Nicaragua
Fourth and Fifth Review Under the Three-Year Arrangement Under the Extended Credit Facility, Requests for Extension of the Arrangement, Rephasing of Access, and Waiver of Nonobservance of Performance of Criterion, and Financing Assurances Review-Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Nicaragua
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International Monetary Fund
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Publication Date:
21 Dec 2010
eISBN:
9781455212972
Language:
English
Keywords:
ISCR; CR; waiver of nonobservance of performance criterion; Three-Year arrangement; Three-Year; waiver; authority; government's decision; authorities' decision; potential GDP; Government debt management; Global
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Economic performance in Nicaragua has been better than envisaged; nonetheless, vulnerabilities remain and will be compounded by electoral uncertainties. The decision to use part of the strong revenue performance to lower the fiscal deficit is appropriate. Exchange-rate and monetary policy remain broadly adequate. Fiscal adjustment should set the stage for a strong program of fiscal consolidation following the elections. Continued vigilance in the financial sector will be critical. Improvement in reporting and monitoring of foreign aid flows and transparency is necessary.

Abstract

Economic performance in Nicaragua has been better than envisaged; nonetheless, vulnerabilities remain and will be compounded by electoral uncertainties. The decision to use part of the strong revenue performance to lower the fiscal deficit is appropriate. Exchange-rate and monetary policy remain broadly adequate. Fiscal adjustment should set the stage for a strong program of fiscal consolidation following the elections. Continued vigilance in the financial sector will be critical. Improvement in reporting and monitoring of foreign aid flows and transparency is necessary.

I. Introduction

1. Economic performance in Nicaragua during 2010 has been somewhat better than envisaged at the time of the Article IV discussions. With a broadly supportive external environment, the recovery has gained strength and growth is now projected to reach 3 percent. Exports are growing faster than anticipated, and net capital flows (mainly official assistance) have been higher than envisaged, keeping international reserve levels above projections. In response to stronger-than-expected tax revenues and higher-than-expected grants, the authorities have slowed down spending growth, and will lower the fiscal deficit, thus saving broadly the equivalent to the wage bonus and the deviations in social security in 2010. Progress has also been made on the structural reform agenda.

2. Nonetheless, vulnerabilities remain and will be compounded by electoral uncertainties. Historically, Nicaraguan elections have been accompanied by heightened economic uncertainty and 2011 entails similar risks. President Ortega is expected to run for a new term (in spite of claims by the opposition that such a move would be illegal), while it is unclear whether the opposition will agree on a consensus candidate. Meanwhile, negotiations between the ruling and opposition parties over the appointment of judges and officials to the Supreme Court and other key institutions continue. Resumption of budget support by some foreign donors remains conditioned on the establishment of a credible electoral process.

3. Against this background, the authorities are requesting a one-year extension of the ECF arrangement to help them anchor policies and expectations. They consider that a Fund-supported program through end-2011 would contribute to reduce uncertainties stemming from the political context and also provide a credible framework to mitigate risks related to a still uncertain external environment. Building on the prudent macroeconomic stance of 2010, macroeconomic policies during 2011 will be anchored on containing expenditures, protecting the external position, and paving the way for fiscal consolidation. Concrete steps to improve the monitoring and reporting on the sources and uses of foreign aid flows will further contribute in improving confidence and transparency.

II. Recent Developments

4. The economic recovery is firming up. The economy grew at 5.9 percent (y/y) in the first half of the year. The recovery is broad based, with most sectors (except construction) posting gains in activity (Figure 1). On the demand side, the recovery in investment is lagging that of consumption, while export growth is outpacing import growth. Despite the adverse impact of strong rainfalls, real GDP growth for 2010 is now projected to reach at least 3 percent (compared to 1 ¾ -2 percent in the last staff report). Inflation is broadly in line with earlier projections and is expected to reach 7 percent by end-2010.

Figure 1.
Figure 1.

Nicaragua: Recent Economic Developments, 2006–10

Citation: IMF Staff Country Reports 2010, 376; 10.5089/9781455212972.002.A001

1/ Excludes Dominican RepublicSources: National Authorities; World Economic Outlook; Information Notice System; and Fund staff calculations.

5. The external position remains relatively sound. The external current account deficit is projected to increase in line with the higher activity, but the non-oil current account balance will strengthen on the back of strong performance of commodity exports (Figure 3).1 On the capital account, a modest recovery of FDI and an increase in concessional inflows related to the Venezuelan oil-collaboration scheme (expected to reach about 8 percent of GDP) will not offset the projected decline in official assistance, but will result in a surplus larger than the one projected during the Article IV consultation. As a result, the shortfall in the balance of payments by end-2010 is projected to be US$100 million lower than envisaged earlier (Table 7).

Figure 2.
Figure 2.

Nicaragua: Selected Fiscal Indicators, 2005–10

Citation: IMF Staff Country Reports 2010, 376; 10.5089/9781455212972.002.A001

Sources: Nicaraguan Authorities; and Fund staff calculations.1/ Includes the 2010–11 wage bonus.2/ Excludes election-related spending in 2006.
Figure 3.
Figure 3.

Nicaragua: External Sector Developments, 2005–10

Citation: IMF Staff Country Reports 2010, 376; 10.5089/9781455212972.002.A001

Sources: Nicaraguan Authorities; and Fund staff calculations.

6. Revenue performance is stronger than expected. The pickup in activity and the effects of the 2009 tax reform (which eliminated a range of exemptions and established a minimum tax on gross income) have resulted in a strong revenue intake in the first half of the year. For the year as a whole, tax revenues are projected to reach 18.3 percent of GDP (17.7 percent in 2009), 0.8 percentage point of GDP higher than envisaged during the Article IV.

7. The financial sector remains stable and highly liquid, but profitability has declined. With the ratio of nonperforming loans (NPLs) stabilizing at 11 percent in July (from 7 percent in 2008), the drop in credit appears to have been halted by mid-2010 and the first signs of a resumption in lending are emerging. However, banks’ returns on assets remain close to zero (compared to 1.8 percent in 2008). At the same time, liquidity buffers remain very high, with a ratio of liquid assets to total assets of 31.5 percent as of July.

8. Relative to the targets and understandings reached at the conclusion of the second and third review (in November 2009), performance has been mixed:

  • Quantitative targets. All quantitative performance criteria (QPCs) through end-June 2010 were met with margins, with the exception of the ceiling on nonconcessional external debt, which for a technical reason was formally not observed. 2 The surplus of the social security institute (INSS) was, however, lower than envisaged.

  • Structural reforms. In July 2010, the National Assembly approved a reform of the electricity anti-theft law and a new Central Bank Charter, both of which incorporated earlier Fund recommendations. In October, the National Assembly approved a new procurement law in line with international best practices. More recently, the authorities published a study on options to reform the pension system, covering the areas staff had identified as critical.

