Press Release: IMF Approves Three-Year Arrangement Under the ESAF for Nicaragua

IMF News, March 19, 1998

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Canonical URL: Press Release: IMF Approves Three-Year Arrangement Under the ESAF for Nicaragua

The IMF approved a three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF) for Nicaragua in an amount equivalent to SDR 100.9 million (about US$136 million) to support the government’s economic program for 1998-2000.
The first annual loan is equivalent to SDR 33.6 million (about US$45 million), available in two equal semiannual installments; the first installment will be made available March 25, 1998.

Post-civil war reforms: strengthened macroeconomic policies, elimination of most price controls, liberalization of foreign exchange and trade.
Outcomes in 1997:
- Inflation dropped to single digits in 1997.
- Real GDP growth accelerated to about 5 percent.
Remaining vulnerabilities:
- Public finances deteriorated due to large expenditure overruns and an increase in the public sector domestic borrowing requirement.
- Weakening of credit controls contributed to pressures on net official international reserves.

Medium-term objectives:
- Move the economy toward sustainability of the public finances and the external sector.
- Carry out structural reform.
- Promote economic growth to alleviate poverty and reduce unemployment.
Fiscal program target:
- Increase public savings by 6 percentage points of GDP during 1998-2000.
- Target a small surplus in the combined public sector balance (after grants) by the year 2000.
Basic macroeconomic objectives for 1998-2000:
- Increase gross reserves to the equivalent of 3 months of imports.
- Achieve a rate of real GDP growth of around 6 percent by the end of the program period.
- Bring down inflation to about 5 percent.
1998 program targets (supported by first annual ESAF loan):
- Increase gross reserves to the equivalent of 1.8 months of imports.
- Achieve a real GDP growth rate of 4.8 percent.
- Limit inflation to 8.0 percent.
Policy measures to achieve objectives:
- Fiscal policy to reduce the overall public sector deficit (before grants) to 9 percent of GDP from 9.7 percent in 1997.
- Reduce the size of the public sector.
- Increase central government revenues through broadening the tax base, increased transparency of the tax system, and elimination of a large number of discretionary VAT and customs exemptions.
- Nominal freeze on central government expenditures and elimination of export subsidies.
- Monetary policy designed to support the external sector and inflation objectives.

Continued public sector reforms to improve services and efficiency.
Implement a law restructuring the executive branch to reduce the number of government ministries and agencies reporting directly to the President.
Prepare comprehensive judicial reform to improve legal procedures and enhance enforcement of contracts and property rights.
Phase out restrictions and eliminate discriminatory treatment against foreign and domestic investors.
Complete reform of the state banking sector.
Privatize public utilities, state oil distribution, and the services of the major ports.

Social strategy focused on investing in human capital by improving health and education.
Investments to include social infrastructure in the poorest regions via the Social Investment Fund.
Objectives for social services: improve targeting, quality, accessibility, and efficiency, and promote decentralization.
Social expenditure will be protected despite cuts in government expenditure as a share of GDP.
Government may increase social expenditure beyond budgeted levels as additional concessional financing becomes available.

Political demands for increased public expenditure pose risks to program implementation.
Despite progress in reducing external debt and debt service, Nicaragua faces a difficult external position in the coming year due to large debt-service obligations.
Sustainable improvements in the external debt situation require strict adherence to the program and the eschewing of nonconcessional borrowing.
Substantial concessional assistance for some years will be needed to support Nicaragua’s reform efforts.

Nicaragua joined the IMF on March 14, 1946, and its quota is SDR 96.1 million (about US$129 million).
Outstanding use of IMF financing currently totals SDR 20 million (about US$27 million).

Real GDP (percent change):
- 1996: 4.5
- 1997*: 5.0
- 1998**: 4.8
- 1999**: 5.3
- 2000**: 5.7
Consumer prices (end of period):
- 1996: 12.1
- 1997*: 7.3
- 1998**: 8.0
- 1999**: 6.5
Overall fiscal balance (before grants; deficit -) (percent of GDP):
- 1996: -15.7
- 1997*: -9.7
- 1998**: -9.0
- 1999**: -5.1
- 2000**: -3.7
External current account balance, excluding official transfers (deficit -) (percent of GDP):
- 1996: -32.2
- 1997*: -26.8
- 1998**: -23.2
- 1999**: -19.3
- 2000**: -17.8
Gross official international reserves (months of imports):
- 1996: 1.4
- 1997*: 0.2
- 1998**: 1.8
- 1999**: 2.4
- 2000**: 3.0
Sources: Nicaragua’s authorities; and IMF staff estimates and projections.
Footnotes in source:
- * Estimates
- ** Program

International Monetary Fund press release, March 19, 1998.