nicaragua: country strategy with the idb (2002-2005)

DOCUMENT OF THE INTER-AMERICAN DEVELOPMENT BANK

NICARAGUA

IDB COUNTRY STRATEGY

This document was prepared by: Manuel Agosín (RE2/RE2), Eduardo Balcárcel (COF/CNI), Hugo Betancor (RE2/SC2), Nancy Jesurun-Clements (RE2/EN2), Carlos Miranda (RE2/SO2), Stefan Queck (RE2/FI2), Charles Richter (RE2/OD3), BCS Team Leader, and Luis Zavaleta (RE2/OD3). Inputs were provided by: Ladislao Brachowicz (RE2/OD3), Sobeida Castillo (COF/CNI), Caroline Clarke (RE2/EN2), Luis Echebarría (SDS/SGC), Juan Manuel Fernández (RE2/SO2), Lorena Mejicanos (MIF), Jorge Requena (RE2/OD3), Nadia Scharen-Guivel (PRI), Ennio Rodríguez (INT/ITD), Alejandra Vallejo (IIC) and Mariana Wettstein (RE2/OD3). Sara Bojorge-Saénz assisted in producing the document.

TABLE OF CONTENTS Introduction................................................................................................................................ i Executive Summary................................................................................................................. iii Bank Country Strategy Matrix ................................................................................................v I.

MAIN CHALLENGES FOR DEVELOPMENT ............................................................................1

A. B.

C. D. E. II.

EVALUATION OF THE STRATEGY AND THE PORTFOLIO ....................................................11

A. B. C. D. III.

EVOLUTION OF THE ECONOMY ............................................................................ 1 THE THREE CHALLENGES .................................................................................... 2 1.

Economic growth ..................................................................................... 2 2.

Governance............................................................................................... 5 3.

Productivity of the very poor ..................................................................... 6 POVERTY REDUCTION AND SUSTAINABLE DEVELOPMENT ................................... 6 1.

Poverty reduction ..................................................................................... 6 2.

Sustainable development............................................................................ 8 MACROECONOMIC PROSPECTS............................................................................ 9 RESPONSE TO THE CHALLENGES ....................................................................... 10 GENERAL CONSIDERATIONS ............................................................................. 11 DEVELOPMENT OF THE STRATEGY 1996-2001.................................................. 12 DEVELOPMENT OF THE BANK’S PORTFOLIO, 1996-2001 .................................. 13 LESSONS LEARNED FOR FUTURE STRATEGY FORMULATION .............................. 14

STRATEGY, OBJECTIVES AND THE AGENDA FOR THE BANK’S DIALOGUE WITH THE COUNTRY ..........................................................................................................................16

A.

B. C. D.

THE LENDING PROGRAM ................................................................................... 17 1.

Strategic approach 1: Economic growth ................................................... 18 2.

Strategic approach 2: Governance.......................................................... 22 3.

Strategic approach 3: Productivity of the very poor............................... 25 THE BANK’S INSTITUTIONAL STRATEGY ........................................................... 26 RISKS IN IMPLEMENTING THE STRATEGY .......................................................... 26 PROGRAM PERFORMANCE INDICATORS ............................................................. 27

ANNEXES Annex I Annex II Annex III Annex IV Annex V

Summary of the Bank’s lending program Work program for the country and the sectors Debt sustainability indicators Actions under way financed by the government, other agencies and the IDB References

-iiLIST OF ABBREVIATIONS BCN BCS BPI CABEI CACM CAFTA CENIS CFAA CGR CIDA CONPES CPE DANIDA DFID EC EU FINDE FISE FTAA GTZ HIPC IMF INIFOM INSS KFW MARENA MDG MIFIC NDF OPEC PAHO PAIS PBL PES

Banco Central de Nicaragua [Central Bank of Nicaragua] Bank country strategy Bono de pago por indemnización [compensation payment bond] Central American Bank for Economic Integration Central American Common Market Central America Free Trade Agreement Certificados Negociables de Inversiones [negotiable investment certificates] Country Financial Accountability Analysis Contraloría General de la República [Office of the Comptroller General] Canadian International Development Agency Consejo Nacional de Planificación Económica y Social [National Economic and Social Planning Council] Country Program Evaluation Danish International Development Agency Department for International Development, United Kingdom European Commission European Union Fondo del Instituto Nicaragüense de Desarrollo [Nicaraguan Development Administration Fund] Fondo de Inversión Social de Emergencia [Social Emergency Investment Fund] Free Trade Area of the American Deutsche Gesellschaft für Technische Zusammenarbeit (German technical-cooperation agency) Heavily Indebted Poor Countries International Monetary Fund Instituto Nicaragüense de Fomento Municipal [Nicaraguan Municipal Development Administration] Instituto Nicaragüense de Seguridad Social [Nicaraguan Social Security Administration] Kredinstalt für Wiederaufbau (German reconstruction bank) Ministerio del Ambiente y Recursos Naturales [Ministry of the Environment and Natural Resources] Millennium Development Goal Ministerio de Fomento, Industria y Comercio [Ministry of Development, Industry and Trade] Nordic Development Fund Organization of Petroleum Exporting Countries Pan American Health Organization Project Alert Identification System Policy-based loan Programa de Empresariado Social [social entrepreneurial program]

-iiiPLC POSAF PPP PRGF PRI PSAC RAAN RAAS SDC SETEC SGPRS SIDA SIEPAC SILAIS SIN SMP TC UNICEF UNPF URACCAN USAID WB WTO

Partido Liberal Constitucionalista [Constitutional Liberal Party] Programa Socioambiental y de Desarrollo Forestal [Socioenvironmental and Forest Development Program] Puebla-Panama Plan Poverty Reduction and Growth Facility Private Sector Department (IDB) Programmatic Structural Adjustment Credit Región Autónoma del Atlántico Norte [Autonomous North Atlantic Region] Región Autónoma del Atlántico Sur [Autonomous South Atlantic Region] Swiss Development Corporation Secretaría Técnica de la Presidencia [Technical Secretariat of the Office of the President] Strengthened Growth and Poverty Reduction Strategy Swedish International Development Cooperation Agency Sistema de Interconexión Eléctrica de los Países de América Central [Central American Electric Interconnection System] Sistema Local de Asistencia Integral de Salud [Local Comprehensive Health Care System] Sistema de Interconexión Nacional [national interconnected system] Staff Monitored Program Technical-cooperation program United Nations Children’s Fund United Nations Population Fund Universidad de las Regiones Autonomas de la Costa del Caribe de Nicaragua [University of the Autonomous Regions of the Caribbean Coast of Nicaragua] United States Agency for International Development World Bank World Trade Organization

-iINTRODUCTION Based on different economic, social and institutional studies and on the IDB’s experience in Nicaragua, this Bank Country Strategy (BCS) identifies the main challenges that need to be tackled to reduce poverty and achieve socioeconomic development in the country. It also analyzes the previous Bank strategy for Nicaragua and, to draw on the lessons learned and respond effectively to the challenges, it proposes a new strategy and lending program.

This introduction summarizes some of the most important political, social and economic events for developing the BCS. With respect to the political context, in January 2002 the new government of President Enrique Bolaños of the Constitutionalist Liberal Party (PLC) took office.

One of the new administration’s top priorities is to comply with the Millennium Development Goals included in the strengthened growth and poverty reduction strategy (SGPRS) which was completed in July 2001 and prepared by the country itself and which, in turn, forms the framework for the Bank’s strategic guidelines described in this BCS. As a complement to the SGPRS, the new administration has pointed out the importance of prioritizing the allocation of scarce resources for productive and social activities to geographic ‘clusters’ with high potential for contributing sustainably to job and income creation. As the clusters are identified, the geographic areas where they are located could be given priority for investments financed by the Bank.

The Heavily Indebted Poor Countries (HIPC) Initiative is also an important process for the Bank’s relations with the country, since it reduces external debt to a sustainable level and involves a substantial contribution by the IDB. The Bank

approved internal debt alleviation for Nicaragua in November 2001 and proceeded to retroactively return the debt service paid since January 2001.

Other events and processes that have been fundamental for preparing the BCS include: the consultative groups, the portfolio review in May 2002, the Policy Dialogue Paper and the consultation meeting organized to discuss the paper on 25 January 2002, which opened the dialogue with the new authorities. The meeting consisted of presentations by the government and the Bank on the main challenges faced by the new administration. The government stressed the need to strengthen the SGPRS pillar for economic growth and underlined the urgency of boosting the country’s competitiveness.

Consultations were held on the content of the BCS with the Governor for Nicaragua in Washington on 13 June 2002; the Minister and Technical Secretary of the Office of the President on 18 June 2002 in Managua; and with the Economic Cabinet in Managua on 24 September 2002.

Perhaps the main message from those consultations is the high priority attached by the government to economic growth and the sustainability of social spending through the development of ‘clusters’ of sustainable activities with high economic impact. The authorities suggested that the Bank hold consultations on the BCS with civil society through the National Economic and Social Planning Council (CONPES), which took place on 23 September 2002.

This BCS has been enriched by comments and suggestions made at meetings with the World Bank and the IMF in Washington (10 May 2002), the international community in Managua (19 June 2002 and 25 September 2002)

-iiand at a meeting on the World Bank’s strategy (9 July 2002).

Last, there are a significant number of bilateral and multilateral institutions in Nicaragua that support the country in its efforts to spur development and reduce poverty. Accordingly, it is very important for the BCS to consider these interests, seeking to generate synergies, while avoiding unnecessary duplications in

programs and ensuring coordination in their execution. To that end, when the BCS was being prepared, the IDB maintained a series of formal and informal exchanges with the IMF, the World Bank, DFID, the European Community, USAID and other institutions. The Bank intends to maintain these exchanges.

-iiiEXECUTIVE SUMMARY This Bank country strategy (BCS) identifies three main challenges for poverty reduction in Nicaragua: (i) economic growth; (ii) governance; and (iii) the productivity of the very poor. In addition to these challenges, the previous strategy exercise revealed that: (i) it is important for the Bank to continually monitor transparency and corruption; and (ii) the limitations on FSO funds make it necessary for Bank interventions to be focused and to have indicators so that the results can be evaluated. Last, the design of the strategy uses as its frame of reference the objectives established in Nicaragua’s strengthened growth and poverty reduction strategy (SGPRS), which represents the commitments made by the country to the international community and forms an integral part of the HIPC process.

The objective of the BCS, which will guide Bank actions for approximately four years, is to support the Nicaraguan government in establishing and carrying out actions to attain the goals of the SGPRS. The actions – included in this Bank lending program – are targeted and chiefly consist of investments and short- and medium-term technical cooperation to tackle the three challenges identified above.

Strategic approach 1: Economic growth. This is the necessary condition for poverty reduction in Nicaragua. Based on experience and considering the actions of other international lending agencies, this BCS has identified two key areas for IDB support: strengthening fiscal policy (in the area of macroeconomic policies) and boosting competitiveness and production. The proposed goal for this strategic approach is to help the country achieve growth in GDP of 5 percent in 2005, with the increases in GDP in 2002-2004 that were planned in the SGPRS. a.

Strengthening fiscal policy. The chief purpose is to offer support in reducing the fiscal deficit, achieve a reduction in domestic debt and mitigate the risk of a crisis caused by excessive internal debt.

b.

Promoting competitiveness and production. To boost exports and economic growth, it is important to continue and step up economic reforms that will spur the investments and increases in capital necessary to finance them, through direct foreign investment or local capital.

Strategic approach 2: Governance. The objective is to have efficient, effective and ethical government with the capacity to attain the goals of the SGPRS, which enjoys the confidence of the citizenry. The success indicator in this strategic approach is to improve Nicaragua’s ranking for governmental and bureaucratic efficiency in the World Bank’s Governance Index. To that end, sweeping actions will be undertaken to modernize and reform the three branches of government. Although the Bank will support strengthening for the three powers, it will assign the highest priority to reform of the executive branch and to following up on a program that has already been approved to support the judicial branch. Headway will also be made in some areas linked to strengthening of the legislative branch.

Strategic approach 3: Productivity of the poorest groups. Top priority has been assigned to social and productive investments to benefit the very poor, particularly programs with highly positive short-term impacts. This strategic approach is particularly important for the government and the Bank on account of its tie-in with compliance with the goals of the SGPRS. The fundamental indicator for achievement of this strategic

-ivobjective is a reduction in the percentage of people living in extreme poverty from 17.3 percent (1998) to 14.3 percent (2005).

The IDB, the international community and coordination of activities. Last, there are a significant number of bilateral and multilateral institutions in Nicaragua that support the country in its efforts to spur development and reduce poverty. The proposed strategy takes account of this confluence of interests and will: (i) generate synergies, (ii) avoid unnecessary duplications in programs, and (iii) favor their coordinated execution.

Accordingly, when the BCS was being prepared, the IDB maintained a series of formal and informal exchanges with the IMF, the World Bank, DFID, the European Community, USAID and other institutions. It also held an additional consultation with the international community and with representative of civil society organizations in Managua in September 2002 and plans to continue these exchanges.

Indicators. Nicaragua is committed to meeting the goals expressed in the SGPRS. The goals are ambitious and meeting them will require concerted efforts on the part of the Government with ample support from the international community. The majority of the indicators of this BCS reflect this commitment. Nevertheless, the Bank, through the actions undertaken in the framework of this BCS, cannot assume the sole responsibility for meeting these goals. This is principally the responsibility of the Government, but it is shared with the international community. Besides, external factors, such as natural disasters and unforeseen political, economic and financial events, will necessarily contribute to the degree of attainment of the goals established in the SGPRS. As a result, an evaluation of the role of the Bank in reaching the indicators would have to consider the issues of attribution and the counterfactual, which have been reviewed by the Board of Executive Directors.

