## _cr12258 - Executive Summary ## Source details **Canonical URL:** [_cr12258 - Executive Summary](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12258.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12258.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12258.pdf.json) --- ### Background - Nicaraguan economy hit by adverse shocks during 2007–11: global financial crisis, commodity price shocks, natural disasters, allegations of electoral fraud, and frictions between executive and legislative branches. - Social tensions and governance concerns weakened traditional donor support. - Political context: Sandinista government took office in early 2007 without a legislative majority; President Ortega re-elected November 2011. - Historical Fund engagement: - Fund-supported programs almost continuous since 1994; implementation often faced setbacks. - 2007 EPA noted macroeconomic stability maintained but structural reforms progressed slowly. ### The 2007–11 ECF-Supported Program: Design, Implementation, and Outcomes - Program design and objectives - Followed main recommendations of the 2007 EPA; sought to consolidate macroeconomic stability while creating fiscal space for social spending in context of debt sustainability. - Structural reform agenda sequenced with clear medium-term objectives. - Original access: SDR 71.5 million (55 percent of quota); augmented to SDR 78 million at first review in 2008. - Arrangement completion originally September 2010; extended twice in 2010 and expired December 2011. - Risk identification and flexibility - Key risks correctly identified; many materialized. - Conditionality evolved as program adjusted to global environment; safeguarding macroeconomic stability became main priority after global financial crisis with objectives changed in late 2009. - Implementation challenges and ownership - Exogenous shocks and weak ownership led to implementation delays; multiple delays in reviews in first three years. - Example: fourth review delayed due to fiscal slippages from introduction of a monthly wage bonus not contemplated in program. - Program impact - Helped preserve macroeconomic stability, improved fiscal balances especially after global crisis, and instrumental in keeping inflation under control. - Paved way for some tax policy and energy sector reforms; progress uneven with shortcomings in pension reform and public financial management reforms. ### Macroeconomic Developments, 2007–11 - Growth and output - Economy contracted by about 1.5 percent in 2009; rebounded quickly thereafter. - Recent growth drivers: commerce and manufacturing (supply-side); private consumption and investment (demand-side). - Inflation and exchange rate - Average annual headline inflation rose to 9.7 percent in 2007–11 from 7.3 percent in 2002–06, driven by food and oil price upswings and natural disaster-related shortages. - Operated a crawling peg exchange rate regime which provided a nominal anchor and helped set a floor on inflation expectations. - Pre-crisis vulnerabilities and crisis impact - Initial conditions: decade-high current account deficit of 25 percent of GDP in 2008; central government fiscal balance turned to a deficit in 2008 (-1.2 percent of GDP) from a surplus in 2007 (0.4 percent of GDP); inflation and public debt-to-GDP ratio were twice regional averages. - Crisis effects: remittances declined by 5.7 percent; exports, FDI, and development assistance fell; credit to private sector declined though financial system remained stable. - Fiscal response: current spending increased (wage increases up 9 percent in real terms; pension and health insurance benefits up 20 percent); implied fiscal impulse was the lowest in Central America. - Fiscal outcomes: central government deficit increased from 1.2 percent of GDP in 2008 to 2.8 percent in 2009. - Monetary/liquidity support: central bank increased size/flexibility of credit lines in early 2009 and signed one-year contingent credit line with CABEI. - Program adaptation: combined second and third reviews completed November 2009 after commitments to improve fiscal balances, undertake revenue-enhancing tax reform, and advance structural agenda. ### External Imbalances, Reserves, and Financial Sector Resilience - External balances and reserves - Current account deficit peaked at 25 percent of GDP in 2008; stable path thereafter. - Growth in exports and remittances offset by large import bill, especially oil. - Current account deficit financed by loans and FDI; sharp increase in Venezuela-related financial assistance offset decline in official assistance. - International reserves increased substantially; staff found no strong evidence of exchange rate misalignment. - Financial sector resilience - Financial sector proved resilient; suspension of debt service on public bonds in 2008 affected two major banks but speedy restructuring mitigated effects. - No decline in bank deposits during global crisis; banks had no toxic asset exposure and limited reliance on foreign credit lines pre-2009. - Banks retrenched credit in 2009, NPLs increased and profitability declined; credit and profitability recovered in 2010 as growth picked up. - Fiscal performance - Fiscal performance worsened after Lehman shock but strengthened subsequently. - Revenue performance improved after 2009 tax reform. - Public debt-to-GDP ratio declined slightly over 2007–11 but remained high at about 73 percent of GDP. - Composition of public spending deteriorated with higher share of current expenditures over five years. ### Structural Policies and Sector Reforms - Tax and revenue administration - 2009 tax reform broadened tax base by rationalizing incentives, simplifying structure, and increasing progressivity; contributed to increased revenue intake in last two years. - Revenue administration reforms implemented; limited progress on PFM. - Tax exemptions remained large ("about 8 percent of tax revenues in 2010"). - Central bank and financial supervision - Central bank charter modified in 2010 to improve governance and political autonomy; coordination with Ministry of Finance improved. - Key supervision reforms: regulatory framework for MFIs (June 2011); improved monitoring of financial cooperatives by INFOCOOP (June 2011); adoption of minimum liquidity requirement and capital requirement (March 2011); pilot stress testing (December 2011); continued on-site supervision. - Electricity sector - Electricity Sector Protocol (2008) strengthened finances; law imposing sanctions for electricity theft adopted. - Unbilled electricity declined from 27 percent of total usage in 2006 to about 20 percent in 2010. - Generation capacity increased from 760MW in 2006 to 1,110 MW in 2010, helping eliminate daily blackouts. ### Venezuela–ALBA Collaboration and Aid Transparency - Venezuela-related gross flows increased from 3 percent of GDP in 2007 to 7.6 percent in 2011. - Key features (text preserved): - Collaboration linked to oil imports/financing; involves ALBANISA (51 percent PDVSA, 49 percent PETRONIC), private sector financing (including BANDES), and grants for budgetary support. - ALBANISA pays 100 percent of oil bill 90 days after bill of landing; 50 percent received by PDVSA and 50 percent transferred to CARUNA as long-term concessional loans (25 years, 2-year grace, interest rate 2 percent). - CARUNA uses 40 percent of funds for financing private/public sectors and 60 percent to a Trust Fund owned by PDVSA but managed by CARUNA. - Policy-relevant implications: - Fiscal balances: funds financed transfers, subsidies, and since 2010 public sector wage bonuses; paying recurrent spending with transitory resources risks fiscal stability and transparency. - Debt sustainability: authorities state assistance does not entail public debt since CARUNA is liable, but adverse shock to CARUNA could risk public debt sustainability; about 45 percent of private external debt is ALBA-related. - Balance of payments: Venezuela-related FDI narrowed external funding gap; sudden stop could affect stability though large deposits could smooth adjustment. - Financial stability: ALBANISA and CARUNA deposits at commercial banks reached 13 percent of total deposits in 2011 from almost zero in 2007; concentration in a few banks poses risks. - Governance: substantial aid through private sector creates monitoring challenges and undermines Comptroller General purview. ### Social Outcomes - Poverty incidence decreased and income inequality improved from 2005 to 2009. - Improvements in illiteracy rate, primary enrollment, and drinking water/sewerage coverage in rural areas. - Outcomes linked to generally stable growth (except 2009), increased