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© 2011 International Monetary Fund

November 2011

IMF Country Report No. 11/323

Poverty Reduction Strategy Papers (PRSPs) are prepared by member countries in broad consultation with stakeholders and development partners, including the staffs of the World Bank and the IMF. Updated every three years with annual progress reports, they describe the country’s macroeconomic, structural, and social policies in support of growth and poverty reduction, as well as associated external financing needs and major sources of financing. This country document for Nicaragua, dated September 2011, is being made available on the IMF website by agreement with the member country as a service to users of the IMF website. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of Nicaragua or the Executive Board of the IMF.

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Front Matter Page

NICARAGUA: PROGRESS REPORT ON NATIONAL HUMAN DEVELOPMENT PLAN AS OF 2010

September 2011

Front Matter Page

NICARAGUA:

TECHNICAL PROGRESS REPORT ON NATIONAL HUMAN DEVELOPMENT PLAN AS OF 2010

TABLE OF CONTENTS

  • EXECUTIVE SUMMARY

  • REDUCING INEQUALITY AND POVERTY

  • GROWTH: MACROECONOMIC POLICY

  • BUDGETARY EFFORT FOR COMBATING POVERTY

  • GROWTH: AGRICULTURE AND FORESTRY STRATEGY

  • GROWTH: FISHING AND AQUACULTURE POLICY

  • GROWTH: INDUSTRIAL POLICY

  • GROWTH: ENERGY POLICY

  • GROWTH: TOURISM DEVELOPMENT

  • FOREIGN TRADE POLICY

  • FOREIGN DIRECT INVESTMENT STIMULUS POLICY

  • DEVELOPING SOCIAL WELFARE AND EQUITY

  • FOOD STRATEGY, NUTRITIONAL SECURITY, AND SOVEREIGNTY POLICY

  • EDUCATION SECTOR: STRATEGY AND POLICIES

  • HEALTH SECTOR: STRATEGY AND POLICIES

  • SOCIAL SECURITY

  • STRATEGIES AND POLICIES FOR RESTORING THE RIGHTS OF CHILDREN, ADOLESCENTS, YOUTHS, AND THE ELDERLY

  • DRINKING WATER: SANITATION STRATEGY AND POLICIES

  • RESIDENTIAL AND SOCIAL HOUSING POLICY

  • LABOR POLICY

  • CITIZEN SECURITY

  • DEFENSE AND CARE OF MOTHER EARTH .... ENVIRONMENTAL SUSTAINABILITY AND FOREST DEVELOPMENT

  • CARIBBEAN COAST DEVELOPMENT STRATEGY

  • ANNEX 2: STRATEGIC MATRIX OF THE PLAN AND GOALS ACHIEVED

  • INTRODUCTION

  • REDUCING POVERTY AND INEQUALITY

  • THE CITIZEN PARTICIPATION MODEL

  • STRATEGIC POLICIES AND PROGRAMS OF THE NHDP

  • MACROECONOMICS

  • MACROECONOMIC STABILITY POLICY

  • FISCAL POLICY

  • MONETARY AND EXCHANGE POLICY

  • Supplemental agenda, transparency, and accountability

  • PUBLIC INVESTMENT POLICY

  • Achievements of the 2007-2010 Public Investments Program

  • [Tr.: Transport; Community works and services; Water, sewerage, and sanitation; Education; Energy; Livestock, forestry, and fisheries; health; State administration; Multisector; Housing; Social protection, assistance, and security; Mining, industry, commerce, and tourism; Environment; Culture, sport, and recreation; Communications.

  • BUDGETARY EFFORT TO COMBAT POVERTY

  • The Citizen Power approach to reducing poverty

  • The budgetary effort and its impact levels

  • FOREIGN TRADE POLICY AND BALANCE OF PAYMENTS

  • Foreign trade policy

  • Balance of payments

  • EXTERNAL FINANCING FOR THE PUBLIC SECTOR

  • PRODUCTION AND TRADE STRATEGY

  • AGRICULTURAL AND FORESTRY STRATEGY

  • Capitalization of small producers

  • Credit for small producers

  • Provision of services: seeds, training, technical assistance, and partnership

  • Agro-industrialization: value added

  • National Food Safety System

  • Access to markets at fair prices

  • Change in agricultural production

  • FISHING AND AQUACULTURE POLICY

  • INDUSTRIAL POLICY

  • Added value of manufacturing industry

  • ENERGY POLICY

  • Increased generation of electrical energy for the people and the economy

  • Further expansion of the electrical power transmission network

  • Rural electrification

  • National Sustainable Electrification and Renewable Energy Program (PNESER)

