51993 IDA At WOrk Nicaragua: Supporting Progress in Latin America's Second-Poorest Country O ver the last two decades, the Central American country of Nica- ragua experienced a remarkable economic turnaround. In the late 1970s and the entire 1980s, natural and man-made disasters resulted in Nicaragua's economic output shrinking by almost 40 percent and debt soaring to 400 percent of GDP. In 1990 Nicaragua was one of the most highly indebted and economically unstable countries in the world, and by 1993 half of all Nicaraguans were living in poverty. The International Development Association (IDA), the World Bank's fund for the world's poorest countries, resumed operations in Nicaragua in 1991 after the country's civil war. Since then, IDA has been a steady partner and, in recent years, has provided about one-fifth of all donor financial support. Country Indicators 1995 2007 Atlas GNI per capita (US$) 674 980 Inequality (GINI coefficient) 50 (1993) 40 (2005)a Average inflation (%) 11.2 16.9 Combined total public debt (% of GDP) 331.9 78.8 External debt (% of GDP) 321.1 59.1 Fiscal deficit (% of GDP) a 3.7 1.2 Foreign direct investment ($US millions) 75 335 Poverty incidence (%) 50.3 (1993) 46.2 (2005)a Extreme poverty incidence (%) 19.4 (1993) 14.9 (2005)a Net primary school enrollment rate (%) 72.6 (1991) 87.3 (2008)c Under-five child mortality (per 1,000) 53 35 Maternal mortality (per 100,000 live births) 250 87 (2005) Population (millions) 4.5 5.6 Sources: World Development Indicators, IMF estimates, government census and statistics, WHO, UNICEF and UNFPA. a. 2005 figures will be updated in 2010, after completion of National Standard of Living Survey b. Overall balance after grants. c. Administrative records. By 2005, income per capita was up by a third, the number of people living in extreme poverty was cut by 25 percent, and inequality was significantly reduced. Economic progress continued after the change of government in early 2007; exports continued to increase at an average annual rate of 12 percent and foreign direct investment increased dramatically. However a new series of external shocks is threatening Nicaragua's momentum again. The country felt the effects of hurricane Felix, rising oil and food prices in 2007-2008, only to be hit again by the international financial crisis of 2009. IDA's challenge over the next few years will be to help the people of Nicaragua prevent a return to the situation of the early 1990s and to continue to support them in their effort to promote sustainable development. IDA's long-term engagement will be important to ensure that all Nicaraguans reap the benefits of stability and growth nnn COUNTRY ACHIEVEMENTS and lost its focus on long-term development. When the huge flow of emergency aid money During the 1950s and 1960s, Nicaragua slowed, the government failed to reduce its boasted one of the region's fastest growing spending, and budget deficits spiraled out of economies. Over the years, natural disasters, control. Nicaragua abandoned its program economic mismanagement, political strife, with the International Monetary Fund (IMF) and civil war (which left over 50,000 dead), and by 2002; economic growth had fallen transformed the nation of 5.5 million people to less than 1 percent. Hurricane Mitch, in from a star performer into the slowest grow- effect, flattened the gains from Nicaragua's ing country in the region. By the early 1990s, return to a market-based economy. Nicaragua had become one of the most highly indebted and economically unstable countries Building the foundation for in the world. Half of the population was living sustained poverty reduction. in poverty and one-fifth in extreme poverty. The administration of President Bolaņos, which During the first half of the 1990s, Nicaragua took office in 2002, focused on establishing made rapid strides towards becoming a mar- fiscal discipline and attacking corruption. ket- based economy. It lowered trade barriers, Its efforts paid off when Nicaragua became reduced the size of its bloated public sector the 10th country in the world to comply with and began modernizing government. More conditions for debt relief under the Highly public spending was aimed at the poor. The Indebted Poor Country (HIPC) initiative. Over education and health sectors were reformed US$3 billion of public debt were forgiven and extreme poverty declined quickly. instantly in early 2004. Investors returned and economic growth jumped to 5.1 percent But after the devastation of Hurricane Mitch, in 2004, and remained at about 4 percent the government was overwhelmed by the until the end of the Bolaņos administration short-term emergency needs of its people in early 2007. 