demand for agricultural exports, and government social policies. ### Program Ownership, Conditionality, Technical Assistance, and Collaboration - Ownership and consultation - Program aimed for broad-based ownership; government’s 2007 Economic and Financial Program was program basis; staff consulted social and civic organizations early. - Conditionality and sequencing - Reform sequencing: year 1 (2007–08) energy measures; year 2 (2008–09) PFM strengthening; year 3 (2009–10) steps on under-funded social security. - Quantitative conditionality streamlined: public sector overall balance, net domestic assets, net international reserves, limits on non-concessional external debt, and non-accumulation of external arrears. - Initial absence of performance criteria on wages or electricity tariffs. - Flexibility, delays, and observance - Program flexible but experienced delays from shocks and policy slippages; suspension of debt service postponed first review; second/third reviews completed November 2009 marked shift to macro stability focus. - Quantitative performance criteria generally met; structural conditionality observance mixed with many benchmarks met with delays. - Technical assistance - Significant Fund TA; CAPTAC-DR contributed to revenue initiatives, multi-year PFM plan, customs improvements, and BCN liquidity management. - 2009 FSAP Update focused on banking issues, monetary operations, public debt, access to finance, microfinance regulation, and financial infrastructure. - Collaboration with other IFIs - Coordinated with World Bank and IDB on energy sector, microfinance legal framework, and public sector employment report. ### Fiscal Structural Reforms and Pension System - Pension system weaknesses - Coverage less than one quarter of total working age population contributing to system. - Actuarial estimate: contribution rates must increase to over 30 percent to maintain current benefit levels over next 50 years. - Without changes, system projected to incur cash deficit and become insolvent during next decade. - Reform options (INSS report, 2010): raise contribution rates; increase retirement age; reduce benefits; lower replacement rates; abolish minimum pension; develop complementary fully-funded system. - Implementation constraints: political economy barriers; reforms require strong resolve, consensus building, and gradual phasing to manage transition costs. ### Public Financial Management, Tax Policy, and Debt Management - PFM reform needs - Multi-year Financial Management System Modernization Plan ("2008–12") provides main ingredients for enhanced expenditure control, planning, flexibility, transparency, and accountability. - Budget rigidities include constitutionally-mandated transfers of "10 percent of revenues" to universities and the judiciary. - Weak link between multi-year framework and annual budget; absence of coherent medium-term wage policy. - Public investment efficiency low despite large share of public investment spending. - Debt management and composition - Total public debt declined from 82 percent in 2007 to 73 percent in 2011. - Non-Paris Club bilateral creditors accounted for 24 percent of outstanding public debt (17.5 percent of GDP) at end-2011. - Debt-to-GDP remains highest in region; debt composition improved slightly with domestic debt share falling by about 3 percent. - Policy implications: accelerate negotiations with non-Paris Club creditors for debt relief; sustained decline in debt ratio depends on continued fiscal consolidation while safeguarding priority expenditures. - Relevant indicators presented: Public sector debt: 112.1 (2006) and 73.1 (2011); reserve coverage increased from 3.4 months of imports in 2006 to four months of imports in 2011; staff assessment of optimal reserve coverage between three and six months of imports. ### Monetary and Financial Sector Reforms; Governance and Private Sector Development - Monetary policy and exchange rate - Crawling-peg regime with predetermined rate of crawl 5 percent judged sensible for a highly dollarized economy; provided nominal anchor and stabilized inflation expectations. - Areas to improve: more liquid interbank market, reserve requirement regime review, and assessment of alternative regimes. - Financial sector structure and risks - Regional banking groups (mainly incorporated in Panama) represent more than 80 percent of banking sector assets. - High concentration in two largest banks; small scale and high country-risk premium hinder competition. - Financial intermediation among lowest in region. - Information shortcomings limit assessment of regional groups operating abroad. - Governance reforms and private sector development - Governance quality deteriorated on indicators of voice/accountability, government effectiveness, and control of corruption. - "Doing Business" indicators show Nicaragua lags Central American average on starting a business, registering property, paying taxes, trading across borders, and getting electricity. - Recommended: depoliticize public institutions, improve transparency, reform land registration, and reduce informality in labor and product markets. ### Lessons and Strategy for Future Fund Involvement - Lessons from 2007 program - Flexibility needed to adapt and safeguard macro stability; persistence required to deliver critical targets; foresight to prepare for domestic risks. - Program preserved macro stability amid shocks but had uneven progress on structural reforms (pension and PFM) and delayed implementation due to weak ownership. - Recommended framework for successor engagement - Continued Fund engagement recommended; surveillance-only less effective. - Success factors: strong ownership; contingency strategy for sudden decline in Venezuela-related flows; well-defined structural agenda focusing on energy and pension systems. - Preferred instrument: successor ECF arrangement if strong ownership exists. ### Specific Recommendations for a Successor Fund-Supported Program - Program design and ownership - Early-stage extensive outreach to social and civic organizations to enhance transparency and build broad-based ownership. - Expand high-level dialogue to generate support for difficult structural reforms. - Streamline and target conditionality to areas where authorities assume clear ownership. - Macroeconomic program features - Build on macro stability while ensuring flexibility to cope with exogenous shocks. - Include contingency plan for sudden stop of Venezuela-related inflows. - Augment fiscal buffers and strengthen international reserves. - Eliminate off-budget expenditures financed with temporary flows. - Quantitative conditionality should ensure public wage bill changes are determined within a comprehensive medium-term wage policy consistent with fiscal sustainability. - Structural priorities - Focus on a few high-payoff areas: energy sector and pension system reforms. - Advance monetary and financial sector reforms and governance reforms where macro-critical. ### Risks to Program Success and Stakeholder Views - Risks identified - Exogenous shocks: sudden stop of Venezuela-related inflows, vulnerability to natural disasters and commodity price movements. - Large imbalances: high public debt and external current account deficit. - Policy slippages and weak institutions/governance threaten stability and pose reputational risk for the Fund. - Authorities’ views - Program important for maintaining macro stability and advancing reforms; TA support (CAPTAC-DR) vital. - Concerns that Fund asked for procyclical fiscal policies during crisis compared with other members; preferred more flexible access during global crises. - On sudden decline in Venezuela-related flows: authorities viewed probability as extremely low and noted large deposits could smooth short-term impact. - Interest in successor Fund-supported program with additional TA. - Views of other stakeholders (May 14-17, 2012) - Fund-supported program helped pursue disciplined macro policies, support reforms, and preserve macro stability during transition. - Stakeholders agreed Nicaragua needs wide-ranging reforms to boost growth and reduce poverty; priority areas: pension reform, energy sector reform, and tax policy reform. - Consensus that future Fund engagement should emphasize transparency/governance of Venezuela-related flows and readiness for possible declines. *Source: Executive Summary and selected excerpts, Ex-Post Assessment of Longer-Term Program Engagement: Nicaragua, 2007–11 (IMF), content unit _cr12258.