Nicaragua: Staff Report for the 2001 Article IV Consultation and the Staff-Monitored Program (SMP) for July-December 2001

Nicaragua showed weak economic performance owing to trade shocks, a decline in investment, and slippages in the fiscal and monetary areas, under the Poverty Reduction and Growth Facility Arrangement. Executive Directors noted that an effective implementation of the fiscal program under the Staff Monitored Program (SMP), together with the envisaged privatization and structural reforms, is crucial for maintaining macroeconomic stability. They welcomed the steps to deepen trade liberalization, improve liquidity management, and strengthen the banking system.


Nicaragua showed weak economic performance owing to trade shocks, a decline in investment, and slippages in the fiscal and monetary areas, under the Poverty Reduction and Growth Facility Arrangement. Executive Directors noted that an effective implementation of the fiscal program under the Staff Monitored Program (SMP), together with the envisaged privatization and structural reforms, is crucial for maintaining macroeconomic stability. They welcomed the steps to deepen trade liberalization, improve liquidity management, and strengthen the banking system.

I. Introduction

1. Discussions for the 2001 Article IV consultation and on the government’s economic program for 2001 were held on three occasions in Managua and two occasions at headquarters in the period from February to June 2001.1 The authorities’ program for July-December 2001, which they have requested the staff to monitor as a Staff-Monitored Program (SMP), is outlined in this staff report for information, and in the attached Memorandum of Economic and Financial Policies (MEFP).2 The SMP aims at strengthening macroeconomic policies and continuing structural reforms to facilitate the transition to the new administration that will take office in January 2002 and build a track record in preparation for a possible new three-year Poverty Reduction and Growth Facility (PRGF) arrangement next year. The authorities have also submitted a full Poverty Reduction Strategy Paper (PRSP) to the Boards of the Fund and the Bank for their consideration. The staffs of the Fund and the Bank have prepared a Joint Staff Assessment (JSA) of the PRSP, which is circulated together with this report.

2. In March 1998, the Executive Board approved a three-year PRGF arrangement in an amount equivalent to SDR 100.9 million (105 percent of quota) (EBM/98/30; EBS/98/7, Supp. 2), which was augmented by SDR 48 million in February 1999, in the aftermath of Hurricane Mitch (EBS/98/8) (Appendix I).3 The second annual PRGF arrangement was approved in September 1999 (EBS/99/164). To date, loans in the amount of SDR 115.3 million have been disbursed. Nicaragua was declared eligible for assistance under the enhanced FHPC Initiative in September 1999, and reached the decision point in December 2000 (EBS/00/259).

3. In concluding the 1999 Article IV consultation on September 15, 1999, Executive Directors emphasized the need to implement post-Hurricane Mitch reconstruction programs and improve social conditions, while making progress toward reducing Nicaragua’s substantial fiscal and external imbalances, accelerating structural reforms, and improving governance. In completing the reviews under the second annual PRGF arrangement in December 2000, Directors noted that recent economic progress had been mixed, with persistent problems of governance and difficulties in the domestic banking system, and urged the authorities to redouble their efforts in these two areas. Nicaragua has accepted the obligations of Article VIII sections 2, 3, and 4 of the Fund Articles of Agreement and maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions.

4. The quality of economic data in Nicaragua is subject to important limitations (Appendix IV), which complicate effective monitoring of economic performance. The staff believes that improvements in statistics, particularly in the areas of public finance and money and banking, will be necessary in the context of preparing a new three-year PRGF-supported program starting in 2002. The authorities are in the process of revising the national accounts data in consultation with staffs of the Fund and other international institutions.

II. Recent Economic Developments

A. Background

5. Nicaragua’s economic performance during 1998 and the first half of 1999 was in line with the program supported by the three-year PRGF arrangement approved in March 1998, despite the adverse effects associated with Hurricane Mitch. Real GDP growth increased and unemployment and inflation declined, as investment rose significantly aided by strong inflows of private capital and official assistance related to the reconstruction effort. The fiscal position improved more than envisaged and credit policy was in line with the program.

