## The Government of Nicaragua has completed its National Development Plan

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---

### Overview: PRSP-II (Plan Nacional de Desarrollo 2005–2009)
- The National Development Plan 2005–2009 serves as the country’s second generation Poverty Reduction Strategy Paper (PRSP-II).
- PRSP-II builds on the PRSP-I (presented September 2001) and earlier documents: Proposal for a National Development Plan (PPND) in 2003 and the Operational National Development Plan (PNDO) in 2004.
- Shift in emphasis: greater focus on economic activity and employment growth for poverty reduction, increased support for the private sector, and increased spending on economic infrastructure; continued emphasis on human capital with a rebalancing between central and local responsibilities.
- Four strategic areas:
  - (i) economic growth for poverty reduction;
  - (ii) human capital development and social protection;
  - (iii) productive and social public infrastructure;
  - (iv) governance and state reforms.
- Medium-term macro-framework objectives (as framed in PRSP-II):
  - Growth reaches 4.3 percent on annual average over 2005–09.
  - Inflation gradually falls to around 3 percent per year.
  - Framework intended to facilitate attainment of 2009 MDG milestones.
- Donor coordination:
  - Donors co-signed a Joint Financing Agreement (JFA) for General Budget Support with an integrated Performance Assessment Matrix (PAM) on May 18, 2005.

### Country ownership and participation
- PRSP-II preparation involved a broad participatory process:
  - Four-stage consultation through seventeen departmental workshops to ensure civil society, private sector, and donor participation.
  - Territorial plans produced for all 15 departments and two autonomous regions (actions, goals, targets, budgets, funding sources when possible).
  - Six sectoral fora established with donor participation to elaborate policy matrices in education, health, social protection, governance, production and competitiveness, and infrastructure.
- National-level culmination:
  - National Development Plan 2005–2009 discussed in August 2005 at the National Commission for Economic and Social Planning (CONPES).
  - Bilateral meetings held with National Assembly’s PRSP Commission.
- Consultations incorporated demands to:
  - Increase infrastructure investment;
  - Emphasize participation and decentralization in PRSP-II implementation;
  - Increase transparency in monitoring and evaluation;
  - Improve alignment of donor contributions to PRSP-II goals.

### Medium-Term Macroeconomic Framework (key projections and indicators)
- Context and recent performance:
  - New government (2002) implemented economic reforms after the 2000–01 banking crisis and policy deterioration; recovery followed with real GDP growth accelerating from 0.8 percent y/y in 2002 to 5.1 percent y/y in 2004.
  - Adverse shocks since 2004: sharp increases in global oil prices slowed growth, contributed to rising inflation, and widened external current account deficit.
- Table 1. Nicaragua: Medium-term Macroeconomic Framework — Projected (selected series by year)
  - Years: 2004 2005 2006 2007 2008 2009 2010
  - GDP growth (percent): 5.1 4.0 3.7 4.3 4.6 4.8 5.0
  - CPI (avg, in percent): 8.5 9.7 8.8 6.2 4.0 3.0 3.0
  - GDP deflator (percent): 10.2 10.9 8.3 5.0 3.0 2.5 2.5
  - Current account (in percent of GDP): -16.1 -16.9 -16.7 -16.0 -15.2 -14.5 -13.7
  - Gross international reserves (in months of imports of G&NFS): 2.8 2.3 2.5 2.7 2.8 3.1 3.3
  - Combined public sector balance before grants: -6.3 -6.0 -6.0 -5.2 -4.9 -4.5 -4.1
  - Combined public sector balance after grants: -2.8 -2.2 -2.2 -1.3 -1.2 -0.9 -0.6
  - Combined public sector debt 1/: 92.7 86.5 83.4 81.1 80.1 78.5 76.9
  - Domestic debt: 29.4 25.2 20.0 15.2 11.7 8.3 5.6
  - External debt: 63.3 61.3 63.4 65.9 68.3 70.2 71.3
  - Memorandum items:
    - Nominal GDP (C$ mn): 72,603 83,793 94,120 103,075 111,051 119,291 128,387
    - GDP (US$ mn): 4,556 5,008 5,358 5,587 5,789 6,037 6,308
  - Sources: Central Bank of Nicaragua, Ministry of Finance and Fund staff estimates.
  - Footnote: 1/ Assuming full delivery of full HIPC relief for 2004. Measured at face value.
- Framework assumptions and policy priorities:
  - With steadfast policy implementation, PRSP-II macro objectives are attainable but subject to risks.
  - Near term: as oil shock effects wane, activity expected to pick up reaching an average of 4.3 percent over 2005–09; inflation expected to decrease to about 3 percent annually.
  - Medium term: growth expected to converge toward potential output growth, estimated at about 5 percent.
  - Strategic policies to boost growth include: improving investment climate, increasing public infrastructure spending, enhancing human capital investment, and strengthening protection of vulnerable groups.
  - Supply-side analyses and costing conducted for financial services, agriculture, and rural development.
  - Export promotion measures identified:
    - (i) developing research capacities and market intelligence;
    - (ii) simplifying administrative procedures with an “Export Gateway”;
    - (iii) facilitating meeting quality and certification standards in trading partners.
- Fiscal and monetary policy stance:
  - Fiscal strategy: reduce overall fiscal deficit via improved revenue administration and rationalized expenditures, aligning expenditures with PRSP-II priorities.
  - Importance of strengthening tax administration and early action to amend the tax code approved in October 2005, which is judged to undermine tax administration authority and risk adverse impacts on revenue.
  - CPS deficit after grants projected to fall to 0.6 percent of GDP by 2010, contingent on continued availability of high grants and concessional finance.
  - Monetary policy: guided by low inflation objective and strengthening central bank reserve position.
  - Priority to lower external and domestic debt stocks to reduce vulnerabilities and support bank lending to private sector.
- Risks and vulnerabilities highlighted:
  - Need for strengthened analysis on reducing domestic vulnerabilities and buffering against external shocks.
  - Past shocks (2001–04): commodity price shocks (oil rise, coffee price decline), hurricanes, banking crisis.
  - Specific vulnerabilities: high dollarization, financial sector currency mismatch risks, high debt levels despite HIPC progress.
  - Suggestion to evaluate suitability of current exchange rate regime over the medium term.