  • Wages. The government’s decision in early May to grant an off-budget wage increase (in the form of a monthly bonus, at an annual cost of 0.7 percent of GDP), financed with grants from Venezuela, delayed the completion of the 4th review. Although the measure was not expected to affect the overall fiscal outturn in 2010, it raised concerns about financing recurrent fiscal spending with transitory resources, and precluded the decline in government spending and the real wage bill that were contemplated in the revised program for 2010.

III. Macroeconomic Outlook and Risks

9. The recovery is expected to continue at a moderate pace. The momentum of the output recovery is expected to carry over into 2011, although the projected slowdown in U.S. growth is expected to keep output growth at about 3 percent. Inflation is expected to remain at around 6-7 percent (reflecting a rate of crawl of 5 percent during 2011), while the external current account deficit is projected to stabilize at about US$1 billion (16 percent of GDP). Gross reserves are expected to decline moderately in 2010 and 2011, as commercial banks reduce their excess (dollar) liquidity, and credit to the private sector recovers. Risks to the outlook stem mainly from an unsettled political environment in the run up to the presidential elections and uncertainties about global conditions, including developments in Nicaragua’s main trading partners (the U.S. and Venezuela).

Nicaragua: Key Economic Indicators

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IV. The Economic Program for 2010 and 2011

10. The authorities consider that a strengthened commitment to macroeconomic stability will be crucial to mitigate risks in an electoral year. To this effect, they have developed an economic program for the remainder of 2010 and 2011 anchored on a tightening of the fiscal stance, a strengthening of prudential regulations, and improvements in the monitoring and use of foreign aid flows.

A. Fiscal Policy

11. The authorities are committed to use this year’s stronger-than-expected revenues to reduce the overall fiscal deficit to 2.3 percent of GDP (3.1 percent in 2009). At the central government level, the supplementary budget approved by the Assembly in October contained a modest increase in spending that will be more than offset by the increase in projected revenues and grants. As a result, the deficit of the central government in 2010 is expected to fall to 1.1 percent of GDP (from 2.8 percent of GDP in 2009—and 1.8 percent of GDP during the Article IV) implying a decline in primary spending (including the wage bonus) of 0.3 percentage points of GDP. At the public enterprise level, restraint in current spending and slower execution of investment programs would mitigate the lower revenues and contain their deficit at 1.2 percent of GDP compared to 1.6 percent of GDP projected during the Article IV. External resources (including US$43 million of budget support loans from the IDB that are expected before year-end) would more than cover the overall deficit, thus helping avoid crowding out the private sector.

12. For 2011, the authorities will keep the central government deficit below 1.5 percent of GDP. Excluding one-off spending to organize the elections of about 0.7 percent of GDP, this would entail a decline in primary spending of 0.4 percentage points of GDP. This measure of primary spending includes an extrabudgetary wage bonus equivalent to 0.7 percent of GDP, which will be again financed with resources from Venezuela. Nevertheless, the authorities are committed to dampen the growth in the public wage bill, which will remain broadly constant as a share of GDP (new indicative target). For the overall public sector, the deficit in 2011 (including election-related spending) will be roughly similar to the projected outturn for 2010, which would represent an improvement in the cyclically-adjusted primary balance of roughly 1 percent of GDP (Box 1). As in 2010, external resources (including US$40 million of budget support from the IDB) would more than cover the projected deficit, thus allowing for further cancellation of the (more expensive) domestic debt.

uA01fig01

Consolidated Public Sector Balance (after grants)

(US$ million)

Citation: IMF Staff Country Reports 2010, 376; 10.5089/9781455212972.002.A001

uA01fig02

Central Government Primary Spending

(percent of GDP)

Citation: IMF Staff Country Reports 2010, 376; 10.5089/9781455212972.002.A001

1/ Includes wage bonus2/ Excludes spending to organize the elections

13. The authorities are committed to keep the spending of the social security institute under control. The authorities recognized that INSS’ expenditures (in particular administrative spending) had been growing too fast and had to be restrained, especially given the precarious actuarial situation of the institution. They agreed to keep the surplus of the INSS at one percent of GDP during 2011 and to include in the program performance criteria on the overall balance of the entity.

Estimates of Fiscal Impulse

To gauge the stance of fiscal policy implied by the proposed program, we constructed cyclically adjusted (CA) measures of Nicaragua’s nonfinancial public sector balance (see Annex 1 for the methodology). Results of the exercise suggest that fiscal policy in Nicaragua was strongly procyclical in 2008, and broadly neutral during 2009.

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Source: Fund staff calculations

During 2010-11, the output gap is projected to remain negative (at about 1.3 percent of potential GDP) but the fiscal targets envisaged in the program are expected to withdraw fiscal stimulus (especially in 2011). This procyclical fiscal policy is justified by the urgency to regain fiscal space used during the downturn and return the public debt-to-GDP ratio to a downward trajectory.

uA01fig03

Cyclically-Adjusted Primary Balance

(percent of GDP)

Citation: IMF Staff Country Reports 2010, 376; 10.5089/9781455212972.002.A001

B. Monetary, Exchange Rate, and Financial Sector Policies

14. Monetary policy will remain focused on keeping inflation stable and protecting the external reserve coverage. The monetary program envisages that a gradual decline of the excess liquidity currently held by commercial banks would result in moderate losses of international reserves in 2011. At the same time, net credit to the central government is expected to decline owing to the amortization of debt originated in the bank bail-out of 2001 as well as through net deposit increases. Currency in circulation is projected to grow slightly more than nominal GDP this year, and in line with nominal GDP in 2011. The authorities agreed on the need to monitor closely developments in banks’ liquidity to avoid a sudden increase in lending not justified by fundamentals.

15. The authorities remain committed to a system of market-determined interest rates and plan to adopt a regulatory framework for microfinance institutions (MFIs). The framework, which will be in place before year-end, will not interfere with the restructuring process of past-due loans currently underway. Staff urged the authorities to revamp the regulatory framework for financial cooperatives, so as to improve their governance structure, and to strengthen their overseeing authority, so as to limit the macroeconomic risks derived from the cooperatives’ activities. The authorities agreed on the importance of these issues and will work on designing specific measures in this area; they are also committed to make progress in the implementation of pending FSAP Update recommendations.3

16. Bank supervision will continue strengthening. Although the rise in NPLs appears to have stabilized, the authorities are committed to maintain enhanced (including on-site) supervision of banks to mitigate the risks of a second round of credit deterioration (particularly against a background of declining bank profitability). The authorities will also monitor closely movements in the deposits associated with Venezuelan aid flows, which are sizeable and concentrated in a couple of banks.