6. Policy implementation weakened in late 1999 and early 2000 In particular, fiscal policy was more expansionary than anticipated, as the combined public sector deficit increased from 3.6 in percent of GDP in 1998 to 7 percent of GDP in 1999 and the current account deficit widened significantly. In addition, the accumulation of net international reserves (NIR) fell short of programmed levels. Further fiscal slippages occurred in early 2000, inflation accelerated, and the external position weakened. Against this background, a modified program for 2000 was agreed with the authorities,4 including prior actions, aimed at establishing a track record of policy implementation that would permit the completion of the program review.

7. On the structural front, during 1998 and 1999 progress was made in preparing the legal frameworks for private investment and advancing the divestment of public enterprises, public employment was reduced, the resolution of property claims was accelerated, and trade tariffs were lowered. Moreover, the central bank charter and the banking and the superintendency laws were revised. However, delays were experienced regarding the privatization of the electricity and telephone companies, the approval of legislation to reform the pension system, and the implementation of steps to improve transparency in the use of public funds. Regarding governance, certain modifications to the constitution in early 2000 that affected nominations for the Supreme Court, the Electoral Council, and the Comptroller’s Office (CO) generated concerns about the independence of these institutions from political interference. To address some of these concerns, the government undertook steps to strengthen the CO and a new law on government procurement was approved and began to be implemented.

B. Performance in 2000 and First Half of 2001

8 Performance in 2000 under the second annual PRGF arrangement (approved in September 1999) was mixed. Further progress was made on several structural reforms, but there were weaknesses in macroeconomic policies. Completion of the reviews and the decision point under the Enhanced Initiative for Heavily Indebted Poor Countries (HIPC) in December 2000 were accompanied by waivers for the nonobservance of performance criteria on public sector savings and domestic financing, central bank net domestic assets and NIR, and structural criteria regarding the social security reform law and privatization.

9. Real GDP growth slowed to 4.3 percent in 2000, from 7.4 percent in 1999, as construction activity tapered off from post-Hurricane Mitch highs and manufacturing slowed. Coffee production reached record levels in 2000, but profitability was severely affected by a sharp drop in international prices, while higher energy costs and domestic demand pressures contributed to an increase in inflation to around 10 percent during 2000, from about 7 percent in 1999. The unemployment rate declined to about 10 percent in 2000, from 10.7 percent in 1999. Monthly indicators suggest that real GDP growth has slowed further during the first half of 2001 to an annual rate slightly above 3 percent, with the 12-month rate of inflation declining to about 8 percent.

10. The deficit of the combined public sector (after grants) reached 8.3 percent of GDP in 2000, compared with 6.9 percent of GDP under the modified PRGF program and 6.4 percent estimated at the time of the Board meeting in December 2000 on the basis of information through September. This fiscal slippage reflected significant capital expenditure overruns and larger-than-anticipated current outlays related to municipal elections that took place in the fourth quarter. The overruns were financed, to a large extent, by an accumulation of domestic arrears (floating debt) of almost 2 percent of GDP.

11 The fiscal stance remained weak during the first half of 2001, with preliminary information pointing to a combined public sector deficit, after grants, of 7.2 percent of the period’s GDP, compared with 4.6 percent in the same period of the previous year. Expenditure remained high as a result of wage increases (for teachers, nurses, and police) granted at the beginning of the year, the cost of bank resolutions (equivalent to 2.5 percent of the period’s GDP), the preparation of the national elections scheduled for November 2001, and a substantial increase in domestically financed capital outlays. The high deficit, the payment of domestic floating debt, and shortfalls in disbursements of balance of payments support (associated with delays in policy actions) contributed to a central bank financing of the combined public sector (including the central bank operating deficit) equivalent to 13 percent of the period’s GDP during the first half of 2001.

12. Weaknesses in the banking system intensified in 2000 but some improvement has been observed this year. The financial condition of several banks deteriorated in 2000 due to fraud and mismanagement, with four banks being intervened since August 2000 (Box 1). The resolution process in each case involved the transfer of deposits and performing assets to other domestic banks, with the central bank providing the acquiring banks with bonds to make up for the difference between assets and deposit liabilities. The bonds associated with the first three interventions amounted to some US$240 million (or 9.5 percent of GDP); the cost of the recent intervention of a fourth bank has yet to be determined (see Box 1, Policy Discussions Section, and Appendix V).