* ### Executive Summary ...................................................................................................... ### _cr12258 - Executive Summary ### Background - The Nicaraguan economy was buffeted by a series of adverse shocks over the 2007–11 period, including the global financial crisis, commodity price shocks, natural disasters, allegations of electoral fraud, and occasional frictions between the executive and legislative branches of government. - Social tensions and governance concerns weakened traditional donor support. - Political context: The Sandinista government took office in early 2007 without a legislative majority; President Ortega was re-elected for a second term in November 2011. - Historical Fund engagement: - Nicaragua has had Fund-supported programs almost continuously since 1994, but program implementation has often faced setbacks. - The 2007 EPA reviewed programs during 1994–2006 and noted that while macroeconomic stability was maintained, structural reforms progressed slowly. ### The 2007–11 ECF-Supported Program: Design, Implementation, and Outcomes - Program design and objectives - The program followed closely the main recommendations of the 2007 EPA. - Sought to consolidate macroeconomic stability while creating fiscal space for additional social spending in the context of debt sustainability. - Structural reform agenda was carefully sequenced with clear medium-term objectives. - Original access was SDR 71.5 million (55 percent of quota); access was augmented to SDR 78 million at the time of the first review in 2008. - The arrangement was set to be completed in September 2010, was extended twice in 2010, and expired in December 2011. - Identification of risks and program flexibility - The program correctly identified key risks, many of which materialized. - Conditionality evolved over time as the program adjusted to changes in the global environment. - After the global financial crisis, safeguarding macroeconomic stability became the main priority and program objectives were changed in late 2009. - Implementation challenges and ownership - Confluence of exogenous shocks and weak program ownership led to implementation challenges. - Multiple delays in completion of reviews in the first three years, primarily because of shocks and policy slippages. - Example: The fourth review could not be completed on time because of fiscal slippages associated with the introduction of a monthly wage bonus that was not contemplated in the program. - Program impact on macroeconomic stabilization - The program helped preserve macroeconomic stability. - It was effective in helping authorities design a realistic policy framework that resulted in a significant improvement in fiscal balances especially after the global financial crisis. - Instrumental in keeping inflation under control. - Structural reform outcomes - The program paved the way for completion of some tax policy reforms and reforms in the energy sector. - Progress was uneven; the program fell short in key structural areas such as pension reform and public financial management reforms. ### Macroeconomic Developments, 2007–11 - Growth and output - The economy contracted by about 1.5 percent in 2009 following spillovers from the global financial crisis and domestic political turmoil, but rebounded quickly thereafter. - Recent growth drivers: commerce and manufacturing on the supply-side; private consumption and investment on the demand-side. - Inflation and exchange rate policy - Average annual headline inflation rose to 9.7 percent in 2007–11 from 7.3 percent in 2002–06, driven by food and oil price upswings and natural disaster-related shortages. - Nicaragua operated a crawling peg exchange rate regime which provided a nominal anchor for monetary policy and helped set a floor on inflation expectations. - Pre-crisis vulnerabilities and crisis impact (Box 1 highlights) - Initial conditions: chronically high current account deficit that widened with the 2008 fuel and food price hikes; central government fiscal balance turned to a deficit in 2008 (-1.2 percent of GDP) from a surplus in 2007 (0.4 percent of GDP); inflation and public debt-to-GDP ratio were twice regional averages. - Crisis effects: exports and remittances fell (remittances declined by 5.7 percent); FDI and development assistance registered significant declines; credit to the private sector declined though the financial system remained stable. - Fiscal response: fiscal policy was accommodative—current spending increased (mostly wage increases–up 9 percent in real terms–and pension and health insurance benefits–up 20 percent). The implied fiscal impulse was the lowest in Central America. - Fiscal outcomes: the decline in grants and the jump in expenditures increased the central government deficit from 1.2 percent of GDP in 2008 to 2.8 percent in 2009. - Monetary and liquidity support: the central bank increased the size and flexibility of its credit lines in early 2009 and signed a one-year contingent credit line with the Central American Bank for Economic Integration (CABEI). - Program adaptation: prolonged negotiations delayed reviews; the combined second and third reviews were completed in November 2009 after commitments to improve fiscal balances, undertake revenue-enhancing tax reform, and advance the structural reform agenda. Focus shifted to safeguarding macroeconomic stability. ### Medium-Term Structural Challenges and Policy Priorities - Core impediments to sustained growth (identified as persistent, structural constraints) - Protracted challenges in the energy sector and pension system. - Weak institutions and governance. - Scarcity of human capital. - Poor infrastructure. - Underdeveloped financial markets. - Low level of private sector development. - Policy implications - Eliminating these impediments can improve long-term growth prospects, reduce poverty, and increase the resilience of the economy. - A successor Fund-supported program could help maintain macroeconomic stability, advance reforms, and lend credibility to policies—potentially attracting FDI and other capital flows. - Critical precondition: strong program ownership by the authorities. - Program design recommendations: - Maintain flexibility to cope with exogenous shocks, including the possibility of a sudden decline in Venezuela-related flows. - Focus the structural agenda on a well-defined set of macro-critical areas with the highest pay-off for stability and growth, notably the energy sector and the pension system. *Source: Executive Summary, Ex-Post Assessment of Longer-Term Program Engagement: Nicaragua, 2007–11 (IMF).* ### 9. External imbalances remained large despite a significant improvement in the ### 9. External imbalances remained large despite a significant improvement in the ### External balances and reserves - After reaching a decade-high of 25 percent of GDP in 2008 because of the escalation of oil prices, the external current account deficit followed a stable path during the past three years. - Growth in exports and remittances was generally offset by a persistently large bill of imports, especially oil bill. - The current account deficit has been more than financed by loans and FDI. - Although there was a steady decline in official assistance owing to governance concerns, this was compensated by a sharp increase in financial assistance from Venezuela. - Monetary policy aimed at protecting the reserve position and robust capital inflows accommodated a substantial increase in international reserves. - Staff assessments of Nicaragua’s external stability suggested no strong evidence of an exchange rate misalignment. ### Financial sector resilience and developments - The financial sector proved to be resilient. - Following the suspension of debt service on public bonds during a legal investigation into alleged improprieties in the handling of the 2000–01 banking crisis, two major banks were affected, which increased financial uncertainty during 2008. - The speedy approval of a restructuring agreement between the central bank (BCN) and the banks helped mitigate the effect of this event on the financial sector. - The direct impact of the global financial crisis on the banking system was minimal; there was no decline in bank deposits (which was already a major concern after the municipal elections in November 2008). - Nicaraguan banks did not have exposures to toxic assets and they did not rely much on foreign credit lines before the 2009 crisis. - As uncertainty increased, banks retrenched credit to the private sector to build liquidity buffers. - Non-performing loans (NPLs) increased and banks’ profitability declined in 2009. - As growth picked up in 2010, credit provision accelerated, the share of NPLs declined, banks’ profitability started