Strategy of the Bank Group. This BCS was prepared by the Bank Group. From its initiation, the preparatory process involved the active participation of the IIC, PRI and MIF. The contribution of the Bank Group is reflected in the overall program of this BCS, especially in the sections addressing competitiveness.

-v-

BANK COUNTRY STRATEGY MATRIX Area

Government strategy

Strategy/actions of other international lending agencies

IDB actions IDB strategy Current

Proposed

Strategic Approach 1: Economic Growth

Fiscal policy

• To prudently manage public finance (SGPRS).

• To reach a PRGF arrangement with the IMF and comply with its goals.

• IMF-PRGF approval expected in the second half of 2002.

• DGI (Germany) • Fiscal policy (World Bank)

• To create conditions for a reduction in the fiscal deficit and the internal debt.

Loan • Tax Administration (1999) Other • Alleviation under the HIPC process (2001) • Cooperation with the IMF and the WB in the HIPC process and in macroeconomic policy missions (since 1999) • Study on the challenges for modernizing the tax system (2002)

Competitiveness and production

• To carry out structural reforms to ensure private sector growth.

• To strengthen government regulatory agencies (SGPRS).

• To improve the road network (WB, DANIDA, OPEC, Japan).

• Technological innovation (WB, UNDP).

• Rural investments (EU, WB, Japan, China, OPEC, Taiwan, Scandinavian countries).

• Rural electrification

• To support an increase in the country’s competitiveness, stressing the role of the private sector and improvements in the investment climate and encouraging reforms.

• Selective investments in boosting the production of

Loans • Reactivation of agricultural production (1997) • Financial sector (1998) • Technological innovation (2001) • Rehabilitation of the San Lorenzo-Muhan highway (2001) • Tipitapa electric plant (PRI, 1998) TCs • Resolution of property conflicts (MIF, 1998) • Strengthening of business services (MIF, 1999) • Business services market (MIF, 1998) • Modernization of the capital market (MIF, 1997)

Loans • Modernization of the State and fiscal reform (2003) • Fiscal modernization (2004-5) TCs • Support to internal debt reduction • Support to modernization of the State and fiscal reform Other • Cooperation with the IMF and the WB in the HIPC process and in macroeconomic policy missions • Country financial accountability analysis with the WB (2002-3) • Financial projections study • Design of a macroeconomic model • Cost-benefit study to prioritize investments to reduce poverty Loans • Reactivation of rural production (2002) • Strengthening of trade negotiating capacity (2002) • Global multisector (2003) • Integration PPP (2003) • Feeder roads (2004-5) • Competitiveness innovations (2003) TCs • Financial, nontraditional agriculture (2002) • Transfer of agricultural technology (2002) • Monitoring and mitigation of forestry losses • Support for the Office of the Superintendent of Banks (MIF, 2002)

Indicators

• GDP growth rate of 5 % in 2005 (ERCERP); intermediate goals: 1.5 % 2002; 3.5 % 2003 and 4.5 % 2004 (SGPRS) • Increase in tax revenues of at least 1.5 percentage points of GDP from 2001 to 2005 (SGPRS).

• Higher ranking of Nicaragua in the growth competitiveness ranking (73rd out of 75 countries in 2001) and in the current competitiveness ranking (71st out of 75 countries in 2001) published by the World Economic Forum.

• Higher ranking of Nicaragua in the quality of the regulatory framework, compared to January 2002 (World

-vi-

(WB).

• Reform of the financial and pension systems (WB).

• Reform of telecommunicati ons (WB).

• Competitiveness (WB).

tradable goods with high economic returns in the short term, focusing on small and medium-scale producers.

1997) • Support for conflict resolution (MIF, 1998) •Development of FINDE (PES, 2000) • Systemization of the network of savings and credit unions (PES, 2000) • Sheep farming on mini and small farms in the tropics (PES, 2000)

• Multisector regulatory agency (MIF, 2002) • Airport security (MIF, 2002) • Identification of ‘clusters’ (2003-5) • Public and private sector partnerships (2003-5) • Clean production centers (MIF, 2003) • Single window (MIF, 2003) • In-shore fishery, Laguna de Perlas (PES, 2003) • Sheep raising RAAN (PES, 2003) Other • Study on infrastructure to increase exports • Study on impact of CAFTA

Bank).

-vii-

BANK COUNTRY STRATEGY MATRIX Area

Government strategy

Strategy/actions of other international lending agencies

IDB actions IDB strategy Current

Proposed

Strategic Approach 2: Governance

To strengthen the three branches of government

• To improve transparency in public spending (SGPRS).

• To introduce a culture of integrity (SGPRS).

• To consolidate the rule of law (SGPRS).

• To strengthen the Office of the Comptroller General (CGR) and the justice system (SGPRS).

• To strengthen government institutions (SGPRS).

• To strengthen government decentralization and local governments (SGPRS).

• To improve efficiency and transparency in government procurement and contracting and support the CGR (USAID, Sweden, the Netherlands, UK, Norway).

• To modernize and strengthen the justice system and the judicial branch: “National Judicial Branch Commission” (USAID, UNDP, EU, Sweden, Spain).

• To strengthen the regional governments of the RAAN and the RAAS (WB, EU, UNDP, Germany).

• Almost all projects contain an institution-building component.

• A loan to support poverty reduction will stress reform of the civil service and the master account, and improve the investment climate (WB).

• Loan for institutional development (WB).

• To help strengthen the justice system.

• To help establish an institutional framework.

• To improve transparency in government procurement and contracting.

• To cooperate in strengthening government institutions.

• To strengthen government decentralization and the local system of government.

• To promote private sector participation in the delivery of services.

Loans • Modernization and strengthening of the CGR (2002) • Efficiency and transparency in procurement and contracting (2000) • Modernization of the judicial branch (2001) • Modernization of Managua’s municipal government (2000) • Implementation of the RPRS (2000) • Strengthening of municipal development (2001) • Strengthening of the Ministry of Family Affairs (2001) TCs • Strengthening of private external auditing services (MIF, 1999) • Government procurement (MIF, 2000) • Support for developing social policy (1999) • Support for CONPES (2001)

Loans • Administrative integrity (2004-5) • Support for the national plan to combat corruption (2004-5) • Technical cooperation loan for egovernment (2004-5) • Almost all of the loans contain institution-building components (2002).

TCs • Strengthening of the executive branch’s internal audit system (2003) • Support for municipal development (2002) • Strengthening of URACCAN and training for local leaders (2002) • Support for urban planning and environmental management (2003) • Support for poverty reduction (2002-2003) • Action plan for public sector modernization (2003) Other • Study on governance and poverty

Indicators • Improve Nicaragua’s ranking in governmental and bureaucratic efficiency compared to January 2002 (World Bank).

• Higher ranking of Nicaragua in corruption control, compared to January 2002 (World Bank).

• Higher ranking of Nicaragua in freedom of speech, fundamental freedoms and accountability, compared to January 2002 (World Bank).

• Higher ranking of Nicaragua in applying the rule of law, compared to January 2002 (World Bank).

-viii-

BANK COUNTRY STRATEGY MATRIX IDB actions Area

Government strategy

Strategy/actions of other international lending agencies

IDB strategy Current

Proposed

Strategic Approach 3: Productivity of the very poor

Social investments

• To increase investments in human capital.

• These investments will focus on basic and vocational education and primary health care in rural areas.

• SILAIS for better medical care (Sweden, EU, USAID, Nordic Fund, Italy, Japan, WB).

• Primary network and hospitals (RAAN and RAAS). Health services in remote areas (USAID, Sweden).

• Reproductive health model (Norway, GTZ and UNPF).

• Vaccinations and immunizations (Luxembourg and Japan).

• Other health programs (Sweden, PAHO, UNICEF, WB, USAID, Spain, KfW, SDC, OPEC).

• Malnutrition prevention (WB, USAID, UNICEF).

• Water and sanitation (Germany).

• Participation in education, design of a national education plan, a training plan, increase in school autonomy (WB, USAID, Finland, UNICEF).

• FISE (WB, KfW).

• Primary education (WB).

• Loan to support poverty reduction (WB).

• To promote social and productive investments focused on the poorest groups.

Loans • Comprehensive child care (2001) • Social safety net (2000) • Development of the Atlantic region (1999) • Education reform (1999) • Modernization of the hospital system (1998) TCs • Support for reform of secondary education (1998) • Support for private health service providers (MIF, 2001)

Loans • Social safety net II (2002) • Social sector (2002) • Urban poverty (2003) • Education II (2004-5) • Social sector II (2004) • Education with job training (2004-5) • Modernization of technical education (2004-5) TCs • Support for disabled groups (2002) • Evaluation of social programs • Preschool education (2002) Other • Study to provide social statistics by ethnic groups.

Indicators • Reduce the percentage of persons living in extreme poverty from 17.3 % in 1998 to 14.3 % in 2005 (SGPRS) • Net increase in primary school enrolment from 75% in 1999 to 83.4% in 2005 (SGPRS).

• Increase from 21% in 1999 to 23% in 2005 in the percentage of fertile women with access to family planning (SGPRS).

• Reduction in infant mortality from 40 per thousand live births in 1998 to 32 in 2005 (SGPRS).

• Reduction in chronic malnutrition in children under five from 19.9% in 1998 to 16% in 2004 (SGPRS).

I.

MAIN CHALLENGES FOR DEVELOPMENT

A.

Evolution of the economy

1.1

In the aftermath of the economic collapse caused by the civil war, Nicaragua emerged in the 1980s with an economy in acute crisis. At the start of the last decade, the authorities simultaneously undertook the tasks of putting an end to hyperinflation and implementing an intensive program of structural reforms intended to transform the economy into a market-based system, with the private sector called upon to play the leading role.

1.2

Nicaragua has made significant progress since the start of the 1990s on four fronts in particular. In the first place, it was able to rein in the hyperinflation that began in 1988, bringing it down to 10 percent by the end of the 1990s and to 5 percent in 2001. Second, it cut back military spending from 28.3 percent of GDP in 1989 to 1.5 percent in 1996. Third, the authorities made significant progress in opening up the economy, starting from a position of excessive protectionism. In addition to participating in a regional liberalization strategy through the Central American Common Market (CACM), the country has signed several free trade agreements, participates in the negotiations on the Free Trade Area of the Americas (FTAA) and is currently part of the Puebla-Panama Plan. Fourth and last comes the impulse it has given to the free zones to develop and diversify exports. As a complement to this effort, the treatment of direct foreign investment has been liberalized.

1.3

Despite this undeniable progress, serious problems must still be addressed with regard to economic performance and the social situation. Nicaragua is one of the poorest countries in Latin America, with per capita GDP (in dollars at purchasing power parity) that is a mere 7.2 percent of per capita GDP in the United States (Graph 1.1). Furthermore, it has lost ground, even in Central America. The four neighboring countries included in Graph 1.1 have a history of poor performance, with growth rates lower that in the United States. Even in this context, Nicaragua’s economic performance is unfavorable, since after having been the regional leader (after Costa Rica) in 1975, it has become the country with the lowest per capita income today. In the second half of the 1990s, the speed up in Nicaragua’s growth meant that its relative situation did not continue to deteriorate, but it has still not begun to make up for the ground lost in the previous 20 years.

-2Graph 1.1. Per capita GDP in current US dollars at purchasing power parity (percentage of United States GDP) 35% 30% 25% Nicaragua

20%

Costa Rica El Salvador

15%

Guatemala 10%

Honduras

5% 0%

1975

1985

1995

1999

B.

The three challenges

1.4

This chapter identifies three key challenges for poverty reduction. They form part of the reference framework for this Bank country strategy (BCS)1 and are: (i) economic growth; (ii) governance; and (iii) the productivity of the very poor.

Attention to these three challenges during the period this BCS remains in effect is crucial for poverty reduction and the country’s socioeconomic development. This chapter also examines the country’s situation with respect to two major areas of the Bank’s institutional strategy – poverty reduction and sustainable development – and ends with a brief evaluation of two key areas for the country’s development: macroeconomic prospects and vulnerability to natural disasters.

1.

Economic growth

1.5

The main pillar of the strengthened growth and poverty reduction strategy (SGPRS) and a necessary condition for poverty reduction is broad-based economic growth coupled with high employment. To achieve that growth, sustained macroeconomic stabilization and the implementation of policies that boost the country’s competitiveness and production are necessary.

1.6

The fiscal deficit. In the area of macroeconomic stabilization, the Bank’s analysis points to the importance of reducing the fiscal deficit. In 2001, the deficit of the Central Government was 17 percent of GDP and preliminary estimates place it at about 10 percent in 2002. One-third of the deficit in 2001 (6.1 percent of GDP) was financed by donations and the rest by external and internal borrowing.

1.7

Despite substantial growth in domestic debt, the inflationary impact of this financing has largely been cushioned by the open market operations of the Central Bank of Nicaragua (BCN). This debt is composed of long-term instruments,

1

It should be noted that some important challenges have not been included in this BCS. Most will be addressed by the Nicaraguan government, in many cases with support from bilateral and multilateral institutions. See Annex 5 of the SGPRS: “Matrix of policy actions”.

-3compensation payment bonds (BPIs) issued to cover land confiscations and expropriations, and short-term instruments in the form of negotiable investment certificates (CENIS) issued by the BCN for open market operations and to support depositors in banks in receivership. The CENIS have grown significantly in recent years, rising from 8.2 percent of GDP in 1999 to 22.6 percent in 2001.