Recent Bank Resolutions

The resolution of the four weak banks since August 2000 consisted in their intervention, immediately followed by the absorption of their liabilities and performing assets by other private banks. The procedures comprised the following steps (1) writing off the shares of the original owners; (2) recapitalization of the intervened banks by exchanging their impaired assets for central bank paper in preparation for their resale; (3) auction of the banks’ portfolios to other domestic private banks; (4) provision of contingent credit lines to the acquiring banks; (5) temporary exemption of acquired deposits from the legal reserve requirements; and (6) implementation of asset recovery plans. The authorities are also pursuing actions in the courts against those suspected of criminal responsibility for the banking problems, with some key players now in preventive custody. To date, all of the deposits of the intervened banks have been transferred to the acquiring banks, while loans are being evaluated prior to transfer (a six-to nine-month process). It is expected that by the end of 2001 all loans from the first three intervened banks, and by early to mid-2002 in the case of the fourth bank, will have been taken over by the acquiring banks or transferred to a special liquidating unit for asset disposal.

13. Demand deposits have been recovering in 2001, but the banking system remains fragile. Although loan loss provisioning and risk adjusted capital asset ratios have increased, the ratio of nonperforming loans to total loans has risen and profitability remains low (Table 10). There also has been a sharp deceleration in the growth of broad money during the last 12 months, with evidence of portfolio shifts toward liquid assets. Following a marked slowdown in 2000, the expansion of bank credit to the private sector slowed further in the first half of 2001.

14. Following a small decline in 2000, NIR dropped by an additional US$120 million in the first half of 2001, owing mostly to the large expansion of central bank credit to the government. As of end-June 2001, gross reserves stood at less than 50 percent of the short-term public sector debt (on remaining maturity basis). Exchange rate policy continued to be based on a 6 percent annual rate of crawl vis-a-vis the U.S. dollar during 2000 and the first six months of 2001. The real effective exchange rate appreciated by close to 11 percent in the 18-month period through June 2001, largely as a result of the appreciation of the U.S. dollar. So far, the currency appreciation does not appear to have affected significantly the competitiveness of noncoffee exports, including beef and seafood.

15. Nicaragua’s terms of trade deteriorated by about 13 percent in 2000 owing to a significant drop in coffee prices and an increase in oil import prices; there was a further worsening in the first half of 2001 associated with a continued decline in coffee prices. Notwithstanding these developments, the current account deficit narrowed markedly in 2000, due to a higher coffee export volume and a drop in imports from the high post-Mitch levels. In the first five months of 2001, the current account deteriorated slightly relative to the same period in 2000.

16 As noted earlier, structural reforms advanced in 2000 and the first part of 2001. The national assembly approved legislation to (i) reform the social security system, including the establishment and supervision of private pension fund managers; (ii) improve government procurement; (iii) strengthen tax administration by restructuring the internal revenue and customs departments; and (iv) provide for more flexibility in payment options in the privatization of the Nicaraguan Telecommunications Company (ENITEL). In addition, the electricity distribution companies were privatized, a long-term lease for a major port facility was granted, and the treasury’s consolidated cash management system for domestic resources was implemented. Privatization of ENITEL and the electricity generation plants, however, was further delayed and the resolution of Banco Nicaraguense de Industria y Comercio (BANIC) was delayed until August 4, 2001, when the bank was intervened and its assets auctioned off to another domestic bank.

17. Recent improvements in governance comprise: (i) improved efficiency of the CO in the reporting of cases of alleged corruption and pursuing administrative and judicial remedial actions; (ii) the establishment of property mediation centers and courts; (iii) approval of a law to protect private interests from wrongful actions by state institutions or officials; and (iv) the establishment of a public defenders’ office to represent low income people. Delays have occurred in the approval of the new code on criminal proceedings and the civil service reform law, as well as in the introduction of the Integrated System for Financial Management and Auditing (SIGFA) in the ministries.