### Poverty diagnostics and data
- Implementation progress under PRSP-I:
  - Poverty-reducing spending increased from 10.4 percent of GDP in 2002 to 12.3 percent of GDP in 2004 and in 2005.
  - Education and water sector PRSP-I targets were overachieved in 2003 and 2004.
  - Health sector targets stalled; vaccination coverage weak.
  - Poverty trends (1993–01): share of population living in poverty fell from 50 percent to 46 percent; extreme poverty declined from 19 percent to 15 percent.
- PRSP-II analytical base:
  - Uses LSMS surveys from 1993, 1998, 1999, and 2001 (panel surveys: 1998 and 2001) and DHS 1998 and 2001.
  - Poverty analysis establishes trend of poverty reduction and considerable responsiveness of poverty reduction to economic growth.
  - Uses a poverty map combined with migration and spatial distribution of economic activities to inform policy.
- Statistical updates and recommendations:
  - New data collection in 2005: Population Census fielded May–June 2005; LSMS fielded July–October 2005.
  - INEC will deepen poverty analysis from seven regions to departmental level (15 departments and two autonomous regions) using 2005 LSMS.
  - Staffs recommend incorporating findings from new welfare analyses into the next PRSP-II progress report.

### Targets, intermediate indicators, and sector results
- PRSP-II extends PRSP-I targets by adding indicators emphasizing economic growth:
  - New areas with targets/indicators: (i) macroeconomic performance, (ii) economic infrastructure, (iii) regulatory framework and bureaucratic procedures, (iv) property rights, (v) access to financial services, (vi) investment attraction, (vii) food security, (viii) sustainable environmental development.
  - The matrix of goals and actions 2005–09 is consistent with the PAM annexed to the JFA.
- Sectoral performance (2003–2004):
  - Education and water goals: overachieved in 2003 and 2004.
  - Health goals: lagging; insufficient vaccination coverage in 2004.
  - Health sector response: new Health Plan 2005–09 defining five strategic priorities aimed at attaining MDGs:
    - (i) increasing survival rates and quality of life of women in reproductive years;
    - (ii) increasing survival rates and quality of life of children under five years old;
    - (iii) improving nutritional levels of children under five years old;
    - (iv) promotion of healthy habits and attitudes;
    - (v) implementing policy actions aiming at attaining the MDGs and PRSP-II goals, including those related to HIV/AIDs.
  - Health Sector MTEF incorporated into the 2006 Budget Proposal.

### Policies, budgetary programming, and recommendations
- Importance of growth for poverty reduction:
  - PRSP-II emphasizes growth as crucial for poverty reduction; staffs stress additional efforts are needed to attain MDGs and increase the impact of growth on poverty reduction.
  - Achieving MDGs appears feasible with sustained and concerted prioritization of PRSP-II spending.
- Budgetary programming and MTEF:
  - Need to better align budgetary programming to PRSP-II goals and improve efficiency and prioritization of poverty spending.
  - Financial Administration Law is a first step toward developing an MTEF; further work on medium-term fiscal policy framework and a road map toward a Fiscal Responsibility Law is recommended.
  - 2006 Budget Proposal includes a three-year MTEF for education, health, and infrastructure.
- Earmarking and targeting concerns:
  - Significant earmarking constrains budgetary allocations: as a share of total spending, 6 percent assigned to universities and 4 percent to the Supreme Court; as a share of revenues, 6 percent assigned to municipalities.
  - Evidence from a PSIA indicates university spending favors the non-poor: over 90 percent of university spending favors the non-poor while the extreme poor received zero from this allocation.
  - Recommendations:
    - Reduce earmarking where possible to improve targeting of poverty alleviation programs.
    - Improve targeting of spending out of earmarked funds (universities, Supreme Court, municipalities).
    - Adopt programmatic decision-making to select cost-effective anti-poverty programs and enhance impact.
- Health sector budgetary implications:
  - Lack of progress in health indicators partly attributed to a significant share of recurrent spending allocated to salaries and historical allocations rather than priority spending.
  - Recommendation: sectoral budget allocations should support implementation of Health Plan strategic priorities to meet PRSP-II and MDG goals.