  • Energy savings and efficiency

  • TOURISM DEVELOPMENT

  • TELECOMMUNICATIONS AND POSTAL SERVICES

  • Telecommunications

  • Postal services

  • DOMESTIC TRADE POLICY

  • FOREIGN DIRECT INVESTMENT STIMULUS POLICY

  • FOOD STRATEGY AND FOOD AND NUTRITIONAL SECURITY AND SOVEREIGNTY POLICY

  • HEALTH SECTOR STRATEGY AND POLICIES

  • SOCIAL SECURITY

  • STRATEGIES AND POLICIES FOR RESTORING THE RIGHTS OF CHILDREN, ADOLESCENTS, YOUTHS, AND THE ELDERLY

  • DRINKING WATER AND SANITATION STRATEGY AND POLICIES

  • RESIDENTIAL AND SOCIAL HOUSING POLICY

  • LABOR POLICY

  • MEASURES FOR SOUND PUBLIC MANAGEMENT TRANSPARENCY AND INTEGRITY

  • Transparency

  • Integrity

  • CITIZEN SECURITY

  • Population’s level of satisfaction

  • ACCESS AND QUALITY IN THE PROVISION OF JUSTICE

  • STRENGTHENING OF THE STATE AND THE CAPACITY FOR RESPONSIBLE PUBLIC ADMINISTRATION

  • Civil Servants Accredited for Administrative Career

  • HARMONIZATION AMONG THE BRANCHES OF GOVERNMENT

  • DECENTRALIZATION AND MUNICIPAL STRENGTHENING

  • Strengthening the Municipalities with Citizen Participation

  • Decentralization

  • Local development

  • Direct democracy in municipalization

  • SECURITY OF PROPERTY RIGHTS

  • DEFENSE AND PROTECTION OF MOTHER EARTH .... ENVIRONMENTAL SUSTAINABILITY AND FOREST DEVELOPMENT

  • Building and rebuilding human values identifying with Mother Earth

  • The forest .... life

  • Women and the environment

  • Sustainable land management (SLM)

  • Protected areas

  • Water conservation, coastal management and pollution control

  • Environment-friendly production

  • Environmental management

  • GOVERNMENTAL POLICY FOR DEALING WITH DISASTERS

  • Early Warning Systems (EWS)

  • Territorial Organization and Preparation (Regional, Departmental, Municipal, and Local)

  • Percentage of families affected by natural disasters that received relief

  • CARIBBEAN COAST DEVELOPMENT STRATEGY

  • IMPLEMENTATION, MONITORING AND EVALUATION

  • THE NATIONAL PLANNING, INVESTMENT, BUDGET, AND COOPERATION SYSTEM

  • MONITORING AND EVALUATION

  • STRENGTHENING THE NATIONAL STATISTICS SYSTEM

  • ANNEX 1: MACROECONOMIC STATISTICS

  • ANNEX 2: THE NHDP STRATEGY MATRIX AND GOALS ACHIEVED

  • ANNEX 3: ABBREVIATIONS AND ACRONYMS

EXECUTIVE SUMMARY

REDUCING INEQUALITY AND POVERTY

The operational goal of Nicaragua’s National Human Development Plan (NHDP) is economic growth with increased employment and reduced inequality and poverty. The results for 2007-2010 highlight a significant reduction in inequality among Nicaraguans based on better distribution of income and consumption as reflected in improved living conditions for the population, particularly among the poorest groups. This has been possible due to, among other factors, redistributive government policies with positive results, to economic recovery and positive economic growth in the midst of a world financial and economic crisis, and to a climate of confidence that has led to greater levels of social cohesion and national alliances lending stability to productive development and increasing investment, which have led to a reduction in poverty.

Nicaragua ranks second in Latin America in terms of the reduction in inequality (Venezuela is the leader), achieving a minus 9.8 percent upon reducing the income GINI coefficient from 0.51 in 2005 to 0.46 in 2009. This improvement is significant considering that between 2005 and 2009 Nicaragua grew at an average annual rate of 1.69 percent, less than the 2.77 percent growth rate for Latin America as a whole and considering that this improvement occurs in a period of profound global economic, social, and environmental crisis.

As a result, in 2009 compared to 2005, Nicaragua has achieved reduction of 5.8 percentage points in general poverty and 2.6 percentage points in extreme poverty, according to the National Household Living Standards Survey (EMNV). The survey shows that general poverty at the national level measured on the basis of consumption fell from 48.3 percent to 42.5 percent between 2005 and 2009, and extreme poverty fell from 17.2 percent to 14.6 percent during the same period. In relative terms, the great challenge continues to be reducing poverty in rural areas. Extreme poverty in the rural area is approximately five times higher than the urban area and general poverty in the rural area is twice that of the urban area. However, while general poverty in rural areas fell by 7.0 percentage points, urban general poverty fell by 4.1 points. While extreme rural poverty fell by 3.9 percentage points, extreme urban poverty fell by 1.1 points. Thus, the greatest reduction is being achieved in rural areas where the most profound and severe poverty exists.

