Press Release: IMF Executive Board Approves US$111.3 Million PRGF Arrangement for Nicaragua

IMF News, October 5, 2007

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Press Release: IMF Executive Board Approves US$111.3 Million PRGF Arrangement for Nicaragua

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Bibliographic details

• Published: October 5, 2007

IMF decision and financial terms

• The Executive Board approved a three-year, SDR 71.5 million (about US$111.3 million) arrangement under the Poverty Reduction and Growth Facility (PRGF) for Nicaragua.
• Immediate disbursement: an amount equivalent to SDR 11.9 million (about US$18.5 million).
• PRGF facility terms: annual interest rate of 0.5 percent; repayable over 10 years with a 5½-year grace period on principal payments.

Program objectives and design

• Purpose: support the government's economic program to consolidate macroeconomic stability, reduce poverty, and achieve the Millennium Development Goals.
• Emphasis on country-owned Poverty Reduction Strategy paper (PRSP) as the basis for PRGF-supported programs.
• Program pillars:
  • Create additional fiscal space to increase social spending and investment (notably energy, water, education, and health).
  • Reduce public debt levels over the medium term.
  • Address key structural challenges: power sector, transparency and governance of public sector institutions, explore future options for social security reform.
  • Improve returns on high investment rates and bolster governance via strengthened fiscal and financial sector institutions.

Key conditional and policy features

• Fiscal policy:
  • A temporary fiscal expansion planned for 2008 to accommodate urgent spending on priority social programs and infrastructure, particularly in the energy and water sectors.
  • Improve targeting of social spending; better targeting, strengthened systems of budget control and investment planning, and transparent accounting for all development assistance.
• Monetary policy:
  • Maintain crawling peg exchange rate regime.
  • Aim for a gradual decline in inflation and further accumulation of international reserves.
  • Strengthen conduct of monetary policy through measures to improve central bank finances, independence, and accountability.
• Structural reforms:
  • Year 1: emphasize energy policy measures to improve electricity service and reduce fiscal risks.
  • Year 2: further strengthen public financial management practices.
  • Year 3: implement specific steps to address medium-term challenges, including the under-funded social security system.
  • Reform sequencing is mindful of implementation and political constraints.

Mr. Murilo Portugal (Deputy Managing Director and Acting Chairman) — Principal observations

• Recognition of important strides: strengthened macroeconomic stability, reduced vulnerabilities, expanded poverty-reduction spending, and progress with structural reforms.
• Past policies, with IMF and international community support including debt relief, facilitated growth and some social improvements.
• The new program aims to consolidate gains and reduce poverty more decisively while maintaining debt sustainability.
• Authorities commit to increasing private investment and strengthening the business climate.
• Emphasis on steadfast implementation despite a more difficult external environment to support confidence.

Recent economic developments (annex highlights)

• Macroeconomic status:
  • Growth has resumed; inflation contained; macro imbalances reduced since the 2000-01 financial crisis.
  • Fiscal position strengthened substantially.
  • Debt relief under enhanced HIPC and MDRI contributed to lower debt levels and some reduction in the current account deficit.
  • Financial sector strengthened and fiscal reforms advanced.
• Remaining vulnerabilities:
  • Half of the population lives below the poverty-line; reduction in poverty has slowed.
  • Public debt levels and the current account deficit remain high despite consolidation and debt relief.
  • High dollarization and exposure to sudden reversals of investor sentiment and external shocks (e.g., higher oil prices and natural disasters).

Nicaragua: Selected economic indicators (as presented)