### CAFTA-DR participation, trade and investment strategy
- Staffs suggest that the next PRSP-II progress report undertake a further analysis of how participation in CAFTA-DR can be incorporated into the strategy to promote trade and investment.
- Authorities should ensure that the economic gains from the CAFTA-DR trade agreement and deeper regional integration efforts are maximized and shared across the population.
- Expected gains: expanded and more permanent market access to the United States (Nicaragua’s main trading partner) and associated structural reforms, leading to higher investment, exports, and growth.
- Long tariff phase-out periods negotiated for commodities affecting incomes: 10, 15, and 20 years.
- A study on the possible impact of this trade agreement on agriculture has been commissioned and disseminated in a CAFTA-DR Forum; staffs suggest incorporating these results into the next PRSP-II progress report, including possible compensatory measures to mitigate potential social impacts on specific sectors (e.g. traditional agriculture).
- Authorities should continue to strengthen domestic revenue to offset the expected reduction of collection of international trade taxes on account of CAFTA-DR that is expected over the medium term.
- Footnote: The magnitude of the fiscal impact will depend on various factors, including trade diversion, import price elasticities, and the overall response of economic activity. Of all the signatory countries, Nicaragua is expected to face the smallest fiscal impact, because of its lower share of imports whose tariffs will be reduced immediately in addition to a relatively lower share of U.S. imports.

### Public Expenditure Management (PEM): status and needed reforms
- PRSP-II emphasizes improvements in public financial management and mechanisms for implementing and tracking poverty spending.
- Nicaragua’s PEM system has improved since the January 2004 completion point.
- Key systems and recent progress:
  - Integrated Financial and Administrative Management System (SIGFA): upgrades include integrating subsystems for budget, accounting and treasury for monthly closing of national accounting and conciliation of accounts statements with the budget.
  - National System for Public Investments (SNIP): established Territorial Units for Public Investment (UTIPs) in all departments in line with participatory budgeting under PRSP-II.
  - MHCP manages both planning and execution of the budget, including poverty spending, through SIGFA.
- National budget identifies all public spending and transfers associated with poverty-reducing activities, including HIPC debt relief, and all other external and internal sources of financing for those programs; information is publicly available and shows external resource inflows, including from HIPC debt relief, have been dedicated to poverty-reducing activities with no significant decline in domestic resources previously allocated to these activities.
- Supplementary Social Fund (FSS):
  - FSS will continue as the entity responsible for monitoring allocation and use of PRSP-II poverty spending and HIPC debt relief.
  - FSS is a virtual fund tracking poverty spending through 'tagging' of specific expenditures on the budget.
  - SIGFA is tagging new spending items consistent with the new poverty spending definition for 2007 budget preparation.
  - Authorities have completed conversion of poverty spending data for 2004 and 2005 to the new definition to preserve consistency with the historical series.
  - Authorities met targets for PRSP-I poverty spending as a share of GDP in the past and have set subsequent targets with a positive trend under PRSP-II.
- Specific historical/target figures:
  - Poverty reduction spending (under the PRSP-I classification) reached 12.3 percent of GDP in 2004 in contrast to the 11.6 percent target.
  - It is expected to reach (under the new PRSP-II classification) 12.4 percent in 2006, an increase of about 0.2 percentage points of GDP annually.
- Areas needing continued efforts:
  1. Further reforms of the decentralization framework (through amending the Municipal Transfers Law and the Municipality Law) to ensure fiscal neutrality and preserve poverty reducing spending, and increase accountability and efficiency at municipal level.
  2. Support implementation of the Civil Service Reform to ensure a more equitable working environment with better performance incentives and improved civil service quality, and enhance public service management and delivery in key economic and social sectors.
  3. Strengthen government fiscal, financial and fiduciary management, especially auditing, for more accurate, timely, relevant and transparent public sector information.
  4. Incorporate into the budget the operations of autonomous entities.
  5. Support activities of the new consensus-building body established under the Financial Administration Law to assess the realism of financing sources proposed by the national assembly.
- These areas are adequately supported with technical assistance and donor funding by means of budget support as well as project lending.

