You may find this list of economic definitions helpful while reading this document.

Source: Banco Central de Nicaragua. The original document in Spanish is not copyrighted, however, this translation was made by the Thinkquest Team 17749 and is Copyright (c) 1998.

1. In 1990, after a decade of civil war and negative growth of the national economy, expansion of the public sector and hyperinflation, the GDP of Nicaragua diminished by two thirds and the volume of her exports diminished by one half of their pre-1980 levels. The per capita income which was reduced to the level of the 1920s. The level of deterioration was reflected in the social indicators of the country such as the infant mortality rate and the average weight of newly born children. Nicaraguan newborn babies have the lowest average weight and the highest mortality rate in the Western Hemisphere. At the same time, the external debt was multiplied to ten times its previous value, US$ 11 billion (700 percent of the GDP). The social conditions deteriorated severely and poverty became rampant. Consequently, Nicaragua was not only the poorest country in the Western Hemisphere but also the most indebted in the world.

2. Since 1990, however, Nicaragua has drastically altered her profile. Peace has been reestablished, democracy has been restored and there was substantial progress in the implementation of policies aimed at correcting the macroeconomic disequilibriums and transforming the economy into a market based economy. The financial policies have triumphed, the majority of the price controls have been eliminated and commerce and the market have been opened wide. A program of privatization of state functions and some drastic cuts in the government employee level as well as in the military level have been realized. Private banks have begun to operate once again and the Superintendency of Banks (SBIF) has been created. Substantial progress in obtaining relief from the burden of external debt has been made. Nevertheless, the macroeconomic conditions have remained fragile and the process of structural adjustment came to a virtual halt near the middle of 1996. Also, in spite of important advances in social conditions, poverty has remained considerably widespread.

3. At the beginning of 1997, a new administration came into power. This change in administration gave Nicaragua the opportunity to return to the road leading toward macroeconomic stability and structural adjustment, and to achieve sustainable economic growth and improve social conditions. With this in mind, the government has prepared a program of economic and social reforms which cover the period from 1998 to the year 2000 and which will be outlined in the following sections. In order to implement this program, the government would like to petition the International Monetary Fund for a new accord under the three year plan for the Reinforced Structural Adjustment Service with its relevant annual agreements.

ECONOMIC PRECEDENTS

4. The economic conditions in Nicaragua have improved substantially since 1994. After a decade of economic decline, the GDP grew 3.3% in 1994 and 4.5% in 1996. Domestic investment and the flow of private capital have grown notably and the unemployment level, which has been growing since the 80s, began to decrease in 1994. The annual inflation rate diminished from 20% at the end of 1993 to 12% at the end of 1996. During the first ten months of 1997, economic activity continued to increase strongly whereas the annual inflation rate decreased to 9%.

5. The financial state of the public sector deteriorated significantly during 1996, reflecting a large deficit in spending during the period before the presidential election, and weak performances by the public enterprises (mostly the electric company (ENEL) and the water company (INAA) and the institute of social security (INSS)). The savings from the public sector (including loses from the Central Bank (BCN)) decreased to 1.5% of the GDP and the combined deficit of the public sector reached 15.5% of the GDP. Compared with 1996, the fiscal position improved during the first nine months of 1997 reflecting, in part, an improvement in the tax collecting processes. Nevertheless, facing an important decline in international financing, the loans extended from the BCN to the public were equivalent to almost 7% of the GDP (compared with 3% of the GDP in 1996).

6. The control over credit policies was damaged in 1996 by the deterioration of public finances and the financial difficulties which the state banks experienced as a result of attempting to recover certain problematic loans. The index grew at the pace as the nominal GDP and the savings deposits, and the rate of growth of the amplified currency accelerated markedly as a result of the increase in foreign currency deposits; at the same time, the rate of growth of loans from banks to the private sector also accelerated. In the face of pressure on the net international reserves (RIN), the BCN began to sell commercial papers indexed to the American dollar (CENIs) with interest rates up to 25% (this rate diminished to 11% by the middle of 1997). In spite of the introduction of CENIs valued at US$ 340 million (18% of the GDP), by December of 1997 the RIN reflected a sum of US$ 159 million. The gross reserves were approximately equivalent to the sum of the CENIs.