to improve, and deposits in local and foreign currency rose. ### Fiscal performance - Fiscal performance worsened following the global crisis, but has strengthened since then. - In the aftermath of the Lehman shock, fiscal policy focused on supporting domestic demand; growth in current spending along with shortfalls in grants led to a significant jump in the central government deficit in 2009. - Revenue performance improved following the tax reform of 2009. - The composition of public spending deteriorated, with a slight increase in the share of current expenditures over the past five years. - The public debt-to-GDP ratio registered a small decline over 2007–11, but remained high at about 73 percent of GDP. - Hence, the overall public sector balance has also improved. ### Structural policies and reforms - The approval of a tax reform in 2009 aimed at broadening the tax base by rationalizing tax incentives, simplifying the tax structure, and increasing progressivity; its adoption contributed to increased revenue intake in the last two years of the program. - Some revenue administration reforms were implemented, but progress on public financial management (PFM) has been quite limited. - Central bank legal framework and financial sector supervision improvements: - The central bank charter was modified in 2010 to improve governance structure and political autonomy. - Coordination between the BCN and the Ministry of Finance improved. - Key financial supervision reforms included: - Approval of a regulatory framework for micro-finance institutions (MFIs) in June 2011. - Improvements in monitoring and supervision of financial cooperatives by INFOCOOP in June 2011. - Adoption of a minimum liquidity requirement and introduction of capital requirement in March 2011. - Pilot stress testing in December 2011 and continued implementation of on-site banking supervision. - Electricity sector reforms: - An Electricity Sector Protocol agreed in 2008 under the ECF-supported arrangement strengthened finances. - A law imposing sanctions for electricity theft further strengthened the protocol. - Unbilled electricity by the distribution company declined from 27 percent of total usage in 2006 to about 20 percent in 2010. - Electricity generation capacity increased from 760MW in 2006 to 1,110 MW in 2010, helping eliminate daily blackouts. ### Venezuela–ALBA collaboration and transparency of aid flows - Venezuela-related gross flows increased from 3 percent of GDP in 2007 to 7.6 percent in 2011. - Monitoring of these large flows became increasingly important given their implications for macroeconomic and financial stability, and governance. - Box 2: Key features of the Venezuela-Nicaragua/ALBA collaboration (text preserved): - The collaboration is primarily linked to oil imports and oil-related financing, and also involves: (i) FDI through a bi-national firm, ALBANISA (51 percent owned by Venezuela’s state-oil company PDVSA and 49 percent by Nicaragua’s state-oil company PETRONIC); (ii) private sector financing (including through Venezuela’s development bank, BANDES); and (iii) the provision of grants for budgetary support. - How it works: - ALBANISA pays 100 percent of the oil bill on commercial terms 90 days after the bill of landing. - 50 percent of this payment is received by PDVSA and the remaining 50 percent is transferred, on behalf of PDVSA, to the private financial credit cooperative Caja Rural Nacional (CARUNA) in the form of long-term concessional loans (payable over 25 years, with a 2-year grace period, at an interest rate of 2 percent). - CARUNA uses 40 percent of the funds to provide financing to both the private and the public sectors (e.g., subsidies and transfers, wage bonuses, and lending to small rural cooperatives). - CARUNA sends the remaining 60 percent to a Trust Fund owned by PDVSA but managed by CARUNA that can only be used for purposes and financing terms approved by Venezuela. - Policy-relevant implications highlighted in the source: - Fiscal balances: funds helped pay for transfers and subsidies for transportation and energy, and, since 2010, public sector wage bonuses; paying for recurrent fiscal spending with transitory resources is a clear risk for fiscal stability and undermines fiscal transparency. - Debt sustainability: authorities state Venezuelan assistance does not entail direct/contingent public debt since CARUNA is liable, but an adverse shock to CARUNA could risk public debt sustainability; about 45 percent of private external debt is now ALBA-related. - Balance of payments: Venezuela-related FDI flows help narrow external funding gap; a sudden stop could affect balance of payments stability; large Venezuela-related deposits at commercial banks could smooth adjustment. - Financial stability: deposits of ALBANISA and CARUNA at commercial banks reached 13 percent of total deposits in 2011 from almost zero in 2007; concentration in a few large banks poses risks despite substantial liquidity buffers. - Governance: substantial portion of aid goes through the private sector, creating monitoring challenges and undermining the purview of the Comptroller General; flows allowed authorities to keep electricity tariffs unchanged in 2011 despite rising world oil prices, undermining targeting of subsidies. ### Social outcomes - Poverty incidence decreased and income inequality improved from 2005 to 2009. - Other social indicators improved, including illiteracy rate, enrollment rate in primary education, drinking water and sewerage coverage in rural areas. - These favorable outcomes appeared related to generally stable economic growth (except in 2009), increased demand for agricultural exports, and the government’s social policies. ### Assessment of the 2007 ECF-supported program: objectives and structural focus - Program objectives (approved October 2007): - Consolidate macroeconomic stability and reduce key vulnerabilities while creating fiscal space for additional social spending in the context of debt sustainability. - The program envisaged a gradual decline in public debt and the current account deficit, and a further accumulation of reserves. - Structural focus: - Comprehensive approach to reforms in energy, fiscal, and financial sectors. - Energy: improve electricity service and strengthen sector finances to promote growth, enhance competitiveness, and reduce quasi-fiscal risks. - Fiscal: improve PFM practices and restore sustainability of the pension system. - Other measures aimed at improving transparency, and strengthening the finances of the central bank as well as its independence and accountability. *Source: IMF country report content unit _cr12258 - 9. External imbalances remained large despite a significant improvement in the (PDF).* ### 19. The program intended to build broad-based ownership, which, according to the ### _cr12258 - 19. The program intended to build broad-based ownership, which, according to the ### A. Program ownership and consultation - The program aimed to build broad-based ownership because the 2007 EPA identified ownership as inadequate in past programs. - The government’s 2007 Economic and Financial Program served as the basis for the design of the Fund-supported program. - Staff undertook a consultation process with social and civic organizations at the early stages of program discussions to improve transparency and ownership by society as a whole. ### B. Program design and implementation - Reform priorities and sequencing - The reform agenda focused on clear medium-term objectives informed by the lessons of the 2007 EPA. - Energy: early actions strengthened sector finances by establishing criminal penalties to discourage fraud in electricity consumption; tariff adjustment was deferred. - Social agenda: the program incorporated priorities of the authorities’ Poverty Reduction and Strategy Paper (PRSP) by including quantitative conditionality tracking poverty-related spending and structural conditionality monitoring social outcomes. - Access to credit: program stressed the need to facilitate access to credit for SMEs and the rural sector; authorities planned to consolidate small state financial institutions and create a second-tier development bank. A development bank (Banco Produzcamos) was created by law in 2007 and became operational in early 2010. - Structural reform sequencing: first year (2007–08) emphasized energy measures; second year (2008–09) envisaged strengthening PFM practices; third year (2009–10) contemplated steps to address medium-term challenges including the under-funded social security system. - Program design correctly identified key risks, many of which