### Monitoring, Evaluation and PSIA (Poverty and Social Impact Analysis)
- National System of Development Indicators (SINASID) launched; provides broad access to indicators and systematizes progress.
- SINASID enhancements suggested:
  - Support better quality of administrative data at sectoral and municipal levels.
  - Establish an interface with SIGFA to provide information on execution of disaggregated anti-poverty spending by programmatic area on-line to contribute to fiscal transparency.
- PSIA work:
  - A PSIA assessed the impact of public investment on growth and poverty reduction; PRSP-II incorporates the results.
  - SNIP incorporated PSIA findings into program selection criteria by strengthening estimation of cost-effectiveness indicators in project preparation.
  - Another PSIA has been initiated on distributional impact of decentralization of water services (financed by the Bank and KfW); staffs attach importance to redistributive impact and potential coverage gains from water services.
- Staffs encourage authorities to translate PSIA findings into specific anti-poverty policy actions and report progress in the next PRSP-II progress report.

### Conclusions and issues for discussion — Risks to the strategy
- Major risks to PRSP-II implementation:
  - Politicized decision-making: wide rift between the Executive and the National Assembly delays decision-making and policy implementation; risk of deterioration in run-up to Presidential and legislative elections in November 2006.
  - Sustaining fiscal adjustment and ensuring long-term sustainability: external and public debt remain high and subject to distress; need for sustained fiscal consolidation.
    - Additional fiscal risks: potential fiscal burden from revenue transfers to municipalities without commensurate devolution of expenditure responsibilities; fiscal rigidities from constitutionally mandated earmarking; increasing public wage bill; civil service reform; quasi-fiscal pressures from recent problems in the power sector.
    - Need to address actuarial insolvency of the public pension system.
  - Financial sector vulnerability: exposure of large banks to government bonds; high level of dollarization; widespread indexation to the exchange rate in financial contracts. These make financial stability vulnerable to government debt sustainability and to the crawling peg regime.
  - Institutional weaknesses: weaknesses in the courts and the comptroller’s office pose risks; absence of a well-functioning judicial system undermines private sector confidence and limits poverty-reduction impacts from growth.
  - Enhancing resilience to shocks: vulnerability to natural disasters (El Niño, hurricanes, earthquakes) and terms of trade shocks (commodity price declines, oil price increases); need structural changes such as export diversification and enhanced natural disaster management; these areas are currently supported adequately with technical assistance and donor funding.
- Staffs recommend the next PRSP-II progress report incorporate more in-depth analysis of these risks, including outlining contingency measures.

### Conclusions and issues for discussion — Priority areas for strengthening the PRS and implementation
- Staffs view PRSP-II as presenting a coherent medium-term macroeconomic framework and credible implementation efforts, but note important risks and vulnerabilities requiring continued prudent macroeconomic policies and structural reforms to raise growth prospects, improve investment climate, and absorb shocks.
- Achievements noted:
  - Maintaining macroeconomic stability while achieving poverty-reducing spending targets.
  - Strengthening transparency in fiscal and public financial management systems (including SIGFA).
  - Consolidating monitoring indicators (developing SINASID).
  - Government-led efforts to align donor assistance to PRSP-II and harmonization progress culminating in the JFA and PAM.
  - Better understanding of distributional impacts of public investment and sectoral reforms via PSIA work.
- Areas where further work is needed:
  - Prioritizing immediate implementation of measures aimed at raising likelihood of attaining PRSP-II/MDG goals, such as ensuring PRSP-II spending allocations in budget formulation and execution, and improved targeting of key interventions.
  - Sustaining fiscal consolidation by neutralizing fiscal impact of transfers under the Municipal Transfers Law, containing the fiscal impact of the pension system, and ensuring sustainable implementation of civil service reform.
  - Maintaining financial stability by implementing financial sector reform laws and enacting an anti-money laundering framework.
  - Tackling growing losses in the electricity sector due to rise in oil prices by increasing electricity tariffs required to stem losses and avoiding distortionary interventions.
  - Identifying fiscal contingency measures to address risks to the strategy to ensure satisfactory PRSP-II implementation.
  - Implementing social auditing mechanisms (such as citizen report cards) to ensure programs and projects translate into tangible and sustainable benefits to the population, and enhancing SINASID to support PRSP-II implementation, monitoring and evaluation, and budgetary decision making.
- Questions for Executive Directors suggested by staffs:
  - Do the Executive Directors concur with the areas identified by staffs as key implementation risks?
  - Do the Executive Directors concur with the areas identified by staffs as priorities for strengthening the PRS and its implementation?