1.8

While long-term instruments pay moderate nominal interest rates, they are bought and sold in secondary markets at deep discounts. Short-term instruments pay between 10 and 15 percent – both indexed to the dollar.

1.9

Although inflation has been contained so far, there is another problem in the medium term. The internal debt represents about 70 percent of GDP and almost half of it will fall due prior to the end of 2004. In that year, the country will have to begin repaying the BPIs, whose service (principal plus interest) will rise from US$16.9 million in 2001 (0.7 percent of GDP) to US$60 million in 2005 (1.9 percent of GDP).

1.10

It is a priority to reduce the fiscal deficit. Its financing through donations and CENIS is not sustainable in the long term.2 On the one hand, a reduction in external donations is expected and, on the other, internal financing through the accumulation of short-term instruments issued by the BCN has the potential for destabilization by making government finances more fragile and vulnerable to shocks in the financial system if private agents do not continue to roll over their CENIS.

1.11

It is also important for the country to lessen its dependence on external donations, while implementing a series of macroeconomic policies to promote significant and sustainable growth that stems from the dynamism of the Nicaraguan economy itself. Rapid accumulation of internal debt raises the cost that the private sector must pay for credit and discourages investment, affecting the country’s competitiveness.

1.12

Competitiveness and increases in production. To achieve high and sustainable growth that would permit a permanent reduction in poverty, production will have to be boosted through measures to improve the competitiveness of Nicaraguan goods and services on international markets.

1.13

Increases in production, particularly in tradable goods, are also fundamental for reducing the deficit in the balance of payments current account, which climbed to 37.8 percent of GDP in 2000 and was about 38.8 percent of GDP in 2001. This deficit is not sustainable, given the scant possibilities of continuing to finance it over the next four to five years.

1.14

The size the this gap is explained by the negative trade balance, which rose to the equivalent of over 42 percent of GDP in 2000 and was approximately 40 percent in

2

Even working on the assumption that the international community would be willing to increase its concessional resources in real terms, estimates indicate that the average primary deficit of Nicaragua’s consolidated nonfinancial public sector will not be sustainable in 1999-2001. See Sebastián Edwards, “Debt Relief and Fiscal Sustainability”, National Bureau of Economic Research, Working Paper 8939, May 2002.

-42001. Half of the current account deficit was financed with public capital, mainly transfers (12.8 percent of GDP). The net government debt also contributed to this financing (loans less amortization), which accounted for 4.2 percent of GDP. Private capital financed 35 percent of the current account deficit, particularly direct foreign investment and net external borrowing, which amounted to 6.3 percent and 7 percent of GDP, respectively.

1.15

Like the fiscal deficit, the external deficit is also unsustainable on account of the probable reduction in donations in the coming years. Sustainable growth requires the country to find means of financing its imports through exports, which have stagnated, direct foreign investment, or direct private borrowing on international financial markets. Whatever the case, borrowing at concessional rates will gradually diminish over the coming decades.

1.16

The analysis of the investment climate performed by the Bank’s Private Sector Group—the Inter-American Investment Corporation (IIC), the Multilateral Investment Fund (MIF) and the Private Sector Department (PRI)— Identified two groups of key actions to promote private sector investment: (i) actions to decrease the perception of economic, financial, legal and regulatory risks; and (ii) policies aimed at increasing the supply of local private capital and local technical expertise.

Box 1.1. Integration. A key element for development Integration is a key element for development in Nicaragua. In addition to having the potential for opening up new markets for the country’s exports, regional integration offers broad potential for developing common, cost-efficient policies for addressing regional challenges. For the small economies of Central America, subregional integration is justified as part of the process of opening up to the outside and making the most of its strategic location. The potential benefits of proximity and cultural affinity with neighbors are under-used in terms of trade and investment flows, given the institutional obstacles (nontariff barriers, customs and border formalities, etc.) and inadequate infrastructure (bad roads).

The country’s commitment to move toward greater openness has been clearly demonstrated. It is in the process of negotiating or approving free trade agreements with Chile, the Dominican Republic and Canada and has taken the first steps toward an agreement with the United States. Nicaragua also participates in the process of the Free Trade Area of the Americas (FTAA) and in World Trade Organization (WTO) negotiations. Nicaragua’s strategy of openness and integration includes different levels of association. The most direct are the Central American Common Market (CACM) and, in meso-America, the Puebla-Panama Plan (PPP). In these contexts, integration goes beyond strictly trade objectives, to include infrastructure and cooperation in a number of fields, ranging from health and education to disaster prevention.

Nicaragua’s participation in trade negotiations makes it necessary to strengthen all the institutions in the public foreign trade system and their capacity to build consensus on national positions with civil society and with the private sector, in particular. The need to build up public and private institutions can also be seen when it comes time to implement trade agreements. Openness is also linked to macroeconomic imbalances, owing to the anticipated reduction in fiscal revenues as a result of tariff reduction. Alternative sources of revenue will have to be found to compensate for tariff reduction.

Progress in subregional integration could provide better conditions for economies of scale, investment allocation and solutions for competitiveness on third markets in key areas of infrastructure, particularly in transport (a regional concept of multimodal solutions) and energy (regional investments in power generation under SIEPAC and growing liberalization of trade in oil and gas).

The strategy presented in Chapter III of this BCS deals with these issues.

1.17

To attract foreign investment and, in particular, to obtain greater private sector involvement in the energy, transportation, water and telecommunications sectors, Nicaragua has its own development opportunities and challenges that can be summarized in three key points:

-5-

1.18

a.

Creation by the government of a new vision and commitment that is favorable to international investors interested in financing projects in the country.

Consolidation of democracy and the reduction and prevention of corruption are key elements in this vision and commitment.

b.

Improvement and diversification of the Nicaraguan economy. It is important to boost productivity, enhance the efficiency of key economic sectors, provide better maintenance of basic infrastructure, improve core services and ensure stable macroeconomic policies that promote private investment.

c.

Strengthening of the legal and regulatory framework. The regulation of tariffs charged to users must be improved, the discrepancies between the laws regulating each sector must be eliminated and the justice system needs to be reformed, since at present it is slow, opaque and perceived to be corrupt.

Another key aspect linked to competitiveness and, in general, to the country’s socioeconomic development is its openness to the rest of the world. Box 1.1 analyzes the main aspects of economic and regional integration. It should be noted that Nicaragua has worked very hard in this area.

2.

Governance

1.19

In the second half of the 1990s, Nicaragua experienced a major loss of confidence in its public administration.3 Although the ‘evaluation’ made by citizens of the public sector is closely linked to macroeconomic issues, certain indicators confirm a decline that needs to be reversed. The ‘democracy index’ (a combination of satisfaction with and support for democracy) fell from 41 percent in 1996 to 34 percent in 2001.4 The situation is no better with regard government effectiveness (27.5 percent for Nicaragua compared to 49.2 percent for the region), justice (21.2 percent compared to 46.1 percent) and corruption control (24.2 percent compared to 50.6 percent).5 Nevertheless, these indicators may improve in 2002 due to the strong anti-corruption measures taken by the new government.

1.20

In the 1990s, Nicaragua undertook major reforms to begin the process of consolidating democracy and modernizing the public administration. However, in recent years the pace and depth of these reforms has stagnated, largely due to deterioration in political institutions and the lack of transparency in the use of public resources (the indicators mentioned in the preceding paragraph confirm these views).

1.21

It is important for Nicaragua to take up the process of institutional reforms once again, with the central objectives of consolidating democracy and the rule of law, ensuring transparency in public spending and instilling credibility and confidence in citizens and private investors for decision making and the exercise of their rights. Execution of the SGPRS will require good governance for economic growth and for poverty eradication. However, the strategy itself takes note of major challenges in governance and institutional development.

3

Latinobarómetro, 1996 and 2001.

Ibid.

World Bank Institute on Governance and Anti-corruption.

4 5

-61.22

Therefore, a second challenge for the country is to revisit the process of institutional reform to consolidate democracy and the rule of law, ensuring efficient and effective government and transparency in public spending.

3.

Productivity of the very poor

1.23

The SGPRS estimates that 47.9 percent of the population lives in poverty and 17.3 percent in extreme poverty. Poverty is linked to very unequal income distribution.6 Apart from being multi-dimensional in nature, poverty goes beyond low income to include discrimination and exclusion expressed in terms of the privation of basic social services.7 For example, Nicaragua has high levels of child malnutrition, disease and lack of education (see Table 1.1). The highest incidence of poverty is on the Atlantic coast, where Afro-Nicaraguans and indigenous groups live, and efforts must be directed to that area to boost productivity.

1.24

This is why the second pillar of the SGPRS highlights the importance of making larger investments in the human capital of the poor for the purpose of helping to break the inter-generational cycle of poverty. As a response, this BCS proposes to bring about permanent increases in the productivity of the poor by improving their education, health, nutrition and training to enable them to obtain sufficient income to surmount their poverty and exclusion.

C.

Poverty reduction and sustainable development

1.25

The Bank’s institutional strategy attaches particular importance to two crosscutting issues: poverty reduction and sustainable development. The country has progressed unevenly in these areas, as is explained below.

1.

Poverty reduction

1.26

After extensive consultations with civil society and international financial institutions, Nicaragua prepared a strengthened growth and poverty reduction strategy (SGPRS) in July 2001. Preparation of the strategy was supported by the international community (See Box 1.2). The SGPRS uses the results of studies conducted over a number of years and reflects the government’s – and more importantly, the country’s – commitment to increase and improve spending on poverty reduction. This commitment has already transcended one political cycle, when it was handed down from the previous administration to the current government in 2002.

1.27

The strategy establishes the guidelines for poverty reduction as well as the goal of reducing extreme poverty by 50 percent by 2015 as compared to 1995. Attainment of that goal necessarily requires that the country achieve substantial and sustainable economic growth. It also requires expansion of the supply of essential services to boost the productivity of low-income groups. Thus, the main challenges discussed in this chapter of the BCS complement the analysis and priorities established in the SGPRS.

6

According to the UNDP, Human Development Report 2002, Nicaragua’s Gini coefficient for income is the fifth highest in the world. A high Gini coefficient indicates greater inequality in income distribution.

Jean Drèze and Amartya Sen, “La India: Desarrollo Económico y oportunidad social”, IDB, Regional Policy Dialogue, June 2001.

7

-7Box 1.2. The Strengthened Growth and Poverty Reduction Strategy.

Content and role of the international community and the IDB The SGPRS. Backed by the Bank and other international entities, the SGPRS was prepared under the government’s leadership and establishes poverty reduction as the mainstay of the strategy. It incorporates the results of extensive consultations with civil society and international lending agencies. It contains short-, mediumand long-term indicators for poverty reduction and millennium development goals. For example, it plans for a 50 percent reduction in extreme poverty by 2015, as compared to 1995.

The SGPRS is built on four pillars: broad-based economic growth and structural reform; larger and better investments in human capital; better protection for vulnerable groups; and governance and institutional development. It also has three crosscutting themes: environmental vulnerability, social equity and decentralization.

Role of the international community. Although the SGPRS is a Nicaraguan document prepared exclusively for Nicaraguans, virtually the entire international community has contributed to different aspects of its preparation: to the study and analysis of poverty; to the sector analyses; to the design and implementation of the consultations; to the preparation of the system of indicators, monitoring and consultation; and to the implementation plan. The international community has also participated in several coordination and consultation meetings in Managua. Like the IDB, the other international lending agencies are determining their future support for the country under the frame of reference established by the SGPRS. Role of the IDB. During the preparation process, the Bank supported the government through technical cooperation projects and loans to support the Technical Secretariat of the Office of the President (SETEC), sector analyses, consulting services, design of the system of indicators, monitoring and evaluation, and design of the implementation strategy. The Bank also worked closely with SETEC on revising the drafts of the SGPRS. This Bank country strategy is intended to program the IDB’s future actions under the framework established by the SGPRS. In addition to an innovation loan in execution (implementation of the reinforced poverty reduction strategy approved in 2000), the Bank expects to approve two sector loans offering direct support for achieving the goals of the SGPRS. All the investment loans and technical-cooperation projects are also geared directly and indirectly to the same goals.

1.28

Table 1.1 presents the main social and poverty indicators in Nicaragua. As expected, there is a strong correlation between poverty and low educational achievement, disease and malnutrition. Although the country made significant progress in poverty reduction during the 1990s, poverty and privation levels remain high. The maternal mortality index deteriorated during the 1990s and little progress was made in the net primary school enrolment rate.

TABLE 1.1. MAIN SOCIAL AND POVERTY INDICATORS Indicator 1990-94 1995 1996 1997 1998 50.3 % 47.9 % Poverty index 19.4 % 17.3 % Extreme poverty index 23.7 % 19.9 % Chronic malnutrition in children under five 58.0 43.0 40.0 Infant mortality per 1,000 live births 98.3 111.8 154.4 142.7 138.2 Maternal mortality per 100,000 live births 77.9% 75.2 % 73.2 % 73.6 % 73.1 % Net rate of primary school enrolment 17.9 % 18.6 % 22.4 % 27.8 % 38.8 % Children who complete primary school in six years 23.0 % 18.8 % Illiteracy rate 50.0 % 56.1 % 59.1 % 61.6 % 62.8 % National potable water coverage 82.6 % 84.1 % National access to sanitation Source: SGPRS, July 2001.