7. In 1995-1996 Nicaragua achieved agreements for structural adjustment and the reduction of her debt to bilateral private and official creditors to US$ 6 billion (300 percent of the GDP). In September of 1997, an agreement was reached with the Central American Bank of Economic Integration (BCIE) for the adjustment of a US$ 560 million debt which substantially alleviated the financial pressure on the cash flow in Nicaragua. The total amount of the payments against the international debt in 1997 were estimated at 40% of the value of the total exports of goods and services in 1997, compared with 92% in 1996 and an average of 309% during the 1993-1994 period.

8. Structural adjustment advances were made during the 1994-1996 period, even though the advances in some areas were more subtle than those already previously witnessed. In November of 1995, the National Assembly approved a law for the privatization of the telephone company (ENITEL). Nevertheless, after an unsuccessful process of international privatization, a new process of privatization has been adopted which contemplates the sale of this company sometime in 1998. To this end, an improved law has been sent to the National Assembly for consideration. With respect to the owners of the property, a process of distribution of the urban and rural property titles to the poor has been proposed, the process of returning properties under state control and compensating the previous owners will continue. The interests on the Compensatory Bonds (created to compensate the owners of confiscated properties) have been paid on time. Reflecting a growing political consensus, a new law (Reformed Law of Urban and Agrarian Property) was approved in November of 1997 by the National Assembly. It will permit the solution of pending claims and it will accelerate the process of returning property titles. This law will permit the solution of a large number of small property claims and it will establish courts for arbitrating property disputes so that pending cases can be solved. The government is contemplating distributing 90,000 property titles in the next two years to small urban and rural landowners.

THE ECONOMIC PROGRAM FOR 1997-2000

9. The principal objective of the economic program of the government for 1997-2000 is to combat poverty and reduce unemployment. The program includes measures which seek to restore the maintainability of international financing and that of the government, and measures to implement the structural adjustments necessary to reach high and preservable growth rates. The government will focus its efforts on the development of the rural sector and will direct public investment towards the rural areas. Under the program, the GDP is projected to increase at an annual rate of 5% (2% in terms of per capita) on the basis of the augmentation of private investment and the strengthening of agricultural and non-traditional exports. At the same time, the inflation will be reduced to 8% in 1998 and to 5% during the course of the program. The financial program has an accumulated growth of the RIN of US$ 155 million during 1997-1998 as its goal; bt the end of the year 2000 the gross reserves will have grown enough to cover 3.0 months of importation instead of the 1.7 months which will be covered in 1998.The authorities hope that the country will be considered eligible under the Highly Indebted Poor Countries (HIPC) incentive until the end of 1999 due to the significant domestic effort which is being made and the successful execution of the program.

10. To reach high growth rates in the program, a significant effort to implement the structural adjustments which augment the efficiency and propagate private investment is necessary. Following the successfully implementation of the tributary reform of May of 1997, the government strengthened the tributary administration and customs. The spending of the government will be rationalized and the size of the state will be reduced. The Law of International Investment will be revised to eliminate whatever impediment toward investors that currently exist and the process of privatization will utilize an appropriate sequence, beginning with sectors which have high probabilities of success (telecommunication and energy sectors). The process of reform of the state bank has already begun; the National Bank of Development (BANADES) will cease its banking functions and alternative financial institutions will be established, without direct government intervention, to attend to the needs of small producers. Particular attention will be given to the decentralization of and an increase in social spending (for education and health), and the arrangement of property rights to insure civil peace and economic prosperity.

11. The fiscal program plans to create the maintainability of public finances, given the projected international aid and the probability of a decrease in international debt under the HIPC initiative. The combined deficit of the public sector will be reduced from 15.5% of the GDP (in 1996) to less than 4% of the GDP during the course of the program until the year 2000. The savings of the public sector are expected to increase during the three years of the ESAF agreement, with a substantial part of the adjustment taking place in the first year (an increase of 5.5% of the GDP in 1998 and an additional increase of 4% of the GDP by the year 2000). The investment of the public sector (in terms of the GDP) is projected to decline sharply during the 1997-2000 period, nevertheless, it will be compensated by an increase in private investment, reflecting as much the planned privatization of public companies as the increased trust.

