Press Release: IMF Approves In Principle a Three-Year, US$129 Million PRGF and US$2.5 Million in Interim HIPC Assistance for Nicaragua

IMF News, December 4, 2002

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Canonical URL: Press Release: IMF Approves In Principle a Three-Year, US$129 Million PRGF and US$2.5 Million in Interim HIPC Assistance for Nicaragua

The IMF approved in principle a three-year arrangement for Nicaragua under the Poverty Reduction and Growth Facility (PRGF) in the amount of SDR 97.50 million (about US$129 million) to support the government's 2002-05 economic program.
The decision entitles Nicaragua to the release of SDR 6.97 million (about US$9 million).
The IMF Board's decision will become effective after the World Bank Executive Board's review of Nicaragua's Poverty Reduction Strategy Paper (PRSP) progress report, scheduled for December 10, 2002.

The PRGF is the IMF's concessional facility for low-income countries; PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 ½-year grace period on principal payments.
PRGF-supported programs are intended to be based on country-owned poverty reduction strategies articulated in a PRSP and adopted in a participatory process involving civil society and development partners.
Objective of the approved PRGF-supported program for 2002-05: promote sustained growth and poverty reduction in an environment of low inflation and fiscal sustainability.
Authorities' strategy for 2002-05: combine deficit reduction with higher and more efficient poverty-related spending.

Nicaragua was granted in principle SDR 1.88 million (about US$2.5 million) in additional interim assistance under the Heavily Indebted Poor Countries (HIPC) Initiative.
The additional interim assistance will become effective after the World Bank Board's review of Nicaragua.
Nicaragua reached the decision point under the HIPC Initiative in December 2000 and is expected to reach the completion point by the end of 2003.
A satisfactory track record of implementation of the PRSP still needs to be established for Nicaragua to reach the HIPC completion point.

Assessment:
- Recent sharp deterioration of economic performance; new government has embarked on a three-year program addressing key economic vulnerabilities and barriers to growth and poverty reduction.
- Authorities have demonstrated strong commitment through measures already put in place; program ownership is important and needs to be broadened across the political spectrum.
Key components and priorities:
- Targeted reduction of the fiscal deficit while protecting poverty-related outlays.
- Stepped-up bank supervision and tight enforcement of prudential rules.
- Central bank asset recovery plan and imminent contracting of the selected firm to carry out recoveries.
- Structural reforms: privatization, increasing budget transparency, public sector restructuring, judicial system reform, further trade liberalization and regional integration.
- Strong anti-corruption agenda and efforts to enhance governance and accountability in public and private sectors.
- Crucial immediate priorities: early approval of the 2003 budget in line with the program; a second round of tax reform including substantial reduction of zero-rated VAT items; strict enforcement of prudential rules; full implementation of the asset recovery plan.
Commendation:
- Government completed the PRSP Annual Progress Report prepared in a participatory process including civil society and the donor community, providing a sound basis for Fund concessional assistance.

Fiscal consolidation:
- Reduce primary spending while protecting poverty-reducing outlays.
- Increase tax revenues; program targets government revenues to rise by 1¾ percent of GDP in 2003 reflecting effects of tax reform.
- Public sector deficit expected to be reduced to 6.3 percent of GDP in 2003, down from 14 percent in 2001.
Financial sector and central bank:
- Improve reserve position of the central bank.
- Strengthen the financial sector through a recovery plan for assets of failed banks and strict enforcement of prudential rules.
External sector:
- External current account deficit expected to be reduced from 28 percent of GDP in 2002 to 24 percent in 2003, mainly due to higher exports from expected recovery in coffee and sugar prices and production and better prospects for seafood exports.
Growth outlook:
- Real GDP growth for 2002 projected at 1 percent.
- Real GDP growth for 2003 projected at 3 percent, driven mainly by construction, agriculture and livestock activities.

Growth and macro performance:
- Economic growth decelerated from over 7 percent in 1999 to an estimated 1 percent in 2002.
- Causes: weakening fiscal policies, a banking crisis, and deterioration in the external environment.
Fiscal actions in 2002:
- Government spending was reined in through administrative means and a reduction in the budget.
- Primary spending during the first three quarters of 2002 contained at 26 percent of GDP, down from 28 percent during the same period of 2001.
- Nicaragua's assembly approved the first round of a tax reform package.
IMF membership and access:
- Nicaragua joined the IMF on March 14, 1946; its quota is SDR 130 million (about US$172 million).
- Outstanding use of IMF financing totals SDR 123 million (about US$163 million).

GDP at constant prices (annual percentage change):
- 1997: 5.1
- 1998: 4.1
- 1999: 7.4
- 2000: 5.9
- Prel. 2001: 3.3
Consumer prices (end of period):
- 1997: 7.3
- 1998: 18.5
- 1999: 7.2
- 2000: 6.6
- Prel. 2001: 4.7
Unemployment rate (percent):
- 1997: 14.3
- 1998: 13.2
- 1999: 10.7
- 2000: 9.9
- Prel. 2001: 10.5
Exports, f.o.b. (annual percentage change):
- 1997: 23.4
- 1998: -0.6
- 1999: -4.9
- 2000: 18.3
- Prel. 2001: -8.1
Imports, f.o.b. (annual percentage change):
- 1997: 30.6
- 1998: 1.9
- 1999: 21.6
- 2000: -3.0
- Prel. 2001: -1.1
Combined public sector overall balance (before grants):
- 1997: -7.4
- 1998: -15.7
- 1999: -15.4
- 2000: -21.0
Combined public sector overall balance (after grants) 6/7/:
- 1997: -4.5
- 1998: -3.6
- 1999: -7.0
- 2000: -14.3
Stock of combined public sector domestic debt (percent of GDP):
- 1997: 44.0
- 1998: 42.5
- 1999: 35.3
- 2000: 41.0
- Prel. 2001: 59.6
Gross domestic investment (percent of GDP):
- 1997: 30.5
- 1998: 33.8
- 1999: 43.3
- 2000: 34.7
- Prel. 2001: 30.8
National savings (percent of GDP):
- 1997: 2.3
- 1998: 1.4
- 1999: 2.6
- 2000: -2.8
- Prel. 2001: -0.7
External current account balance (percent of GDP):
- 1997: -40.0
- 1998: -38.7
- 1999: -47.7
- 2000: -38.3
- Prel. 2001: -38.1
Outstanding external public debt (end of year, percent of exports of goods and nonfactor services):
- 1997: 296.7
- 1998: 296.0
- 1999: 289.0
- 2000: 278.0
- Prel. 2001: 250.3
Gross international reserves (in months of imports):
- 2000: 2.2

Source: International Monetary Fund press release, December 4, 2002.