Press Information Notice (PIN) No. 98/27

Press Information Notice (PIN) No. 98/27


April 9, 1998

International Monetary Fund

Washington, D. C. 20431 USA

The IMF Executive Board on March 18, 1998 concluded the 1997 Article IV consultation1 with Nicaragua at the same time it approved the authorities’ request for a three-year arrangement under the Enhanced Structural Adjustment Facility (see Press Release No. 98/7).


Following a decade of civil war, public sector overexpansion and hyperinflation, Nicaragua changed its course drastically during 1990-97 as peace was reestablished and substantial progress in policy implementation was made to reduce macroeconomic imbalances and to transform to a market-based economy. Macroeconomic policies were strengthened, most price controls eliminated, and the foreign exchange and trade systems liberalized. A program of public asset divestment was implemented, and public employment and military outlays declined substantially. Private banks were allowed to operate again and the Superintendency of Banks was created as an independent unit.

As a result, inflation was reduced dramatically to single digits in 1997, and real GDP growth resumed in 1994 and accelerated to around 5 percent by 1997. During 1993–97, domestic investment (mainly public sector) rose markedly and was financed to a large extent by sizable concessional external financing. While the rate of unemployment fell below 14 percent in 1997 (from 22 percent in 1993), Nicaragua remains one of the poorest and most heavily indebted countries in the Western Hemisphere. Moreover, the public finances remained weak and in combination with a loosening of credit controls, led to pressures on net official international reserves.

The objectives of the authorities’ medium term strategy for 1998–2000 are to move the economy toward sustainability of the public finances and the external sector, structural reform, and economic growth in order to alleviate poverty and reduce unemployment. The macroeconomic objectives for 1998–2000 are to: (1) increase gross international reserves—net of central bank paper, CENIS—to the equivalent of 3 months of imports; (2) bring down inflation to about 5 percent; and (3) achieve a rate of real GDP growth of around 6 percent a year.

Achieving these objectives requires the strengthening of macroeconomic policies and the resumption of structural reforms. The fiscal program aims at reducing the size of the public sector. Public savings would rise from 3.5 percent in 1997 to 8 percent in 2000 and the combined public sector deficit (after grants) would shift to a small surplus by 2000. Policies include a tax reform, introduced in 1997, tight control of outlays, and improved performance of public utilities and social security. The central bank will conduct a tight credit policy. Directed credit was eliminated in late 1997; all branches of the largest state bank have been sold or closed; and, reserve requirements have been strengthened and broadened. The structural program aims at broadening the scope for private sector activity through privatization of public enterprises and state banks, reforms of the public sector, strengthening property rights, a comprehensive judicial reform, and improving prudential regulation and banking supervision.

Executive Board Assessment

Executive Directors commended the authorities for the progress made toward macroeconomic stabilization and structural reform following a decade of civil war, public sector overexpansion, and hyperinflation in the 1980s. However, Directors noted the uneven implementation of macroeconomic and structural policies in the period leading up to the presidential elections held in October 1996. They welcomed the authorities’ intention to undertake a credible medium-term economic program covering the period 1998–2000, with the goal of achieving sustainability of the public finances and the external sector, structural reform, and economic growth. They supported the authorities’ request for IMF support under new ESAF arrangements.

Directors stressed the importance of achieving the programmed fiscal consolidation and implementing structural reforms that increase efficiency and foster private investment. They commended the authorities for the passage of the tax reform package in May 1997 that broadened the tax base and increased the transparency of the tax system, and they encouraged further improvements in tax administration in order to strengthen budget revenues. They also emphasized the importance of the government’s commitment to control current outlays, including wages and transfers, and to reduce the size of public employment further in line with the program to reform the public sector. Directors noted that the success of the program would depend on the authorities’ willingness to take additional fiscal measures in the event of underperformance in the fiscal area, or as otherwise needed to meet program objectives.