1999 -

2000 -

-

-

148.3 75.0 %

77.0 %

32.0 %

29.5 %

66.5 %

67.9 %

-

-

-81.29

Although not included in the Table, the high population growth rate bears a close link to poverty. 8 The poorest households tend to have larger family sizes and higher dependency ratios than wealthy ones. High unemployment, estimated at 10.5% in 2001, and low incomes have contributed to a large flow of Nicaraguan immigrants to other countries. Even though this indicates a shortage of jobs, remittances from Nicaraguans living abroad, which are the equivalent of about 15 per cent of GDP, help substantially in financing the country’s balance of payments.

2.

Sustainable development

1.30

Nicaragua has made progress in the environmental area. It has an institutional and legal framework and government policies, including the second version of the environmental action plan launched in 2000 (the first dated from 1993), which provide a foundation for suitable environmental management. The Ministry of the Environment and Natural Resources (MARENA) is the lead agency, but its limited resources hamper effective environmental monitoring and control on the national level. With support from projects financed by the Bank, the environmental capacity of public institutions has improved and environmental rules and procedures have been designed and included in each sector’s project cycle. Environmental management units have been established in 12 public institutions.

1.31

Agriculture has expanded in recent decades at the expense of natural resources, through unsustainable farming practices and expansion of the agricultural frontier that have led to rapid deforestation and general degradation of water and soil.

Productivity is low. Recent programs (POSAF, rural production reactivation) have been including actions to address this concern and solve these problems, stressing the need to introduce technologies that make for the sustainable management of natural resources and significant increases in productivity.

Box 1.3. Nicaragua: One of the countries hardest hit by natural disasters Nicaragua is located in one of the parts of the world that is most vulnerable to natural disasters of different kinds, including hurricanes, storms, tidal waves, earthquakes, eruptions, drought and flooding. The magnitude is reflected in large losses, which have exceeded US$4 billion (more than 150 percent of GDP in 2001). Those same disasters have affected more than 3 million Nicaraguans.

On the regional level, Nicaragua has made important commitments to reduce the risk of disasters. The commitments recognize the common challenges and set out lines of action to address them jointly.

Also, the country has taken some major steps with a view to mitigating the risk of disasters: (i) it passed a law in 2000 establishing the National Disaster Fund (which must still be regulated); (ii) it has obtained financing to identify risks in selected municipalities and carry out community works to mitigate them; and (iii) it is strengthening the environmental management system through the Ministry of Environment and Natural Resources (MARENA).

Additional steps that could be taken include: (i) promoting a private disaster insurance market as envisaged in the Puebla-Panama Plan; (ii) making more use of hydrometeorological information to reduce disaster risk; and (iii) preparing a financial strategy to respond to disasters quickly, effectively and efficiently.

These actions form part of the policy dialogue between the Bank and the government. The IDB has played a leadership role in disaster prevention. The World Bank and the international community also have important programs in this area.

Bank Group programs contribute to disaster prevention and mitigation through financing municipal public works for disaster protection through the Municipal Strengthening and Development Program (1086/SF-NI), land risk maps as a criteria for housing vouchers through the Low Income Housing Program (1111/SF-NI), drought management in the Rural Production Reactivation Program (1110/SF-NI), and a regional MIF program in preparation which will include support for a private disaster insurance market.

8

Nicaragua’s population growth rate of 2.8 percent from 1975-2000 is almost 50 percent higher the average of Latin America and the Caribbean which is 1.9 per cent (UN, Human Development Report, 2002).

-9D.

Macroeconomic prospects

1.32

Excessive public spending in 2001 was the main reason why the targets established for year two of the Poverty Reduction and Growth Facility (PRGF) agreed upon with IMF were not met. The difficulty in meeting the targets and in presenting a coherent program for year three of the program led the authorities in mid-2001 to negotiate an interim program (SMP – Staff Monitored Program) for the second half of that year, in order to assist the new authorities in laying the groundwork for a three-year PRGF starting in 2002. The country fell far short in meeting the targets of the SMP and the IMF has begun a review of the situation with the new government with the objective of negotiating a new PRGF in mid-2002. After several months of satisfactory implementation, the program will be presented to the IMF’s Executive Board, possibly in the second half of 2002.

1.33

In 2001, growth in GDP was positive (3 percent) but the decline observed in the previous year continued (see Table 1.2). The biggest slowdown was in the agricultural sector, owing to a severe drought and the collapse of international coffee prices. The immediate prospects for Nicaragua are not bright. For 2002, the serious macroeconomic imbalances and an external situation that continues to be adverse, despite the recovery in the United States, will continue to be reflected in very low growth. However, the figure could rise to 5 percent in 2004-2005 if the authorities are able to create a context that promotes economic growth and if the world economy continues to recover. The Nicaraguan economy is expected to recover by the middle of this decade, as a result of exports and private investment in response to policies to promote the country’s competitiveness on international markets.

1.34

It should be noted that the macroeconomic indicators in Table 1.2 presented as percentages of GDP are seriously skewed by a substantial under-estimation of GDP. The IDB and other international institutions are cooperating with the government to correct this problem.

TABLE 1. 2. MAIN MACROECONOMIC INDICATORS AND PROJECTIONS 1997 1998 1999 2000 2001 2002 2003

GDP (change) Inflation (Dec./Dec.) Gross fixed investment/GDP External debt (with HIPC debt relief)/GDP Total Internal debt /GDP Total debt/GDP Fiscal deficit nonfin. pub. sect. before donations (% of GDP) Donations (% of GDP) BOP current acct. deficit (% of GDP)

2004

2005

5.1 % 7.3 %

4.1 % 18.5 %

7.4 % 7.2 %

5.5 % 9.9 %

3.0 % 4.7 %

1.5 % 6%

3.5 % 5%

4.5 % 4%

5% 4%

21.5 %

23.1 %

30.1 %

26.1 %

24.8 %

24.3 %

24.3 %

25.2 %

25.5 %

305 %

304 %

296 %

275 %

251 %

77 %

80 %

81 %

81 %

92 %

79 %

72 %

66 %

69 %

70 %

67 %

63 %

60 %

397 %

383 %

368 %

341 %

320 %

147 %

147 %

144 %

141 %

7.3 %

3.0 %

12.5 %

14.6 %

16.1 %

13.0 %

10.6 %

10.3 %

10 %

5.4 %

3.8 %

8.7 %

7.3 %

6.1 %

6.1 %

5.0 %

4.5 %

4%

47.1%

39.6 %

49.3 %

37.8 %

38.8 %

32.8%

30 %

28 %

26 %

Source: Banco Central de Nicaragua, projections based on a consistency model.

1.35

The Heavily Indebted Poor Countries Initiative contributes to Nicaragua’s macroeconomic stability by reducing the external debt. The total reduction of the

-10country’s debt could be as high as US$3,267 million in net present value or 72 percent of the net present value of the external debt in 2001. The present value of the IDB’s contribution is US$386 million, which is the second highest.9 The figure for the Central American Bank for Economic Integration (CABEI) is US$435 million (the highest) and for the World Bank it is US$189 million.

1.36

Nicaragua reached the Decision Point in the HIPC process in December 2000, when it became eligible for interim debt service alleviation. This alleviation could reach a maximum of one third of the total alleviation described in the preceding paragraph. The two main conditions for obtaining an irreversible reduction of the debt under the HIPC Initiative are concluding a PRGF arrangement with the IMF and executing the SGPRS for a period of one year. The Culmination Point could be reached in 2003. The effects of the HIPC process on the country’s debt situation and on its debt with the IDB and service on that debt are presented in Annex III.

E.

Response to the challenges

1.37

This BCS outlines the Bank’s response to the challenges that have been presented in this chapter.

9

The face value is US$726 million.

II.

EVALUATION OF THE STRATEGY AND THE PORTFOLIO

A.

General considerations

2.1

This chapter includes a brief overviewof the Bank’s experience in implementing the strategy established for the period 1996-2001. It summarizes the main achievements and problems in portfolio execution and the lessons learned. The new BCS is generally in agreement with the themes for the future proposed by a draft version of the Country Program Evaluation (CPE) as noted in Box 2.1.10

2.2

The strategy established for the period was approved by the Board of Executive Directors in the Country Paper of October 1996. The strategy was implemented until 1998, when it was revised to address the destruction caused by Hurricane Mitch. Although the strategy continued to be valid, it needed to be adjusted to bring it into line with the plan for the reconstruction and development of Nicaragua.

Box 2.1. Nicaragua: Recommendations of the Country Program Evaluation (CPE) and the BCS The CPE suggested consideration of the following four themes for the future: (i) Prioritization of growth. (ii) Bank leadership aimed at improved coordination between the country and the international community. (iii) Enhancement of accountability mechanisms. (iv) Work toward the reduction of the volatility, unpredictability and pro-cyclicality of aid disbursements.

The BCS is consistent with the first three themes. Consonant with the emphasis on economic growth expressed by the first pillar of the SGPRS, the first strategic approach of this BCS also prioritizes growth as a necessary condition for poverty reduction in Nicaragua. As leader of the Consultative Group for Nicaragua, the Bank will encourage country leadership in the definition of effective coordination of international agencies oriented toward meeting the country’s development goals. The enhancement of accountability mechanisms is a central thrust of the BCS’s second strategic approach.

The fourth point concerning volatility, unpredictability and pro-cyclicality of aid is still a working hypothesis, and will be given further consideration.

2.3

The country asked to have loans reformulated to cope with the situation at that time, and US$55 million were identified from programs in execution. The immediate purpose of the reprogramming was to repair infrastructure that had been damaged or lost and to assist the population with its most pressing needs. Funds were programmed to reactivate agricultural production, protect the health of vulnerable groups that had been affected, and repair schools and economic infrastructure (roads and electricity).

2.4

The consultative groups for Nicaragua played a crucial role in this situation, particularly the 1999 consultative group for the reconstruction and development of Central America after Hurricane Mitch and the Central American consultative group that met in February 2001. In addition to promoting reconstruction, the

10

Office of Evaluation and Oversight, Country Program Evaluation: Nicaragua: 1991-2000, November 20, 2002, Draft submitted to the Programming Committee of the Board. RE-272. At the time the BCS was completed, the final version of the CPE was not available.

-12consultative groups supported the Bank’s efforts by committing funds for the country’s socioeconomic development.

B.

Development of the strategy 1996-2001

2.5

The main objective was to support the country in achieving sustained and equitable development. Four strategic areas were selected for Bank intervention: (i) external debt reduction; (ii) poverty alleviation and human capital development; (iii) promotion of the private sector and reactivation of production; and (iv) optimization of the use of natural resources. The strategy also identified two necessary conditions: maintaining the stability of the economic system and consolidating structural reforms.

2.6

The strategy was developed in an international economic climate that favored growth. However, the natural disaster caused by hurricane Mitch drastically altered the conditions and needs envisaged when the strategy was designed, particularly in the social assistance area.

2.7

Stability of the economic system and consolidation of structural reforms.

During the time the strategy was in effect, GDP grew by a respectable average of 5 percent a year. Although it is difficult to measure the Bank’s contribution to the country’s economic growth, the presence of major economic policy reforms that the government introduced with support from the Bank and other international lending agencies contributed to that growth. The reforms included tariff reduction, negotiation of free trade agreements, privatization of public companies, strengthening of bank supervision, reform of the pension system, a start on strengthening the justice system and a law that facilitated the settlement of property disputes.

2.8

The results of the strategy have not been uniform in all areas, but two merit special attention. The strategic area of external debt reduction is in the process of being successfully implemented. Under the HIPC process led by World Bank and the IMF, and with extensive IDB participation (see Chapter I), Nicaragua has already obtained temporary debt service alleviation and is in the process of obtaining a 72 percent reduction in its present value. One third of the reduction will be financed by multilateral institutions, and the Paris Club and bilateral donors will contribute the other two thirds.

2.9

The strategic area of poverty reduction and human capital development is an excellent example of the Bank’s capacity to respond to changes in a dynamic atmosphere. Initially, the tools or programs were not sufficient to achieve the objectives outlined in the strategy. The Bank responded rapidly to the gaps found.

To address the lack of technical and institutional capacity, it financed the design and implementation of the Technical Secretariat of the Office of the President (SETEC), the lead agency responsible for making social needs compatible with economic policy which, subsequently, became the institutional anchor and interlocutor in the formulation of future programs.

-132.10

Immediately afterwards, the social safety net program was prepared, which had a high impact on the development of groups living in extreme poverty and served to bridge gaps in basic health and education services.11 For example, the program brought about a net rise of 30 percent in the number of children covered by growth monitoring and promotion programs and of 17 percent in the number of children receiving immunization at appropriate ages, in comparison with nonbeneficiary poor families. The program also led to a net increase of over 28 percent in enrolment of children living in extreme poverty in the first four grades of primary school, in comparison with nonbeneficiary families.

2.11

In response to the devastation caused by hurricane Mitch, the Bank reallocated funds to assist in the emergency and in reconstruction of the country. At least 2,500 schools, 350 health care units and 50 social welfare units were reconstructed and at least 45 water projects were built. The quality of the projects was high and the vast majority will almost certainly be sustainable.

2.12

To respond to the new opportunities created by the birth of the HIPC Initiative, the Bank supported the country in designing two innovative instruments: (i) the Supplementary Social Fund, a plan for channeling resources from the international community and protecting social spending; and (ii) a program to facilitate implementation of the SGPRS.

2.13

These examples permit the Bank to infer that – although work remains to be done to achieve the country’s poverty-reduction goals – the efforts made thus far have contributed significantly to improving the indicators reported in Table 1.1.

C.