• GDP growth (percent): 2004: 5.3; 2005: 4.3; 2006: 3.7; 2007: 4.2; 2008 (Prog.): 4.7; 2009 (Prog.): 5.0; 2010 (Prog.): (not listed).
• CPI (eop, in percent): 2004: 9.3; 2005: 9.6; 2006: 9.5; 2007: 7.3; 2008 (Prog.): 7.0; 2009 (Prog.): 7.0.
• CPI (avg, in percent): 2004: 8.5; 2005: 9.1; 2006: 8.2.
• GDP deflator (percent): 2004: 9.4; 2005: 10.6; 2006: 7.9; 2007: 7.6.
• Current account (US$ millions): 2004: -563; 2005: -724; 2006: -838; 2007: -896; 2008 (Prog.): -993; 2009 (Prog.): -998; 2010 (Prog.): -1,020.
• Current account (in percent of GDP): 2004: -12.6; 2005: -14.9; 2006: -15.8; 2007: -16.3; 2008 (Prog.): -15.3; 2009 (Prog.): -14.6.
• Exports of goods, f.o.b (US$ millions): 2004: 1,369; 2005: 1,654; 2006: 1,978; 2007: 2,185; 2008 (Prog.): 2520; 2009 (Prog.): 2878; 2010 (Prog.): 3,230.
• Imports of goods, f.o.b. (US$ millions): 2004: -2,457; 2005: -2,956; 2006: -3,422; 2007: -3,735; 2008 (Prog.): -4,186; 2009 (Prog.): -4,590; 2010 (Prog.): -4,977.
• Gross international reserves (US$ millions): 2004: 670; 2005: 730; 2006: 924; 2007: 925; 2008 (Prog.): 1,043; 2009 (Prog.): 1,183; 2010 (Prog.): 1,317.
• Nonfinancial public sector — Revenue (percent of GDP) 1/: 2004: 17.2; 2005: 18.1; 2006: 18.8; 2007: 19.6; 2008 (Prog.): 19.7; 2009 (Prog.): 19.8; 2010 (Prog.): 19.9.
• Nonfinancial public sector — Expenditure (percent of GDP) 2/: 2004: 22.2; 2005: 22.6; 2006: 22.5; 2007: 25.0; 2008 (Prog.): 25.6; 2009 (Prog.): 25.2.
• Interest (percent of GDP): 2004: 2.1; 2005: 1.9; 2006: 1.8; 2007: 1.6; 2008 (Prog.): 1.4; 2009 (Prog.): 1.3.
• Overall balance before grants (percent of GDP): 2004: -5.0; 2005: -4.5; 2006: -3.7; 2007: -5.4; 2008 (Prog.): -5.9; 2009 (Prog.): -5.3.
• Combined public sector balance (percent of GDP): 2004: -6.5; 2005: -5.1; 2006: -4.2; 2007: -5.8; 2008 (Prog.): -6.4; 2009 (Prog.): -5.6; 2010 (Prog.): -5.5.
• Grants (percent of GDP): 2004: 3.5; 2005: 4.6.
• Primary balance after grants (percent of GDP): 2004: 0.8; 2005: 2.2; 2006: -0.1; 2007: 0.4.
• Overall balance after grants (percent of GDP): 2004: -2.8; 2005: -1.6; 2006: -1.0; 2007: -1.8.
• Debt of the combined public sector (percent of GDP): 2004: 150.7; 2005: 137.7; 2006: 106.5; 2007: 56.2; 2008 (Prog.): 55.9; 2009 (Prog.): 55.3.
• Domestic debt (percent of GDP) 3/: 2004: 30.0; 2005: 27.5; 2006: 23.3; 2007: 16.6; 2008 (Prog.): 12.9; 2009 (Prog.): 9.9.
• External debt (percent of GDP) 4/: 2004: 120.7; 2005: 110.2; 2006: 83.3; 2007: 36.3; 2008 (Prog.): 39.6; 2009 (Prog.): 42.9; 2010 (Prog.): 45.4.
• Investment (percent of GDP): 2004: 28.0; 2005: 29.6; 2006: 29.5; 2007: 28.8; 2008 (Prog.): 29.3; 2009 (Prog.): 29.1; 2010 (Prog.): 28.6.
• Private sector investment (percent of GDP): 2004: 21.3; 2005: 22.7; 2006: 23.7; 2007: 21.5; 2008 (Prog.): 21.4; 2009 (Prog.): 21.1; 2010 (Prog.): 20.7.
• Public sector investment (percent of GDP): 2004: 6.7; 2005: 6.9; 2006: 5.8; 2007: 7.8; 2008 (Prog.): 8.0; 2009 (Prog.): 8.0.
• Savings (percent of GDP): 2004: 15.4; 2005: 14.7; 2006: 13.7; 2007: 13.0; 2008 (Prog.): 13.8; 2009 (Prog.): 14.0; 2010 (Prog.): 12.5.
• Memorandum items:
  • Nominal GDP (C$ mn): 2004: 71,156; 2005: 81,233; 2006: 93,135; 2007: 104,702; 2008 (Prog.): 117,991; 2009 (Prog.): 132,452; 2010 (Prog.): 148,810.
  • GDP (US$ mn): 2004: 4,465; 2005: 4,855; 2006: 5,301; 2007: 5,675; 2008 (Prog.): 6,092; 2009 (Prog.): 6,513; 2010 (Prog.): 6,970.
  • Gross reserves (in months of imports of G&NFS excl. maquilas): 2004: 3.3; 2005: 3.1; 2006: 3.4; 2007: 3.2.
  • NIR adjusted stocks (US$ mn): 2004: 211; 2005: 282; 2006: 535; 2007: 595; 2008 (Prog.): 665; 2009 (Prog.): 745; 2010 (Prog.): 835.
  • External debt (legal situation) 5/: 2004: 85.4; 2005: 50.0; 2006: 52.2; 2007: 54.5; 2008 (Prog.): 56.1.

Notes on debt relief and projections (as presented)

• Debt relief: combined effects of enhanced HIPC initiative and MDRI contributed to lower debt levels.
• 2007 external debt projection includes MDRI and HIPC debt relief from IDB and assumes settlement on HIPC-equivalent terms for outstanding debt to non-Paris Club bilaterals and private creditors.
• Of the 50 percent reduction in external debt in 2007: 21 percent corresponds to IDB, 25 percent to non-Paris Club bilaterals, and 3.4 percent to private creditors.
• Footnotes in the source specify data definitions and coverage for revenue, expenditure, domestic and external debt, and reserves.

International Monetary Fund — Press Release No. 07/224, October 5, 2007.

References

• Nicaragua and the IMF
• Portugal and the IMF
• Press Releases
• PRESS CENTER
• https://www.imf.org/en/home