The reduction in poverty measured on the basis of income (according to the International Poverty Line) is also significant. In 2009, 5.5 percent of the Nicaraguan population consumed US$1.25 or less per day (less than half the 11.2 percent in 2005); a reduction of 5.7 percentage points. Twenty-one percent survived on consumption of US$2.00 or less, a reduction of 10.6 percentage points compared to 31.6 percent in 2005. The results by area of residence show that the reduction in the percentage of people surviving on less than US$1.25 per day was 2.3 and 9.8 percentage points for urban and rural areas, respectively, while for those living on US$2.00 per day the reduction was 6.1 and 15.7 percentage points, respectively. Again, the reduction is more significant in rural areas, indicating that targeted social programs are yielding positive results.

The indicators of Unmet Basic Needs (UBN) also improved. Between 2005 and 2009, overcrowding and limited education fell by 10.9 and 10.4 percentage points, respectively. Although progress was made in the area of inadequate housing (a reduction of 0.6 percentage points), this continues to be one of Nicaragua’s most significant social challenges.

There are also notable achievements in terms of increased employment. Survey results (2009 Continuous Household Survey) show that between 2006 and 2010 the active population grew by 649,200 people, or 31.1 percent. From end 2009 until the fourth quarter of 2010, based on data measured in comparable moving series, employment grew by 304,000, which represents an increase of 12.5 percent. By the end of 2010, the free trade zones had recovered 89,927 jobs after the losses caused by the global financial crisis.

Formal employment has increased as well. The number of employees and employers registered in the social security system has shown a sustained upward trend, reaching 534,879 people or 32.6 percent more than at the end of 2006.

Another key factor in reducing inequality and poverty is economic growth. In 2010 Nicaragua grew by 4.5 percent (higher than the 3.9 percent average for Central America); one year after the worst financial and economic crisis since the Great Depression. In 2009, economic activity declined 1.5 percent in Nicaragua, although that was less than the average decline in Central America (1.9 percent). Growth in 2010 was propelled by increased exports, investments, and remittances, in an environment of macroeconomic stability with single-digit inflation and gross international reserves at their highest level.

Exports have shown sustained growth since 2007 (17.1 percent, followed by 20.7 percent in 2008, and a crisis-related 5.5-percent decline in 2009 due to the international crisis). In 2010, exports grew by 32.8 percent and as of June 2011 exports had grown by 27.7 percent compared to the same period a year earlier. On net, 2010 exports were 77.3 percent above their 2006 level. Agricultural and manufactured products stand out among the list of exported goods performing well. In addition, increased tourism offset the decline recorded in exported services. In addition, increased tourism offset the decline recorded in exported services. Investments recovered by 29.8 percentage points, strengthened by increased consumption (3.2 percent). With macroeconomic and social stability, it is estimated that Foreign Direct Investments in 2011 could be twice the 2010 amount of US$508 million.

An important contribution has come from sustained growth in remittances, reaching US$822.8 million in 2010, with an increase of 18 percent compared to 2006 (US$697.5 million).

The principal instruments used to reduce inequality and poverty in the period 2007-2010 have been social policies directed to strengthening the capabilities of the poorest segments and helping to improve their standard of living. The human and constitutional rights of free health and education were restored. Work is being done on campaigning for sixth grade education in 2012 and for the third year of secondary school in 2015. Targeted social programs are being implemented such as the AMOR program, the AMOR program for the Youngest Children, the Family and Community Health Model (MOSAFC), Operation Miracle, and the Everyone Has a Voice program. Through capitalization programs, the poor have been brought to the fore as agents of development with emphasis on the social and economic participation of women contributing to nutrition, food security, and job and income creation through programs such as the Zero Hunger and Zero Usury programs.

Small urban and rural production has been supported with financing, inputs, and technical assistance with emphasis on small producers (94 percent of all producers). These producers provide 60 percent of Nicaragua’s two main export products, coffee and meat, 90 percent of basic grains, and 90 percent of fruits and vegetables. Along with small urban producers, they also generate 70 percent of employment and 40 percent of GDP. Creation of the Banco Produzcamos in 2010 serves to give small producers organized access to loans at fair rates. ALBA CARUNA is noted for assisting small and medium-sized producers to increase agricultural production and exports. A total of 47,530 small and medium-sized producers have received financing for a total of C$1,365,300 under the headings of Agriculture, Livestock, Fisheries, Agribusiness, Harvesting, and Marketing. To guarantee food security for Nicaraguans and rural families in particular, the National Seed Plan provided 208,462 small producers with 131,236 quintals of certified seed and 87,602 quintals of urea or NPK through the Support Program for Producers of Small Grains (KRII).