Development of the Bank’s portfolio, 1996-2001

2.14

At 15 May 2002, the Bank’s portfolio in Nicaragua was composed of 82 operations for a value of US$705.7 million, as shown in Table 2.1.

TABLE 2.1. COMPOSITION OF THE PORTFOLIO Type of operation Projects Technical cooperation MIF Small projects PPF line of credit IIC PRI TOTAL

Number of operations 31 21 20 3 1 5 1 82

Amount (US$ million) 629.6 6.2 13.0 1.4 5.0 20.5 30.0 705.7

2.15

Of the 31 projects in the current portfolio, 27 were approved during the time that the 1996-2001 strategy was in effect. Execution of this portfolio has generally been satisfactory, with an average of 20 percent of available funds disbursed annually, for a five-year execution period per project. These results have been possible despite the difficulties mentioned in the following paragraphs.

11

The preliminary evaluation performed by IFPRI concluded that “looking at the impact of the social safety net the pilot stage of the project can be judged a success.”

-142.16

Of the 31 projects, 7 were identified by the Bank’s Project Alert Identification System (PAIS) and placed under alert status and were being subjected to a close monitoring by COF/CNI.12

2.17

The portfolio was affected by the weak institutional capacity of the executing agencies and the difficulties presented by projects that were being carried out by several executing agencies concurrently. High staff turnover in the institutions, chiefly on account of political appointments, increased the difficulties of project execution.

2.18

Two cases in the portfolio merit special recognition. In the first, after receiving information that some funds from a program had been used to contribute to the governing party’s political campaign financing, the Bank immediately suspended disbursements and conducted a special audit. As a result, the institution in charge of the program repaid the funds, adopted a code of ethics and improved its internal audit systems to prevent similar situations from recurring.

2.19

In the second case, the Bank did not disburse funds for a sector operation since one of the conditions stipulated in the loan contract had not been complied with. The new government has been able to correct that situation.

2.20

Both cases and the visibility they had with the government and the international community have helped to affirm the Bank’s role as a leader in promoting transparency in government spending and in the fight to combat corruption.

D.

Lessons learned for future strategy formulation

2.21

Transparency and the fight to combat corruption. These are highly important areas that the Bank must monitor continually, particularly on account of the public perception that there is a systemic problem of corruption in the country’s governments. Periodic supervision by the Bank, supplemented by external audits and timely presentation of audited financial statements, can provide some degree of certainty that the Bank’s funds are used for the purposes for which they were intended and are not being illicitly diverted or appropriated. Future Bank action is required to support efforts to improve the management of public funds, which is included as part of the new BCS (see Chapter III).

2.22

Flexibility and innovation. Although the strategy seeks to create a coherent set of instruments to achieve the objectives, it is impossible to anticipate every possible event or circumstance. Strategy is designed in a set of circumstances that can change rapidly and drastically, which means that it should be flexible enough to adapt to the new situation. The case of the social component is an excellent example. The Bank not only reacted quickly and effectively to the new situation in the country, but it did so with innovative programs.

2.23

Focus. Nicaragua is a country facing large challenges in different areas. Therefore, the limited FSO resources demand that the Bank’s intervention be focused and include indicators of results. Having indicators makes it possible to supervise execution of the Bank’s country strategy and to directly and indirectly evaluate its contribution to the country’s development objectives.

12

As of December, 2002, only four of these seven programs remained on alert status.

-152.24

Suitable scaling of the strategy. The strategy should be targeted. This will help to increase the impact of Bank operations on achieving the objectives. However, it should be kept in mind that, given the limited funds available, even full implementation of the strategy could be a necessary but insufficient condition.

Only in very special cases, such as debt reduction where the convergence of financial resources is high in comparison with the total problem, would it be realistic to expect that an ambitious goal can be attained.

2.25

Institutional capacity. One of the main systemic problems in the Bank’s portfolio in Nicaragua is the difficulty that institutions encounter in executing projects.

Although this limitation is present in most government agencies, it is particularly serious in the social sectors, which is a priority area in the proposed strategy.

Therefore, the interventions proposed in the strategy should be based on a simply designed institutional framework in order to reduce the risk that operations cannot be executed efficiently.

2.26

Project coverage. Coverage should be carefully determined. Projects that are relatively new should be carefully scaled and, preferably, involve moderate amounts. This would permit the institutions to fine-tune their processes for adequate project execution and avoid the high opportunity costs that are incurred when resources are paralyzed.

2.27

Convergence of donors. The Bank’s sphere of influence in comparison with needs is quite limited, even in small countries like Nicaragua. Accordingly, it needs to seek convergence with the resources provided by bilateral donors and multilateral institutions to achieve greater impact (see Chapter III). In turn, this strategic convergence would be a great help in minimizing local counterpart requirements, which is particularly important in a climate of fiscal restriction, such as the climate that could prevail during execution of the proposed strategy.

III.

STRATEGY, OBJECTIVES AND THE AGENDA FOR THE BANK’S DIALOGUE WITH THE COUNTRY

3.1

The vision that guided preparation of the Bank’s country strategy (BCS) is Nicaragua’s strengthened growth and poverty reduction strategy (SGPRS). The vision is consistent with the priorities of the Bank’s institutional strategy and with the Bank’s new poverty reduction and social equity strategy currently in preparation.

3.2

The objective of the BCS, which will guide Bank actions for a period of about four years, is to support the Nicaraguan government in determining and carrying out actions to achieve the targets of the SGPRS. The actions included in the Bank’s lending program are focused and consist mainly of short- and medium-term investments and technical cooperation projects to address the three challenges identified in Chapter I of this BCS. Box 3.1 summarizes the proposed structure for the BCS.

3.3

The BCS matrix given at the beginning of this document summarizes the portfolio in execution and new operations to support the proposed strategy. It also presents a summary of the government’s priorities and the main actions of other international lending agencies.

Box 3.1. Structure of the IDB’s country strategy Vision guiding the preparation of the BCS Poverty reduction and achievement of the targets established in the Strengthened Growth and Poverty Reduction Strategy (SGPRS)

Objective of the BCS To lay the groundwork for achieving the goals of the SGPRS

Stragegic approach 1 Economic growth

Macroeconomic policy

Competitiveness and production

Strategic approach 2 Governance

Strategic approach 3 Productivity of the very poor

-17Box 3.2. The IDB, the international community and coordination of activities The IDB and the international community. The IDB is the largest lending agency in Nicaragua with average annual disbursements of US$88 million in 1997-2001, followed by the World Bank with US$85 million. The largest bilateral institution is Taiwan, with an average loan portfolio of US$26 million over the same period.

The two largest donors are Japan and the United States, with average annual disbursements of about US$50 million in 1997-2001, followed by Sweden and Denmark (US$21 million). Other countries with annual disbursements of more than US$5 million are Germany, the Netherlands, Spain, Norway, Switzerland, Finland and Taiwan. The support provided by United Nations agencies has averaged US$30 million a year.

The IDB was the institution that offered the largest sum at the consultative Group meeting in May 2000 (34 percent of the total of US$2,593 million). The country making the largest contribution was Spain (9 percent of the total). The sum of the contributions by the other multilateral entities was 31 percent and other countries contributed the remainder (26 percent).

Coordination. Given the country’s dependence on donations and concessional loans, actions by the international community are highly visible in Nicaragua. Over the years, effective methods have been developed for exchanging information among international entities but there is still a need for better coordination of their activities.

The current government has taken important steps to: (i) improve coordination among donors; (ii) improve the identification of areas where assistance is needed most; and (iii) improve systems for accountability and monitoring of donor activities.

In its capacity as chair of the consultative groups and in the process of formulating its strategies and programs, the IDB takes great pains to ensure good coordination with the international community. Based on its close cooperation with the World Bank in preparing their respective strategies and excellent exchanges of ideas with bilateral entities, the IDB will improve its coordination with other international entities during implementation of this BCS. This BCS takes account of programs being implemented by other agencies (see Annex IV) that are related to the strategy (see the BCS matrix at the beginning of this document).

This BCS has been enriched by different comments and suggestions made at meetings with the World Bank and the IMF in Washington (10 May), the international community in Managua (19 June) and a meeting on strategy with the World Bank (9 July 2002). It is highly important for the BCS to take this confluence of interests into account, seeking to generate synergies, avoid unnecessary duplications in programs and achieve their coordinated execution.

In the forthcoming CG for Nicaragua, expected to take place in 2003, the IDB will take advantage of its leadership role to encourage and support the government work with international agencies to develop sector strategies with clearly defined goals.

A.

The lending program

3.4

The maximum financing for the lending program for Nicaragua will depend on the resources available in the Fund for Special Operations and on Nicaragua’s progress in economic and social reforms, compared to other countries that are also eligible for FSO financing. If Nicaragua makes faster progress that other eligible countries, its allocation will increase under the country institutional and policy evaluation (CIPE). Thus the triggers determining Nicaragua’s share of FSO resources will be measured by its relative progress in the four areas included in the CIPE: economic management, structural policies, policies for social inclusion and equity, and public sector management and institutions.

3.5

Table I.1 in Annex I lists the projects that would form part of the annual program for 2002-2005. The final determination of the lending program will also depend – apart from the availability of the FSO – on the results of the programming negotiations between the government and the Bank.

3.6

Scenarios. The FSO allocation for Nicaragua for the period 2002-2003 is US$211.2 million, which constitutes the base scenario (Table 1.1, Annex I). A high

-18scenario is also considered, which assumes the allocation to Nicaragua of an additional US$34.2 million in 2003. The increase would finance the PPP integration program in 2003 instead of in 2004-5. For 2004 and 2005 the BCS proposes an investment pipeline in which the base scenario assumes that FSO funds will remain at US$211 million for two years. If major progress is made in the reforms, the high scenario increases the funds available for Nicaragua in that period by US$40 million. However, if there are problems in implementing the reforms, the low scenario assumes a US$40 million reduction in the funds available.

3.7

Over the four-year period, the estimate for the funds available in the base scenario is US$422.2 million. The figure is US$382.2 million in the low scenario (US$40 million less than in the base scenario) and US$496.4 million in the high scenario (US$74.2 million more than in the base scenario).

3.8

To maximize the probability of achieving the objective of the BCS and its three strategic approaches, the technical-cooperation projects will focus on those same objectives and approaches.

3.9

The three strategic approaches. This section presents the Bank’s three strategic approaches and the main lending and technical-cooperation activities that respond to the challenges identified in Chapter I. Within the strategy framework presented in this section, the Bank will explore the possibility of undertaking productive and social investments in ‘clusters’ of activities with high potential for making a sustainable contribution to income and job creation (see the reference to this priority in the introduction to this BCS). The synergies among the three approaches should be underlined. For example, strategies to boost competitiveness could have a large impact on boosting the productivity of the poor. Improvements in governance would improve the economic climate and, therefore, competitiveness.

1.

Strategic approach 1: Economic growth

3.10

As mentioned in Chapter I, economic growth is a necessary condition for poverty reduction in Nicaragua. Based on experience and considering the actions of other international lending agencies, this BCS has determined two key areas for IDB support: strengthening fiscal policy (within the macroeconomic policy area) and promoting competitiveness and production. The proposed goal for this strategic approach is to help the country achieve growth in GDP of 5 percent in 2005, with the increases in GDP in 2002-2004 proposed in the SGPRS.

3.11

Strengthening fiscal policy. The IMF is the lead institution in the support offered by international financial institutions for macroeconomic stabilization in Nicaragua. The IDB and the World Bank have also participated in IMF missions, with the IDB backing actions to strengthen the financial and pension systems.

3.12

Under the first challenge described in Chapter I, the main purpose of strengthening fiscal policy is to reduce the fiscal deficit. This is a key to reducing the need for deficit financing by the Central Bank. It is also an important condition for reducing the size of the internal debt under a PRGF arrangement with the IMF and for allaying the risk of a crisis caused by excessive domestic borrowing by the government. Further, reduction of the deficit will ease the pressure on interest rates

-19thanks to lower demand for credit by the government and will increase the credit available to the private sector to finance productive activities.

3.13

The main actions proposed by the BCS in the field of fiscal policy include: (i) technical support for the process of transparency in government operations and for the tax reform launched by the country, which seeks to increase revenues by broadening the tax base; (ii) technical assistance to rationalize public spending, particularly current spending; and (iii) technical and financial support to bring about the conditions necessary to reach the Culmination Point of the HIPC Initiative, as soon as possible.

3.14

In the short term, it is hoped that successful negotiation of the PRGF by the government and the IMF will help to improve the country’s fiscal situation. Bank support will be coordinated with the targets established by the government and the IMF under the PRGF.

3.15

Promoting competitiveness and production. To boost exports and economic growth, it is important to continue and step up economic reforms that will spur the investments and increases in capital necessary to finance them, through direct foreign investment or local capital.

3.16

Owing to the need to rationalize public spending, thereby reducing the fiscal deficit, direct foreign investment should be maximized, particularly in the infrastructure needed to increase exports, which mainly involves transportation infrastructure, ports and electric power. Public investments will have to be limited to the most urgent priorities which are absolute necessities for stepping up the production of tradable goods and services, hence exports. Sustainable programs that increase investment and the production of tradable goods with high economic returns in the short term will be supported. Programs of this kind could promote production and the productivity of the rural economy, the workforce, and small and medium-scale producers through the effective use of technology, job training, implementation of effective management systems and promotion of sustainable credit programs.

3.17

An aggressive program is envisaged, in which the public sector forges partnerships with the private sector to make the necessary investments. Specifically, a partnership with the private sector to find alternatives outlets for exports to Atlantic markets, particularly the United States and Europe, as quickly as possible.