III. Policy Discussions

18. Discussions on the third annual PRGF arrangement could not be completed because of policy slippages during the first part of 2001 and delays in taking corrective actions, which made it unfeasible to bring the program back on track in 2001. Moreover, the authorities indicated that they were not in a position to make policy commitments beyond 2001 because of the end of the current presidential term in January 2002. The authorities requested an SMP for the period July-December 2001, which is described in the MEFP, with the objective of facilitating the transition to the new administration and building a track record in preparation for a program that could be supported under a new three-year PRGF arrangement starting in 2002.

19. The authorities’ program aims at advancing toward macroeconomic stability and implementing pending measures under the structural reform agenda. It is based on a real GDP growth of 3 percent in 2001 and targets an inflation rate of 8 percent. The rate of crawl of 6 percent of the exchange rate vis-á-vis the U.S. dollar will be maintained. During the discussions, the authorities and the staff concurred on the need to adopt measures to restrain government expenditures during the second half of 2001, strengthen the banking system, and implement other actions related to public sector reform and good governance.

20. In addition to the PRGF/SMP discussions, the Article IV discussions focused on (i) the review of current economic developments and prospects; (ii) the stance of financial policies; (iii) an assessment of the exchange rate policy and of external competitiveness; (iv) a review of vulnerability in the banking system; and (v) statistical issues.

A. Fiscal Policy

21. The authorities’ fiscal program for 2001 aims at reducing the combined public sector deficit to 7.4 percent of GDP (8.3 percent of GDP in 2000). This target implies that the fiscal deficit during the second half of 2001 would be similar to that observed during the first half, notwithstanding the cost of a scheme to assist coffee growers facing difficulties in servicing their debts to the banking system, which is estimated at US$15 million (1.2 percent of the period’s GDP). Moreover, excluding interest payments resulting from bank resolutions (estimated at 2.5 percent of GDP during 2001), the proposed reduction in the 2001 fiscal deficit is substantial.

22. Central government expenditure are projected to decline to 35.5 percent of GDP in 2001, after reaching a level equivalent to about 40 percent of GDP in 1999-2000 in the context of the reconstruction efforts associated with Hurricane Mitch; non Mitch-related social expenditures, however, would increase moderately from 12.4 percent of GDP in 2000 to 12.8 percent of GDP during 2001. To attain this expenditure level, central government outlays, excluding the expected support for the coffee sector, are targeted to decline by about 6 percent during the second half of 2001 relative to the same period in 2000 (expenditures rose by about 5 percent during the first half of 2001 on a year-to-year basis). The decline in expenditures will be more apparent on infrastructure, particularly on roads and transportation, where high Mitch-related expenditures were concentrated during 1999-2000 and, to a lesser extent, on current expenditure on goods and services.

23. Savings of the combined public sector are expected to decline to negative 0.1 percent of GDP in 2001, from 3.6 percent in GDP in 2000. The main factor behind this deterioration is the substantial increase in the interest bill (of about 3.6 percent of GDP), mostly as a result of the interest cost of bank resolutions5 (2.5 percent of GDP). Excluding interest payments, however, savings would remain broadly constant in 2001, notwithstanding a higher budgetary cost of national elections (0.3 percent of GDP).6

24. For 2002, the new administration will face the challenge of putting in place quickly a fiscal program capable of addressing a further decline in tax revenues7 and a reduction in privatization proceeds and balance of payments support. Against this background, the staff stressed the need to implement a comprehensive tax reform package, including measures equivalent to 21/2 percent of GDP on an annual basis, with the objective of both increasing revenues and reducing distortions. Following previous recommendations by an FAD technical assistance mission, this could be achieved largely by eliminating exemptions and special regimes under the valued added tax (VAT) and by reducing import duty exemptions. The authorities agreed with the general thrust of the proposed reforms and indicated that specific measures would need to be discussed with the new administration.

