ESAF Summary -- Experience Nicaragua

A copy of the ESAF II (Enhanced Structural Adjustment Facility) was sent to the

ESAF (in Spanish)

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Transcript in English

International Monetary Fund by the Nicaraugan Central Bank and was approved in early 1998. This approval has made it possible for more than a billion dollars of Nicarauga's debt payments to be rescheduled and made way for Nicaragua to receive more aid from international donors.

You may click here to study the ESAF document.

The Nicaraguan economy has been diminishing since the 1980s as a result of the civil war and consequently the international debt has increased to ten times its previous value, 11 billion dollars or seven times what the country produces in a year, thus making Nicaragua the poorest country in the Western Hemisphere and the most heavily indebted country in the world in 1990. However, now that the peace has been reestablished, economic conditions have improved drastically and inequities in the market have been corrected. However, conditions are anything but stable and poverty is still at extremely high levels. In 1997, a new administration took power and it is determined to help Nicaragua become a growing, stable economy and improve social conditions. With this in mind, the administration has petitioned the International Monetary Fund for a new economic aid program which would last from 1998 to the end of the year 2000 and has succeeded.

The economy of Nicaragua has improved a lot since 1994. The rate growth of the economy has gotten higher each year and the rates of unemployment and inflation have decreased a lot. However, state-owned companies like the water and gas company haven't done so well and they even did worse in 1996 than they had previously. Also, loans from the National Bank to these companies have increased quite a bit. This deterioration did a lot to hamper the control over the rules on credit which the government could impose. So, in order to make money, the National Bank had to issue bond-type papers with percentage rates up to 25% in 1996. An interest rate of 25% on anything is ridiculous, by the way, because it means that in just four years a person could double their money! However, this rate did decrease quite a bit in 1997 even though it was still pretty high. On the bright side, Nicaragua reached some agreements with her creditors in 1995 and in 1996 which cut the debt by more than half bringing the total amount that Nicaragua owed to 3 times what the country produces in a year. In 1997, another agreement was reached that eased the pressure on Nicaragua to make her payments on the loan. The government tried to sell the phone company in 1995 but failed miserably. However, they have revised the process of privatizing it completely and they will try to sell it again sometime in 1998. Also, the government has passed new laws that could possibly distribute almost one hundred thousand properties to poor urban and rural landowners.

The main objective of this new program is obviously to combat poverty and supply more jobs for everyone. The government plans to do this by investing its money into rural areas and making agriculture and some new exports its main source of income. They expect the inflation rate to keep on decreasing and that the national economy will grow at a high steady rate until the end of the program. In order to achieve these goals, the government realizes that it will have to totally restructure sections of itself and it has begun to do so already. The National Bank is being closed and its offices distributed and the national budget is going to be revised so that a large percentage of government offices will be shut down. Also, a new set of laws has already been passed which make it as easy as possible for investment in Nicaragua.

Under the new program the previously mentioned debts of state companies are expected to decrease a lot just as private investment is expected to increase. The central government has also revolutionized its tax collecting processes and laws and accordingly expects to receive more funds each year. New laws have been passed which will make government fiscal operations a lot more transparent, which eliminated certain tax exemptions, and revised export taxes. Gubernamental operating costs have been chopped and they will continue to decrease throughout the term of the proposed program. The government funds are going to be redirected towards social endeavors like education and health and spending in these areas is going to increase. Furthermore, the state is going to play a smaller and smaller role in providing the basic infrastructure for the country as private companies step in to take their place as a result of the privatization process.

As a result of El Niño, the costs of producing energy have increased a lot for the state owned companies, thus contributing to their financial problems. So, the tariffs are going to be increased and the fiscal state of these companies is expected to increase as a result of a the suppression of operating costs and increased revenues.

The government is going to conduct a poll with the technical help of international organizations which will help them revise the social security system. Pensions, the legal retirement age, and other factors will be altered to help the economy improve. The Central Bank will decrease its domestic activities and its credit policies are going to be restrictive as long as the economy is weak. Reserve rates on deposits have been changed as well, and a bidding system instead of a straight-sale system will be instituted for the sale of government bond-type papers to private investors.

Recognizing that the banking system needs reform, the government is in the process of instituting new regulations which will reduce favoritism, increase fiscal transparency, and increase inter-bank competition. The Superintendency of Banks has been created for the purpose of monitoring bank activities and new modes of operation have been adopted to consolidate the growth which some private banks had experienced to the rest of the banks.

The reforms and new operations which the government has outlined for the new program will help strengthen the Nicaraguan economy. However since the export level is still low and the financial situation is weak the country will still need international aid in order to succeed. So, the government has asked for loan payment reductions and new terms of payment from its creditors such as the Club of Paris. The Ministry of Finance has also undertaken debt management functions and will ensure that no payments become delinquent.

The Central Bank, which buys and sells international currency at a rate determined by the system of devaluation, agreed to buy and sell currency at the same rate in January of 1996. As a result of the approval of this program, inflationary pressures are expected to decrease and the devaluation rate will therefore decrease as well.

The government wants a laissez faire commercial system without tariffs and restrictions. Therefore, the Law of Tributary Justice was passed which has reduced tariffs and will continue to decrease them throughout the course of the program. Also, enterprises which export products will still have access to imported machinery and goods without taxes because of the free trade zones.

As 1997 ended, the National Assembly submitted a law which will severely restrict Executive authority and will slash the number of gubernatorial agencies and ministries which report directly to the President, thereby decreasing the chances of a coup or misuse of power. And to improve the transparency and efficiency of public expenditures, a proposal will be submitted sometime in 1998 which will approve a new financial administrative system. The government is currently reducing state participation in banking activities but it wants to ensure that small farmers can get loans if they need to.

Public enterprise like petroleum distribution and port services are going to be privatized. Laws concerning oil, electricity, and water are in discussion in the National Assembly and they will soon be approved. Reorganizations of many state enterprises are scheduled to occur soon. The government is also going to modernize the code of commerce, bankruptcy, and intellectual property. The Executive wing is beginning a widespread program of legal and judicial reforms which will improve legal procedures, fulfillment of contracts, and property deeds. Judicial reforms will be supported by way of increased government fund allocation and the establishment of more courts.

Concerning the social programs for 1997-2000, in collaboration with the BIRF and the BID, the authorities will continue to improve the effectiveness and the quality of social spending and they will increase the investments in sanitation projects such as in water treatment and in dwelling places for low income families. Also, the government will adjust its resources so that more of them flow into primary education and health. The government will work to reduce the school dropout rate by improving the quality of primary education and its infrastructure. In the health sector, the government will develop a modern health system, strengthening the primary services and prevention services. The strengthening of a security net to protect the most vulnerable sectors of the Nicaraguan population will be one of the principal elements of the general strategy to reduce poverty. Nevertheless, the main part of the strategy will be to generate jobs by way of economic growth, with the basis of an educated environment to increase private investment.