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Document of The World Bank FOR OFFICIAL USE ONLY Public Disclosure Authorized Report No. 53710-NI REPUBLIC OF NICARAGUA JOINT IDA-IMF STAFF ADVISORY NOTE Public Disclosure Authorized ON THE POVERTY REDUCTION STRATEGY PAPER April 14, 2010 Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized INTERNATIONAL MONETARY FUND AND INTERNATIONAL DEVELOPMENT ASSOCIATION REPUBLIC OF NICARAGUA Joint Staff Advisory Note on the Poverty Reduction Strategy Paper Prepared by the Staffs of the International Monetary Fund and the International Development Association Approved by Miguel Savastano and Dhaneshwar Ghura (IMF) and Pamela Cox (IDA) April 14, 2010 Contents Page I. OVERVIEW .............................................................................................................................2 II. CONTEXT .............................................................................................................................2 III. POVERTY TRENDS AND DIAGNOSTICS .............................................................................4 IV. MACROECONOMIC FRAMEWORK.....................................................................................5 V. SECTORAL POLICIES ...........................................................................................................6 VI. IMPLEMENTATION RISKS, MONITORING AND EVALUATION .......................................10 VII. CONCLUSIONS AND ISSUES FOR DISCUSSION ..............................................................11 I. OVERVIEW 1. This Joint Staff Advisory Note (JSAN) reviews Nicaragua’s Updated Poverty Reduction Strategy Paper (Plan Nacional de Desarrollo Humano Actualizado, PNDHA) covering the period 2009-11. The PNDHA lays out the strategic priorities for accelerating growth and reducing poverty, while taking into account the impact of the global economic crisis on the Nicaraguan economy. The document was delivered to Fund and World Bank Staffs in early-October 2009, and was distributed to the IMF Board on October 29, 2009, ahead of discussions on the second and third reviews of the PRGF arrangement (now ECF—Enhanced Credit Facility). 2. The PNDHA was prepared under the coordination of the Ministry of the Presidency, and it is an updated and abridged version of the larger Plan Nacional de Desarrollo Humano (PNDH) elaborated in October 2008. While an extensive consultative process was adopted for the original PNDH, the consultations for this updated version were narrower in scope and more targeted to key stakeholders, namely some civil society organizations and international donors. The authorities considered that having an extensive consultation process for this updated and refined version was not needed since the major strategic pillars had not changed. 3. The PNDHA is structured around five strategic pillars. These pillars are: (i) promoting growth through sound macroeconomic policies, increased public and private investment, and improved access to external markets; (ii) fostering well-being and equity through the expansion of health and education services and targeted social programs aimed at supporting production of poor households; (iii) improving the governance and transparency of public sector institutions, including the strengthening of audit and control mechanisms; (iv) promoting environmental sustainability; and (v) reducing inter-regional disparities by promoting the development of the autonomous regions along the Caribbean coast. II. CONTEXT 4. Nicaragua is one of the poorest countries in Latin America. Its per capita income reached US$1,022 in 2007, and according to the 2005 Living Standards Measurement Survey (LSMS), 48 percent of the population lived below the national poverty line, while 17 percent lived in extreme poverty. The country’s poverty rate has remained stubbornly high despite improvements in average living standards. According to the Bank’s last Poverty Assessment (Report No. 39736-NI)1, while the country’s poverty rate fell by only four percentage points between 1993 and 2005, per capita income levels grew by over 30 percent during this same period. Progress in reducing poverty (particularly in the rural areas) slowed during 2001-05, while improvements in intermediate indicators of education and health have been uneven and many of the MDG targets are off-track. 5. Nicaragua has been hit hard by recent external and domestic shocks. Real GDP growth slowed from about 4 percent in 2006 to an average of 3¼ percent in 2007-08, reflecting the impact of natural disasters (Hurricane Felix, October 2007), a sharp rise in energy prices, and the global economic crisis of late 2008. 2 Real GDP is estimated to have declined by about 1½ percent in 2009 and the recovery is expected to be slow in line with weak global demand. The external current 1 World Bank. 2008. Main Report. Vol. I of Nicaragua Poverty Assessment. Washington, DC: World Bank. 2 Growth rates for 2007-08 were well below the Latin American averages for those years. 2 account deficit increased significantly in 2007-08, though it has improved since, as declines in imports have more than offset lower exports and remittances. 6. Political tensions and governance concerns have aggravated the situation. President Ortega’s Sandinista party does not command a majority in the National Assembly. While the administration has been generally successful in forging political alliances, delays have emerged in the approval of key economic legislation largely due to a deterioration of governance conditions: Allegations of irregularities following the October 2008 municipal elections resulted in some civil unrest and the suspension of budget support from traditional donors (only US$15 million was disbursed in 2009, compared to an average commitment of US$70–90 million). In addition, some investment projects co-financed by donors were placed on hold, and multi-partisan agreements to pass important reforms in the national assembly became more difficult. A Supreme Court decision that would permit President Ortega to seek reelection in 2011 reignited tensions in October 2009. Opposition parties and a broad spectrum of civil society and NGOs condemned the Court’s decision and are pressing for reforms to strengthen electoral transparency. The issuance in January 2010 of a Presidential decree extending the period for judges and officials of key public sector institutions (Supreme Court, Electoral Court) increased tensions further. 3 7. Despite the unsettled environment, the authorities have followed prudent macroeconomic policies and have maintained macroeconomic stability. Performance under the Fund’s ECF-arrangement has been broadly satisfactory, though the program was substantially revised in 2009 to take account of the impact of the global financial crisis. The Consolidated Public Sector deficit is estimated to have increased from 1½ percent of GDP in 2008 to 3.9 percent in 2009 (well below the program target of 4.6 percent of GDP).4 The authorities plan to start reducing the fiscal deficit in 2010, and to this end have recently adopted: (i) a revenue-enhancing tax reform; (ii) an austere budget (that keeps nominal spending unchanged relative to budgeted 2009 levels); and (iii) a one percentage-point increase in the pension contribution rate. Progress on the structural front has been more uneven, though improvements in the energy sector are worth noting. 8. The authorities’ poverty reduction strategy has been revised, reflecting current political and economic realities, to emphasize increased access to basic services and productive support. Anti-poverty spending is projected to rise from an average of 11.8 percent of GDP during the previous administration (2002–06) to an average of 13.2 percent for 2007–11 (although this falls short of the original target of 15.5 percent of GDP, included in the October 2008 PNDH). The share of poverty-reducing expenditure is projected to remain above 40 percent of public sector spending, while improvements in targeting of programs will protect more vulnerable households. At the same time, the dependence on external financing for poverty reduction spending is projected to decline from over 65 percent during 2002–06, to under 50 percent for 2007–11. While Staffs support the increased poverty expenditures, they believe that the linkages between many of the new programs and the strategy’s overall objectives could be better articulated. 3 Most judges and magistrates must be appointed by end-June 2010. The ratification of these appointments requires a two-thirds majority in the Assembly. 4 Despite several rounds of budget cuts during the course of 2009, central government current spending increased by about 7 percent in real terms while social security outlays increased by about 20 percent in real terms. 3 Box 1. Main Recommendations of the 2007 JSAN The 2007 JSAN reviewed the Annual Progress Report (APR) dated August 2007 on the implementation of the National Development Plan of Nicaragua. It highlighted the progress made in implementing the Poverty Reduction Strategy (PRS), including: (i) strengthening export performance, partly reflecting gains from recent free trade agreements; (ii) improving budget execution, public investment planning and aid monitoring through upgrades in Public Financial Management (PFM) systems; (iii) conducting a new poverty survey – 2005 Living