B. Monetary and Financial Policies

25. The monetary program for 2001 is based on an increase in base money in line with nominal GDP growth and involves a contraction in the central bank’s net domestic assets equivalent to 1.8 percent of GDP. The program contemplates an increase in government deposits at the central bank as a result of the expenditure restraint to be implemented during the second half of the year and the projected disbursements of balance of payments support and privatization proceeds. On this basis, NIR are targeted to increase by US$50 million during 2001, with gross reserves reaching a level equivalent to about 90 per-cent of public sector short-term debt on remaining maturity basis. The central bank’s operating deficit is expected to rise due to a significant increase in the stock of central bank liabilities resulting from bank resolutions.

26. The staff cautioned the authorities about the increased vulnerability associated with the large volume of central bank paper (mostly U.S. dollar indexed paper) that is falling due within the next 12 months (equivalent to about the level of gross foreign assets of the central bank or 10 percent of GDP) and, particularly, during July-December 2001. The staff stressed that these liabilities posed a major vulnerability risk in the event of a large exchange rate adjustment. The authorities agreed on the desirability of reducing the stock of these liabilities over the medium term. In the near term, to partially maintain tight monetary conditions, the authorities increased temporarily (through January 2002) the reserve requirement8 by 2 percent effective in August and one additional percentage point in September 2001, but agreed that interest rates might need to increase to facilitate the rollover of the short-term debt. In addition, the authorities intend to take steps to improve open market operations in line with recommendations of a recent MAE technical assistance mission, including by introducing a system of repurchase agreements and by standardizing central bank paper to facilitate the development of a secondary market.

27. Regarding the financial system, during the remainder of the year the superintendency of banks will complete the implementation of its plan of on-site inspections and take steps to strengthen banks where weaknesses are encountered. It will also improve its prudential norms on asset risk classification and provisioning, fit and proper criteria, conflict of interest, and lending to related parties, in line with best international practices. The staff emphasized, however, that the superintendency should be further shielded from political pressures, which could impede its effectiveness. A recently established asset-liquidating unit has started to collect loans and dispose of assets taken over from the banks intervened in 2000-01, and the national assembly is expected to approve an amendment to the criminal code that defines financial crimes. The implementation of limits on deposit guarantees, established by the recently approved bank deposit insurance law, has been postponed to August 2002 because of concerns about a possible drop in bank deposits in the period preceding the elections.

28. An important part of the discussions with the authorities centered on the need to take immediate action to address the financial problems of BANIC, a bank identified as weak in the context of on-site inspections. Following several unsuccessful attempts to arrive at a private solution involving an injection of capital, on August 4, 2001 BANIC was intervened and its assets and liabilities auctioned off to another domestic bank (see Appendix V). While liabilities (deposits) to be absorbed are equivalent to about 8 percent of total banking system deposits, the fiscal cost of the operation will only be determined over the coming months, following the evaluation of the quality of the banks’ assets. In light of this uncertainty, the authorities’ program allows for an adjustment of the fiscal targets.

C. External Sector Policies

29. The real appreciation experienced by the Cordoba over the last 18 months does not appear to have so far affected seriously the competitiveness of noncoffee exports in key sectors, such as beef and seafood, but the performance of other nontraditional sectors is mixed. Against this background, the staff supported the continuation of the present crawl of 6 percent vis-a-vis the U.S. dollar, but stressed that this reinforced the need for prudent fiscal policy, particularly in view of the high degree of dollarization of the economy (84 percent of bank loans are denominated in U.S. dollars and 16 percent are indexed to the U.S. dollar). The authorities agreed with the staff’s view.

30. Key components of the external financing anticipated under the program for 2001 include privatization proceeds, balance of payments support, and HIPC-interim assistance. Specifically, the program is based on privatization receipts of US$115 million (see the section on Structural and Policies and Governance); disbursements of the Inter-American Development Bank (IDB) balance of payments support, corresponding to the financial sector, electricity, and pension reform loans, of US$80 million; and World Bank and IDB interim HIPC assistance of US$34.4 million. The World Bank has already begun disbursing interim assistance, while the IDB has indicated that disbursements of both balance of payments support and interim assistance could start on the basis of the SMP.9 In addition, the Central American Bank for Economic Integration (CABEI) is considering providing interim assistance. Given the uncertainties associated with the timing and amounts of HIPC-interim assistance, the authorities’ program contains an adjustor for any shortfall/excess relative to the assumed level.