C. Structural Reforms

17. The economic program for 2010-11 will make further progress in key structural areas. In particular, the program contemplates measures in the areas of public financial management; pension reforms; the management and monitoring of aid flows; and the electricity sector:

  • Public Financial Management. The authorities will prepare a study on the composition and structure of employment in the central government. The study will serve to assess the scope for increasing productivity gains and rationalizing government employment practices (new structural benchmark).

  • Pension Reforms (INSS). The release of the study on reform options (prior action) will facilitate a discussion of the options for reforms among all stakeholders.

  • Monitoring and Management of Aid Flows. Starting in March 2011, the authorities’ “Aid Report” will include information on the use, by economic sector, of Venezuela-related aid flows (new structural benchmark). In addition, starting in October 2010, the authorities will provide staff (monthly) data on the bank deposits associated with those aid flows. Moreover, except for the amounts allocated for the wage bonus, the authorities express a commitment to refrain from using those resources to finance fiscal spending.4

  • Electricity Sector. Efforts to ensure that electricity tariffs cover generation costs and reduce oil dependency in the energy sector will continue. The tariff hike (of about 7 percent) of early May brought tariffs in line with costs, while the reform of the anti-theft law will allow for a gradual reduction of the non-technical losses by the private distribution company. In addition, during 2011-14, the scheduled completion of large power generation projects will facilitate the substitution of less efficient (and oil-dependent) units.

V. Program Financing

18. Program financing. The program is projected to be fully financed for the remainder of 2010 and for 2011, through the undisbursed amount under the ECF, budget-support grants of about US$20 million in 2010, and IDB budget support loans for US$43 million in 2010 and US$40 million in 2011. The projection assumes no budget-support loans from the World Bank. The program includes adjustors whereby (i) higher-than-programmed external budget support loans will be used to build international reserves; (ii) higher-than-programmed grants are earmarked for increased social spending; and (iii) higher-than-programmed concessional external project loans can be used to increase investments up to 0.2 percent of GDP in 2010 and 0.8 percent of GDP in 2011.

19. Financing assurances. Negotiations continue to obtain debt relief on HIPC-equivalent terms with non-Paris Club bilateral creditors and one pending claim (for US$21 million) from the commercial debt buy-back operation launched in October 2007. While debt relief was secured from Algeria, Poland, and Venezuela (for about US$210 million during 2007–09), and negotiations are ongoing to secure debt relief from Libya (with a pending claim of US$311 million), debt to non-Paris Club bilateral creditors pending relief stood at US$1.6 billion (25 percent of GDP) by end-2009.

VI. Program Modalities, Risks, and Safeguards

20. The proposed extension of the ECF through December 2011 would require rephasing of the undisbursed resources under the arrangement. Staff proposes that slightly more than one half of the undisbursed amount (SDR 23.9 million) be made available upon completion of the fourth and fifth reviews and the rest be disbursed in two equal tranches during 2011 (Table 11). The proposed access levels are consistent with maintaining gross reserves at about the equivalent of 4 months of non-maquila imports during the program period. Program performance will be monitored by two additional reviews. The quantitative performance criteria agreed on for December 2010 and June 2011 and the structural agenda for the next 12 months are presented in Tables 1a-b.

21. Unsettled domestic conditions in the run up to the elections and the uneven record of program implementation present key risks. Political tensions related to the pending appointment of members to the Supreme Court and the Electoral Council and the launch of official candidacies may increase uncertainty and spending pressures on the government. Uncertainties related to the pace of the U.S. recovery and the amount of Venezuelan aid flows present additional risks. The relatively small size of the disbursements proposed under the extension and the adequate capacity to repay the Fund mitigate these risks somewhat.

22. Safeguards. The financial statements for the years 2007-09 submitted by the audit firms and approved by the Central Bank have been published. However, these are yet to be approved by the Comptroller General. While the overall goal of transparency was achieved, technical non-compliance with the Safeguards Policy still exists. The 2010 audited financial statements will be prepared pursuant to the new Central Bank charter which no longer requires Comptroller General validation, and will be published in March 2011 in line with the Safeguards Policy

VII. Staff Appraisal

23. A stronger-than-expected recovery has improved the near-term outlook for Nicaragua. The pickup in activity in 2010 has been broad based and balanced, balance-of-payment flows have returned to normal, pressures on reserves have not materialized, and the financial system remains stable and highly liquid.

24. The authorities’ decision to use part of the strong revenue performance in 2010 to lower the fiscal deficit was appropriate. The efforts in improving tax administration and the adherence to the tax measures approved at the time of the November 2009 review are also welcome. Nonetheless, the continued increase in the government’s wage bill is regrettable and should be addressed to make room for investment spending and well-targeted poverty reduction programs.

25. Exchange-rate and monetary policy remains broadly adequate. Central bank credit policy continues to be consistent with the crawling peg regime and was able to offset larger-than-expected flows of official assistance (including from Venezuela). Nonetheless, the crawling peg system continues to set a relatively high floor for inflation expectations and, together with the high degree of bank dollarization, constrains the effectiveness of monetary policy.

26. There has been some progress on the structural agenda. The adoption of the new central bank charter and the strengthening of the anti-theft electricity law are welcome. The recent completion of the study on pension reform options, the adoption of a new procurement law in line with best international practices, as well as the plans to strengthen the regulatory framework for microfinance institutions also are steps in the right direction. Staff encourages the authorities to maintain the momentum of structural reforms despite the challenges of the electoral calendar.

27. The fiscal adjustment contemplated for 2011 is modest, but should set the stage for a strong program of fiscal consolidation following the elections. While the decision to maintain the off-budget wage bonus in 2011 is unfortunate, the growth of the wage bill will be contained, and the fiscal outlook for next year has improved considerably. The one-off expenditures associated with the elections and the still sizeable output gap constrain the withdrawal of fiscal stimulus in an electoral year, particularly since the public debt dynamics are relatively benign. Nonetheless, sustained fiscal consolidation and continued reduction of the still high public debt level remains the key challenge and macroeconomic policy priority in Nicaragua.

28. Structural measures to improve fiscal sustainability are also key. Improving the actuarial situation of the pension system remains central for the soundness of public finances in the medium term. In this regard, the publication of the recently concluded study laying out options for reform constitutes a significant milestone. Similarly, the envisaged review of employment in the central government will provide useful guidance for reforms looking forward. Efforts to improve tax administration need to be sustained.

29. Continued vigilance in the financial sector will be critical. While the rise in nonperforming loans appears to have abated, uncertainties about the economic outlook call for continued enhanced supervision. Similarly, the concentration of large deposits in some institutions requires careful monitoring. Progress in adopting the recommendations of the recent FSAP update has been slow.

30. Notwithstanding the proposed improvement in reporting and monitoring of foreign aid flows, further transparency in this area is necessary. More transparency in this area will help mobilize donor support, foster confidence, and help program monitoring and macroeconomic management. Adherence to the commitment that foreign aid flows not be channeled to the government nor be used to finance government spending or create fiscal contingencies will be a condition for maintaining Fund support.