In the area of energy, the crisis of daily blackouts lasting up to 12 hours was resolved with the rapid installation of 240 MW of power thanks to the support of the countries of the Bolivarian Alternative of the Americas (ALBA) plus an additional 110 MW, for a total of 350 MW. The current strategy is to reduce dependence on oil for generating electricity by moving from 20 percent renewable energy in 2007 to 90% renewable energy in 2017. Hydroelectricity, geothermal power, wind power, and biomass are being considered for doubling electrical capacity.

Other important factors have been respect and guarantees for private property; the search for new export markets; working for the first time on a Financial and Economic Program (FEP) as an instrument for negotiating with the IMF, given Nicaragua’s status as a heavily indebted poor country; the transparency of public investment; the gradual reorientation of foreign cooperation in line with national priorities; early integration in ALBA based on the common denominators among the member countries: brotherhood; solidarity; complementarity; recognition of asymmetries; defense of the original and afrodescendant peoples; a new focus on the roles of women and youth, fair trade and markets.

Nicaragua’s corporate sector has underscored the social stability generated by consensus-based policies among Nicaragua’s principal sectors. The Chairman of the High Council for Private Enterprise (COSEP) stated at an investors’ forum in August 2011 that: “We are the most economically and commercially open country in Central America. In terms of GDP growth, in the last three years Nicaragua has been the economy with the highest growth in Central America.” Generally speaking, entrepreneurs have recognized Nicaragua’s openness to investment in addition to its stability.

Finally, the process of national consultation that has generated social cohesion represented by the Great Alliance of Workers-Producers/Entrepreneurs-Government has made it possible to consolidate social and labor stability, providing predictability in terms of costs and labor stability. This Great Alliance was described by President Daniel Ortega in his 2010 report to the National Assembly on June 10, 2011 in the following terms: “Throughout 2010, by strengthening the Great National Alliance of Urban and Rural Workers, Producers, Entrepreneurs, Cooperatives, Small, Medium, and Large Industry, and the Sandinista Government of Reconciliation and National Unity, accompanied by international cooperation and national and foreign investment, all of us united are achieving 4.5 percent growth in our economy.”

As a result of this alliance, consensus was reached on increases of 12 and 15 percent in the minimum wage in 2010 and 2011 and wage increases of 8, 9, and 10 percent in the free trade zones for 2011, 2012, and 2013, respectively. The Regional Director of the ILO for Latin America and the Caribbean has stated that there is a context of social dialogue that has continued without interruption, with very tangible achievements, especially in the free trade zones, which has set an example for the rest of Latin America.

This National Human Development Plan (NHDP), presented to the Nicaraguan people in April 2008 in preliminary form and in October 2008 in its final version, was the culmination of various strategic collaborative processes initiated from the time the Government of Reconciliation and National Unity (GRUN) took office. The NHDP is based on the Citizen Power Model that places humans at the center of the model, restores to the people the role of the State in leading social progress, and restores to the people their sovereign role in national decision-making processes. The NHDP has placed priority on economic growth with increased employment and the reduction of poverty and inequalities, and the restoration of the economic, social, environmental, and cultural rights of the people, particularly historically marginalized sectors. Thus, the reduction of inequality and poverty in Nicaragua has been the principal result of the policies and programs of the NHDP.

GROWTH: MACROECONOMIC POLICY

The objective of macroeconomic policy continues to be a stable economy, which stimulates economic growth with greater social benefits for the poorest segments of society. It includes management of a sustainable fiscal deficit, a monetary policy to guarantee confidence in the currency and the stability of the financial system, an exchange policy using the exchange rate as the nominal anchor of price levels with gradual devaluation using Open Market Operations (OMOs) as the principal policy instrument and the accumulation of international reserves to guarantee more than twice the value of the monetary base.

In the first year of the administration (2007), Gross Domestic Product (GDP) grew at a rate of 3.1 percent, propelled by greater goods and services exports, increased family remittances, and increased foreign investments. Within this context, growth rates between 4.2 percent and 5 percent were projected from 2008 to 2011. However, due to the effects of the international financial crisis and structural problems in the economy, production growth slowed down in 2008, ending the year at 2.8 percent, while in 2009 a dramatic decline in exports, foreign investment, family remittances, external bank credit, and reduced economic vitality with declining tax revenues resulted in a 1.5 percent reduction in economic activity rather than the projected growth of 5.0 percent.

Due to the international financial crisis and the national economy’s intrinsic structural problems, the President of the Republic, Commander Daniel Ortega, directed in late the implementation of a strategy that would be more far-reaching but would be more closely prioritized than that originally considered for the five-year period 2007-2011. Its principal objectives were to reduce the effects of the crisis on the most vulnerable sectors, defend a framework favorable to production, investment, and employment, and maintain the cohesion of the population around the most fundamental tasks. The strategy was called “Defense of Production, Investment, Growth, and Employment.” The principal pillars of the measures approved by the President of the Republic in January 2009 were: (i) financial stability; (ii) prioritized public investment; (iii) support for production and private investment; (iv) solidarity-based employment; and (v) fiscal austerity.