Directors noted the importance of the strengthening of the financial position of the state enterprises for the success of the overall program. They stressed the need to ensure that costs are contained and revenue increased to facilitate the achievement of the fiscal program and to prepare these entities for privatization. In this regard, they emphasized that it is critical that the government carry out its commitment to adjust the tariffs of the energy and water companies both to reflect current cost increases, and to approach long-term production costs.

Directors agreed that credit policy needs to be tight to achieve program targets. They cautioned the authorities against undue reliance on central bank short-term exchange-rate indexed instruments (CENIS) and welcomed the authorities’ plan to reduce the outstanding stock of these instruments. Directors stressed that the maintenance of a sound credit policy was dependent on the authorities’ success in strengthening the public sector position, ceasing the banking function of the largest state bank, and avoiding directed credit to the agricultural sector.

Directors commended the authorities’ decisive actions to reduce the size of state banking operations and unify reserve requirements, while extending them to all bank liabilities with the private sector. They stressed the importance, especially in the present environment of developing a sound and competitive banking system by strengthening prudential regulations and supervision, through full and timely implementation of the financial sector adjustment program to be supported by the IDA and the IDB. They also emphasized the importance of closing or privatizing the remaining state banks.

Directors stressed that the program’s structural reforms are essential to increase efficiency, foster private investment, and form the basis for social consensus to underpin the program’s success. They welcomed the recent enactment of a new property rights law, emphasized the importance of gaining a speedy resolution of outstanding property claims within a comprehensive judicial reform, and noted that a sustained increase in foreign direct investment will require a nondiscriminatory treatment of domestic and foreign investment. They emphasized that it is crucial that the privatization of public enterprises take place in an appropriately sequenced and transparent process within an adequate regulatory framework. Furthermore, they urged the continued reform of both the public and financial sectors to help deepen private sector activity.

Directors were encouraged by the authorities’ recent steps to improve governance. They welcomed the reduction in discretionary tax exemptions resulting from the tax reform package and the broadened coverage of the budget that is included in the program.

Directors commended the government’s commitment to alleviate poverty by improving education and health services, in particular in the poorest regions, and by implementing targeted social safety net programs. They strongly supported the protection of social expenditure from further expenditure cuts, and they considered appropriate the programmed increase in such expenditure as additional concessional resources become available. Directors encouraged the government to establish a mechanism to monitor social expenditure and performance, which would help to achieve specific targets in this area.

Directors noted that the crawling peg exchange system has been helpful in protecting Nicaragua’s external competitiveness, as evidenced by the continued strong growth of nontraditional exports. Some Directors agreed that a gradual reduction in the rate of the crawl may become appropriate after sustained implementation of macroeconomic and structural reforms.

Directors were encouraged by the substantial progress that has been made in reducing Nicaragua’s external debt and debt service. They noted, however, that Nicaragua will continue to face a difficult external position in the coming years as a result of large debt service obligations, even after full application of traditional debt relief mechanisms. They stressed that sustainable improvements in its external debt situation would require strict adherence to the program supported by the ESAF arrangements and the avoidance of nonconcessional borrowing. Directors agreed that provision of substantial concessional assistance would be needed for years to come to support Nicaragua’s reform efforts. In that context, they stressed that sustained strong performance under the program will be critical in considering Nicaragua’s eventual eligibility for the HIPC Initiative. Directors welcomed the authorities’ decision to publish the letter of intent and the memorandum of economic and financial policies, as this would help achieve broad public support for the program, as well as enhance the transparence of government policies.

Directors emphasized the importance of improving the quality of economic statistics in several areas, and of providing them on a timely basis to the IMF.

Press Information Notices (PINs) are issued, at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF’s assessment of these policies.

Nicaragua: Selected Economic Indicators

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Source: Central Bank of Nicaragua; Ministry of Finance; and IMF staff estimates.

Includes operational result from the central bank.

Starting in 1995, this includes central bank paper (CENIS) held by the private sector.


Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. In this PIN, the main features of the Board’s discussion are described.

Press Information Notices