31. Based on the above, staff recommends the granting of a waiver for nonobservance of the quantitative performance criterion on nonconcessional external debt, completion of the fourth and fifth reviews under the ECF arrangement, rephasing of disbursements, and the extension of the arrangement.

1

The oil bill for 2010 is projected to be 40 percent higher than in 2009 owing to higher oil prices and a one-off expansion of fuel-oil reserves.

2

In August 2010, the authorities renewed for 12 months an existing US$200 million contingent credit line with the Central American Bank of Economic Integration secured in 2009 (and contemplated in the program). Since the renewal of this credit line—which has not been activated—had not been explicitly foreseen in the TMU, this triggered a nonobservance of the performance criterion of the ceiling on nonconcessional external debt, for which the authorities are requesting a waiver.

3

See SM/10/156.

4

The authorities also provided more information to staff on the modalities of Venezuelan aid that may have implications for the recording of those transactions. This information clarified that all flows related to the oilcollaboration assistance (amounting to half of the oil bill) take the form of concessional loans from Venezuela to the domestic financial cooperative Caruna, which distributes about half of these funds as grants, while investing the other half for profit. The authorities are still studying the implications of this modality for their official statistics, but the preliminary conclusion of staff is that it implies an increase of recorded private external debt as of end-2009 of about 5 percent of GDP. Moreover, although this change would not alter the debt sustainability assessment, it would imply an increase in fiscal risks.

Annex 1: Estimates of Fiscal Impulse

Coverage. The Non-Financial Public Sector (NFPS) includes the Central Government (CG), the Social Security Institute (SS), the Public Enterprises (PEs), and the Municipality of Managua (MM).

Methodology. Cyclically-adjusted (CA) accounts were obtained applying the methodology used in Chapter 4 of the October 2009 REO). In particular, details of the calculation include the following:

  • Revenues. Total revenues were split into domestic revenues and external grants. Domestic revenues comprise tax receipts and SS contributions. A (short-term) elasticity of 1.2 was assumed to describe the relationship between domestic revenues and the output gap. For external grants, it was assumed that such elasticity is zero, i.e. their cyclical component only reflects the sign and size of the output gap.

  • Primary expenditures. They include those of the CG and SS, plus the deficit (before grants) of PEs and MM. An elasticity of zero was assumed to reflect the relationship between primary spending and the output gap.

  • Spending to organize elections. The Nicaraguan law mandates that the budget has to make a provision to finance the organization of national elections, once every 5 years; for 2011, these costs are budgeted to amount to around 0.7 percent of GDP. The CA primary spending was adjusted to reflect this pattern, by evenly allocating such a cost over a period of 5 years (i.e., 0.14 percent of GDP per year).

  • Fiscal Impulse. It is calculated as the (negative) of the change in the CA primary balance, excluding grants.

  • Output Gap. Trend GDP was calculated by taking the simple average of Hodrick-Prescott filtered headline real GDP series starting in 1920, using alternative smoothing parameters (6.25, 10, 100, and 250). The output gap was estimated in a similar manner. In order to avoid an end-of-period bias, the filter was applied to a series through 2015 that assumes that GDP growth converges gradually to 4 percent in the long term.

Table 1a.

Nicaragua: Quantitative Performance Criteria and Indicative Targets, 2009-11 1/

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

Cumulative flows starting at the beginning of the calendar year. Targets for end-December 2009 and end-June 2010 are those set during the second and third reviews (EBS/09/157). Definitions are specified in the TMU, including adjustors. N.A. indicates not applicable.

Adjusted by any excess of project loans aboved programmed levels for up to US$15 million in 2010 and US$55 million in 2011. Adjusted in 2011 by any use of US$49.5 million of a grant to ENACAL received in 2009.

Adjusted for deviations in budget support external loans compared to programmed leves both in 2010 and 2011.

The targets for NDA and NIR-Adjusted are defined as cumulative flows from June 2010.

Adjusted for deviations in observed grants and project-loans compared to programmed amounts.

Adjusted for deviations in external loans and grants compared to programmed levels, as specified in TMU.

Table 1b.

Nicaragua: Structural Measures, 2010-11 1/ 2/

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SB= Structural benchmark; PA= Prior action; * denotes measures agreed at the technical level, to be proposed at the review that was envisaged for early 2010.

An increase in electricity tariffs in the range of 5-6 percent was a prior action for consideration at the review that was envisaged for early 2010.

Prior Action for Board consideration of 4th and 5th Reviews.

Table 2.

Nicaragua: Selected Social and Economic Indicators, 2007–11

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

Staff Report for the 2010 Article IV Consultation (June 25, 2010).

Projections for 2010-11 include budget support that covers the financing gap.

Figures for 2009 includes the SDR allocation for SDR 105.1 million (US$165 million) of September 2009.

Projections for 2010-11 include off-budget wage bonus.

Estimates up to 2009 correspond to the legal situation. The projections assumes “no” restructuring of the outstanding debt to non-Paris Club Bilaterals, currently under negotiations.

Program definition. Includes deposit insurance fund (FOGADE) and excludes new SDR allocation and reserve requirements of commercial banks in foreign currency.

Table 3a.

Nicaragua: Operations of the Central Government, 2007–11

(in millions of Córdobas)

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

Staff Report for the 2010 Article IV Consultation (June 25, 2010).

Starting in 2008, a portion of capital spending was reclassified to current spending, namely wages and goods and services.

Starting in 2010, it includes an extra-budgetary wage bonus financed with Venezuela-related resources.

Current transfers in 2009 includes payment of arrears to the electricity sector for US$28 million.

Starting in 2010, it includes an extra-budgetary grant from Venezuela to finance a wage bonus.

In 2010 a project loan for US$17 million was reclassified as a grant.

It includes issuance of central government bonds to the social security institute (INSS).

It includes the wage bill of all decentralized agencies of the central government; and the extra-budgetary wage bonus.

It includes the extra-budgetary wage bonus.

Table 3b.

Nicaragua: Operations of the Central Government, 2007–11

(in percent of GDP)

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

Staff Report for the 2010 Article IV Consultation (June 25, 2010).

Starting in 2008, a portion of capital spending was reclassified to current spending, namely wages and goods and services.

Starting in 2010, it includes an extra-budgetary wage bonus financed with Venezuela-related resources.

Current transfers in 2009 includes payment of arrears to the electricity sector for US$28 million.

Starting in 2010, it includes an extra-budgetary grant from Venezuela to finance a wage bonus.

In 2010 a project loan for US$17 million was reclassified as a grant.

It includes issuance of central government bonds to the social security institute (INSS).

It includes the wage bill of all decentralized agencies of the central government; and the extra-budgetary wage bonus.

It includes the extra-budgetary wage bonus.