Revision of the NHDP was also ordered, leading to the document called “Updated Technical Summary of the 2009-2011 NHDP,” approved in September 2009, which defined the policies, goals, and resource allocation to be achieved in the context of the limitations being imposed by the international financial crisis.

Macroeconomic stability has been achieved through sustainable fiscal management, a crawling peg for the exchange rate and guaranteed convertibility of the córdoba, control of the money supply and of inflation, and maintenance of the level of international reserves. However, macroeconomic stability is a necessary but insufficient condition for achieving the objective of reducing inequality and poverty. Achieving a sustained recovery of the economy over the medium term with a redistributive effect on income was an initial purpose of the NHDP for changing assistance-based public policies, achieving advances in restoring the productive potential of the poor, increasing human capital, and improving the competitiveness of the economy. Effort has been made to have public spending with a higher rate of social return than observed up to 2006, where greater effectiveness is achieved both through accurate prioritization of programs and projects and coordination of these policies with Citizen Power.

As a result of these policies, annual growth of 4.5 percent was achieved in 2010. This result, in addition to what has been described above in terms of domestic policies, was associated with the recovery of the world economy, which meant an increase in exports and creation of domestic demand, in an environment of macroeconomic stability.

Productive activities, particularly those linked to external markets, responded to the impetus of demand. The most dynamic groups of activities that responded to this impetus were agriculture and livestock (7.7 percent) and manufacturing (7 percent). Trade and services showed growth, except for financial services. Finally, construction became less contractive, showing indications of recovery.

Exports have seen sustained growth since 2007, when they increased by 17.1 percent growth in 2008 and a crisis-related 5.5 percent fall in 2009. In 2010 exports grew by 32.8 percent and as of June 2011 exports had grown 27.7 percent compared to the same period in 2010. Exports were 77.3 percent higher in 2010 when compared to 2006. This growth has been propelled by a 19.9 percent expansion in goods due to improved international prices and increased global demand. This offset the 4.7 percent decline in the services component. Exports of agricultural and manufactured products are notable. In addition, increased tourism offset the decline in exported services. Investments grew 29.8 percentage buoyed by increased private consumption (3.2 percent). With macroeconomic and social stability, it is estimated that Foreign Direct Investments in 2011 will be twice the 2010 figure of US$508 million.

The recovery of private consumption was based on families’ increased disposable income due to growing economic activity, the recovery of remittances, and real salary growth. Two factors that affected the increase in real disposable income were adjustments in the minimum wage and the provision of a transfer of C$550 per month up to May 1, 2011 and C$700 per month thereafter, financed by the Venezuelan Cooperation authorities, for employees earning salaries equal to or less than 5,500 córdobas in public sector agencies. Aggregate public consumption did not change, although there were increases in transfers, compensation payments, and expenses for social programs, notably the bonus for health workers and increased spending on goods and services directed to social assistance programs.

Fiscal policy introduced changes seeking prudent management of the fiscal deficit along a sustainable path. This has been the government’s ongoing practice for maintaining medium- and long-term stability and producing a greater impact on infrastructure and social and productive programs to combat poverty. The government seeks to generate a policy of effective spending, going beyond the superficial or assistance-based programs of earlier periods.

Starting in 2007, there was a structural change in spending involving a better allocation of resources in line with the objectives of the NHDP, creating fiscal opportunities in favor of social spending by eliminating non-priority spending items, regulating salaries for public servants, renegotiating domestic public debt, and implementing an anti-crisis program.

At the same time, the government continues to promote changes in public investment policy, recognizing that structural changes in the economy are a long-term task. The NHDP establishes an order of priorities within which three levels of action are defined: primary and immediate, stabilization, and growth with social justice. The objective is to increase the impact that public and private investment have on economic growth and poverty reduction. The strategy adopts a sectoral, multisectoral, and national approach that goes beyond the microeconomic and institutional vision of earlier periods. It includes a policy of targeting investment in strategic productive and social sectors, fixed capital formation as a generator of productive capacity and social response. Another part of the strategy is to direct resources to pre-investment as a planning instrument and to eliminate the improvisation factor in projects.

To improve the impact of public spending on poverty reduction, the government has introduced changes in the definition and criteria of allocation:

  • (a) Enhanced productive capacities among the poorest groups;

  • (b) Implementation of a food strategy in rural areas;

  • (c) Restoration of free health and education services;

  • (d) Implementation of a New Social Welfare System;

  • (e) Creation of anti-poverty programs.