31. The Nicaraguan trade system is relatively open, with a rating of four out often on the Fund’s trade restrictiveness index. There are no quantitative trade restrictions and the tariff regime is framed by the country’s membership in the Central American Common Market (CACM). Recently, Nicaragua eliminated the temporary protection tariff of 5 percent levied on intermediate and capital goods not produced in Central America, and progress is being made on the implementation of the recently signed free trade agreements with Chile, the Dominican Republic, and Panama. However, a punitive 35 percent surcharge on all imports from Colombia and Honduras, which was imposed in December 1999 as a result of territorial sovereignty issues, remains in effect (no timetable has been set for its removal); in March 2000 Colombia filed a complaint with the World Trade Organization (WTO), which is currently under investigation. In addition, the authorities need to enforce compliance with recently passed legislation on intellectual property rights (Nicaragua is not a signatory of the Trade-Related Aspects of Intellectual Property Rights agreement) and to strengthen capacity to investigate invoice fraud so as to fully implement the WTO Customs Valuation Agreement.

32. Given the high level of debt, the staff underlined the need to limit external public sector financing to grants and concessional loans. It also urged the authorities to avoid the accumulation of external debt arrears and offer comparable treatment to all bilateral and commercial creditors. The authorities emphasized that they would maintain prudent debt management policies and continue servicing all nonreschedulable obligations on a timely basis. The staff welcomed recent progress in securing HIPC assistance from bilateral creditors, such as the recent swap of Nicaraguan debt between Guatemala and Spain, and urged the authorities to work toward securing agreements with other bilaterals.

D. Structural Policies and Governance

33 Further actions in the structural area are envisaged under the SMP (MEFP, Table 3). In particular, in addition to the steps to strengthen the financial system described above, the authorities intend to: (i) complete the privatization of the generating plants of the Nicaraguan Electricity Company (ENEL) in August; (ii) award to the private sector a management contract and a 40 percent stake in ENITEL in August; and (iii) begin the operations of a privately managed pension system by end-2001 (operating licenses will be issued to Fund managers in November).

34. The authorities intend to improve governance, with assistance from the World Bank, the IDB, and the donor community, by advancing judicial reforms, facilitating the resolution of property rights, and further improving transparency and monitoring of the budget process. To this end, the national assembly is expected to pass a code on criminal procedures by September and a law on decentralized real estate registries before the elections. Moreover, the 2002 budget is expected to incorporate the implementation of the SIGFA, including a mechanism for tracking poverty reducing expenditure and the use of HIPC debt relief funds in line with the PRSP.

E. Poverty Reduction Strategy Paper (PRSP)

35. The staff supports the government’s policy agenda described in the PRSP, which rests on four pillars and three cross-cutting themes. The four pillars are: (i) broad-based economic growth, (ii) investment in human capital; (iii) better protection of vulnerable groups; and (iv) institutional strengthening and good governance. The three cross-cutting themes address the country’s ecological vulnerability, social inequality, and the need for greater decentralization. The PRSP ranks broad-based economic growth as the most important pillar to reduce poverty.

F. Quantitative and Structural Benchmarks

36. The authorities’ program includes indicative quantitative benchmarks for September and December 2001 on the net domestic financing and savings of the combined public sector, central bank net domestic assets, NIR, and no use of public sector borrowing on nonconcessional terms (MEFP, Table 1). To ensure the prompt identification of possible deviations, the program incorporates monthly indicative ceilings on central government total expenditure (excluding interest and projects financed with tied foreign resources), current expenditure (excluding interest), total domestic financing, and central bank financing (MEFP, Table 2). Structural policy benchmarks are shown in Table 3 of the MEFP. The program envisages adjustment of the benchmarks for shortfalls in HIPC-interim assistance from multilateral institutions as well as the interest cost of BANIC’s resolution, the latter with an upper limit of 0.2 percent of GDP.

Table 1.