2 President Daniel Ortega, who was sworn into percent. Unemployment is up, tax revenues office in January 2007, has also placed great are decreasing as are remittances coming importance on macroeconomic stability. One from the United States and Costa Rica. A 10 of the first achievements of the new govern- percent reduction on imports is projected for ment was to successfully negotiate a three- 2009 while the volume of exports is expected year Poverty Reduction and Growth Facility to remain at same level of 2008 given the (PRGF) Program with the International Mon- country's efforts to find new markets. The etary Fund (IMF) as an important policy tool impact of the crisis is reflected in the high to continue to strengthen the healthy macro level of liquidity available in the banking situation inherited from the previous admin- system (currently at over 30 percent). This istration. represents a major obstacle for the reactiva- tion of the economy. Hurricane Felix and subsequent heavy rains which destroyed much of the crops ready to IDA CONTRIBUTIONS harvest, provoked a spike in inflation that reached almost 17 percent at the end of 2007. IDA's partnership with Nicaragua Rising oil and food prices continued to fuel an has evolved over the years and inflation rate of 14 percent in 2008. become more effective. Two and a half years into its mandate, the Investment projects are now more closely Ortega administration continues to implement monitored and assessed than ever before. an ambitious public investment program. The More emphasis has been placed on country- administration proposes a "National Human driven poverty reduction strategies and Development Plan," which builds on many of support for policy reform. To help jump-start the successes of the previous administration economic reconstruction in the early 1990s, but gives more focus to basic infrastructure, IDA financed two large, quick-disbursing especially energy, roads, and water, increased loans. From 1996 to 2002, IDA lent US$656 access to health and education, and more of a million for 20 operations--mostly investment focus on small and medium producers in both projects covering health, education, social towns and the countryside. The administra- development, natural disaster management, tion is also committed to reducing poverty rural economic assets, local government by increasing the human capital of the poor strengthening, natural resource management, through strengthening programs in health, and business-climate improvements. education and special programs targeted towards at risk children. However in late 2002, IDA began to shift the nature of its relationship with Nicara- Nicaragua's ambitious anti-poverty gua, providing about half of its financial agenda is being threatened however, by resources--US$135 million--through budget the current international economic crisis. support operations and associated technical assistance, on top of debt relief designed Although in 2009, high inflation is no longer to support Nicaragua's homegrown Poverty an issue, growth has come to a halt. The Reduction Strategy Paper (PRSP). The PRSP latest estimates for 2009 from the IMF pre- established national development goals, pov- dict a negative growth rate of at least 1.0 erty spending targets, and a mechanism for 3 strong donor coordination, which was linked amount to its creditors as it was spending on to the PRSP targets. The strategy was fine- education--about 12 percent of its annual tuned during the second half of the Bolaņos budget. administration and by the Ortega adminis- tration over the last two years. Nicaragua's The debt relief granted to Nicaragua has been development plans during this decade have the largest of all the debt relief operations shared a common vision of more infrastruc- granted under the HIPC initiative, including ture, more and better services in health and US$382.6 million from IDA. Nicaragua has been education, more economic growth and better able to use the funds that it would otherwise incomes for the poor. have paid in servicing debt to increase spend- ing on anti-poverty programs from 10 percent IDA's Country Partnership Strategy (CPS) for of GDP in 2002 to 13.4 percent in 2008. Nicaragua for FY2008-2012 reflects these priorities. A preliminary IDA allocation of IDA continued to assist the government in approximately US$240 million--to be used in reducing its foreign debt. In 2007, IDA and an annual series of budgetary support opera- Nicaragua signed a Grant Agreement for the tions and new investment operations in water Commercial Debt Reduction Program in the and sanitation, public sector management, amount of up to US$61 million. In concrete land administration, and rural roads--was terms, this has meant that approximately quickly amended to include a $17 million US$1.3 billion of foreign debt was erased Emergency Relief Credit after the country from Nicaragua's books by the end of 2008. was hit by Hurricane Felix IDA's contribution to reducing poverty IDA is preparing a progress report to be pre- in Nicaragua spans many sectors. sented to the World Bank's Board of Direc- tor's in December of 2009. The report will IDA's contribution has been most notable outline the major changes proposed in the in the following areas: education, rural CPS as a result of the internal and external infrastructure, public sector management, shocks and crises of the last two years. It is and the development of a more competitive likely to propose new investment operations business environment. Gains in these areas to address challenges posed by the prevailing reflect improvements in IDA's approach to aid economic crisis and the spread of the H1N1 delivery. flu virus. The report will also suggest alterna- tive investment operations to replace budget Education--Rising