12. The program includes a number of proposed actions which will augment the central government revenues by up to 2.5% of the GDP until the year 2000, with most of the increase being concentrated in 1998. The government is committed to improving the transparency of public sector financial operations by way of amplifying the budget reports to include income operations which were not previously reported. In this sense, fiscal bills will include 1% of the GDP in gross incomes which were not previously subject to declaration. In May of 1997 a tax reform was implemented which corrected structural deficiencies of the system and widened the recordable base by way of the reduction or elimination of tax exemptions from the sales tax and customs tax, and which introduced a property tax while at the same time consistently reducing the taxes on imports at two levels (5% and 10%) until the end of 1999. Also, in September of 1997 the government began a process to correct the distortions in the relative costs of gasoline and diesel, causing the prices of diesel to be raised and the cost of gasoline to be reduced; and certain measures were taken to improve the collection mechanisms of revenue taxes on coffee exports. The government will have to take additional measures in the case of a fiscal deficit, a great decline in international resources or difficulties in the placement of CENIs.

13. The normal operating costs of the central government are programmed to diminish by 4% of the GDP during the course of the program until the year 2000 (half of this reduction is scheduled to occur during 1998) reflecting a freeze on expenditures (excluding payment of interest and transfers stipulated in the Constitution of the Republic but including salaries) and a reduction of export subsidies. The government will seek technical assistance from the Fund to establish mechanisms which will ensure the completion of these objectives. In an effort to increase the transparency of government operations, the budget reports will include almost 2% of the GDP in costs which were previously not reported. The decrease in operating costs will be reached, in part, by way of a reform program of the civil service which consists in the structural adjustment of the government. In spite of the 1,800 public positions which were eliminated in 1997, an estimated 1,500 positions will be cut each year during 1998-1999. These figures will be revised in accordance with the Law of Structural Adjustment of Executive Power which was submitted to the National Assembly for their forthcoming approval.

14. The government will continue to work at orienting the expenditures toward the social sector, particularly the areas of health and education, and it will emphasize programs to alleviate the poverty. In this context, social expenditures will be increased (in consultation with the FMI and the BIRF) more than has been previously stipulated and they will be financed by revenues from the privatization of ENITEL and the increase in contributions which will be derived by a support group, such as the Group for Consultation on Nicaragua, which will be created for this end.

15. The expenditures of capital and net concession of loans from the public sector are programmed to diminish by 5% of the GDP in 1997 to 12% of the GDP, keeping this average until the year 2000. As previously noted, the participation of the private sector in providing basic structural services (services which were previously reserved for the public sector such as energy, telecommunications, ports and roads) is expected to increase substantially following the approval of a new series of laws (described section #6). The public investment program will privatize social and basic infrastructure development, aiming towards medium-term self sustainability of rendered services. The Project for Institutional Management Skills will endeavor to optimize resource allocation and keep investment levels in line with medium and long term capacities.

16. The strengthening of the financial positions of the public enterprises by way of larger revenues and the suppression of costs will be an important component of the fiscal program. The financial problems which ENEL has faced for an extended period of time have accumulated in such a way that the losses in energy have increased and the greater dependency on thermal energy has increased generation costs. As of April of 1997, ENEL raised the adjustment rate of its tariffs from 1 percent to 1.5 percent monthly. Nevertheless, this has not been enough to compensate for the increases in operating costs which have resulted in part because of the effects of El Niņo. In this context, ENEL implemented an additional adjustment of 5% as of the first of October of 1997; the government has also approved the introduction of a permanent thermal factor in the structure of ENEL's tariffs in order to compensate for the increase in costs related to the greater use of thermal energy during the dry season (low income consumers are exempt from these increases); ENEL will also strengthen their billing procedures and will exert a more widespread control on expenditures. Also, the government has solicited the assistance of the BIRF and the BID to support the program of investment in ENEL and its financial requirements, including the financial compensation for the effects of El Niņo. In order to protect the financial situation of INAA, which has also been affected by the increases in energy costs, the tariffs will be increased in accordance with the recommendations of a study which was recently undertaken with the technical assistance of the BID. During the period of the program, the tariffs on electricity and water will continue to be adjusted by 1.5 percent monthly.