3.18

Bank program. Bank actions to strengthen fiscal policy will be framed in the context of the IMF’s PRGF and will draw on the experience of the tax administration program approved in 1999. The tax modernization study already conducted by the Bank will also be used.13

3.19

The Bank’s program will cooperate with the government in promoting increased competitiveness and production, while setting the stage for the private sector to respond favorably to the brighter investment climate. The Bank will support the

13

Juan Carlos Gómez Sabiani, “Nicaragua: Desafíos para la modernización del sistema tributario”, April 2002, study contracted by the IDB.

-20integration process and will finance the investments in infrastructure defined in the PPP. It will also promote actions to boost production by small producers. The main actions are described below. a.

Actions to strengthen fiscal policy14

3.20

Loans. Two loans will lay the foundation for strengthening fiscal policy. The first will be a sector loan for modernization of the state and fiscal reform (2003). It will back government actions to improve the regulatory framework for investments and the transparency of procedures, based on the guidelines established in the study on modernizing the tax system. The second sector loan for fiscal modernization (2004-5) will strengthen fiscal policy. The goals of these two loans will be coordinated with those of the PRGF.

3.21

Other actions. To bring country’s external debt down to sustainable levels, the Bank will continue to participate in the HIPC process, which involves cooperation with the government and other international lending agencies for compliance with the HIPC conditions. Regarding the internal debt, the Bank will finance a TC to help the country explore and propose alternatives to bring this debt down to more sustainable levels. The TC will complement Bank loans and the PRGF, that aim to lowering the fiscal debt through improved fiscal policy.

3.22

One particularly important area for the IDB is implementation of the SGPRS. One condition for reaching the Culmination Point in the HIPC process and making the debt alleviation irreversible, is implementation of the SGPRS for at least one year (see Box 1.2).

3.23

The Bank will continue to cooperate with IMF missions, taking the lead in actions targeted to the financial and pension systems. In addition to contributing to the dialogue on financial policies with the authorities and other international financial institutions, IDB participation in these missions serves to frame the general context of Bank support for financing small and medium-scale producers. The Bank will maintain its leadership in the financial area, which is a key for boosting competitiveness and production.

3.24

To strengthen the tax system, the IDB will participate with the World Bank in 2002 in a country financial accountability analysis (CFAA). b.

Actions to boost competitiveness and production

3.25

The Bank has programmed six new loans and several technical-cooperation projects to support competitiveness and higher production. All these operations support the country’s attempts to increase growth through expanding trade, tariff reduction and integration, especially in the frameworks of the Central America Free Trade Agreement (CAFTA) and the Plan Puebla Panamá (PPP). Box 3.3 summarizes this support.

14

See Annex I for a description of the objectives of each operation. The Bank’s country strategy matrix at the beginning of this document also mentions the main loans and technical-cooperation projects under way, which support competitiveness and other areas included in the strategic approaches.

-21Box 3.3. Bank Group support to economic integration and trade liberalization The IDB will provide ample support to economic integration and trade liberalization over the period spanned by the BCS. A summary of key actions include: • • • • • • • • • •

A loan to strengthen the country’s negotiating capacity.

An innovation loan to improve competitiveness through stronger cooperation between the public and private sectors.

Two loans to support increased competitiveness and production of small producers.

PRI support to the private sector in four strategic areas: energy, transportation, water and sanitation, and telecommunications.

IIC financing of small and medium enterprises through financial intermediaries and direct investment.

Seven MIF TCs to increase the country’s competitiveness.

Plan Puebla-Panamá Integration Loan.

Feeder roads loan in support of increased production Study on the benefits and challenges of the TLC. Policy dialogue to facilitate the transition toward regional integration and freer trade of Central America with its principal trade partners.

3.26

Loans. Two loans will directly support Nicaraguan competitiveness. The loan to strengthen negotiating capacity (2002) will help the authorities to open up markets under new programs for economic integration and trade liberalization. The competitiveness innovation loan (2003) will strengthen cooperation between the public and private sectors. This is particularly important for forging key partnerships between the two sectors, which will permit the private sector to increase its financing for basic investments that the public sector is unable to undertake owing to the restrictions on public spending that will prevail during the period that the BCS will remain in effect.

3.27

Two operations will contribute to higher production by small producers. A global multisector loan (2003) will support development of the private entrepreneurial sector by expanding the financial supply, and the loan to reactivate rural production (2002) seeks to provide more opportunities to boost rural family income, mainly through the provision of small infrastructure works. These resources will permit the private sector, particularly small producers, to respond to the improvement in the investment climate and to new international markets that open up.

3.28

PRI will explore operations with the government in four strategic areas: energy, transportation, water and sanitation, and communications (see Table I.4, Annex I).

3.29

For its part, the IIC will support the private sector through medium- and long-term financing for small and medium-sized enterprises through financial intermediaries and direct investment. Sectors identified as having good investment potential are agriculture, agri-business, power generation and textiles (in-bond industries).

3.30

It should be noted that the IDB’s rural development program has been designed in close communication with the World Bank, which is making large investments, particularly in agricultural technology, and with other international financial institutions. The Bank has also made contact with the European Commission regarding major investments that the EC has programmed for the same sector in 2003. The IDB has offered to exchange information and to cooperate with the EC in preparing the investments.

-223.31

The Bank has also programmed a Puebla-Panama Plan (PPP) integration loan (2003) and a loan for feeder roads (2004-5) that will back key investments for increased production. It is expected that a large part of these investments will be linked to rural development (roads and rural electrification), physical integration to reduce production costs in the Puebla-Panama corridor and other integration projects identified in the PPP. They include disaster prevention and border integration of the Gulf of Fonseca and the San Juan Basin.

3.32

Technical-cooperation projects. Three technical-cooperation projects that have been planned for financing through the Multilateral Investment Fund in 2002 will play an important role in regulatory strengthening and in boosting the country’s competitiveness. They include operations to improve airport security and to support the Office of the Superintendent of Banks and the entity responsible for multisector regulation.

3.33

The MIF has also identified the following potential areas for action: (i) support for the Ministry of Development, Industry and Trade (MIFIC) in establishing a single window for the registration of new businesses; (ii) management of eco-efficient systems; (iii) improvement in the operation of the financial market, particularly a primary mortgage and underwriting system; and (iv) the productive linkage of SMEs in the tourism industry. Annex I, Table I.3, summarizes these and other operations proposed by the MIF to promote competitiveness and production.

3.34

To help small producers make the most of opportunities to expand their production, the Bank has planned two technical-cooperation projects for 2002, to support unconventional financing for farming and the transfer of agricultural technology.

3.35

Additional technical-cooperation projects will be required for 2003-2005 to lay the groundwork for partnerships between the public and private sectors. Over the same period, a Bank-financed TC will help the government identify ‘clusters’ that offer good potential for job and income creation. In response to the interest expressed by the government in this area and the potential it offers to assure the sustainability of investments, it has been made a priority for economic and sector analyses (see Annex II). Once the clusters are identified, they could identify priority regions for new investments and could be key in determining future areas of growth by sectors and geographic regions. Even though work remains to be completed in this area, the government expects to work with the private sector to encourage foreign investment in tourism, industry and agriculture.15 2.

Strategic approach 2: Governance

3.36

The objective of this strategic approach is to have efficient, effective and ethical government with the capacity to achieve the goals of the SGPRS, that merits public trust. The indicator proposed by the BCS to measure success in executing this strategic approach is a higher ranking for Nicaragua in governmental and bureaucratic efficiency in the World Bank’s Governance Index.16

15

Gobierno de Nicaragua, “Estrategia Reforzada de Crecimiento Económico y Reducción de la Pobreza, Primer Informe de Avance” (Segundo Borrador), October 2002, page 6.

See the BCS matrix at the beginning of this document.

16

-233.37

The Bank’s strategy for achieving this objective covers three areas: (i) establishing a suitable legal foundation for effective and efficient government; (ii) undertaking sweeping actions to modernize and reform the three branches of government; and (iii) making full use of technology. Nicaragua has made considerable progress in the first area, including passage of a legislative platform to strengthen the three branches of government. This legislation includes the Contracts Law, the Law governing the Office of the Comptroller General and the Administrative Integrity Law. The country has also established the National Integrity Commission and made progress in a national plan to combat corruption. It is expected that major legislation will continue to be passed during the period that this BCS will be in effect, including a civil service law and completion of the national plan to combat corruption. Although it is the government’s responsibility to carry out these activities, the Bank and the international community have been cooperating through the policy dialogue and technical advisory services.

3.38

Work is under way in the second area and is about to begin in the third. These areas are the subject of the Bank’s program presented in the next paragraphs of this BCS.

3.39

All these actions will support the principles announced in the SGPRS, which proposes consolidation of the rule of law, institution building, greater transparency and effectiveness in public spending, institutionalization of a culture of integrity, promotion of democracy through gradual decentralization, participation by civil society and respect for human rights as the cornerstones for good governance. The SGPRS also recognizes that an efficient, transparent and impartial system of justice is a fundamental condition for attracting the necessary private investments and achieving growth rates that make it possible to reduce existing poverty levels.

3.40

Bank program. The Bank’s program during the period of the proposed BCS will give top priority to the second area identified above, which is the implementation of intensive actions for modernization and reform of the three branches of government. Although the Bank’s actions will support the three branches, the greatest emphasis will be placed on reform of the executive branch and on monitoring a program that has already been approved to support the judicial branch. Headway will also be made in some areas linked to strengthening of the legislative branch.

3.41

The Bank has played a leadership role with regard to the executive branch. The World Bank and other international lending agencies also have important programs in this area. The three main focuses of international support that will continue in the next four to five years include: (i) support for the integrated financial administration system, led by the World Bank; (ii) support for the procurement system, led by the IDB; and (iii) strengthening of the internal auditing system, led by the IDB.

3.42

With respect to the two areas where the Bank has loans in execution, the procurement loan focuses on 10 government institutions, with the objective of establishing a framework that will ensure transparency in government procurement processes. This operation has received contributions from several bilateral sources, including USAID, Sweden, the Netherlands and Norway. The Bank is supporting the internal auditing system through a loan approved in 2002 for modernization of

-24the Office of the Comptroller General (CGR). The main focus of the loan is to strengthen the auditing system, mainly in the executive branch. Germany and Spain have contributed to this operation through consulting services and the Bank has begun discussions with other entities that could potentially provide additional support.

3.43

In 2004-5, the Bank plans to develop a new operation to back the national plan to combat corruption. The operation will include the establishment of processes to prevent corruption and ensure transparent procedures in all government agencies.

For the effort to combat corruption to be a success and to awaken the interest and active support of the public, parallel actions are required to build the legal framework, install the institutional scaffolding (the CGR, the Department of Justice, the Office of the Attorney General and the Human Rights Commission) and gradually develop a culture of integrity, which is the objective of the national anti-corruption plan and the actions to implement it.

3.44

With respect to the judicial branch, the Bank is executing a loan to strengthen the justice system. This support has been coordinated with USAID, the UNDP, the European Union, Sweden and Spain, which have helped strengthen the National Judiciary Commission.

3.45

The Office of the Comptroller General (CGR), referred to above, is an autonomous entity that reports administratively to the legislative branch and whose authority extends to the entire public sector. In 2004-5, the Bank’s program envisages an operation to support implementation of an integrity law. The operation will be an extension of the internal auditing system and will build up the CGR’s integrity unit.

3.46

Based on the priorities established in the SGPRS, decentralization of government is also an important element in modernization of the public sector. The Bank supports the strengthening of municipal governments and community participation through various loans in execution (see BCS matrix at the beginning of this document).

3.47

Almost all the operations financed by the Bank include institution-building components and this priority will continue to be supported over the period 20022005. Operations under way targeted directly to institutional strengthening include one loan and several technical-cooperation projects that back implementation of the SGPRS, and a loan that finances restructuring of the Ministry of Family Affairs.

3.48

In 2002-2005, the policy dialogue will attach high priority to two key areas: the civil service law and greater independence for the Central Bank of Nicaragua and the Office of the Superintendent of Banks. One particularly important action is approval and implementation of the civil service law, which will facilitate the selection and retention of competent human resources in the ministries and line agencies.

3.49

As for decentralization of the public administration, the key actions of the Bank include a loan under way for municipal strengthening. Several loans in execution – for example the health and education loans and the loan for development of the Atlantic Coast – promote the decentralization of government activities. The

-25program for 2002 includes two technical-cooperation projects to bolster local development.

3.50

In the third area of the Bank’s strategy – making full use of technology – a technical-cooperation project is slated for 2003, which will support the government in preparing a plan of action to modernize the public sector. This study will lay the groundwork for process reengineering, the adaptation and training of human resources, continuation of modernization of the state (e-government) and the introduction and use of technological innovations. The experience gained in this technical-cooperation program will be tapped to develop a technical-cooperation loan in 2004-5.

3.

Strategic approach 3: Productivity of the very poor

3.51

Top priority will be attached to social and productive investments to benefit the very poor, particularly under programs with very positive impacts in the short term.

This strategic approach is especially important for the government and the Bank, owing to its tie-in with compliance with the goals of the SGPRS. All operations support these goals. The main indicator for achievement of the objective of this strategy is a reduction in the number of people living in extreme poverty from 17.3 percent in 1998 to 14.3 percent in 2005 (which is the indicator established in the SGPRS).

3.52

For the purposes of focusing resources under this strategic approach, very poor groups include people living in poverty or extreme poverty. Investments will be made in human resources to enable them to improve their own incomes. Based on the evolution of the government’s strategy to promote sustainable investments in the social sectors, these investments should benefit poor groups living in areas with high potential to contribute to job and income creation.