*IMF staff summary based on Plan Nacional de Desarrollo 2005–2009 and associated PRSP-II documentation.*

### 1.      The Government of Nicaragua has completed its National Development Plan

### The Government of Nicaragua has completed its National Development Plan

### Overview: PRSP-II (Plan Nacional de Desarrollo 2005–2009)
- The National Development Plan 2005–2009 serves as the country’s second generation Poverty Reduction Strategy Paper (PRSP-II).
- PRSP-II builds on the PRSP-I (presented September 2001) and earlier documents: Proposal for a National Development Plan (PPND) in 2003 and the Operational National Development Plan (PNDO) in 2004.
- Shift in emphasis: greater focus on economic activity and employment growth for poverty reduction, increased support for the private sector, and increased spending on economic infrastructure; continued emphasis on human capital with a rebalancing between central and local responsibilities.
- Four strategic areas:
  - (i) economic growth for poverty reduction;
  - (ii) human capital development and social protection;
  - (iii) productive and social public infrastructure;
  - (iv) governance and state reforms.
- Medium-term macro-framework objectives (as framed in PRSP-II):
  - Growth reaches 4.3 percent on annual average over 2005–09.
  - Inflation gradually falls to around 3 percent per year.
  - Framework intended to facilitate attainment of 2009 MDG milestones.
- Donor coordination:
  - Donors co-signed a Joint Financing Agreement (JFA) for General Budget Support with an integrated Performance Assessment Matrix (PAM) on May 18, 2005.

### Country ownership and participation
- PRSP-II preparation involved a broad participatory process:
  - Four-stage consultation through seventeen departmental workshops to ensure civil society, private sector, and donor participation.
  - Territorial plans produced for all 15 departments and two autonomous regions (actions, goals, targets, budgets, funding sources when possible).
  - Six sectoral fora established with donor participation to elaborate policy matrices in education, health, social protection, governance, production and competitiveness, and infrastructure.
- National-level culmination:
  - National Development Plan 2005–2009 discussed in August 2005 at the National Commission for Economic and Social Planning (CONPES).
  - Bilateral meetings held with National Assembly’s PRSP Commission.
- Consultations incorporated demands to:
  - Increase infrastructure investment;
  - Emphasize participation and decentralization in PRSP-II implementation;
  - Increase transparency in monitoring and evaluation;
  - Improve alignment of donor contributions to PRSP-II goals.

### Medium-Term Macroeconomic Framework (key projections and indicators)
- Context: New government (2002) implemented economic reforms after the 2000–01 banking crisis and policy deterioration; recovery followed with real GDP growth accelerating from 0.8 percent y/y in 2002 to 5.1 percent y/y in 2004.
- Adverse shocks since 2004: sharp increases in global oil prices slowed growth, contributed to rising inflation, and widened external current account deficit.
- Table 1. Nicaragua: Medium-term Macroeconomic Framework — Projected (selected series by year)
  - Years: 2004 2005 2006 2007 2008 2009 2010
  - GDP growth (percent): 5.1 4.0 3.7 4.3 4.6 4.8 5.0
  - CPI (avg, in percent): 8.5 9.7 8.8 6.2 4.0 3.0 3.0
  - GDP deflator (percent): 10.2 10.9 8.3 5.0 3.0 2.5 2.5
  - Current account (in percent of GDP): -16.1 -16.9 -16.7 -16.0 -15.2 -14.5 -13.7
  - Gross international reserves (in months of imports of G&NFS): 2.8 2.3 2.5 2.7 2.8 3.1 3.3
  - Combined public sector balance before grants: -6.3 -6.0 -6.0 -5.2 -4.9 -4.5 -4.1
  - Combined public sector balance after grants: -2.8 -2.2 -2.2 -1.3 -1.2 -0.9 -0.6
  - Combined public sector debt 1/: 92.7 86.5 83.4 81.1 80.1 78.5 76.9
  - Domestic debt: 29.4 25.2 20.0 15.2 11.7 8.3 5.6
  - External debt: 63.3 61.3 63.4 65.9 68.3 70.2 71.3
  - Memorandum items:
    - Nominal GDP (C$ mn): 72,603 83,793 94,120 103,075 111,051 119,291 128,387
    - GDP (US$ mn): 4,556 5,008 5,358 5,587 5,789 6,037 6,308
  - Sources noted: Central Bank of Nicaragua, Ministry of Finance and Fund staff estimates.
  - Footnote: 1/ Assuming full delivery of full HIPC relief for 2004. Measured at face value.
- Framework assumptions and policy priorities:
  - With steadfast policy implementation, PRSP-II macro objectives are attainable but subject to risks.
  - Near term: as oil shock effects wane, activity expected to pick up reaching an average of 4.3 percent over 2005–09; inflation expected to decrease to about 3 percent annually.
  - Medium term: growth expected to converge toward potential output growth, estimated at about 5 percent.
  - Strategic policies to boost growth include: improving investment climate, increasing public infrastructure spending, enhancing human capital investment, and strengthening protection of vulnerable groups.
  - Supply-side analyses and costing conducted for financial services, agriculture, and rural development.
  - Export promotion measures identified: (i) developing research capacities and market intelligence; (ii) simplifying administrative procedures with an “Export Gateway”; (iii) facilitating meeting quality and certification standards in trading partners.
- Fiscal and monetary policy stance:
  - Fiscal strategy: reduce overall fiscal deficit via improved revenue administration and rationalized expenditures, aligning expenditures with PRSP-II priorities.
  - Importance of strengthening tax administration and early action to amend the tax code approved in October 2005, which is judged to undermine tax administration authority and risk adverse impacts on revenue.
  - CPS deficit after grants projected to fall to 0.6 percent of GDP by 2010, contingent on continued availability of high grants and concessional finance.
  - Monetary policy: guided by low inflation objective and strengthening central bank reserve position.
  - Priority to lower external and domestic debt stocks to reduce vulnerabilities and support bank lending to private sector.
- Risks and vulnerabilities highlighted:
  - Need for strengthened analysis on reducing domestic vulnerabilities and buffering against external shocks.
  - Past shocks (2001–04): commodity price shocks (oil rise, coffee price decline), hurricanes, banking crisis.
  - Specific vulnerabilities: high dollarization, financial sector currency mismatch risks, high debt levels despite HIPC progress.
  - Suggestion to evaluate suitability of current exchange rate regime over the medium term.