17. The government intends to carry out a study which will collate the opinions about social security reform. This study, which will be conducted with the technical assistance of the BIRF and the BID, will strengthen the actual system and the participation of the private sector in the subministry of Health Services and will ensure the viability of the pension system. In order to improve the financial state of the social security system, the government will revise the contribution rates, pensions, retirement age, and will improve the financial management of the Social Security Institute.

18. The monetary program will be consistent with the objectives concerning inflation and with the international sectors of the program and will be based on an increase in the index in line with the nominal growth of the GDP. The net domestic activities of the BCN (AND) are projected to contract by an amount which is equivalent to almost 2% of the GDP in 1997 and are programmed to diminish by almost 3% of the GDP, on average, during the 1998-2000 period. The contraction of the AND will reflect the planned improvement in the fiscal states of the public sector which are not financed by the BCN, and the awaited reduction in losses of the BCN after 1999 (this will follow an expected increase in losses during 1998). This reduction will reflect less interest payments associated with the net redemption of CENIs (beginning in 1998) and larger incomes from interest received due to the increase in the international reserves.

19. The BCN will implement a policy of restrictive credit while the fiscal position is strengthened. In this context, the credit policies directed in favor of agriculture were eliminated recently and will not be reintroduced. Also, in October of 1997 the rate of reserves on deposits was unified at 17% for all the types of currency and deposits, and extensions were made on all the obligations of the banks with the private sector. In the same context the authorities have recently replaced the system of direct sales were the price was preset, for one of auctions in which amounts are fixed based on the need to get rid of excess liquidity in line with the monetary program, and where the interest rate is determined in the said auction. In this sense, the authorities are attempting to reduce the sum of CENIs by at least US$ 130 million during the period of the program.

20. The government is implementing measures to ensure the solidity of the banking system. The regulatory framework will be improved and its implementation will be deepened in order to reduce favoritism, increase the competition between the banks and increase the banking solvency by way of increasing the capital base. In order to consolidate the successful growth demonstrated by the private banks since 1991, the concept of the availability of capital based on the 1992 Basiliean Norms have been adopted. The availability of capital was increased from 6% to 8% in 1996, and the government will increase the said availability to 10% by the year 2000. In 1993, the BCN and the SBIF, promoted the Bonds of Fomentation (BOFOS) distributed by the private banks and counted as secondary capital. As of July of 1999, these bonds will no longer be useable as secondary capital. The SBIF will pay greater attention to the strict application of the existing standards, including restrictions which apply to the concentration of banking activities. Also, the role of the SBIF in the regulation of the new banking activities such as financial leasing and mortgaging will be revised to ensure that any existing favoritism will be eliminated. The government will financially support the SBIF to ensure the successful implementation of its functions.

21. The implementation of the financial policies and structural adjustments described in this memorandum will strengthen the international position of Nicaragua even more. Nevertheless, due to the still low level of exportations and the large payments required against the international debt, the requirements for international financing will remain high during the next few years. In the beginning of 1998, the government asked to restructure all the debts which were considered eligible by the Club of Paris in order to make them fall under the terms of Naples. To advance toward international viability, the policy of government debt handling will be restricted to only obtaining donations and highly flexible loans to cover its international financing needs. At the same time, the government will continue to actively search for debt balance and payment reduction agreements with the rest of the creditors, in terms, at least, comparable to those set forth by the Club of Paris. The public sector has committed itself to abstaining from contracting or guaranteeing any new disbursements in non-flexible terms. To increase the effectiveness of debt management, the Ministry of Finance will coordinate all the international debt functions with the BCN to constantly ensure that no new payments become delinquent during the course of the program, except for those obligations which are currently subject to negotiations, those which were considered under the program as potentially eligible for refinancing or restructuring, or those which fall under other debt reduction operations.