materialized. - Quantitative conditionality - Streamlined relative to previous Fund-supported programs with Nicaragua. - Initial quantitative targets focused on: the public sector overall balance, net domestic assets, net international reserves, limits on non-concessional external debt, and non-accumulation of external arrears of the public sector. - The program initially did not include performance criteria on wages or electricity tariffs. - Flexibility and delays - The program remained flexible despite multiple delays in the completion of reviews caused by policy slippages and domestic and external shocks, especially the global financial crisis. - Example: suspension of debt service on public bonds postponed the first review (originally scheduled for March 2008); staff and authorities agreed on a policy response and implemented a bond swap to re-activate the program. - The global financial crisis delayed the second review; the 2009 budget underestimated the crisis impact and continued to feature large increases in current spending, producing a large ex-ante financing gap and shifting some fiscal consolidation to 2010. - Completion of the second and third reviews in November 2009 marked a turning point: policy priority shifted to preserving macroeconomic stability and building a track record; structural reform scope was streamlined. - The fourth review could not be completed in May 2010 because the government granted a wage bonus to public sector employees not contemplated in the program; staff proposed an indicative ceiling on the wage bill and macro adjustments to offset the fiscal effect. The program was extended twice and access was rephased. - Transparency and monitoring of external aid (Venezuela/ALBA) - Uncertainties about size and use of flows from Venezuela/ALBA were a major program discussion issue. - Staff emphasized identical reporting standards for all aid and focused structural conditionality on enhancing monitoring and transparency of official aid flows. - Progress was achieved at the combined fourth and fifth reviews, which included a structural benchmark to publish “Aid Reports” documenting use by economic sector of all aid flows, including from Venezuela; reports showed part of Venezuelan aid had been spent and part deposited at a few commercial banks. - Authorities later provided aggregate data on bank deposits to broadly track those aid-associated flows. ### C. Program performance and outcomes - Macroeconomic projections vs outturns - Significant gaps between some program projections and outturns, especially in the first three years, largely reflected the gravity of shocks hitting the economy. - Growth projections: could not foresee the depth of the 2009 global crisis and were too conservative in 2010 regarding recovery speed. - Inflation: fluctuated with global commodity prices; first-half program outturns differed from projections. - Public sector balance: projections were pessimistic given stronger-than-expected tax revenues in the last two years. - Net capital flows: often higher than envisaged, keeping international reserve levels above projections during most of the program. - Gaps between projections and outturns shrank during the sixth and seventh reviews owing to a relatively calmer global environment. - External financing and access - Financing needs became a major concern after the global financial crisis, but external financing constraints were not binding. - Access under the program was augmented by SDR 6.5 million at the completion of the first review (September 2008) to help cope with 2008 natural disasters. - Nicaragua received no budget-support loans from the World Bank after 2008; budget-support grants from bilateral donors were suspended during the last two years of the program due to alleged shortcomings in electoral transparency. - These developments and the global financial crisis significantly changed official external financing sources in 2009 and required Nicaragua to lower reliance on official external financing. - The ECF-supported arrangement included adjustors on net international reserves, central government expenditure, and the consolidated public sector balance to accommodate fluctuations in external budget loans and grants. - Observance of conditionality - Quantitative performance criteria were generally met throughout the arrangement; quantitative conditionality was always met with few exceptions, though some indicative targets were missed by small margins. - Structural conditionality observance was mixed: the majority of structural benchmarks were met but many with delays; some required revision of test dates or escalation to prior actions; Assembly approval timing caused some delays. - Program performance remained broadly satisfactory despite the 2009 objective shift: at the time of the second and third reviews in 2009, all quantitative performance criteria were met; compliance with quantitative conditionality remained strong after 2009. - Structural program facilitated some reforms but ceased to be the primary focus after the global financial crisis. - Key achievements and shortcomings - Achievements: - Tax reform of 2009. - Passage of legislation regulating microfinance institutions. - Publication of semiannual reports on sources and uses of foreign aid, including from Venezuela. - Law establishing economic and penal sanctions for electricity theft. - Negotiation of a new Electricity Sector Protocol. - Modification of the Central Bank Charter. - Shortcomings: - Insufficient progress in reforms of the pension system and public financial management (PFM). - Areas requiring greater resolve and ownership — pension, governance, and institutional reforms — were only partly addressed by conditionality, especially in later program stages. - The wage bill: size, implications, and program adjustments (Box 4) - Size and trend: - The public wage bill absorbed, on average, about one-third of the annual budget during 2006–11. - Share increased from 32 percent of total spending in 2006 to 35 percent in 2011. - Drivers of increases: - 2007: reclassification of health and education expenditures from investment to wages. - June 2007 law required bi-annual adjustments in the minimum wage with a floor equal to accumulated inflation plus real GDP growth. - 2008: wage increases of 16 percent granted to teachers, health-sector workers, the army, and the police. - 2009: expansionary fiscal package included a real increase of around 9 percent in the public sector wage bill. - May 2010: off-budget monthly wage bonus introduced at an average annual cost of about 0.7 percent of GDP, financed with grants from Venezuela. - Fiscal and program implications: - Wage policies were a key source of uncertainty for expenditure plans, limiting fiscal flexibility and reducing fiscal space for capital and social spending. - Early program conditionality did not explicitly cover wage policies; following the 2010 wage bonus, conditionality was strengthened to include an indicative ceiling on the wage bill and a requirement to complete a study on productivity gains and rationalization of government employment. - The 2010 wage bonus raised transparency concerns and delayed the completion of the fourth review. ### D. Overall assessment and lessons - The program was designed to enhance ownership, incorporate social priorities, and sequence structural reforms while identifying key risks. - Flexibility allowed adaptation to shocks, notably by refocusing on macroeconomic stability during the global financial crisis. - Quantitative conditionality performance was strong; structural conditionality had mixed observance, with many benchmarks met with delays. - Program delivered several important reforms but was unable to complete reforms in pensions and PFM, in part because conditionality shifted toward preserving macroeconomic stability after 2009, and areas requiring stronger ownership remained only partly addressed. *Source: IMF staff reports and supporting material in the provided content unit.