### Poverty diagnostics and data
- Implementation progress under PRSP-I:
  - Poverty-reducing spending increased from 10.4 percent of GDP in 2002 to 12.3 percent of GDP in 2004 and in 2005.
  - Education and water sector PRSP-I targets were overachieved in 2003 and 2004.
  - Health sector targets stalled; vaccination coverage weak.
  - Poverty trends (1993–01): share of population living in poverty fell from 50 percent to 46 percent; extreme poverty declined from 19 percent to 15 percent.
- PRSP-II analytical base:
  - Uses LSMS surveys from 1993, 1998, 1999, and 2001 (panel surveys: 1998 and 2001) and DHS 1998 and 2001.
  - Poverty analysis establishes trend of poverty reduction and considerable responsiveness of poverty reduction to economic growth.
  - Uses a poverty map combined with migration and spatial distribution of economic activities to inform policy.
- Statistical updates and recommendations:
  - New data collection in 2005: Population Census fielded May–June 2005; LSMS fielded July–October 2005.
  - INEC will deepen poverty analysis from seven regions to departmental level (15 departments and two autonomous regions) using 2005 LSMS.
  - Staffs recommend incorporating findings from new welfare analyses into the next PRSP-II progress report.

### Targets, intermediate indicators, and sector results
- PRSP-II extends PRSP-I targets by adding indicators emphasizing economic growth:
  - New areas with targets/indicators: (i) macroeconomic performance, (ii) economic infrastructure, (iii) regulatory framework and bureaucratic procedures, (iv) property rights, (v) access to financial services, (vi) investment attraction, (vii) food security, (viii) sustainable environmental development.
  - The matrix of goals and actions 2005–09 is consistent with the PAM annexed to the JFA.
- Sectoral performance (2003–2004):
  - Education and water goals: overachieved in 2003 and 2004.
  - Health goals: lagging; insufficient vaccination coverage in 2004.
  - Health sector response: new Health Plan 2005–09 defining five strategic priorities aimed at attaining MDGs:
    - (i) increasing survival rates and quality of life of women in reproductive years;
    - (ii) increasing survival rates and quality of life of children under five years old;
    - (iii) improving nutritional levels of children under five years old;
    - (iv) promotion of healthy habits and attitudes;
    - (v) implementing policy actions aiming at attaining the MDGs and PRSP-II goals, including those related to HIV/AIDs.
  - Health Sector MTEF incorporated into the 2006 Budget Proposal.

### Policies, budgetary programming, and recommendations
- Importance of growth for poverty reduction:
  - PRSP-II emphasizes growth as crucial for poverty reduction; staffs stress additional efforts are needed to attain MDGs and increase the impact of growth on poverty reduction.
  - Achieving MDGs appears feasible with sustained and concerted prioritization of PRSP-II spending.
- Budgetary programming and MTEF:
  - Need to better align budgetary programming to PRSP-II goals and improve efficiency and prioritization of poverty spending.
  - Financial Administration Law is a first step toward developing an MTEF; further work on medium-term fiscal policy framework and a road map toward a Fiscal Responsibility Law is recommended.
  - 2006 Budget Proposal includes a three-year MTEF for education, health, and infrastructure.
- Earmarking and targeting concerns:
  - Significant earmarking constrains budgetary allocations: as a share of total spending, 6 percent assigned to universities and 4 percent to the Supreme Court; as a share of revenues, 6 percent assigned to municipalities.
  - Evidence from a PSIA indicates university spending favors the non-poor: over 90 percent of university spending favors the non-poor while the extreme poor received zero from this allocation.
  - Recommendations:
    - Reduce earmarking where possible to improve targeting of poverty alleviation programs.
    - Improve targeting of spending out of earmarked funds (universities, Supreme Court, municipalities).
    - Adopt programmatic decision-making to select cost-effective anti-poverty programs and enhance impact.
- Health sector budgetary implications:
  - Lack of progress in health indicators partly attributed to a significant share of recurrent spending allocated to salaries and historical allocations rather than priority spending.
  - Recommendation: sectoral budget allocations should support implementation of Health Plan strategic priorities to meet PRSP-II and MDG goals.