22. The BCN approved the rate of exchange unification as of the first of January of 1996. The BCN buys or sells whatever quantity of foreign currency that the financial institutions wish at a rate determined by a system of devaluation. In spite of the fact that Nicaragua has maintained a competitive international profile such as that which is reflected in the strong growth of exports and the improvement of the commercial balance in the last few years, her international position remains fragile. In lieu of the fact that inflationary pressures continue to decrease as a result of the monetary and fiscal policies in accordance with the program, the devaluation rate is expected to gradually reduce.

23. The government is committed to a commercial system without restrictions and tariffs and to continuing the process of the reduction of taxes on imports and subsidies on exportation. For the large majority of imported products, the recently approved Lay of Tributary Justice reduced the tariff maximum to 30%. As of January of 1998 the tariffs were reduced to 20% and as of July of 1999 they will be at 10%. The Law of Export Promotion, which offers reductions on taxes on rent and other tax benefits for certain exports in the form of Negotiable Certificates, expires in 1997. The export enterprises will continue to have access to imported machinery, equipment, and intermediary goods without taxes by way of temporary admissions or by way of the special rules concerning free zones.

24. As 1997 ended, the government submitted a law to the National Assembly for the structural adjustment of the Executive Power which significantly reduced the number of gubernatorial ministries and agencies which reported directly to the President. To increase the efficiency and the transparency of public finances, the government will submit a proposal sometime in 1998 which will permit the implementation of a new financial administrative system for the central government (System for the Evaluation of the Financial Integrity of the State, SEIF). It will also develop pilot projects for local representative offices of the SEIF. At the same time, the government will strengthen the National System of Public Investment (SNIP), and the Office of the President will be authorized to supervise the public investment of all the ministries and give better coherence to the strategy for developing the country.

25. With respect to the reforms of the financial system, the government is reducing state participation in the banking sector; at the same time it will ensure that the financial services remain available to small farmers. The government is taking steps to cease the banking functions of the largest state bank (BANADES) and sell the control of the Nicaraguan Bank (BANIC) to the private sector. The BIRF and the BID will provide support by covering the resulting losses from the negative net commerce of the branch offices of BANADES which have been or will be sold. In October of 1997, a total of 22 agencies and branch offices representing 80% of the deposits of BANADES were already sold to the private bank. As of May of 1998, the Superintendency of Banks will have withdrawn BANADES' operating license. In order to satisfy the credit needs of small farmers, the government will establish a fund which will operate as a second level institution, relying on the help of the banking branch offices, cooperatives and ONGs who are familiar with the best practices in rural finances, so that the credit reaches the needy farmers directly.

26. The government will increase the capital of BANIC by introducing a new distribution of functions for the private sector and in the process it will dilute its participation as owner, until it manages to become a minority by the middle of 1998. To deal with possible legal complications related to the ownership of the bank, a law will be passed in March of 1998 which will establish that the government is responsible for the eventual compensation of the previous owners. The government will also privatize the second level financial institution which provides financing for commercial banks with international resources guaranteed by the government.

27. The government plans to privatize the public enterprises, the petroleum distribution enterprise, and port services. To establish the appropriate legal framework, laws for oil, electricity, and water sectors are in discussion in the National Assembly and are expected to be approved by early 1998. The government will coordinate the privatization to safeguard the transparency and the efficiency of the operation, reform the structure of tariffs on water and electricity, and eliminate whatever intersubsidies among the services; it will initiate the required reorganization of ENEL and INAA. Consistent with the law pertaining to electricity, ENEL will be vertically separated and processes of generation and distribution of energy will be sold or given out as concessions. The new law required to privatize ENITEL will be approved sometime in early 1998 and the bidding should be finished by the end of 1998.

28. The government will modernize the code of commerce, the law financial bankruptcy, the law of intellectual property and will make appropriate revisions to the international investment law. This law will eliminate unnecessary restrictions, favoritism and the granting of tributary benefits which are not specified in the general outline of taxes and it will guarantee international investors stability in the regulatory and tributary environment. The Executive Power is beginning a widespread program of legal and judicial reforms which aim to improve legal procedures, the fulfillment of contracts and the property deeds. The government is supporting the judicial power by way of investments in the judicial establishment and civic centers in the majority of the municipalities of the country, improving the governability and the state of human rights in all of Nicaragua. In order to achieve this end, the government seeks financial and technical assistance from international donors.

29. 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.