Table 4a.

Nicaragua: Operations of the Combined Public Sector, 2008–11

(in millions of Córdobas)

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

Staff Report for the 2010 Article IV Consultation (June 25, 2010).

Starting in 2010, it includes the extra-budgetary wage bonus financed with Venezuela-related resources.

Starting in 2008, a portion of capital spending was reclassified to current spending, namely wages and goods and services.

In 2010, a project loan for US$17 million was reclassified into a grant. Starting in 2010, it includes an extra-budgetary grant from Venezuela to finance a wage bonus.

It includes the state-owned water, electricity generation, electricity transmission, and port companies, as well as the telecommunications regulatory agency.

It includes a project grant for US$49.5 million received in December 2009 by the state-owned water company is projected to be spent in 2010 or 2011.

It nets out purchases of central government bonds by the social security institute (INSS).

In 2010, it includes payments of short-term bills by the central government and a debt net out by the state-owned electricity company.

It includes all resources from the oil-colaboration scheme, some of which have not been spent and are deposited in the commercial banks.

Table 4b.

Nicaragua: Operations of the Combined Public Sector, 2008–11

(in percent of GDP)

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

Staff Report for the 2010 Article IV Consultation (June 25, 2010).

Starting in 2010, it includes the extra-budgetary wage bonus financed with Venezuela-related resources.

Starting in 2008, a portion of capital spending was reclassified to current spending, namely wages and goods and services.

In 2010, a project loan for US$17 million was reclassified into a grant. Starting in 2010, it includes an extra-budgetary grant from Venezuela to finance a wage bonus.

It includes the state-owned water, electricity generation, electricity transmission, and port companies, as well as the telecommunications regulatory agency.

It includes a project grant for US$49.5 million received in December 2009 by the state-owned water company is projected to be spent in 2010 or 2011.

It nets out purchases of central government bonds by the social security institute (INSS).

In 2010, it includes payments of short-term bills by the central government and a debt net out by the state-owned electricity company.

It includes all resources from the oil-colaboration scheme, some of which have not been spent and are deposited in the commercial banks.

Table 5.

Nicaragua: Summary Accounts of the Central Bank, 2008–11

(Flows in millions of córdobas; unless otherwise indicated)

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

Staff Report for the 2010 Article IV Consultation (June 25, 2010).

Program definition. Includes deposit insurance funds (FOGADE), and excludes new SDR allocation and observed reserves of commercial banks in foreign currency.

Includes only “Titulos Especiales de Inversion”

Estimate for 2009 and projections for 2010 and 2011 include the SDR allocation for SDR105.1 million (US$165 million) of September 2009.

Estimates for 2008 and 2009 were revised downward from C$8,787 million and C$9,662 million respectively.

Table 6.

Nicaragua: Summary Accounts of Deposit Banks and the Financial System, 2008–11

(Flows in millions of córdobas; unless otherwise indicated)

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

Staff Report for the 2010 Article IV Consultation (June 25, 2010).

Includes Financiera Nicaraguense.

Includes Central Bank of Nicaragua.

Program definition. Includes deposit insurance funds (FOGADE), and excludes new SDR allocation and observed reserves of commercial banks in foreign currency.

Financial cooperatives and microfinance entities are not included in the consolidated financial sector.

Table 7.

Nicaragua: Balance of Payments, 2007–15 1/

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

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

Assumes that outstanding debt to non-Paris Club bilaterals is settled on HIPC-equivalent terms in 2011. Debt service is measured on an accrual basis.

Staff Report for the 2010 Article IV Consultation (June 25, 2010).

Untied grants are recorded above the line.

The one-off allocation of SDR 105.1 million (US$165 million) in 2009 is reported in the official financial account, in accordance with BPM6.

A portion of ALBA-related transfers are being used to finance off-budget transport subsidies and wage bonuses in 2010.

Includes short-term credits for importing oil under ALBA.

Includes possible budget support loans and grants for 2010 and 2011. The financing gap estimated for 2012-14 is preliminary and its financing unidentified.

Table 8.

Nicaragua: External Financing Requirements, 2007–15 1/

(In millions of U.S. dollars)

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

Assuming that outstanding debt to non-Paris Club bilaterals is settled on HIPC-equivalent terms in 2011. Debt service is measured on an accrual basis.

In 2010-11, projections include financing gap.

2009 entry includes the allocation of SDR 105.1 million (US$165 million) of September 2009.

Includes public external assets.

Table 9.

Nicaragua: Nonfinancial Public Sector Gross Financing Requirements, 2008–11

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

Staff Report for the 2010 Article IV Consultation (June 25, 2010).

Projections for 2010 include grant from Venezuela for 0.5 percent of GDP to finance wage bonus.

Program and projections figures for 2010 assume disbursement of IDB budget support loan for US$43 million.

Table 10.

Nicaragua: Indicators of Capacity to Repay the Fund, 2010–15

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Source: Fund staff calculations.

Projections of interest payments incorporate the temporary interest relief initiative and interest rate structure under the new LIC financing architecture.

Includes new SDR allocation in 2009.

Table 11.

Nicaragua: Schedule of Disbursements Under the Current and Extended ECF Arrangement

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Sources: IMF, Finance Department and Fund staff estimates and projections.

Nicaragua’s quota is SDR 130 million.

Includes augmentation of 5 percent of quota approved in September 2008.

Includes disbursement for completion of second and third reviews, each for SDR 11.9 million.

Original program contemplated 6 reviews.

A re-phasing of pending SDR 23.9 million into three disbursements is being assumed. Dates for disbursements are tentative.

Table 12.

Nicaragua: Financial Soundness Indicators: Core and Encouraged Sets, and Structure and Performance, 2005–10

(In percent, unless otherwise indicated)

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Sources: Superintendency of Banks; and Central Bank of Nicaragua.

Data through July 2010.

In 2006 a regulatory change narrowed the definition of Tier 1 capital.

NPLs including restructured and reprogrammed loans.

In 2009, HSBC (with deposits less than one percent of total deposits) closed its operations in Nicaragua.

Appendix 1. Letter of Intent

GOBIERNO DE NICARAGUA

October 30, 2010

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, D.C.

Dear Mr. Strauss-Kahn:

1. The Nicaraguan economy has begun recovering from the global financial crisis. The Government of Reconciliation and National Unity (GRUN) commitment to achieving macroeconomic stability has served to counteract the effects of the crisis. All the quantitative performance criteria for December 2009 and June 2010 under the Extended Credit Facility (ECF) arrangement have been met, and various steps have been taken to strengthen fiscal consolidation in 2010 and 2011, while safeguarding social and investment expenditure.1 The extension of the ECF arrangement through December 2011 is designed to provide a framework within which macroeconomic consolidation can be enhanced, the implementation of the reform agenda will move forward, and expectations can be better anchored amidst an international environment characterized by persistent uncertainties.