3.53

The principal actions under this strategic approach include: (i) sustainable social investments, strictly targeted to very poor groups, particularly people living in extreme poverty; (ii) incentives for human capital formation, focused on groups living in extreme poverty, including programs to promote the inclusion of AfroNicaraguans and indigenous peoples; and (iii) cost-efficient programs to generate income and employment for the poor. The Bank’s social programs will continue to include gender considerations.

3.54

The IDB’s actions in the social area have been coordinated with other international lending agencies, particularly the World Bank, whose program contains a large component for the social sectors. In those sectors, the IDB plays a leadership role in social safety nets and secondary and higher education, while the World Bank takes the lead in primary education. The two Banks closely coordinate their support for modernization of the health sector and the Emergency Social Investment Fund (FISE). These loans are fundamental for the prevention of transmissible diseases and for compliance with the millennium development goals, which are incorporated into the indicators for the programs mentioned in the BCS matrix at the beginning of this document.

3.55

Bank program. Within the above-mentioned priorities, the Bank’s program for the period covered by this BCS will stress: (i) attainment of the goals of the SGPRS

-26through social sector loans, social safety nets and the reduction of urban poverty; and (ii) expansion and improvement of the quality of secondary and vocational education, taking account of the importance of establishing linkages between secondary education and the labor market.

3.56

Loans. The program will take advantage of the Bank’s experience in Nicaragua in the areas of education, health care, social protection, water and sanitation and childhood. The new loans give top priority to two social sector operations for 2002 and 2004 that are directly linked to compliance with the goals of the SGPRS. Preparation and implementation of these loans will be coordinated with the World Bank’s Programmatic Structural Adjustment Credit (PSAC) that will also support implementation of key aspect of the SGPRS. Also included are a program to break the cycle of inter-generational transmission of poverty through the social safety net (2002), a program for extremely poor barrios (2004-5), loans targeted to poor groups in urban areas (2004-5), secondary education (2004-5), education for youths and adults including job training (2004-5) and technical education (2004-5).

3.57

Technical-cooperation programs. Several technical-cooperation programs are under way, with direct links to the Bank’s strategy in this area, particularly programs for health services offered by the private sector, secondary education and assistance for children and teenagers. The new technical-cooperation programs will support vulnerable groups such as the disabled (2002) and, in the period 20022005, specific actions that are keys to attaining the targets of the SGPRS, such as literacy (2002) and pre-school education (2002).

B.

The Bank’s institutional strategy

3.58

The BCS described in this document is consistent with the four priority areas of the Bank’s own institutional strategy – competitiveness, social development, modernization of the State and regional integration. With respect to the Bank’s crosscutting objectives, all the actions of the BCS are justified in the frame of poverty reduction. The Bank’s support for the environment was already noted in Chapter I (see section C.2).

C.

Risks in implementing the strategy

3.59

There are three main risks that could seriously affect implementation of the strategy: (i) natural disasters, (ii) adverse external economic conditions that drastically affect the country’s markets, and (iii) the current political situation. In the first case, Nicaragua is located in one of the parts of the world that is most vulnerable to natural disasters, which have cost the country US$4 billion over the last 30 years. To mitigate this risk, the country has been taking legislative, financial and institutional actions to reduce its vulnerability (see Box 1.3). Also with the intention of mitigating the impact of disasters, the Bank will support Nicaragua in promoting an insurance market under the Puebla-Panama Plan, preparation of a financial strategy for coping with natural disasters and technical assistance for the analysis of information to forecast events of this kind.

3.60

Second, despite the fact that the steps that can be taken to mitigate adverse economic conditions that would drastically affect the country’s markets are limited, the Bank is supporting the government’s efforts to lessen the country’s

-27vulnerability. In the present strategy, the Bank’s support to modernize the State, improve public finances and boost the country’s competitiveness, are actions intended to mitigate the impact of adverse economic shocks.

3.61

Current events have led to a tense political confrontation between the legislative and executive branches of government, which in turn has diminished the country’s governance. If this were to continue into the medium term, it would hinder the country’s ability to reach the HIPC completion point. This would deepen the country’s macroeconomic problems and endanger the possibility of an IMF arrangement.

D.

Program performance indicators

3.62

Nicaragua is committed to meeting the goals expressed in the SGPRS. The goals are ambitious and meeting them will require concerted efforts on the part of the Government with ample support from the international community. The majority of the indicators of this BCS reflect this commitment. Nevertheless, the Bank, through the actions undertaken in the framework of this BCS, cannot assume the sole responsibility for meeting these goals. This is principally the responsibility of the Government, but it is shared with the international community. Besides, external factors, such as natural disasters and unforeseen political, economic and financial events, will necessarily contribute to the degree of attainment of the goals established in the SGPRS.

3.63

As a result, an evaluation of the role of the Bank in reaching the indicators would have to consider the issues of attribution and the counterfactual, which have been reviewed by the Board of Executive Directors. 17 Whenever possible, loans and TCs for Nicaragua will specify measurable outcome indicators which will show the degree to which the proposed actions contribute to meeting the goals specified in the BCS.

3.64

The Bank country strategy matrix at the beginning of this document presents two types of indicators: (i) indicators linked to the strategic approaches of the BCS; and (ii) indicators linked to the areas in the strategic approaches. The two are ‘macro’ indicators of results (outcomes) that transcend the outputs of specific operations.

17

OVE, “Development Effectiveness Report”, February 2002 (RE-260).

Annex I Page 1 of 3

SUMMARY OF THE BANK’S LENDING PROGRAM Table I.1. Loans Project name

Scenario (US$ million)

Objective

Low

Base

High

Modernization and strengthening of the Office of the Comptroller General. NI-0160

5.4

5.4

5.4

Rural production reactivation program.

NI-0159 Social safety net II. NI-0161

60

60

60

20

20

20

5

5

5

30

30

30

Low-cost housing program. NI-0064 SUBTOTAL 2002

22.5 142.9

22.5 142.9

22.5 142.9

Global multisector program. NI-0167

30

30

30

Sector loan for modernization of the State and fiscal reform (PBL). NI-0172

20.8

20.8

25

Loan for competitiveness innovation.

NI-0174 Municipal environmental program and the Masaya Watershed. NI-0152 Integration, PPP, NI-0170 SUBTOTAL 2003

7.5

7.5

7.5

10

10

10

68.3

68.3

30 102.5

Anti-mines program Social sector II

-

-

-

Fiscal modernization

-

-

-

Program for urban barrios in extreme poverty

-

-

-

To improve the quality of life of the inhabitants of poor barrios through closer and better coordination for timely access to infrastructure and more earning opportunities.

Administrative integrity National plan to combat corruption

-

-

-

Secondary education

-

-

-

Education for work

-

-

-

Program to modernize technical education

-

-

-

171 382.2

211 422.2

251 496.4

To introduce a policy of integrity in public employment.

To extend the system introduced in 10 institutions under the first project to all institutions in the public system.

To strengthen secondary education by expanding the supply in rural areas and improving educational efficiency and planning.

To strengthen secondary education for the very poor by expanding the supply in rural areas and improving linkage with the job market.

To provide better job training for the poor through institutional reforms, training and the development of labor intermediation.

To expand the use of technology by the government.

To expand the system of rural feeder roads.

To revert rising insecurity and crime rates.

Strengthening trade-negotiating capacity.

NI-0165 Social sector program (PBL). NI-0169

TC loan for e-government Feeder roads Citizen security SUBTOTAL 2004-5 TOTAL 2002-2005

2002 To modernize the CGR, making it a reliable entity thanks to the quality of its human resources, its technical capacity and credibility in the performance of its functions.

To bring about a sustainable rise in rural family income through increases in the productivity of agricultural activities.

To protect people living in extreme poverty by strengthening the institutions in the operating framework and delivering health care, food security and education services.

To boost the government’s capacity to negotiate trade agreements.

To support achievement of the targets for the social sectors by implementing the SGPRS, protecting social spending and promoting reforms in the social sectors.

To strengthen housing markets for low- and middle-income groups.

2003 To support development of the private entrepreneurial sector by expanding the supply of financing.

To promote competitiveness through improvements in public sector procedures.

To establish a conceptual framework including the public and private sectors to boost competitiveness.

To improve the environmental condition of the Laguana de Masaya watershed.

To support integration works identified under the PPP. 2004-5 Prevention and recuperation of handicapped persons.

To support achievement of the targets for 2005-2007 for the social sectors by implementing the SGPRS, protecting social spending and promoting reforms in the social sectors.

To rationalize public spending and follow up on the tax reforms supported by the loan to modernize the financial sector.

Annex I Page 2 of 3 Table I.2. Technical cooperation programs Number TC-0209011

Name

Amount (US$ thousand) 750

Source

Comments

AU

327.5

JF

To finance preinvestment studies identified by master urban development plans.

To provide assistance in launching a housing program for low-income families.

To obtain key information for studying the problems of the disabled.

To support the preparation for environmental risks in the whole country.

To conduct a pilot project to test an unconventional type of pre-school education to improve the readiness of children entering grade one.

To support the design of methods and programs whose objective is to promote local economic development in Nicaragua.

To prepare the meeting of the consultative group.

TC-0012010

Preparation of municipal development projects Support for low-cost housing

TC-0112011

Support for the disabled

300

SF

TC-0208015

Prepare environmental risk maps

300

AE

TC-0112055

Pre-school education

250

SF

TC-0112015

Support for municipal development and the local economy

250

SF

TC-0207007

Preparation of the consultative group meeting Strengthening of URACCAN and training for community leaders Pilot program for functional literacy

150

SF

150

KB

150

SF

Economic and environmental evaluation of Masaya Comprehensive assistance for barrios

94

SC

92

SF

69

SF

TC-0111029

Unconventional mechanism for farm financing Transfer of agricultural technology

60

SF

TC-0103017

Housing workshop

39

FW

TC-0112030

Support for urban planning and environmental management

150

DC

Internal debt reduction

250

SF

Evaluation of Social Programs

250

SF

Pre-school Education

150

SF

Monitoring and mitigation of forestry losses due to pests and fire Modernization of the State and fiscal reform Strengthening of the executive branch

180

SF

300

SF

-

-

Action plan for modernization of the public sector Clusters

-

-

-

-

TC-0106025 TC-0102035 TC-0206019 TC-0207001 TC-0112026

Total

4,261.5

To strengthen the management capacity of community leaders.

To design, implement and evaluate a program of functional literacy targeted to mothers living in extreme poverty.

To evaluate the economic and environmental situation in Laguna de Masaya.

To improve the quality of life of residents in poor barrios.

To find feasible mechanisms for providing financial services for small and medium-scale rural producers.

To study the lessons learned from technical assistance activities financed by the Bank in Nicaragua.

To support the effective development of microlending for housing.

To design instruments for urban environmental management to be implemented in municipal action plans.

To assist the government identify measures for internal debt reduction To support government efforts to determine the most successful and efficient social programs.

To support the design of pre-school education curriculum for the Atlantic Coast.

To help the responsible institutions in the prevention and reduction of forestry losses.

To support actions required by the loan for Modernization of the State and fiscal reform.

To strengthen the system of internal auditing in the executive branch.

To prepare an action plan for modernizing the public sector.

To identify geographic areas and economic and social activities to implement the policy on clusters.

Annex I Page 3 of 3 Table I.3. Multilateral Investment Fund (MIF) Operations, 2002-2003 Number TC-9912013 TC-0201103 TC-0202015 Total

Name Support for the Office of the Superintendent of Banks Multisector regulatory agency Airport security Clean production centers Single window for the establishment of companies Improvement of the primary mortgage and underwriting system Linkage of SMEs in the tourism industry

Amount (US$ thousands) 1,238 500 498 700 1,500 -

Comments To lessen the vulnerability of the country’s financial system.

To improve regulation of the electric sector.

To improve airport security through the modification and adaptation of regulatory frameworks and civil aviation polices.

To promote environmentally clean production.

To simplify the process of registering new companies.

To strengthen the primary mortgage system.

To strengthen the role of SMEs in the tourism industry.

4,436

TABLE I.4. PRI STRATEGIC AREAS Area Energy Transport Water and sanitation Communications

Comments Strategy in this area is three-pronged: (i) to maintain long-term financing with loans to support restructuring and modernization of the electric sector; (ii) to study additional capacity for different types of generation; and (iii) to continue privatizing the sector.

The strategy in this sector is two-pronged: (i) to use technical-cooperation funds to further the study on the best prototype for privatizing the ports; and (ii) once the model for privatization is selected, to prepare bids and concession contracts.

PRI will explore the possibility of supporting the modernization and expansion of the water and sanitation services with the government.

PRI’s strategy in this sector is to study the possibility of financing the final stage in the privatization of the investment program.

Annex II Page 1 of 1

WORK PROGRAM FOR THE COUNTRY AND THE SECTORS Title

Justification

Financial projections

Given the importance of reducing the public sector deficit, it is necessary to have an analysis that identifies sources of financing for the main programs in the SGPRS over the medium and long terms.

Social statistics on ethnic groups

Although poverty rates are higher on the Atlantic coast where the largest concentration of minority groups is to be found, there are no clear statistics on poverty and exclusion broken down by ethnic groups. This information, which could possibly be collected through household surveys, could be very valuable for designing appropriate investments.

Macroeconomic model

Nicaragua should have a macroeconomic consistency model, which would facilitate the simulation of the interaction between economic and financial variables.