*IMF staff summary based on Plan Nacional de Desarrollo 2005–2009 and associated PRSP-II documentation.*

### 17.      Staffs suggest that the next PRSP-II progress report undertake a further

### _cr06172 - 17.      Staffs suggest that the next PRSP-II progress report undertake a further

### CAFTA-DR participation, trade and investment strategy
- Staffs suggest that the next PRSP-II progress report undertake a further analysis of how participation in CAFTA-DR can be incorporated into the strategy to promote trade and investment.
- Authorities should ensure that the economic gains from the CAFTA-DR trade agreement and deeper regional integration efforts are maximized and shared across the population.
- Expected gains: expanded and more permanent market access to the United States (Nicaragua’s main trading partner) and associated structural reforms, leading to higher investment, exports, and growth.
- Long tariff phase-out periods negotiated for commodities affecting incomes: 10, 15, and 20 years.
- A study on the possible impact of this trade agreement on agriculture has been commissioned and disseminated in a CAFTA-DR Forum; staffs suggest incorporating these results into the next PRSP-II progress report, including possible compensatory measures to mitigate potential social impacts on specific sectors (e.g. traditional agriculture).
- Authorities should continue to strengthen domestic revenue to offset the expected reduction of collection of international trade taxes on account of CAFTA-DR that is expected over the medium term.
- Footnote: The magnitude of the fiscal impact will depend on various factors, including trade diversion, import price elasticities, and the overall response of economic activity. Of all the signatory countries, Nicaragua is expected to face the smallest fiscal impact, because of its lower share of imports whose tariffs will be reduced immediately in addition to a relatively lower share of U.S. imports.

### Public Expenditure Management (PEM): status and needed reforms
- PRSP-II emphasizes improvements in public financial management and mechanisms for implementing and tracking poverty spending.
- Nicaragua’s PEM system has improved since the January 2004 completion point.
- Key systems and recent progress:
  - Integrated Financial and Administrative Management System (SIGFA): upgrades include integrating subsystems for budget, accounting and treasury for monthly closing of national accounting and conciliation of accounts statements with the budget.
  - National System for Public Investments (SNIP): established Territorial Units for Public Investment (UTIPs) in all departments in line with participatory budgeting under PRSP-II.
  - MHCP manages both planning and execution of the budget, including poverty spending, through SIGFA.
- National budget identifies all public spending and transfers associated with poverty-reducing activities, including HIPC debt relief, and all other external and internal sources of financing for those programs; information is publicly available and shows external resource inflows, including from HIPC debt relief, have been dedicated to poverty-reducing activities with no significant decline in domestic resources previously allocated to these activities.
- Supplementary Social Fund (FSS):
  - FSS will continue as the entity responsible for monitoring allocation and use of PRSP-II poverty spending and HIPC debt relief.
  - FSS is a virtual fund tracking poverty spending through 'tagging' of specific expenditures on the budget.
  - SIGFA is tagging new spending items consistent with the new poverty spending definition for 2007 budget preparation.
  - Authorities have completed conversion of poverty spending data for 2004 and 2005 to the new definition to preserve consistency with the historical series.
  - Authorities met targets for PRSP-I poverty spending as a share of GDP in the past and have set subsequent targets with a positive trend under PRSP-II.
- Specific historical/target figures:
  - Poverty reduction spending (under the PRSP-I classification) reached 12.3 percent of GDP in 2004 in contrast to the 11.6 percent target.
  - It is expected to reach (under the new PRSP-II classification) 12.4 percent in 2006, an increase of about 0.2 percentage points of GDP annually.
- Areas needing continued efforts:
  1. Further reforms of the decentralization framework (through amending the Municipal Transfers Law and the Municipality Law) to ensure fiscal neutrality and preserve poverty reducing spending, and increase accountability and efficiency at municipal level.
  2. Support implementation of the Civil Service Reform to ensure a more equitable working environment with better performance incentives and improved civil service quality, and enhance public service management and delivery in key economic and social sectors.
  3. Strengthen government fiscal, financial and fiduciary management, especially auditing, for more accurate, timely, relevant and transparent public sector information.
  4. Incorporate into the budget the operations of autonomous entities.
  5. Support activities of the new consensus-building body established under the Financial Administration Law to assess the realism of financing sources proposed by the national assembly.
- These areas are adequately supported with technical assistance and donor funding by means of budget support as well as project lending.

