangement.

The completion of the reviews makes available SDR 13.9 million (about US$20.1 million) for disbursement. Nicaragua's three-year PRGF arrangement amounting to SDR 97.5 million (about US$140.9 million) was approved in December 2002 (see Press Release No. 02/53). Completion of the latest reviews will bring total disbursements under the arrangement to SDR 69.7 million (about US$100.7 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 has strengthened, as the domestic consensus for economic reforms has been rebuilt despite a difficult political environment. Key policy measures under the PRGF-supported reform program have been approved, including fiscal and financial sector reforms. Nicaragua's recent approval of the US-Central America-Dominican Republic Free Trade Agreement (CAFTA-DR) is also very welcome.

"Economic developments were broadly positive in 2005, notwithstanding pressure from higher oil prices. Output continues to grow at a moderate pace, reserves have increased, and the fiscal deficit has been contained, although the high level of inflation remains a concern. The IMF has granted Nicaragua debt reduction under the Multilateral Debt Relief Initiative (MDRI), and the authorities are committed to using the resources thus freed for poverty-reducing spending. At the same time, it is important to strengthen debt reduction efforts by continuing negotiations with Nicaragua's creditors, including non-Paris Club creditors.

"Nicaragua nevertheless continues to face important economic vulnerabilities, in particular from a still-high public debt, a large external current account deficit, and widespread financial dollarization.

"The authorities' medium-term strategy focuses on boosting growth through private sector development while maintaining macroeconomic stability, to help further reduce poverty while moving toward achieving the Millennium Development Goals. Going forward, the fiscal consolidation process will need to continue, as will efforts to strengthen the investment climate so as to take full advantage of the opportunities afforded by CAFTA-DR.

"The fiscal strategy for 2006 is centered on containing the budget deficit, while preserving the room for poverty reducing spending. The authorities are committed to keeping growth of the public sector wage bill in line with expected inflation to maintain stability, protect competitiveness and avoid crowding out poverty spending. Steps have also been taken to eliminate losses in the electricity sector, and the authorities intend to review the legal framework for the sector to eliminate distortional interventions that could deter needed investment.

"Nicaragua's key challenge going forward will be to strengthen the fiscal framework to assure sustainability, and preserve the space for needed investment and poverty-reducing spending. In this vein, tax administration will need to be strengthened, including by revising the tax code. It will also be important to move ahead with reforms of the decentralization framework to ensure that the transfer of revenues to municipalities is matched by the devolution of spending responsibilities. Focus will also need to be placed on returning the public pension system to actuarial soundness, and developing a credible fiscal responsibility framework.

"The authorities have moved forward with reforms to strengthen the financial sector, including the passage of important financial sector legislation. They plan to prepare a roadmap to implement additional reforms recommended in the context of the Financial Sector Assessment Program (FSAP).

"The authorities are to be commended for their strong commitment to the reform agenda, which has helped to maintain a stable macroeconomic framework and set the stage for the implementation of structural reforms that will be key to growth and poverty reduction. The authorities' focus on good governance and the fight against corruption is also essential to achieving strong and lasting growth and poverty alleviation. At the same time, Nicaragua will continue to depend on international support to reinforce its reform efforts," Mr. Carstens said.



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