In early 2009 the government began a process of “Tax Consultation” seeking consensus on the most suitable system for Nicaragua, for which it outlined four overall lines of discussion. In late 2009, this consultation led to the approval of:

  • (a) Reduced production costs and financing of productive activities;

  • (b) Financing of tax incentives through generalized measures and rationalization;

  • (c) Neutrality in terms of collection;

  • (d) Improved tax legislation.

The government is seeking a long-term approach to tax policy, abandoning the short-term management of taxes and emphasis on tax collection. This subject will be a topic of consultation during 2011. In practical terms, this means:

  • (a) Gradually changing the regressive structure of the system;

  • (b) Adjusting tax rates to competitive levels;

  • (c) Increasing the efficiency of tax collection;

  • (d) Reducing still existing levels of discretion; and

  • (e) Increasing the tax base by incorporating sectors currently outside the system.

For Nicaragua, like the other countries of Central America, the adverse effects of the global economic crisis were felt more intensively in the domestic economy during 2009, with negative effects on tax collections. At the same time, government finances were affected by a lower amount of external grants intended for budgetary support. In response to this, the government adjusted its expenditure budget during the year by 2.2 percent of GDP, a measure that partially offset the decline in revenues. This resulted in a deficit after grants in the Non-Financial Public Sector (NFPS) of 1.9 percent of GDP in 2009 (0.8 percent of GDP in 2008).

After contracting in 2009 as a result of the world economic crisis, in 2010 the Nicaraguan economy showed better-than-expected signs of recovery in 2010. The rebound of economic activity was the result of success in implementing the Program for Defense of Production, Growth, and Employment, redirecting the course of economic growth.

The stability of the payments system was not threatened by the international economic crisis, in large part because the National Financial System (NFS) did not hold toxic assets in its portfolio, nor did it face significant cutbacks in international lines of credit. This is demonstrated by analyzing the development of the banking system’s foreign indebtedness, which continued to increase up to April 2009, and reversed as the NFS reacted to uncertainty by cutting back on credit, which in turn allowed the system to accumulate liquidity and reduce the debt balance.

Monetary and fiscal policy were in line with the IMF Extended credit facility (ECF) supported-program objectives. Thus, on November 19, 2010 the Executive Board of the IMF approved the fourth and fifth review of the ECF, along with extending the program for an additional year and disbursing 12.8 million SDRs, the equivalent of US$19.6 million, intended to strengthen the foreign exchange regime.

In the context of the ECF, monetary and financial policies focused on three broad objectives: (i) keeping prices stable; (ii) safeguarding the soundness of the NFS; and (iii) strengthening the legal framework of the BCN. Accordingly, the New Organic Law of the BCN, intended to consolidate the BCN’s institutional status, improve monetary policy instruments, and strengthen the mechanisms of accountability, was approved in July 2010. Measures were also adopted to preserve the soundness of the NFS such as on-site supervision and strengthening of the supervisory framework.

Despite the impact of the world crisis in 2009, Nicaragua continued its open trade policy. One of the major actions taken was the National Assembly’s approval of the framework agreement for establishment of the Central American Customs Union. A bilateral agreement was signed with Panama and the respective tariff reduction program began on January 1, 2010. Negotiations continued on Free Trade Agreements (FTAs) with Chile and Canada. Negotiations were concluded and a Partnership Agreement was signed between Central America and the European Union, under which Central America and Nicaragua in particular tied down the trade preferences granted under the Generalized System of Preferences (GSP+). Diversification and entry into new markets such as Russia and Brazil continued in the areas of trade and financing.

Trade and cooperation relationships with the ALBA member countries were strengthened with a view to preparing the legal and operational infrastructure of the Unitary Regional Clearance System (SUCRE). In addition, the proposal to expand the partial scope agreement in existence between Nicaragua and Venezuela since the 1980s was drafted and revised. Thus, in 2010 the Venezuelan market became the second most important market for Nicaragua, moving from 23rd place in the country’s foreign trade in 2006. In addition, Nicaragua was admitted to the Latin American Integration Association (ALADI) as a Relatively Less Economically Developed Country.

Over the last ten years, Nicaraguan exports grew from US$692.4 million in 2000 to US$1.8511 billion in 2010, an average annual growth of 11.4 percent (15.7 percent during 2007–07). Exports increased 32.8 percent in 2010. As of June 30, 2011, exports have grown 27.7 percent, with a projection of US$2.14 billion by the end of the year due to improved international prices for the principal export products.

Public investment policy (PIP) promotes the development of projects with high national impact, giving priority to gross capital formation, to reducing current expenditure recorded as investment, and adopting a physical and financial monitoring system for each project in the Public Investment Program (PIP) of the NHDP.

Spending policy continued to be based on principles of austerity, financial discipline, rationalization, and prioritization of public spending, while at the same time guaranteeing constitutional allocations, as well as contractual public debt service obligations. The bulk of spending was directed to social spending in institutions such as the Ministry of Health (MINSA), the Ministry of Agriculture and Forestry (MAGFOR), and other ministries. In addition, given the damage done by weather-related events, resources were allocated to the Ministry of Transport and Infrastructure (MTI), the Nicaraguan Army, and other institutions to address priority spending.

