Press Release No. 05/215

Press Release: Statement by an IMF Mission to Nicaragua

September 23, 2005

The following statement was released today in Managua by an IMF mission:

"An IMF staff mission led by Vikram Haksar visited Managua, Nicaragua during September 7-22, 2005 for discussions with the authorities on the 2005 Article IV Consultation. The mission had the privilege of meeting with President Enrique Bolaños, Finance Minister Mario Arana and central bank President Mario Alonso; members of the Economic Committee of the National Assembly, and members of the business community and civil society. The mission reviewed the medium term prospects for the economy as well as the policy requirements for resumption of the PRGF arrangement with the Fund which is otherwise set to expire in December this year.

"Nicaragua has made many important advances in the last years. The economy has grown and poverty has fallen in the context of a macroeconomic stability that has supported real incomes of the poor and created more jobs. Several key reforms have advanced in the areas of boosting revenues, and strengthening governance and the financial sector framework. Macroeconomic developments this year remain broadly positive, despite the oil shock and rising inflation. The economy and employment continue to expand, fiscal developments are generally as expected and the international reserves have remained stable.

"The central challenge now is to maintain a stable macroeconomic framework, while reinvigorating the economic reform program that has delivered such positive results for Nicaragua. This will require a renewed commitment to the core elements of prudent macroeconomic policies and structural reforms to entrench financial stability and achieve sustained growth. We hope that a domestic consensus can be found on the economic policies and reforms for the period ahead, which would allow the PRGF arrangement to be resumed.

"In this regard, it will be crucial to hold the line on the fiscal deficit in 2006. This will require tight control over total expenditures while protecting poverty-reducing spending. To this end, it will be important to avoid a rise in public sector real wages which are now on average above those in the private sector. Another area of concern is the fiscal cost of the energy crisis. Electricity tariffs need to be raised as soon as possible while putting in place a mechanism to protect the poor through the proposed subsidy to low-usage consumers. Moreover, it will also be important to find a way to ensure continuing adjustments of tariffs with fluctuations in oil costs to avoid a repetition of the current electricity crisis.

"The mission also discussed steps to consolidate progress on the structural reform agenda. In this regard, progress is needed in the area of fiscal decentralization by devolving expenditure functions to municipalities. Also, the laws on financial administration, the superintendency of banks and on FOGADE, are steps in the right direction, but require further strengthening in a number of key aspects. Moreover, the banking law and the tax code are still under consideration by the assembly.

"The mission discussed these concerns with the authorities who agreed that time was of the essence, especially with regards to building a consensus for passage of these economic reforms and for a 2006 budget in line with the program. The mission will remain in close contact with the authorities and plans to return to Nicaragua in November, before the expiry of the program, to evaluate if the conditions to bring the program back on track are in place."