* ### 34. The authorities’ ownership of the program also seems to have been in some ### _cr12258 - 34. The authorities’ ownership of the program also seems to have been in some ### Program ownership and conditionality - Authorities’ ownership of the program "seems to have been in some instances overestimated." - Decision not to include quantitative conditionality on wage policy and the energy sector in the initial stages: - Suggests confidence in the authorities’ resolve despite past major challenges in these issues in previous programs with Nicaragua. - In the case of wage conditionality, reflects a shift in conditionality guidelines to overall spending and priority items rather than individual budget items. - Program employed a relatively high number of prior actions, many focused on submission of a budget or a supplementary budget. - Implication: ownership was not sufficient to deliver program targets in a timely fashion. ### D. Technical Assistance - Program was supported by significant technical assistance (TA) from the Fund. - TA contributions and impacts: - Critical in the design of some revenue reform initiatives that became part of the 2009 tax reform. - CAPTAC-DR provided TA to develop a multi-year plan to improve effectiveness, transparency, and accountability of public expenditures. - CAPTAC-DR TA instrumental in formulating steps to improve customs regulations and to enhance the BCN’s liquidity management facilities. - 2009 Financial Sector Assessment (FSAP) Update focused on banking system issues, monetary operations and public debt, access to finance and microfinance regulation, and financial system infrastructure—areas closely related to structural program objectives. ### E. Collaboration with Other IFIs - Collaboration with the World Bank and the IDB yielded tangible gains in structural reform areas outside the Fund’s core expertise. - Close coordination with the World Bank and IDB in the design of energy sector reforms. - World Bank played a pivotal role in preparing the new regulatory framework for microfinance institutions. - IDB provided terms of reference for the preparation of the report on public sector employment, which constituted a structural benchmark. ### IV. MEDIUM-TERM STRUCTURAL POLICY CHALLENGES — A. Stability and Growth: Half Full or Half Empty? - Achievements over the last decade: - Nicaragua preserved macroeconomic stability and completed two broadly successful Fund-supported programs. - Significant decline in macroeconomic volatility and inflation. - Robust growth in exports and FDI inflows compared with regional peers. - Increasing integration into the world economy helped align Nicaragua’s business cycle with the global cycle. - Shortcomings: - Growth performance weak and lagging regional peers. - Per capita income growth averaged an annual rate of "1.3 percent" over the past two decades, lower than the Central American average of "2.5 percent". - Productivity growth has been low; Nicaragua consistently ranked lower than typical Central American country in most indicators of competitiveness and development. - Identified bottlenecks preventing faster growth: - Protracted challenges of the energy sector and pension system. - Weak institutions and governance. - Scarcity of human capital. - Poor infrastructure. - Underdeveloped financial markets. - Low level of private sector development. - Role of Fund-supported programs: - Clearly identified these bottlenecks and helped make some progress, but broader reform efforts often faded due to lack of political consensus. - Need for structural reforms: - Reforms would increase output growth and amplify gains from increased trade and FDI. - Example: infrastructure improvements, including electricity sector reform, could significantly increase growth benefits from trade integration. - Given Nicaragua’s low level of development, growth gains from reforms tend to be much larger than in other Central American countries. - Political economy constraint: - Structural reforms can be implemented only with broad political and public consensus. ### B. Energy Sector Reforms - Current challenges: - More than two-thirds of electricity still generated by (expensive) fuel-oil based plants. - Electricity tariffs have often been below generation costs. - Non-technical losses remain large, causing liquidity problems for electricity distribution. - Electrification rate increased from "47 percent in 2003" to "72 percent in 2009", but remains low by regional standards. - Recommended actions to improve growth prospects and reduce vulnerabilities: - Update parameters of the Electricity Sector Protocol to secure sector finances. - Acknowledge that such an update may imply higher tariffs for consumers and accompany it with measures to improve targeting of subsidies to protect the most vulnerable. - Invest to reduce technical and non-technical losses and increase service coverage. - Diversify generation toward non-exhaustible electricity generation plants. - Consider Public Private Partnerships (PPPs) to increase investment after ensuring the institutional framework is consistent with best international practice. ### C. Fiscal Structural Reforms and Debt Management — Pension Reform - Current pension system issues: - Current parameters imply a long-run imbalance between contributions and benefits. - Coverage among the lowest in Latin America: "less than one quarter of the total working age population contributing to the system." - Large increases in minimum pension payments, rapid growth of administrative costs, and expansion in medical insurance coverage since 2007 have aggravated long-term finances of INSS. - Actuarial estimates: pension contribution rates must increase to "over 30 percent" to maintain current benefit levels over the next 50 years. - Without changes, the system is projected to incur a cash deficit and become insolvent during the next decade. - Reform options (INSS report, 2010): - Raise contribution rates. - Increase retirement age. - Reduce benefits. - Lower replacement rates. - Abolish minimum pension. - Develop a complementary fully-funded pension system. - Implementation constraints: - Progress has often been stalled by political economy constraints. - Necessary reforms require strong resolve, continued consensus building, and gradual phasing to account for transition costs. ### Tax policy, revenue administration, and public financial management - Revenue and tax administration: - Revenue intake increased during the last program, but weaknesses remain. - Important to lock in gains from the 2009 tax reform by: - (i) Broadening the tax base by eliminating tax exemptions, which remain large ("about 8 percent of tax revenues in 2010"), particularly in VAT and corporate income taxes. - (ii) Simplifying the tax system while enhancing efficiency of revenue administration. - Public Financial Management (PFM) reform: - Nicaragua needs a comprehensive PFM reform. - The multi-year Financial Management System Modernization Plan (for "2008–12") provides main ingredients to enhance expenditure control and planning, increase budget flexibility, and improve efficiency, transparency and accountability. - Budget rigidities complicate spending reallocation: - Constitutionally-mandated transfers of "10 percent of revenues" to universities and the judiciary. - Weak link between multi-year budget framework and the annual budget. - Absence of a coherent medium-term framework to guide wage policy. - Public investment efficiency: - Despite a large share of public investment spending relative to regional peers, infrastructure quality indicators are among the lowest in the world. - Need to boost effectiveness of PFM system by: - Enhancing public investment management processes (project selection, appraisal, implementation, monitoring and evaluation). - Improving coordination between budgeting and planning. - Strengthening internal and external controls. ### Debt Management - Debt-to-GDP ratio: - Remains the highest in the region owing in part to slow progress in fiscal consolidation and securing debt relief from non-Paris Club creditors. - Debt relief history and challenges: - Nicaragua reached the HIPC completion point in 2004 and received substantial debt relief from all Paris Club creditors. - Negotiations for further debt relief on HIPC-equivalent terms from some non-Paris Club bilateral creditors have proceeded at a slow pace since then. - Debt composition: - Improved only slightly during the last program, with the share of (expensive) domestic debt falling by about "3 percent." *Source: _cr12258 - 34. The authorities’ ownership of the program also seems to have been in some* ### 49. It would be important to reduce public debt over the medium term and improve its ### It would be important to reduce public debt over the medium term and improve its composition. ### Public debt: vulnerabilities, composition, and outlook - Moderate risks of external public debt distress persist, driven by: - worsening financing terms; - lower-than-envisaged medium-term growth; - slower-than-expected external adjustment; - deterioration in the social security’s operating balance. - Key debt composition and exposure findings: - Nicaragua’s domestic public debt is denominated in foreign currency and is sensitive to exchange rate shocks; gradual