Report No. 23095-NI N icaragua Public Disclosure Authorized Public Expenditure Review Improving the Poverty Focus of Public Spending December 7, 2001 Central America Department Latin America and the Caribbean Region Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank CURRENCY EQUIVALENTS Currency Unit - Cordoba (C$) US$1.00 13.78 (December7, 2001) GOVERNMENT FISCAL YEAR January 1 - December31 Vice-President David De Ferranti Country Director Donna Dowsett-Coirolo PREM Director Emesto May Lead Economist Ian Bannon Task Manager Ulrich Lachler Nicaragua Public Expenditure Review Main Acronyms and Abbreviations ALMA Mayoralty of Managua APRENDE Second Basic Education Project financed by IDA BAVINIC Nicaraguan Housing Bank BCN Central Bank of Nicaragua CATIE Tropical Agriculture Research Center CENIS Certificados Negociables de Inversi6n CGR Comptroller General's Office CIDA Canadian International Development Agency CNU National University Counsil COERCOs State Construction Enterprises CONAGRO National Agriculture Council CONPES National Council for Economic and Social Planning COSUDE Swiss Development Agency CSE Supreme Electoral Council DGIP Dept of Public Investment ENACAL Nicaraguan Water & Sewerage Utility ENEL Nicaraguan Electric Utility ENITEL Nicaraguan Telecommunications Utility ESAF Enhanced Structural Adjustment Program FINNIDA Finnish International Development Agency FISE Emergency Social Investment Fund FSS Supplementary Social Fund FUNIC-MUJ. Nicaraguan Women's Foundation GDP Gross Domestic Product GTZ German Technical Cooperation Agency HIPC Highly Indebted Poor Countries IDA International Development Association IDB Inter-American Development Bank IDR Rural Development Institute IMF International Monetary Fund INATEC National Technological Institute INIFOM Municipal Promotion Institute INSS Nicaraguan Social Security Institute INTA Institute for Agricultural Technology INATEC National Technological Institute INTECNA National Technical Institute INVUR Institute for Urban and Rural Housing JICA Japanese International Cooperation Agency KfW German Bank for Reconstruction LSMS Living Standard Measurement Survey MAGFOR Ministry of Education, Culture and Sport MECD Ministry of Agriculture Measurement Survey MHCP) Ministry of Finance MIFAM Ministry of the Family MINREX Ministry of Foreign Affairs MINSA Ministry of Health MHCP Ministry of Finance NORAD Norwegian Agency for Development Co-operation OPEC Organization of Petroleum Exporting Countries Nicaragua Public Expenditure Review PAININ Programa de Atenci6n Intregral a la Nifiez Nicaragiiense PEM Public Expenditure Management PHC Primary Health Care PINE School Nutrition Program PIP Public Investment Program PRGF Poverty Reduction and Growth Facility PROTIERRA Project for Rural Municipalities PRSP Poverty Reduction Strategy Paper SAS Social Action Secretariat SETEC Technical Secretariat of the Presidency SIDA Swedish International Development Agency SIGADE Debt Management System SIGFA Integrated Financial Management System SILAIS Departmental Health Service SNIP National Public Investment System SREC Secretariat for Economic Relations and Cooperation TFPG Total Factor Productivity Growth UCRESEP Coord.Unit for Public Sector Reform and Modern. Program UNDP United Nations Development Program UNFPA United Nations Population Fund USAID United States Agency for International Development WFP World Food Program NICARAGUA PUBLIC EXPENDITURE REVIEW IMPROVING THE POVERTY FOCUS OF PUBLIC SPENDING Table of Contents Executive Summary ........................................................................................ i Introduction........................................................................... 1 Chapter I The Evolution of Public Spending in Nicaragua A. The Efforts to Restore a Market Economy in the 1990s. 7 B. The Evolution of the Fiscal Balances and their Sustainability . 1 C. The Evolution of Central Government Expenditures .14 D. The Financing of Central Government Expenditures .21 E. Foreign Aid, Public Investment and Productivity Growth .24 F. Summary and Recommendations .32 Chapter II Review of Public Expenditures on Rural Development A. Sector Background and Issues .37 B. The Governnent's Rural Development Strategy .41 C. The Evolution of Rural Sector Spending in the 1990s ................................................ 42 D. The Main Agricultural Sector Programs in 2001 .45 E. Sector Management .49 F. Summary and Recommendations. 51 Chapter III Review of Social Sector and Social Protection Expenditures A. Social Conditions in Nicaragua .55 B. The Evolution of Social Spending in Nicaragua ........................................................ 59 C. The Government's Poverty Reduction Strategy in the Social Sector . .63 D. Review of Principal Sub-Sectors in the 2001 Budget .. 