Macroeconomic framework for 2010–11

2. After declining by 1.5 percent in 2009, gross domestic product (GDP) is expected to grow by approximately 3 percent per year during the period 2010–11, reflecting a recovery of both external and domestic demand. After recording a historically low level of 0.9 percent in 2009, inflation is expected to reach around 7 percent in 2010, reflecting the rise in the prices of oil and other commodities. Looking forward, inflation is expected to post a slight decline in 2011, and to end the year in the range of 6–7 percent. In line with the economic recovery, the deficit in the current account of the balance of payments is expected to increase, to around 16 percent of GDP for 2010-11. The primary sources of its funding are projected to remain foreign direct investment and official foreign aid, allowing gross international reserves coverage to remain stable.

Fiscal policy

3. The government will continue implementing a prudent fiscal policy for the remainder of 2010 and during 2011. In this respect, a Supplement to the General Budget of the Republic for 2010 has been approved by the National Assembly, consistent with a reduction in the deficit (after grants) of approximately 0.9 percent of GDP compared to the program. This deficit reduction is largely attributable to larger-than-programmed tax revenues, partly reflecting the impact of the reform of the Fiscal Equity Law at end-2009. The government remains committed to strengthening the finances of the Social Security Institute (INSS); for this purpose, an increase of one percentage point in the rate of contribution to the social security system has been implemented since January 2010. As of December 2010, the ECF will include a quantitative performance criterion on the INSS’ overall balance after grants. These measures will help to ensure that the overall deficit for the consolidated public sector (CPS) does not exceed 2.3 percent of GDP in 2010. For 2011, the government has sent to the National Assembly a budget for the central government consistent with a deficit of 1.5 percent of GDP, including 0.7 percent of GDP of expenditure necessary to organize the 2011 presidential elections. This will further strengthen the position of the consolidated public sector, which is projected to post a deficit of 2.2 percent of GDP. The monitorable wage bill will remain constant in GDP terms during 2011. In the event that revenue collection is better than programmed, the options for its use will be examined in the second half of the year.

4. To preserve fiscal sustainability while meeting Nicaragua’s social and infrastructure needs, the government will continue to focus on further strengthening the tax and pension systems. On the subject of pensions, the INSS—in consultation with an inter-institutional commission—has prepared a report which sets out a range of options for improving the system’s financial position while gradually correcting its actuarial deficit. This report will be published for general circulation in October this year (prior action). At the same time, the INSS’ investment regulations will be evaluated to ensure that the INSS’ portfolio is managed in line with best international practices. Regarding the tax system, the authorities will continue to assess their options for further streamlining exemptions and exonerations, and establishing transfer pricing regulations. The authorities will seek to ensure that minimum wage increases are kept in line with inflation and economic growth.

Monetary and financial policy

5. Monetary policy will remain centered on ensuring adequate international reserve coverage and managing financial system liquidity. Adjusted net international reserves (NIR-Adjusted, excluding SDR allocations), which recorded a larger-than-programmed increase despite the impact of the global crisis, will fall each year around US$40 million both in 2010 and 2011. These declines will be attributable partly to a reduction incommercial banks’ deposits at the central bank as credit begins to recover and to smaller net security placements by the monetary authority. The central bank will maintain the rate of crawl of the exchange rate of 5 percent per year.

6. The financial sector remained sound during the economic slowdown. The monetary and financial authorities will adopt further measures to safeguard the soundness of the financial system (e.g., on-site supervision), and maintain loan-loss provisioning at adequate levels. The new rules pertaining to the “Law on the Promotion and Use of Credit Cards” will help to protect those credit card users that are less financially experienced, thereby enhancing the soundness of the financial system. In the event of a decision to amend or replace the current law, the government will ensure that the legislative framework fosters the sound development of the financial sector, without changing the current policy whereby interest rates are set freely between the parties.

Financing policy

7. The economic program for 2010 and for 2011 will be financed primarily with concessional resources from international cooperation, and strict control will be maintained on non-concessional indebtedness. The authorities will pursue the gradual development of the domestic debt market, while strengthening the management of public debt, in cooperation with the Fund and the World Bank. Loan disbursements for budgetary assistance in the amount of US$42.5 million in 2010, and approximately US$40 million in 2011 are projected, along with further measures to obtain additional resources from multilateral institutions and the donor community. In the context of the HIPC Initiative, further efforts will be made to restructure external debt pending relief.

Supplementary agenda

8. Electricity sector reforms. Further progress has been made in improving the finances and services of the electricity sector, and in increasing the supply of electricity generation.

  1. To continue reducing distribution losses, in July 2010 the National Assembly approved a reform of the legal framework broadening the range of residential customers liable to fines for irregularities in using and paying for electricity, and ensuring that the distribution company make the investments necessary to curb technical losses and improve the quality of service. The hike in electricity prices (of approximately 7 percent) in May 2010 corrected the discrepancies with generation costs, and will serve to normalize flows within the sector. In particular, the state-owned electricity company (ENEL) will begin making steady reductions in its debts to fuel suppliers. In turn, the central government will continue guaranteeing through the budget the payments of its electric power bill as well as the energy consumption subsidies for customers paying subsidized rates, pensioners, and disadvantaged neighborhoods.

  2. Ongoing efforts are being made to increase the supply of electricity generation, with private sector participation and support from official aid. In 2009–10, a total of 220MW of generation, including 60MW with renewable sources of energy, will have been installed. It is expected that during the period 2011–14, power generation projects will be completed that will provide 490MW in additional generation capacity. This will enable less efficient units to be kept on standby, while changing Nicaragua’s power generation matrix to reduce the country’s dependence on oil.

9. Enhanced monitoring of the uses of official foreign aid. The fifth report on cooperation (incorporating data at end-June 2010) will be published by end-October 2010. As part of the effort to enhance the monitoring and transparency of foreign aid, the sixth report on cooperation (incorporating data for end-2010) will include detailed information on the uses of foreign aid. This report is expected to be published by end-March 2011 (structural benchmark). The government will ensure that the use of foreign aid pose no fiscal contingencies and will consult with the Fund to avoid that the use of such aid put the economic program at risk.

10. Strengthening of the public administration. With financial and technical assistance from the World Bank and the Inter American Development Bank (IDB), specific steps are being taken in the following areas: (i) the publication in March 2010 of a monthly report on monitoring the physical implementation of the Public Investment Program for the purpose of improving investment expenditure management; (ii) the adoption of a new Procurement Law by the National Assembly in October 2010, with the aim of improving the efficiency and transparency of government purchases in line with international best practice; (iii) the elaboration of a study, with assistance from the IDB and the Fund, to assess the budgeting for permanent and temporary positions in the central government, including options for improving the system going forward (structural benchmark); and (iv) the Office of the Comptroller General of the Republic (CGR) published in 2010 the audit of the budget for 2008, and will finalize that of 2009 by end-June 2011.