### Monitoring, Evaluation and PSIA (Poverty and Social Impact Analysis)
- National System of Development Indicators (SINASID) launched; provides broad access to indicators and systematizes progress (website noted in source).
- SINASID enhancements suggested:
  - Support better quality of administrative data at sectoral and municipal levels.
  - Establish an interface with SIGFA to provide information on execution of disaggregated anti-poverty spending by programmatic area on-line to contribute to fiscal transparency.
- PSIA work:
  - A PSIA assessed the impact of public investment on growth and poverty reduction; PRSP-II incorporates the results.
  - SNIP incorporated PSIA findings into program selection criteria by strengthening estimation of cost-effectiveness indicators in project preparation.
  - Another PSIA has been initiated on distributional impact of decentralization of water services (financed by the Bank and KfW); staffs attach importance to redistributive impact and potential coverage gains from water services.
- Staffs encourage authorities to translate PSIA findings into specific anti-poverty policy actions and report progress in the next PRSP-II progress report.

### Conclusions and issues for discussion — Risks to the strategy
- Major risks to PRSP-II implementation:
  - Politicized decision-making: wide rift between the Executive and the National Assembly delays decision-making and policy implementation; risk of deterioration in run-up to Presidential and legislative elections in November 2006.
  - Sustaining fiscal adjustment and ensuring long-term sustainability: external and public debt remain high and subject to distress; need for sustained fiscal consolidation.
    - Additional fiscal risks: potential fiscal burden from revenue transfers to municipalities without commensurate devolution of expenditure responsibilities; fiscal rigidities from constitutionally mandated earmarking; increasing public wage bill; civil service reform; quasi-fiscal pressures from recent problems in the power sector.
    - Need to address actuarial insolvency of the public pension system.
  - Financial sector vulnerability: exposure of large banks to government bonds; high level of dollarization; widespread indexation to the exchange rate in financial contracts. These make financial stability vulnerable to government debt sustainability and to the crawling peg regime.
  - Institutional weaknesses: weaknesses in the courts and the comptroller’s office pose risks; absence of a well-functioning judicial system undermines private sector confidence and limits poverty-reduction impacts from growth.
  - Enhancing resilience to shocks: vulnerability to natural disasters (El Niño, hurricanes, earthquakes) and terms of trade shocks (commodity price declines, oil price increases); need structural changes such as export diversification and enhanced natural disaster management; these areas are currently supported adequately with technical assistance and donor funding.
- Staffs recommend the next PRSP-II progress report incorporate more in-depth analysis of these risks, including outlining contingency measures.

### Conclusions and issues for discussion — Priority areas for strengthening the PRS and implementation
- Staffs view PRSP-II as presenting a coherent medium-term macroeconomic framework and credible implementation efforts, but note important risks and vulnerabilities requiring continued prudent macroeconomic policies and structural reforms to raise growth prospects, improve investment climate, and absorb shocks.
- Achievements noted:
  - Maintaining macroeconomic stability while achieving poverty-reducing spending targets.
  - Strengthening transparency in fiscal and public financial management systems (including SIGFA).
  - Consolidating monitoring indicators (developing SINASID).
  - Government-led efforts to align donor assistance to PRSP-II and harmonization progress culminating in the JFA and PAM.
  - Better understanding of distributional impacts of public investment and sectoral reforms via PSIA work.
- Areas where further work is needed:
  - Prioritizing immediate implementation of measures aimed at raising likelihood of attaining PRSP-II/MDG goals, such as ensuring PRSP-II spending allocations in budget formulation and execution, and improved targeting of key interventions.
  - Sustaining fiscal consolidation by neutralizing fiscal impact of transfers under the Municipal Transfers Law, containing the fiscal impact of the pension system, and ensuring sustainable implementation of civil service reform.
  - Maintaining financial stability by implementing financial sector reform laws and enacting an anti-money laundering framework.
  - Tackling growing losses in the electricity sector due to rise in oil prices by increasing electricity tariffs required to stem losses and avoiding distortionary interventions.
  - Identifying fiscal contingency measures to address risks to the strategy to ensure satisfactory PRSP-II implementation.
  - Implementing social auditing mechanisms (such as citizen report cards) to ensure programs and projects translate into tangible and sustainable benefits to the population, and enhancing SINASID to support PRSP-II implementation, monitoring and evaluation, and budgetary decision making.
- Questions for Executive Directors suggested by staffs:
  - Do the Executive Directors concur with the areas identified by staffs as key implementation risks?
  - Do the Executive Directors concur with the areas identified by staffs as priorities for strengthening the PRS and its implementation?

*Source: Excerpt from PRSP-II assessment and staff recommendations as provided in the supplied document.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06172.pdf_