Subsidies policy continued to be directed to protecting consumers’ disposable income by maintaining stable rates for some basic services. Thus, the price for urban mass transit fares in Managua and Ciudad Sandino remained unchanged and subsidies continued for drinking water-related energy costs, electricity to the settlements, and power and water services to universities and pensioners.

In the area of salaries, the government’s policy was directed to correcting lags in the lower income sectors. Additionally, starting in May 2010, more than 120,000 government employees with salaries less than or equal to 5,500 córdobas received a bonus of 530 córdobas until May 1, 2011 and 700 córdobas thereafter, an amount not included in the General Budget of the Republic. These transfers were funded with contributions from the private initiative of ALBA.

Between 2007 and 2010, annual foreign cooperation disbursed to Nicaragua averaged U$584.1 million, 3.2 percent higher than the average of U$566.2 million received between 2002 and 2006.

BUDGETARY EFFORT FOR COMBATING POVERTY

The government protected spending geared toward combating poverty, creating fiscal space amounting to an investment during this four-year term (2007-2010) of US$3.36 billion, averaging US$841.0 million per year (13.5 percent of GDP). This expenditure averaged US$304.1 million more per year, or 56.7 percent more per year, than the US$536.8 million annual average (11.7 percent of GDP) invested during the period 2002-2006.

Although it is very difficult to evaluate the impact of spending on poverty reduction, it is clear that sustained increases in spending on better targeted programs and projects, in both sectors and areas with higher concentrations of the poorest members of society, has helped to reduce general poverty during the period 2005-2009 by 5.8 percentage points and to reduce extreme poverty by 2.6 percentage points (EMNV 2009).

Budgetary efforts to combat poverty indicate that actions giving priority to the education and health sectors, as well as care for children and adolescents and the population affected by national disasters, produced an accelerated increase in resources allocated to the social sectors, accounting for two-thirds (65.9 percent, US$2.2117 billion) of executed spending during the years 2007-2010 and 67.2 percent (US$204.4 million) of the average total increase (US$304.1 million) during this period. The productive sector, for its part, absorbed 21.0 percent of these resources (US$748.0 million), thanks to the increase in the budgetary allocation for developing the energy sector and for the construction and maintenance of highways and rural roads.

GROWTH: AGRICULTURE AND FORESTRY STRATEGY

The government is expanding policies to support technical assistance, training, and technological innovation and to make loans accessible for small- and medium-sized producers, indigenous communities, and afrodescendent peoples. This has allowed for efficiency and effectiveness in domestic resources, private resources, and cooperation resources, achieving better sectoral performance,1 the objective being to allow this segment of formerly marginalized producers and communities to join large producers in capitalizing on Nicaragua’s comparative advantages.

Since 2007, the government has been implementing the Food Production Program (PPA), better known as Zero Hunger (Hambre Cero). It is considered to be one of the most successful programs of the Food Security and Sovereignty Strategy for rapidly satisfying the food requirements of households living in extreme rural poverty. Implemented for four years (2007-2010), the PPA has provided capital for 59,755 rural women and their families, who have in turn organized into 1,256 savings fund groups with their respective boards of directors. Of the total number of groups organized, 182 have achieved the level of cooperatives.

On the subject of access to credit, the policy during the period 2007-2010 has been to promote access to credit for microentrepreneurs and small producers. Loans were granted to 90,209 women under the Zero Usury loan program, providing a total of 155,786 loans amounting to C$ 827.1 million. Similarly, first the Rural Credit Fund and currently the Produzcamos development bank have provided loans to 86,143 small producers for a total of C$1.06 billion, 1.6 times more than in 2006.

In terms of access to markets and fair prices, starting in 2007 the government reactivated the National Basic Foodstuffs Supply Company (ENABAS) to gather basic foodstuffs by purchasing from producers at fair prices, encouraging private agents to pay similar prices. Consumers are also supplied with basic foodstuffs at fair prices and a reserve of basic foodstuffs is guaranteed to protect the population when prices rise. Currently, ENABAS gathers 1,770,444 quintals of agricultural products and distributes them through 3,817 points of sale, protecting the poor population from spikes in prices for basic foodstuffs (beans, for example) and producing an impact on poverty reduction.