11. Progress in the area of tax and customs administration. The implementation of a work plan, developed with the help of the Regional Technical Assistance Center (CAPTAC-DR), has begun with the purpose of: (i) strengthening oversight activities;(ii) improving the mechanisms for monitoring and expediting payment of refunds; and (iii) streamlining the management of the large taxpayers unit. The regulations for implementing the reform of the Fiscal Equity Law (approved at end-2009) have been completed and implemented.

12. Institutional strengthening of the central bank. In July 2010, the National Assembly approved a new Central Bank Charter with the aim of consolidating its institutional strength, improving the instruments for monetary policy, and ensuring greater accountability. The 2010 audited financial statements, prepared pursuant to the new charter, will be published in March 2011. In the meantime, the financial statements for 2007–09 submitted by the audit firms and approved by the central bank were published in October 2010.

13. Reform and regulation of the microfinance sector and cooperatives. The government remains committed to ensuring the sound development of the microfinance sector and, more generally, to instilling a payment-oriented culture. Accordingly, microfinance entities are being monitored to assess the impact of the process for the restructuring of past-due micro credits. With the aim of enhancing the supervision, transparency, and efficiency of the sector, the government, by end-November 2010, will seek the approval of a law to regulate and manage the sector, in particular, the regulatory framework applicable to unsupervised microfinance institutions. Concurrently, enhanced efforts will be made to monitor the activities of financial cooperatives by strengthening the supervisory agency.

14. In view of the progress recorded in relation to the ECF arrangement and the framework for implementing the remaining policies, the government requests the completion of the fourth and fifth reviews of the program, the corresponding waiver, the re-phasing of the disbursements under the arrangement and the approval of the fifth and sixth disbursements totaling SDR 12.8 million, as well as the extension of the program by one year. Program performance will be monitored through two additional reviews, anticipated for mid-April and mid-October 2011, respectively, and the quantitative performance criteria for end-December 2010 and end-June 2011. Performance criteria and the structural agenda for the next 12 months, as well as the prior actions for the completion of the fourth and fifth reviews are presented in LOI Tables 1 and 2. We believe that the policies described in this letter are sufficient to meet the objectives of our program and we stand ready to take additional measures that may be needed for this purpose. We will consult with the Fund in advance of any revisions to the policies described in this letter, as well as the adoption of additional measures, in accordance with IMF policies on such consultations.

LOI Table 1.

Nicaragua: Quantitative Performance Criteria and Indicative Targets, 2009-11 1/

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

Cumulative flows starting at the beginning of the calendar year. Targets for end-December 2009 and end-June 2010 are those set during the second and third reviews (EBS/09/157). Definitions are specified in the TMU, including adjustors. N.A. indicates not applicable.

Adjusted by any excess of project loans aboved programmed levels for up to US$15 million in 2010 and US$55 million in 2011. Adjusted in 2011 by any use of US$49.5 million of a grant to ENACAL received in 2009.

Adjusted for deviations in budget support external loans compared to programmed leves both in 2010 and 2011.

The targets for NDA and NIR-Adjusted are defined as cumulative flows from June 2010.

Adjusted for deviations in observed grants and project-loans compared to programmed amounts.

Adjusted for deviations in external loans and grants compared to programmed levels, as specified in TMU.

LOI Table 2.

Nicaragua: Prior Actions and New Structural Benchmarks, 2011 1/

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SB= Structural benchmark; PA= Prior action.

Sincerely yours,

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Appendix 2. Changes to the Technical Memorandum of Understanding

October 30, 2010

All aspects of the Technical Memoranda of Understanding, issued on September 4, 2007, August 28, 2008 and October 16, 2009, respectively, remain valid, except for new revisions incorporated in the October 15 letter of intent and those indicated below.

A. Definitions

1. The targets for the quantitative and indicative performance criteria are defined as cumulative annual flows. The targets for the performance criteria for the Adjusted Net International Reserves and Net Domestic Assets are defined as cumulative flows from June 30, 2010 (Technical Memorandum of Understanding, October 16, 2009). The program exchange rates for 2010 and 2011 are 21.4 and 22.4 Córdobas per U.S. dollars, respectively.

2. The overall balance after grants for the Nicaraguan Social Security Institute (INSS) is defined as INSS’ total income plus foreign grants minus INSS’ total expenditures. INSS’ income is defined on a cash basis and includes contributions to the social security (payments of current and overdue contributions), current income from investments and other current revenue. INSS’ expenditures are defined on a cash basis and include operational expenses (pensions, other benefits, and administrative expenses), other current expenditures, medical expenses, current transfers to the private sector, and capital expenditures.

3. The monitorable wage bill is defined as the sum of the central government’s wage bill and its decentralized agencies plus transfers received by employees of the central government and the rest of the public sector in the form of extra-budgetary bonuses. For 2010-11, the monitorable wage bill includes transfers in the form of extra-budgetary bonuses of US$31 million, and US$43 million (of which US$20 million through June 2011), respectively, financed through a grant from the Venezuelan cooperation arrangement.1

4. The following paragraph will be added to paragraph 21 of the September 2007 Technical Memorandum of Understanding: “The ceiling excludes the contingent credit line for 12 months renewed by the Central Bank of Nicaragua on August 20, 2010 with the Central American Bank of Economic Integration (CABEI) by US$ 200 million, as well as any subsequent extensions or renewals of this credit line.”

B. Quantitative Targets

5. The quantitative performance criteria will include a floor on the overall balance of the INSS after grants, as defined above.

6. Indicative targets will include a ceiling on the monitorable wage bill, as defined above.

7. The program targets for the quantitative performance criteria for end-December 2010 and June 2011, as well as the indicative targets for end-December 2011 are detailed in Table 1

TMU Table 1.

Nicaragua: Quantitative Performance Criteria and Indicative Targets, 2009-11 1/

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

Cumulative flows starting at the beginning of the calendar year. Targets for end-December 2009 and end-June 2010 are those set during the second and third reviews (EBS/09/157). Definitions are specified in the TMU, including adjustors. N.A. indicates not applicable.

Adjusted by any excess of project loans aboved programmed levels for up to US$15 million in 2010 and US$55 million in 2011. Adjusted in 2011 by any use of US$49.5 million of a grant to ENACAL received in 2009.

Adjusted for deviations in budget support external loans compared to programmed leves both in 2010 and 2011.

The targets for NDA and NIR-Adjusted are defined as cumulative flows from June 2010.

Adjusted for deviations in observed grants and project-loans compared to programmed amounts.

Adjusted for deviations in external loans and grants compared to programmed levels, as specified in TMU.