diversification of the currency composition of debt is needed. - Non-Paris Club bilateral creditors (Costa Rica, Libya, Taiwan POC, Iran, Honduras, Peru, China, Uruguay, India, and Ecuador) accounted for 24 percent of the outstanding public debt (17.5 percent of GDP) at end-2011. - Total public debt declined from 82 percent in 2007 to 73 percent in 2011 despite shocks and slow progress in negotiations for further debt relief. - Policy implications: - Accelerate negotiations with non-Paris Club creditors to secure further debt relief. - Sustained decline in the debt ratio hinges on continued fiscal consolidation. - Fiscal program should be geared towards ensuring debt sustainability while safeguarding social and other priority expenditures. - Relevant indicators (as presented): - Public sector debt: 112.1 (2006) and 73.1 (2011) [chart values]. - Reserve coverage increased from 3.4 months of imports in 2006 to four months of imports in 2011. - Fund staff assessment of optimal reserve coverage for Nicaragua: between three and six months of imports (based on a 2011 methodology). ### Monetary and financial sector reforms - Exchange rate and monetary policy framework: - The crawling-peg regime is judged a sensible choice for a highly dollarized economy; the predetermined rate of crawl is 5 percent. - The regime has provided a nominal anchor and stabilized inflation expectations. - Areas to improve in monetary policy operations: - develop a more liquid interbank money market; - improve the reserve requirement regime; - review alternative exchange rate regimes to assess longer-term options. - Financial sector structure and risks: - The financial sector is dominated by regional banking groups (mainly incorporated in Panama), which represent more than 80 percent of the banking sector’s assets. - High concentration in the two largest banks; small scale, high concentration, and relatively high country-risk premium hinder competition. - Financial intermediation (credit to the private sector) is among the lowest in the region. - Information shortcomings limit comprehensive assessment of regional groups operating abroad, posing potential risks. - Priority reforms (from the 2009 FSAP Update Recommendations): - (i) improve banks’ regulation, risk management and oversight; - (ii) enhance efficiency and competition in the banking sector; - (iii) strengthen consolidated and cross-border supervision; - (iv) upgrade monetary policy management by enhancing liquidity operations. ### Governance reforms and private sector development - Governance trends and constraints: - Quality of governance has continued to deteriorate: indicators of voice and accountability, government effectiveness, and control of corruption have been declining over the past decade (World Bank Worldwide Governance Indicators). - “Doing Business” indicators suggest Nicaragua compares less favorably to the Central American average on dimensions including starting a business, registering property, paying taxes, trading across borders, and getting electricity. - Recommended institutional reforms: - Enhance institutional and regulatory frameworks by depoliticizing public institutions and promoting transparency to strengthen policy formulation. - Improve the land registration system to increase certainty of property titles. - Undertake reforms to reduce informality in labor and product markets to improve the business climate, promote private investment, and leverage CAFTA-DR and regional integration. - Aid flows and governance of affiliated domestic private institutions: - Transparency, monitoring, and governance of aid flows remain a concern. - Precautionary measures are necessary to mitigate macroeconomic impacts of aid inflows. - Improve governance of domestic private institutions affiliated with Nicaragua-Venezuela/ALBA collaboration (among them CARUNA) by publishing their audited financial statements. ### Poverty reduction and social policy reforms - Progress on Millennium Development Goals (MDGs): - Good progress on targets for extreme poverty and child mortality. - Concerns remain for universal primary education and maternal health targets. - Poverty remains very high, with rural poverty particularly deep. - Social policy framework and execution: - Social policies are anchored in the government’s Poverty Reduction Strategy Paper (PRSP), updated in 2011 with five pillars: - (i) promoting growth through sound macroeconomic policies, increased public and private investments, and improved access to external markets; - (ii) fostering well-being and equity through expansion of health and education services, and targeted social programs supporting production of poor households; - (iii) improving governance and transparency of public sector institutions; - (iv) promoting environmental sustainability; - (v) reducing inter-regional disparities. - Implementation of the PRSP’s five strategic pillars could lead to marked improvements in living standards over the medium term, but success hinges on improved governance and public financial management (PFM) systems, increased transparency in public finances, and enhanced monitoring and evaluation of social programs. - Further impact analysis is needed to ascertain contributions of different factors, including social programs, to observed changes in social indicators. ### Lessons from the 2007 Fund-supported program and strategy for future Fund involvement - Assessment of the 2007 program: - The program helped preserve macroeconomic stability amid shocks including the global financial crisis; Fund advice aided in keeping inflation, and the fiscal and current account balances under control, and in beefing up foreign reserves. - Program shortcomings: uneven progress on structural reforms (notably pension and PFM reforms); delayed implementation due to shocks and weak ownership. - Program parallels with the 2002 program: unexpected large wage increases, fiscal slippages, weak ownership, multiple combined reviews (seven in 2007 program; 11 in 2002 program), but eventual completion in four years with broadly successful macroeconomic outcomes. - Key lessons: - Be flexible to adapt to changing circumstances and safeguard macroeconomic stability. - Be persistent to deliver on critical targets; fiscal discipline was essential to keep deficits under control, even when it delayed reviews. - Have foresight to recognize potential domestic risks and prepare policy responses ahead of time. - Recommended framework for future Fund involvement: - Continued program engagement with the Fund is recommended to preserve macroeconomic stability and advance structural reforms; surveillance-only engagement would be less effective. - Success factors for a prospective program: - strong ownership; - clear strategy to mitigate adverse effects of exogenous shocks, including a sudden decline in Venezuela-related flows; - a well-defined structural agenda addressing energy sector and pension system problems. - A successor ECF arrangement is the preferred framework if strong ownership exists; it could consolidate achievements and provide a policy framework for structural reforms. ### Specific recommendations for a successor Fund-supported program - Program design and ownership: - Early-stage extensive outreach to social and civic organizations to enhance transparency and build broad-based ownership. - Expand dialogue with authorities at the highest political level to generate support for difficult structural reforms. - Streamline and target conditionality to areas where authorities assume clear ownership; clearly outline risks to stability and set expectations. - Macroeconomic program features: - Build on achieved macroeconomic stability while ensuring flexibility to cope with recurrent exogenous shocks. - Include a well-defined contingency plan to respond to a sudden stop of Venezuela-related inflows. - Continue to augment fiscal buffers and strengthen international reserves. - Eliminate off-budget expenditures financed with temporary flows. - Quantitative conditionality should ensure changes in the public wage bill are determined within a comprehensive medium-term wage policy consistent with fiscal sustainability. - Structural reform priorities: - Concentrate on a few well-defined structural areas with highest payoff: priority focus on energy sector and pension system reforms. - Seek progress in other macro-critical areas, including monetary and financial sector reforms, and governance reforms. *Source: IMF staff report excerpt.