Abstract
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.
1. The following information has become available since the “Staff Report for the 2001 Article IV Consultation and the Staff-Monitored Program (SMP)” (EBS/01/148) was issued. It does not change the thrust of the staff appraisal.
2. Through mid-September, however, net international reserves have continued to decline for a cumulative loss of US$200 million (compared with a targeted loss of US$43 million under the SMP for the period January-September 2001). The shortfall is mostly due to delays in completing privatizations (US$110 million) and disbursements of balance of payments support (US$35 million). The authorities now expect these resources to become available in October-November. As of September 11, gross reserves stood at US$325 million, or 2.0 months of imports of goods and services, compared with 3.2 months at end-2000.
3. Central bank financing to the government through end-August was below the levels envisaged under the SMP. However, although information is incomplete, there are indications that the government has accumulated new domestic arrears. The authorities have stated that they intend to eliminate all arrears before year-end, in line with the SMP.
4. The telecommunications company (ENITEL) was sold to a Swedish-led consortium on August 31 for US$83 million, with an initial payment of US$33 million that has not yet been made effective and five additional annual installments of US$10 million, in line with the SMP projections. The legality of the operation has been challenged in the courts by parties with claims on ENITEL and a ruling by the Supreme Court is expected within the next few weeks. The government had previously issued a decree guaranteeing payment of any court-approved liability. The privatization of the electricity generating plants, which was expected to take place in August and generate about US$90 million in 2001, has not been completed because potential investors declined to bid, citing legal concerns, including possible claims by third parties. The authorities have indicated that they are addressing the investors’ concerns, including by providing, if necessary, government guarantees similar to those offered in the case of ENITEL. They expect to complete this privatization over the next month. Also, Nicaragua’s request for the release of disbursements for US$35 million under the IDB financial and electricity loans is expected to be considered by the IDB Board by late September or early October.
5. The government is addressing the adverse effects of low international coffee prices and a drought in the North-Western region. As indicated in the staff report, the SMP envisages US$15 million in financial assistance from the government to coffee growers. While the authorities estimate that the effect of the drought on agricultural output would be limited, the impact at the regional level appears significant, with some 30,000 families losing more than 50 percent of their crops. Support is being provided by redirecting some US$3.7 million of previously committed IDB funds to fast disbursing assistance, and by emergency assistance from the World Food Program (WFP).