66 D. 1 Education Sector .67 D.2 Health SeCto .70 D.3 Housing .72 D.4 Social Protection .73 D.5 Local Development .77 E. The 2001 Budget as Reflection of Government and Donor Priorities . .78 F. Main Conclusions and Recommendations .. 82 Chapter IV Review of Transport Sector Expenditures A. Sector Background and Key Issues .87 B. Evolution of Public Spending in the Sector during 1990s . O 92 C. Review of Sector Program .96 D. Sector Management .100 E. Main Findings and Recommendations .102 Chapter V The Institutions of Policy Making and Public Expenditure A. Public-Expenditure Management Outcomes in Nicaragua ......................................................... g109 B. Policy Making ................................................................... 116 C. The Public Expenditure Management System ......................................................... 119 C. 1 The Authority for Managing Public Money .................................................... 119 C.2 The Budget: Coverage and Information Provision .................................. 122 C.3 Formulating the Budget .................................. 125 C.4 Executing the Budget .................................... 129 C.5 Budget Institutions: an Overview .................................. 134 D. Findings and Recommendations .................................................................... 137 Chapter VI Tracking Poverty Reduction Spending in Nicaragua A. Two Basic Principles of Expenditure Tracking ........................................................ 145 B. Nicaragua's Supplementary Social Fund (FSS) ........................................................ 146 C. Tracking the FSS through the Budget ................................................................... 148 D. The Management and Structure of the FSS ............................................................. 156 E. Baselines for Measuring Resource Additionality ...................................................... 159 F. Main Conclusions and Recommendations ................................................................... 162 Annexes Annex A Measuring Nicaragua's Gross Domestic Product .165 Annex B Nicaragua's Fiscal Sustainability After HIPC .169 Annex C The Evolution of Wages and Salaries in Nicaragua .179 Annex D Estimates of Total Factor Productivity in Nicaragua 1993-2003 .181 Annex E The Measurement of Foreign Aid .183 Annex F Prioritizing Expenditure Reductions in the 2001 Budget .185 Annex G Review of Rural Sector Projects Included in the PRSP Portfolio .193 Annex H The Main Social Sector and Social Protection Projects .199 Annex I The Public Investment Program ................................................................... 205 References .......................................................................... 215 STATISTICAL ANNEX .................................... .................................... 219 This report was prepared by a team led by Ulrich Lachler (Resident Representative in Nicaragua) and comprising Ema Budinich (Consultant), Michele Gragnolati (HNP Economist), Tony James (LCSFP, Sr. Financial Analyst), Pablo Sauma (Consultant), Geoffrey Shepherd (Lead Specialist, LCSPS) and Josef Trommer (LCC2C, Country Analyst). Ema Budinich prepared a background paper for Chapter II. Pablo Sauma, with funding provided by the Swedish International Development Agency, prepared a background paper for Chapter III, which also includes inputs from Michele Gragnolati and draws on earlier papers by Ema Budinich, and Nancy Gillespie. Tony James prepared a background paper for Chapter IV. Geoffrey Shepherd prepared Chapter V. Axel Roestel and Leopoldo Lopez electronically processed the budget information used throughout this report. Secretarial assistance was provided by Yolaina Montoya and Aida Alvarado. Peer reviewers are Yasuhiko Matsuda and Pierre Demangel (Public Sector Specialists) Text Tables Table 1.1 Nicaragua: Consolidated Operations of the Public Sector (% of GDP) ......... .................... 8 Table 1.2 Nicaragua-Operations of the Central Government (% of GDP) ...................................... 15 Table 1.3 Nicaragua: Sector Shares of Central Government Expenditures ..................................... 17 Table 1.4 Economic Classification of Central Government Expenditures (% of GDP) ....................... 18 Table 1.5 Sector Distribution of the 2001 Public Investment Program .......................................... 20 Table 1.6 Net Financing of the Central Government Deficit (% of GDP) ...................................... 21 Table 1.7 Fiscal Adjustment in Response to declining Aid Flows ............................................... 22 Table 1.8 Total