GROWTH: FISHING AND AQUACULTURE POLICY

In 2007 the government created the Nicaraguan Fishing and Aquaculture Institute (INPESCA) for the purpose of strengthening and restoring the rights of fishermen, particularly small-scale fishermen. The results of promoting small-scale fishing and providing equipment, technical assistance, access to loans, partnerships, and research are evident in increased production and exports in this sector. In 2006 Nicaragua produced 43.9 million pounds of fish and aquaculture products, increasing to 70.8 million, or an increase of 61.3 percent in 2010. In 2010, Nicaragua exported 24.5 million pounds and US$53.5 million more than in 2006 (US$ 165.2 million in 2010 compared to 111.7 million in 2006). The most important export categories were shrimp, lobster, and fish.

GROWTH: INDUSTRIAL POLICY

Industrial policy has formulated and carried out actions directed to facilitating and improving the capacities of micro, small, and medium-sized companies in the industrial sector so they can improve their production and sale levels and thus improve income for producers and employees, and encourage the creation of new companies that are able to generate jobs and income.

In the context of the strategy for developing the MSME sector, the Micro, Small, and Medium Enterprise Development Program (PROMIPYME) was developed and started up to help increase and consolidate the competitiveness of MSMEs. This sector represents more than 90 percent of Nicaragua’s corporate base, 40 percent of GDP, and generates 70 percent of employment.

Attention to MSMEs has been mass produced through the Support Center for Micro, Small, and Medium Enterprise (CAMIPYME) serving more than 40,000 MSMEs over the last three years with decentralized services related to training and technical assistance, trade fairs, departmental, national, and international events, access to financing, and improved product quality.

GROWTH: ENERGY POLICY

Since 2009, installed generating capacity has been expanded beyond maximum demand. Transformation of the energy matrix with renewable energy has been initiated based on the approval and streamlining of new projects executed by private enterprise and public-private partnerships. Private and public investment in this sector amounts to US$1.44 billion dollars. There has also been an 18 percent increase in total final energy consumption, which increased from 2,133.21 GWH in 2005 to 2,520.21 GWH in 2009.

With solidarity-based cooperation from the government of Venezuela, technical support from Cuba, economic support from Taiwan, the participation of ENEL, ENATREL, and the private investors, the government had increased generating capacity by 350 MW by end-2010. Of this capacity, 290 MW come from plants managed by ALBA de Nicaragua S.A. (ALBANISA) and Taiwan and 60 MW from the Amayo 1 and 2 Wind Plants built with private capital. For the first time, Nicaragua has nominal installed capacity in excess of 1,000 MW and effective capacity of 827.3 MW.

During the period 2007-10, 158.1 km of new transmission lines were installed, guaranteeing the supply of energy to 326,623 beneficiaries. In addition, 236.3 MW of additional power were installed, benefiting a population of 561,796 people.

During the period 2009-2010, rural electrification has brought power to 93,015 households, particularly in isolated areas, through the system of alternative networks and sources such as small hydroelectric stations, solar panels, and other alternatives and Nicaragua will continue to promote concessions for local companies to generate and distribute energy.

GROWTH: TOURISM DEVELOPMENT

There is a development strategy for community tourism and agrotourism and domestic social tourism is being promoted, strengthening existing tourist destinations and encouraging the development of new tourism destinations and routes. Accordingly, the infrastructure of tourism centers and spas has been improved and rebuilt to allow public access, with an investment during the period 2007-2010 of C$47.6 million córdobas. These investments have allowed for 3,451,098 visitors during the period from 2007 to 2010, amounting to cumulative growth of 37 percent, meeting the objective of restoring the people’s right to recreation and leisure.

In 2010 there were one million foreign tourists, representing cumulative growth of 34.9 percent during the period 2007 to 2010, for a total of 3,601,052 tourists. Monetary income generated by tourism from 2007 to 2010 amounted to $1.199 billion.

FOREIGN TRADE POLICY

Foreign trade policy focused on implementing a system of strategic basic grain reserves and more direct channels for distribution to consumers, with the following objectives: stability of supply in the market; priority given to rural investment so as to reduce transportation and production costs and losses in product quality; promoting programs to guarantee quality, safety, and security of production, to achieve greater competitiveness on national and international markets; modernizing the legal framework regulating domestic trade and promoting its spread; and protecting consumers and producers rights in commercial transactions.

Stable consumer prices have been achieved for many of the products in the basic food basket, avoiding significant market distortions, based on consensus among the producers, importers, exporters, and marketers of these products. There has been a notable stabilization in the prices for rice, sugar, cooking oil, milk, bread, and meats, although not for fish.

FOREIGN DIRECT INVESTMENT STIMULUS POLICY

Since 2007, the government of Nicaragua has had a firm policy of promoting foreign investment by building a climate of peace, citizen security, and social and macroeconomic stability, as well as a solid regulatory framework consistent with the principle of respect for private property.

During the period 2007-10, Foreign Direct Investment (FDI) attracted was US$1.95 billion higher than during 2002-06 (US$720 million). The government has managed to achieve a 25 percent increase in attracting foreign investment compared to the previous administration, for a total of 375 foreign companies representing various countries.