enrollment support in case internal political problems and completion rates continue to weaken international support for budgetary lending. As a result of initial IDA support to education, preschool enrollment more than doubled Poverty-linked debt relief from 14.5 percent of young children in 1993 to about 31 percent in 2004. IDA financed the Nicaragua's huge external debt was the construction and establishment of community greatest burden it had to bear as a result of preschools nationally with a focus on poor rural the economic mismanagement of the 1980s. areas, marginalized urban neighborhoods, Through the 1990s, Nicaragua paid the same and isolated indigenous populations. IDA also 4 Development Assistance Has Made an Impact in Nicaragua Indicator Baseline Progress Preschool enrollment (%) 14.5 (1993) 31 (2008) Net primary school enrollment (%) 74.4 (1998) 87.3 (2008) Share of rural roads in good or fair conditions (%) 17 (1999) 21 (2009) Share of small rural towns connected to public telephone (%) 24.5 (2003) 90 (2008) Spending on poverty reduction (% of GDP) 10 (2002) 13.4 (2008) Days required to start a business 71 days (2003) 39 days (2009) Sources: Ministry of Education, World Development Indicators, Ministry of Transport and Infrastructure, Telecommunications Regulatory Agency, Ministry of Finance and Public Credit, Doing Business. trained both teachers and parents in project 27 percent in 1997 to 67.2 percent in 2008. areas. Over this period, preschool drop-out Notably, the share of students aged 7 to 13 rates fell by one-third. IDA also succeeded in living in extreme poverty that did not attend better preparing children for primary school, school was slashed from 45 percent in 1993 helping to cut drop-out rates nearly in half to to just 20 percent in 2005. IDA is also working just 6 percent. on improving the quality of education and for all primary school children will be using new In 2007, the incoming Minister of Education textbooks financed by IDA and the Education reaffirmed the country's desire to achieve for All Trust Fund managed by IDA. the education Millennium Development and Education for All (EFA) goals by 2015. In March IDA is also supporting the National Integral 2008, the Ministry of Education presented School Nutrition Program for the 2009-2010 its new education strategy 2008-2011, orga- school years; the program will provide lunches nized along the themes of education for all for 38,000 pre-school children and has been children; improved educational quality; local cited by the FAO as one of the top four school participation management and decentraliza- feeding programs in the world. tion; and education as part of the life cycle. Rural infrastructure--Increasing More recent IDA operations have focused on access and connectivity primary schooling. Thanks to large contribu- tions from IDA and other donors, more Nica- IDA has played a major role in helping to raguan children, especially among the poor, develop the rural sector by extending road are attending and finishing primary school and telecommunications networks, which in more suitable classrooms equipped with connect people to markets and social ser- better educational materials. Net primary vices, and expanding the use of land titles, enrollment in Nicaragua rose from 76 percent which help the poor access financing and in 1996 to 87.3 percent in 2008, and the build productive assets. primary school completion rate climbed from 5 Roads. IDA's support for the development IDA is also contributing to making the tourist of rural roads in Nicaragua is an example sector one of the most dynamic in the country where the combination of policy, investment, by rehabilitating two of the most important and technical assistance generated greater paved roads to touristic areas in the Pacific returns for all. Long-term IDA involvement Coast of Nicaragua--San Juan del Sur and has helped increase the share of the road Diriamba­Casares. network in good and fair condition from 17 percent of rural roads in 1999 to 21 percent Telecommunications. Prior to 2000, insuf- in 2009). IDA-financed projects restored ficient competition left Nicaragua with one over 3,000 km of secondary roads destroyed of the lowest telephone connection rates in by Hurricane Mitch, rehabilitated the Pan Latin America. IDA investment lending helped American highway between Managua and San privatize the state monopoly and create Benito--restoring a key trade link with the a regulatory agency. IDA's budget support rest of Central America--and more recently, operations helped create a Telecom Invest- has been working to improve 240 km of rural ment Fund to extend services in rural areas. roads by using a type of concrete cobblestone By putting this fund to work, an IDA-financed (adoquines) as an intermediate solution, link- project helped provide telephone services to ing the poor to markets, health centers, and 500,000 citizens living in 365 small towns. schools. IDA-financed projects have promoted the use of these lower-cost construction With IDA support, national coverage of fixed techniques, which represent an efficient and mobile phones increased sevenfold from allocation of resources and results in the 194,000 in 1999 to more than 1.3 