Internal Debt Analysis

The internal debt constitutes a heavy burden that impedes private investment and makes the country vulnerable to an economic crisis. The Bank will support a study that will explore alternative financing opportunities to reduce this burden.

Benefits and challenges of the CAFTA

This study will analyze the impacts of the proposed CAFTA on the countries of Central America with emphasis of its benefits and the challenges it poses to the countries.

Governance and poverty

To provide maximum support for poverty reduction, it would be useful to have an analysis of the kinds of corruption that affect the poor most and the most effective programs for responding to these challenges.

Clusters of economic activities

To support the government’s interest in establishing clusters of economic activities to promote sustainable economic growth, areas with high economic potential and activities should be identified that could contribute to the growth of the clusters.

Infrastructure to increase exports.

Investments with high economic performance should be identified to facilitate the exit of Nicaraguan exports through ports on the Atlantic to markets in Europe and the eastern US. It would also be useful to design models that would permit cooperation between the public and private sectors.

Definition of the best areas for investments for poverty reduction

A cost-effectiveness study is recommended to see where funds can be spent best – on social policy or on productive investments to improve the income of the very poor.

Annex III Page 1 of 1

DEBT SUSTAINABILITY INDICATORS Indicator

2000

2001

2002

2003

2004

2005

(US$ million) IDB approvals

113.7

153.5

112.4

98.8

105

105

IDB disbursements

69.6

109.7

148.7

110

110

110

Repayments

20.3

13.6

-1.3 4/

2.6

3.1

10.1

Interest and fees 1/

18.0

11.6

-0.8 4/

3.7

3.9

5.5

Net flow

31.3

84.5

150.8

103.7

103.0

94.4

Net debt to the IDB

885

981

405

512

619

719

(percentages) IDB’s share of the debt (<18%) 2/

1.7 %

2.0 %

0.8 %

1.0 %

1.2 %

1.4 %

IDB debt service/exports of goods and nonfactor services (< 8 %)

4.2 %

2.5 %

-0.2 %

0.5%

0.5 %

1.1 %

Debt service to multilaterals/total debt service (<50%)

67.2 %

41.7 %

22.5 %

31.4 %

14.1 %

16.7 %

IDB debt service/total debt service (< 30%)

30.8 %

18.0 %

8.1 %

12.8 %

17.1 %

20.8 %

Face value of the debt (US$ million) 3/

5,882

5,625

3,620

3,815

3,933

4,022

Value of the debt, net present value (US$ millions)

4,651

4,309

1,320

1,395

1,471

1,542

•

Percentage of exports of goods and nonfactor services

537 %

462 %

128 %

123 %

119 %

115 %

•

Percentage of income (target < 250%)

734 %

609 %

166 %

157 %

153 %

149 %

•

Percentage of GDP

194 %

171 %

50%

50 %

50 %

49 %

916

1,027

1,131

1,247

1,340

1,443

Debt service after the HIPC Initiative (US$ millions)

126.1

116.9

187.7

152.5

122.8

126.7

GDP (US$ millions)

2,397

2,522

2,649

2,794

2,961

3,139

Exports of goods and nonfactor services (US$ millions)

SOURCES: Estimates based on information from the Department of Finance, the IDB and the IMF. 1/ Includes subscriptions and contributions.

2/ IDB guidelines in parentheses.

3/ Reflects the assumed HIPC Initiative reduction for 2002.

4/ Negative numbers reflect retroactive adjustments.

Annex IV Page 1 of 3

ACTIONS UNDER WAY BY THE GOVERNMENT, OTHER AGENCIES AND THE IDB Area

Government actions

Actions by other agencies USAID, SIDA, CIDA, the Netherlands, United Kingdom, Germany and Norway WB, European Union, and UNDP: activities and projects

IDB actions

Relation to the SGPRS and MDGs SGPRS: Fourth pillar (Governance)

Transparency: To improve efficiency and transparency in government procurement and contracting. To support the CGR. Institutional strengthening: To strengthen regional governments in the RAAN and the RAAS.

Presentation of documentation on procurement processes.

Modernization of the judicial system: To strengthen the system of justice.

Modernization and strengthening of the justice system and the judicial branch. National Judiciary Modernization Commission.

Construction of works and performance of studies.

USAID, UNDP, European Union, Sweden, Spain

WB investment in rural electrification UNDP study on mini hydro plants KfW: ENEL

• Support for the electric sector (1017/SF, ATN/MT-6088)

SGPRS: First pillar (Growth)

Appointment of a national commission to draft sector legislation.

NDF, Nordic Fund, KfW, OPEC: complementary works CIDA: drinking water studies

• Sanitation Lake Managua and modernization of water and sewerage systems (978, 1049, 1060 and ATN/MT-7187)

Plan of action to obtain bilateral and multilateral funds.

WB, DANIDA, OPEC, Japan: rehabilitation of roads and bridges

• Road rehabilitation and maintenance (1088/SF-NI) • Northern Pan-American highway and branch highway (957, 1036 and 1049/SF-NI) • Support for technological innovation (1079/SF) • Expansion and deepening of the technology services market • Building the capacity of agencies that coordinate supply and demand • Innovation facility in a controlled frame of action • Agri-food reactivation (1001/SF-1 and 1001/SF2)

SGPRS: Second pillar (Human capital) MDGs: (i) Halve by 2015 proportion of persons without access to safe water; and (ii) Reduce under 5 mortality by 2/3 from 1990-2015.

SGPRS: First pillar (Growth)

Energy: To improve the reliability and efficiency of electric power service. To expand the SIEPAC connection.

To facilitate inclusion of the private sector in the SIN. Sanitation: (i) To improve sanitation and the environment; (ii) to improve management of the sector institution.

To strengthen the regulatory agency.

Transportation: To improve the road network.

Decentralization of operating functions for FISE, INIFOM in the RAAN and the RAAS.

Technology innovation: To lay the groundwork for a national innovation system.

Production reactivation: (i) To obtain a sustainable increase in the competitiveness of agrifood production by small and medium-scale producers; (ii) to build institutional capacity to assist and manage the agricultural sector.

Environment: To improve socioeconomic conditions and the standard of living of people living in priority watersheds and reduce the impact of natural disasters.

WB, UNDP: complementary projects

Development of a rural investment strategy.

European Union, WB, and bilateral support (Japan, China, OPEC, Taiwan, Scandinavian countries)

• Efficiency and transparency (1064/SF) • National procurement and contracting system (ATN/MT-7467) • Local development Atlantic coast (1051/SF) • Design of a methodology for development plans (ATN/FW-7488) • Strengthening of private sector organizations (planned) • Judicial strengthening and access to justice (1074/SF)

• Socioenvironmental program for forest development II (1084/SF)

SGPRS: Fourth pillar (Governance)

SGPRS: Fourth pillar (Governance)

SGPRS: First pillar (Growth)

SGPRS: First pillar (Growth)

SGPRS: First cross-cutting theme (environmental vulnerability) MDGs: Integration of sustainable development into country policies.

Annex IV Nicaragua BCS Page 2 of 3

ACTIONS UNDER WAY BY THE GOVERNMENT, OTHER AGENCIES AND THE IDB Area

Government actions

Health: Infant mortality

Reduction in mortality in infants and children under five.

To improve the health and well-being of low-income Nicaraguans. .

Support for 15 SILAIS to improve medical care.

Rehabilitation of the primary system and hospitals in the RAAN and RAAS. Delivery of services in remote areas.

Monitoring patient care in 12 municipalities.

Support for organization of health services in 40 municipalities.

Provision of vaccines and inputs for the immunization program.

Implementation of a reproductive health model.

Better reproductive health counseling and services.

Development and dissemination of communications plans.

Actions by other agencies Support for implementation of the SGPRS. Sweden, EU, USAID, Nordic Fund, Italy, Japan, WB

Preparation of a plan to strengthen health and nutrition education.

Support for investments in epidemiological surveillance systems and systems to monitor maternal mortality.

Prevention and control of control epidemics.

Design and implementation of education campaigns.

Passage of the General Health Law. Development of a human resource policy.

Continuation of hospital autonomy.

• Health sector modernization (1027/SF) NI-0169

• Component III (1027/SF )

KfW, WB

USAID, SIDA SIDA, PAHO, UNICEF

Relation to the SGPRS and MDGs SGPRS: Second pillar (Human capital) MDGs: Reduce under 5 mortality by 2/3 from 1990-2015.

SGPRS: Second pillar (Human capital) MDGs: (i) Reduce by ¾ maternal mortality; (ii) Reduce under 5 mortality by ⅔ from 1990-2015; (iii) Halt by 2015 and begin to reverse, the incidence of malaria and other major diseases.

• Component I (1027/SFNI)

SIDA, PAHO • Component IV (1027/SF) Luxembourg, Japan

Norway, Finland, GTZ, UNPF

Preparation of a study to expand the INSS basket.

To increase the ability of families to protect their own health.

IDB actions

• ATN/MT-7158 and ATN/ME-7159 WB USAID, SIDA, KfW, SDC, WB, OPEC USAID, Spain, SIDA

USAID, SIDA, KfW, SDC, WB, OPEC

WB

• Modernization of the health sector (1027/SF-NI Component III, FONMAT, 1055/SF and 1081/SF)

SGPRS: Second pillar (Human capital) MDGs: (i) Reduce by ¾ maternal mortality; (ii) Reduce under 5 mortality by ⅔ from 1990-2015; (iii) Halt by 2015 and begin to reverse, the incidence of malaria and other major diseases.

Annex IV Nicaragua BCS Page 3 of 3

ACTIONS UNDER WAY BY THE GOVERNMENT, OTHER AGENCIES AND THE IDB Area Nutrition: To promote the prevention of malnutrition.

Education promotion.

Actions by other agencies WB

Promotion of healthy child development.

USAID, UNICEF: partially financed.

Government actions

IDB actions

Provision of care for pregnant women.

Relation to the SGPRS and MDGs SGPRS: Second pillar (Human capital) MDGs: (i) Halve, between 1990-2015, the proportion of people who suffer from hunger; and (ii) Reduce under 5 mortality by ⅔ from 1990-2015.

Review of education for health.

Guarantee of quality standards for the very poor.

Analysis of a pilot project for comprehensive care for children in the community.

Protection for the most vulnerable groups: To improve the well-being of people living in extreme poverty.

Institution building: To modernize the institutional framework for assistance for vulnerable groups.

Education: To base the reform of secondary education on social and productive demand.

Design of actions to improve nutrition.

Implementation of programs for food security, poverty alleviation, community employment and the alleviation of women’s poverty.

Improvement in quality and focus.

Strengthening of the institutional framework for social protection.

Passage of the Education Participation Law. Completion of the design of the national education plan.

Implementation of the training plan for school boards, parents and principals.

100% increase in school autonomy.

USAID WB

WB

• Social safety net (Comp.I 1055/SF) • Poverty reduction strategy (1071/SF) • Strengthening for the MIFAMILIA program (1061/SF) • Comprehensive child care (Comp. II 1081/SF) • Institution building (1032/SF)

SGPRS: Third pillar (Vulnerable groups) MDGs: These programs support most of the MDGs, especially those related to gender, nutrition, education and health..

WB, USAID: School decentralization.

Finland, UNICEF: School strengthening.

• Education reform (1034/SF)

SGPRS: Second pillar (Human capital)

Annex V Page 1 of 1

References (i)

Echebarria, Koldo, “Desafíos en el Area de Gobernabilidad e Instituciones”, document prepared for the dialogue with the Nicaraguan authorities, 2001. (ii) Gómez Sabiani, Juan Carlos, “Nicaragua: Desafíos para la Modernización del Sistema Tributario”, contracted by the IDB, April 2002. (iii) Government of Nicaragua, “Estrategia para el Desarrollo de Nicaragua”, 1 June 2002. (iv) Government of Nicaragua, SETEC, “Estrategia Reforzada de Crecimiento Económico y Reducción de la Pobreza (ERCERP)”, August 2001. (v) IDB, “Economic crisis and the poor”, in Social Protection for Equity and Growth, 2000. (vi) IDB, “Informe de Misión de Revisión de Cartera”, December de 2001. (vii) IDB, Meeting with the Nicaraguan authorities to discuss the main challenges and opportunities facing Nicaragua, Managua, 25 January 2002. (viii) IDB, “Principales Desafíos de Cara al Siglo XXI: Documento de Diálogo”, January 2002 (version for discussion). (ix) IDB, Regional Operations Department II, “Nicaragua: Plan de Trabajo de País”, April 2002. (x) IDB, RE2/CEP, “Evolución de la Cooperación Externa para el Período 1997-2000”, August 2001. (xi) IDB, “Situación Económica y Perspectivas”, Region II. Regional Operations Department, May 2001. (xii) IDB, “Situación Económica y Perspectivas”, Region II. Regional Operations Department, February 2002. (xiii) IIC, MIF and PRI, “Estrategia de país del BID, Sector privado”, May 2002. (xiv) IMF, “Nicaragua—Enhanced Heavily Indebted Poor Countries Initiative—Decision Point Document”, December 7, 2000. (xv) IMF, “Nicaragua—Staff Report for the 2001 Article IV Consultation and the StaffMonitored Program”, August 28, 2001. (xvi) Lora, Eduardo, “La Competitividad de la Economía Nicaragüense”, IDB/RES, September 2001. (xvii) Pagés, Carmen, “La Situación Laboral en Nicaragua”, IDB/RES, September 2001. (xviii) United Nations, World Development Report 2002. (xix) World Bank, Nicaragua, “Public Expenditure Review”, 7 December 2001.