Nicaragua: Selected Economic and Financial Indicators, 1995-2003

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Sources: Central Bank of Nicaragua; Ministry of Finance; and Fund staff estimates.

In relation to currency in circulation at the beginning of the year.

Six-month deposits, end of period.

Includes central bank operational losses.

From 2001 onward, includes the cost of bank resolution on accrual basis.

External current account deficit, excluding interest on debt to non-Paris Club bilateral creditors that is eligible for debt rescheduling and deferred interest to Paris Club.

Table 2.

Nicaragua: Consolidated Operations of the Public Sector

(In percent of annual GDP)

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Sources: Ministry of Finance; Central Bank of Nicaragua: and Fund staff estimates.

Assumes privatizations receipts of US$115 million.

Assumes that private pension funds initiate operations in 2002.

Includes the interest cost of bank resolution on accrual basis.

Excluding post-Mitch reconstruction expenditure.

Table 3.

Nicaragua: Summary Operations of the Central Government

(In percent of annual GDP)

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Sources: Ministry of finance; Central Bank of Nicaragua; and Fund staff estimates.

For 2001, assumes privatization receipts of US$115 million, of which US$22 million would be used to repay ENEL’s short-term commercial debts and the rest would be deposited in the central bank.

G. Medium-Term Macroeconomic Outlook

37. Nicaragua faces significant challenges over the medium term to achieve sustained growth and meaningful reductions in poverty levels, while advancing toward fiscal and external sustainability. The staff and the authorities agreed that maintaining appropriate investment levels would require a substantial increase in both public and private national savings over the medium term so as to offset expected declines in external savings. To achieve these objectives, a stable macroeconomic environment based on a significantly improved fiscal stance, continued strengthening of the financial system, consolidation of pension system reforms, improvements in the judicial system, and civil service reform, will be critical. The authorities’ medium-term strategy and macroeconomic projections presented in the PRSP are in line with the staff’s recommendations and the adjustment scenario presented below10 (Table 8).

Table 4.

Nicaragua: Summary Accounts of the Central Bank

(Flows in millions of cordobas; unless otherwise stated)

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Sources: Central Bank of Nicaragua; and Fund staff estimates.

Includes bonds issued to recapitalize weak banks.

Excludes bonds issued to recapitalize weak banks.

From 2002 onward, asset recovery of closed banks is included in “other.”

Table 5.

Nicaragua: Operations of the Central Bank and the Financial System

Stocks at accounting exchange rates

(In millions of cordobas)

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Sources: Central Bank of Nicaragua, and Fund staff estimates.

Accounting adjustments with respect to exchange rate revaluations are included in “other.”

Table 6.

Nicaragua: Balance of Payments

(In millions of U.S. dollars; unless otherwise indicated)

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Sources: Central Bank of Nicaragua: and Fund staff estimates.

Medium and long term.

Short-term debt, and private debt due to official creditors.

Net of the stock of CENIs and in terms of the following year imports of goods and nonfactor services.

Table 7.

Nicaragua: Medium-Term Balance of Payments

(In millions of U.S. dollars; unless otherwise indicated)

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Sources: Central Bank of Nicaragua; and Fund staff estimates.

Figures for 2001 and 2002 include interim IIIPC assistance in the amount of 71.2 and 140 million respectively.

Medium and long term.

Short-term debt, and private debt due to official creditors.

The financing gaps could be filled with debt relief to be granted under the enhanced HIPC Initiative.

Net of the stock of CENIs and in terms of the following year imports of goods and nonfactor services.

Table 8.

Nicaragua: Medium-Term Macroeconomic Projections

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Sources: Central Bank of Nicaragua; Ministry of Finance; and Fund staff estimates.

Assumes that private pension funds initiate operations in 2002.

Excluding interest on debt owed to non-Paris Club bilateral creditors that is eligible for debt rescheduling

Table 9.

Nicaragua: Public Sector External Debt and Debt Service

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Sources: Central Bank of Nicaragua; Ministry of External Cooperation; and Fund staff estimates.
Table 10.

Nicaragua: Indicators of Financial Sector Vulnerability

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Source: Central Bank.