* ### 69. The prospective program should also emphasize the necessity of further ### _cr12258 - 69. The prospective program should also emphasize the necessity of further ### Program design and policy recommendations - Emphasize further improvements in transparency and use of foreign aid flows, including those from Venezuela. - Find ways to take account of the quasi-fiscal spending undertaken by CARUNA in the fiscal framework. - Carefully assess the implications of CARUNA’s plans with respect to investment and social programs for: - real activity; - fiscal contingencies; - cost of subsidies. - Maintain close collaboration with other IFIs and support the program with extensive technical assistance (TA). - Most structural reforms are outside the core expertise of the Fund; collaboration and close coordination with other IFIs is critical to ensure appropriate division of labor. - Fund TA should continue supporting the objectives of the structural program. ### Risks to program success - Exogenous shocks: - A sudden stop of Venezuela-related inflows could lead to significant reserve losses, a sharp deterioration in the current account, and pressures on the fiscal accounts. - Nicaragua is inherently vulnerable to natural disasters and movements in commodity prices. - Large imbalances: - High levels of public debt and the external current account deficit could threaten economic stability if not kept under control. - Given the high level of dollarization, financial stability is quite sensitive to changes in confidence. - Policy slippages: - Uneven implementation of macroeconomic and structural policies could undermine economic stability. - Weak institutions and governance: - Lack of progress in institutional reforms and governance could threaten economic stability over the medium term and constitute reputational risk for the Fund. ### Authorities’ assessment and reflections (views summarized) - Program successes (authorities’ view): - The program played an important role in maintaining macroeconomic stability and in helping to push forward significant reforms. - Nicaragua registered sustained output growth (except in 2009), increased its exports, and attracted substantial FDI during 2007–11. - The program catalyzed reforms in financial regulation, central bank governance, tax policy, and the energy sector. - Program design took into account Nicaragua’s social and economic conditions and identified key implementation risks; it was built on the authorities’ 2007 Economic and Financial Program (PEF) and the National Development Plan. - TA support—particularly through CAPTAC-DR—was vital in strengthening key institutions (the Tax and Customs Administration, the BCN, the Superintendent Office, and the Social Security Administration) and in helping implement structural reforms. - Authorities’ concerns: - The program could have been more effective in supporting growth during the global financial crisis. - The second review was delayed due to uncertainties associated with the global crisis, despite an early policy response. - The authorities perceive that Nicaragua did not receive consistent treatment from the Fund during the crisis compared with other member countries; Nicaragua was asked to implement procyclical fiscal policies during the crisis while most other member countries were able to employ countercyclical measures. - The program could have led to better outcomes if Nicaragua had been able to have additional, and more flexible, access to Fund resources; the Fund should consider expanding facilities available to low-income countries like Nicaragua during global crises. - On staff recommendation to consider a strategy for a sudden decline in Venezuela-related flows: - Authorities argued the analysis should have been broader to reflect Nicaragua’s needs for donor support. - Given the strong partnership with Venezuela, they viewed the probability of a sudden decline in the flows as extremely low. - If flows fell, the impact could be manageable in the short-term given the large deposits (of Venezuela-related flows) in the financial system; adjustments in subsidies and social programs could be gradual without a large adverse fiscal impact. - Nicaragua missed stronger support during the financial crisis because the World Bank and other bilateral donors reduced financial assistance. - Nicaragua received additional funding from the IDB and a contingent credit line from the CABEI in 2009, but suspension of budget-support loans from the World Bank after 2008 hindered social programs. - Communication issues: - High staff turnover in Nicaragua mission teams during the program was a concern. - Better communication across Fund departments was needed to present a unified policy front. - Preventing leaks of program-related documents to the press was imperative. - Unfinished reform agenda and forward-looking views: - Authorities acknowledged unfinished reforms in the pension system, energy sector, revenue collection, and public sector wage policy. - Although progress was made in increasing capacity and reducing losses in the energy sector, reform of the regulatory framework remains challenging. - Authorities indicated interest in a successor Fund-supported program to continue implementing sound macroeconomic policies, eliminate vulnerabilities, reduce poverty, and address the unfinished reform agenda. - Future collaboration would benefit from additional TA support. *Source: _cr12258 - 69. The prospective program should also emphasize the necessity of further* ### Annex II. The Views of Other Stakeholders in Nicaragua ### Annex II. The Views of Other Stakeholders in Nicaragua ### Summary of stakeholder discussions - Discussions were held in Managua during May 14-17, 2012. - Other stakeholders acknowledged that the Fund-supported program helped the authorities pursue disciplined macroeconomic policies and undertake important reforms. - The program served Nicaragua during a transition period as the new administration and other stakeholders were in the process of establishing a consensus on economic policies. - Despite the prevalence of multiple domestic and external shocks during 2007-11, the Fund-supported program was able to help guide policies and ultimately led to successful outcomes. - The program helped to preserve macroeconomic stability, support a favorable investment climate, enhance business confidence, and play a significant role in advancing major reforms. ### Venezuela-related flows: risks and transparency - Business and financial community representatives argued that while a sudden decline in Venezuela-related flows was a low probability event, it would be critical to devise a strategy to mitigate its impact. - They noted the authorities could cope with such a contingency in the short term because of the large deposits of Venezuela-related flows in the banking system. - Stakeholders emphasized the importance of having a clear strategy to lessen negative effects of a potential decline in flows and to consider how the government would adjust its fiscal accounts given the large subsidies and social programs funded by these flows. - Other stakeholders noted that the Fund-supported program played a major role in increasing transparency of the flows. - Any future program with the Fund would need to continue improving the transparency and governance of the flows while working with the authorities to make sure that Nicaragua would be ready for the possibility of an unexpected decline in the flows. ### Structural constraints and reform priorities - Consensus that Nicaragua must embark on a wide-ranging reform program to achieve better economic growth and poverty reduction outcomes. - Stakeholders identified key constraints: - Labor and product market informality, which hampers growth in the real and financial sectors. - Governance quality, described as a serious concern. - Recognition that improving institutional quality would be difficult in a short time, but a comprehensive strategy is needed to begin reducing informality and improving governance given their effects on long-term growth. ### Views on a prospective Fund-supported program - It was argued that Nicaragua would benefit greatly from a new Fund-supported program. - A new program would: - Signal policy continuity and build on the successes of the last two arrangements. - Help maintain macroeconomic stability. - Continue to play a catalytic role in advancing the reform agenda. - Stakeholders recommended the structural program focus on: - Reforms of the pension system. - Reforms of the energy sector. - Tax policy reform. - The prospective program should emphasize growth-augmenting policies. *Source: Annex II. The Views of Other Stakeholders in Nicaragua (May 14-17, 2012).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2012/_cr12258.pdf_