News Brief No. 00/120

News Brief: IMF Approves First and Second Review of Nicaragua under the PRGF

December 20, 2000

The Executive Board of the International Monetary Fund (IMF) completed the first and second reviews of Nicaragua's economic performance under the second annual arrangement under the Poverty Reduction and Growth Facility (PRGF)¹. The completion of those reviews enables the release of a further SDR 20.18 million (about US$26.1 million) from the IMF. To date, loans in the amount of SDR 95.14 million (about US$123 million) have been disbursed under the program.

In commenting on tne Executive Board discussion of the reviews, Eduardo Aninat, Deputy Managing Director and Acting Chairman, made the following statement:

"The authorities are to be commended for preparing a comprehensive Interim Poverty Reduction Strategy Paper (I-PRSP), which provides a good analysis of poverty and sets out the authorities' strategy for reducing poverty. The I-PRSP will provide a sound basis for the development of a full PRSP, for Fund concessional assistance, and for reaching the decision point under the enhanced HIPC Initiative. Preparations for a full PRSP are underway. In completing the full PRSP, it will be important to intensify the consultations with civil society, strengthen the underlying macroeconomic framework and further prioritize expenditure, taking into account realistic costing and funding projections.

"Following recent serious banking problems, the authorities acted to bring the situation under control and the financial system has now stabilized. The authorities intend to review and modify, as necessary, the legal, regulatory and supervisory framework of the financial system: and they have developed a specific action plan to be implemented with technical support from the Fund, Inter-American Development Bank and World Bank.

"The authorities are urged to move ahead with the steadfast implementation of all necessary measures to strengthen Nicaragua's financial sector. It will also be of critical importance to adhere strictly to the comprehensive program of macroeconomic, structural and social reforms supported by the Fund's Poverty Reduction and Growth Facility (PRGF), and an early agreement on a third annual arrangement under the Facility will be essential. The authorities' commitment to maintain tight monetary and fiscal policies in the period ahead is welcome.

"With the aim of rebuilding the official reserve cushion and maintaining exchange rate stability, the authorities are acting to mop up excess liquidity in the banking system by shifting public deposits from the commercial banks to the central bank, and through open market operations. The authorities' plans to save a significant proportion of the proceeds from privatization of the electricity company will also help to shore up the reserves. The current crawling peg exchange rate system, supported by prudent fiscal, credit, and wage policies and productivity-enhancing structural reforms, has helped to bring inflation down and uphold confidence.

"On the fiscal front, the authorities intend to continue to restrain domestically financed outlays as necessary, while protecting poverty alleviating expenditures. Consistent with this approach, they will refrain from granting across-the-board wage increases. It will be crucial that the authorities continue to monitor fiscal developments closely, and stand ready to take corrective actions if needed.

"Important steps are being taken to expand the role of the private sector by establishing regulatory frameworks for private investment and by advances in privatizing the electricity and telecommunications companies, and leasing the ports, water, and sewerage facilities. Progress also is being made in putting in place a comprehensive reform of the Social Security System; rehabilitating and expanding rural infrastructure; and implementing policies aimed at improving the delivery of government services, including by establishing an effective social safety net.

"Important steps are being taken to improve governance. These focus on improving public procurement procedures and the Comptroller's Office, strengthening the civil service and the Superintendency of Banks, increasing the transparency of, and control over, the public finances, and strengthening the judicial system and property rights. It is crucial that these steps to strengthen governance be implemented rigorously to ensure that effective use is made of HIPC assistance to achieve poverty reduction.

"A final decision on Nicaragua's debt relief under the Enhanced HIPC Initiative is pending action later this week by the World Bank's Executive Board. A press release will be issued jointly with the World Bank following these deliberations. The full participation of all of Nicaragua's creditors, including large non-Paris Club creditors, in providing debt relief will be crucial for Nicaragua to achieve debt sustainability," Mr. Aninat said.

¹On November 22, 1999, the IMF's concessional facility for low-income countries, the Enhanced Structural Adjustment Facility (ESAF), was renamed the Poverty Reduction and Growth Facility (PRGF), and its purposes were redefined. It was intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a poverty reduction strategy paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5%, and are repayable over 10 years with a 5 1/2 year grace period on principal payments.