C. Adjustors

8. The target for the consolidated public sector (CPS) overall balance for 2011 will be adjusted downwards by any use of the US$49.5 million grant to ENACAL received in December 2009 for the purpose of implementing water and sanitation projects financed by the Instituto de Credito Oficial (ICO), acting as the financial agent of the Spanish Government.

9. The CPS balance target for 2010 will be adjusted downwards up to US$15 million by the cumulative amount of any excess of project-related external loans compared to the programmed amounts. For 2011, the above-mentioned target will be adjusted downwards up to US$55 million by the cumulative amount of any excess of project-related external loans compared to the programmed amounts.

10. The NIR-Adjusted target for 2010-11 will be adjusted downwards in the event of any shortfalls in external budget support loans compared to the programmed amounts, up to a maximum of US$40 million in 2010, and also in 2011. Similarly, in such a case the Net Domestic Assets will be adjusted upwards up to US$40 million in 2010 and in 2011.

11. The NIR-Adjusted target for 2010-11 will be adjusted upwards in the event of any excess in external budget support loans compared to the programmed amounts. Similarly, in such a case the Net Domestic Assets will be adjusted downwards.

12. The indicative target on primary expenditure of the central government for 2010-11 will be adjusted upwards if the sum of budgetary grants of the central government (both tied and untied) and project-related external loans of the central government exceeds programmed levels; similarly, it will be adjusted downwards in the event of any shortfalls relative to the programmed amounts. In the case of project-related external loans, the maximum adjustment will be of US$15 million in 2010 and US$55 million in 2011.

13. The adjustments related to external financing will be applied to the updated projections in Table 2.

TMU Table 2.

Programmed External Financing 2010-11

(in millions of US$)

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Excludes IMF.

Excludes extra-budgetary grants to finance wage bonus

14. The indicative target on poverty-reducing spending will be adjusted downwards for any shortfalls of external financing related to the poverty programs specified in Table 3. Similarly, the indicative target on poverty-reducing spending will be adjusted upwards for any excess of external financing related to the poverty programs specified in Table 3.

TMU Table 3.

Nicaragua: Central Government Poverty Spending and Financing, 2009-11

(in C$ millions)

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Source: Ministry of Finance and Public Credit.

D. Supplementary Agenda

15. Strengthening of the Biannual Report on External Aid Flows. The report corresponding to the year 2010 will include a group of tables detailing the source and economic sector of foreign aid flows (showing separately flows to the public and private sectors, and in each case, distinguishing between foreign grants and loans). Such information will also be shown in a disaggregated manner by project of the public sector (financed by both grants and loans) and of the private sector (financed by grants). Regarding the flows linked to the oil-related cooperation, the report will include detailed information about the transfer programs, social loans, and others, in particular those prioritized by the National Plan of Human Development. The publication of such a report before end-March 2011 will constitute a structural benchmark.

16. Preparation of a study on Central Government employment. The Ministry of Finance and Public Credit will prepare a study to assess the procedures in place for the budgeting of permanent and temporary positions in the central government; the study will include options for improving the system going forward. The terms of reference for this study will be formulated before end-December 2010 in consultation with Fund staff and the Inter-American Bank of Development (IDB), which will be also consulted during the preparation process. A preliminary report will be ready before end-March 2011 and the final report will be completed before end-August 2011. The presentation of the final report will constitute a structural benchmark.

E. Safeguards

17. Some of the recommendations of the 2009 update safeguards assessment have been implemented and a new agenda with additional measures has been established.

TMU Table 4.

Safeguards Implementation of Recommendations Timetable, 2010-11

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F. Provision of Information and Monitoring

18. Electricity Sector. With the purpose of strengthening the monitoring of the electricity sector, the regulating body (INE) will publish a quarterly report on the energy market with monthly information. This report will include the following: (i) the effective tariff applied and the tariff resulting from the application of the formula; (ii) the electricity production split by generation source (hydroelectric, thermal, wind power, geothermal) for each of the generation companies with any type of public sector ownership; (iii) the purchases and payments executed by the distribution companies to the generation companies with any type of public sector ownership; (iv) the volumes and values of fuel used in electricity generation, as well as the value of effected payments of such bill by generation companies with any type of public sector ownership; (v) the volume (in GWh) of electricity distributed, the volume and value of billed electricity, as well as the payments received for billed electricity by the distribution companies. The first report will correspond to the year 2010, and will be available by end-March 2011.

19. Public Enterprise Debt. The Ministry for Finance and Public Credit will prepare twice a year (in March and September) a report on the debt by public enterprises (showing separately external and domestic debt, and including within those categories the type of creditor), with information for end-December and end-June, respectively. This report will complement the debt report that is already being produced and that includes debt of the Central Government and the Central Bank. The first report will be available in March 2011, and will include information corresponding to the year 2010.

20. Financial System. The authorities will provide Fund staff (on a monthly basis), the stock of deposits of the major depositors of the supervised financial entities, grouped by sectors. This information will be provided for the first time by end-October 2010.

21. Micro-finance Institutions. The Superintendence of Banks and other Financial Entities will prepare a biannual report (containing information with a 3-month lag) on the performance of the non-supervised micro-financial institutions with loans exceeding US$8 million as of end-June 2009. The report will include information on loans by sector, financial obligations (including their source split into foreign institutions, domestic institutions, and social investors), portfolio quality (including current, non-performing, restructured and postponed), provisions and capital. The first of these reports will include information for 2010 and will be available before end-March 2011.
1

For a purely technical reason, the ceiling on nonconcessional external debt was formally not observed, as an existing US$200 million contingent credit line with the Central American Bank of Economic Integration secured in 2009 (and contemplated in the program) was renewed in August, 2010. The renovation of this credit line—which has not been activated—had not been explicitly foreseen in the TMU. We are requesting a waiver of nonobservance of the above mentioned performance criterion.

1

An analogous treatment will be given to the primary expenditure of the Central Government.

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Cover IMF Staff Country Reports
Nicaragua: Fourth and Fifth Review Under the Three-Year Arrangement Under the Extended Credit Facility, Requests for Extension of the Arrangement, Rephasing of Access, and Waiver of Nonobservance of Performance of Criterion, and Financing Assurances Review-Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Nicaragua
Author:
International Monetary Fund
Volume/Issue:
Volume 2010: Issue 376
Publisher:
International Monetary Fund
ISBN:
9781455212972
ISSN:
1934-7685
Pages:
64
DOI:
https://doi.org/10.5089/9781455212972.002
Figure 1.

Nicaragua: Recent Economic Developments, 2006–10
Figure 2.

Nicaragua: Selected Fiscal Indicators, 2005–10
Figure 3.

Nicaragua: External Sector Developments, 2005–10

Consolidated Public Sector Balance (after grants)

(US$ million)

Central Government Primary Spending

(percent of GDP)

Cyclically-Adjusted Primary Balance

(percent of GDP)