million in provision of higher than traditional service 2005, and mobile coverage in provincial capi- levels for rural traffic, as the alternative to tals increased from 50 percent in 1999 to 100 gravel-surfaced roads. percent in 2003. With continued IDA support, the majority of the municipal capitals of the While IDA and other donors such as the United country will have Internet connectivity by the States, Japan, Denmark, the European Union end of 2008. and IADB, were financing the improvement of rural roads, analysis identified the need for Almost all municipalities now have "telecen- better road maintenance. As a result, succes- tros" in which young people can learn com- sive IDA budget support operations helped set puter skills and have access to unprecedented up a road maintenance fund. By the end of levels of information. 2008, the fund had contracts for maintaining 2,774 km of roads (85 percent of the coun- Land administration--Securing try's maintainable road network), creating property rights for all jobs for poor people, and lowering transport costs. Throughout this process, IDA has also IDA's analytical work helped raise awareness promoted the creation of 38 local micro- of the importance of land titling in the battle enterprises for basic routine maintenance against rural poverty. The IDA-financed pilot of roads (2,416 km by mid 2009), which also Land Administration project also assisted provide stable, productive work for some 430 Nicaraguan authorities in preparing and very poor families. implementing key legal and procedural 6 reforms that will be the basis of a massive have turned their attention to strengthening national regularization program. With IDA's public sector management systems to promote support, Nicaragua has designed a Registry greater transparency and accountability. IDA Law and a state-of-the-art Cadastre Law; it has been supporting the modernization of the also introduced a less costly and more effec- public sector management as one of the pil- tive systematic approach to regularize land lars for the implementation of the country's rights and start clearing the backlog of titles development strategy, improving budget and juridical services provision. transparency and government accountability. In addition, the planning systems have been By mid 2009, cadastre surveys and new streamlined in order to improve the public institutional procedures with national and policy effectiveness and monitor and evaluate municipal authorities were in place in four of their implementation. Finally, a reasonable the fifteen Departments of the country; more civil service reform has been implemented than 76,000 cases of rural land holdings are with the goal of creating a professional and being analyzed as part of the new regulariza- stable public sector. tion process. 11 environmentally protected areas are also being studied. The average Business climate--Easing the time it takes to title a property dropped from costs of doing business 65 days in 2003 to 10 days in 2005. Nicaragua continues to implement reforms An important component of IDA's support to to enhance its business climate. The 2010 land administration in Nicaragua is the titling Doing Business Report will take note of the of indigenous territories in the Caribbean establishment of the Central American Cus- Coast of the country. Over the last two years, toms Union. An additional reform in the leg- with strong support from the Government of islative arena is the approval of the Coastal Nicaragua, the Land Administration project Zone Development Law which should trigger has helped Nicaraguan institutions imple- important investments in the tourism and ment the Law on Indigenous Territories issued overall service sectors. in 2002. By mid 2009, for the first time in Nicaraguan history, over 123 indigenous com- A recently approved US$20 million operation munities, home to more than 53,000 Miskito to promote micro, small and medium busi- and Mayangna ethnic peoples, now live in nesses will continue to increase IDA's role territories that have been registered in the in this sector. This operation encompasses a name of their communities. These nine areas Partial Credit Guarantee Fund by which micro, represent 8 percent of national territory. small and medium enterprises with collateral limitations will have access to commercial Public sector management-- loans from the local banking system. Improving governance The ongoing Broad Based Access to Finance Over the years, IDA and other donors have Project has supported an increase in lending begun to direct more resources through to small and medium producers, both urban government channels (for example, through and rural, by working with the government direct budget support). As a result, donors and the micro finance industry to expand their 7 services nationwide--increasing the points of Responding to Crisis financial services from 200 in 2005 to 253 in 2009. As a result of last year's food price increase crisis, IDA is supporting an emergency program that will Agriculture--Unlocking rural opportunities give 31,000 poor farmers access to a package of certified seeds, fertilizers, technical assistance and In Nicaragua, agriculture represents 19 per- training to improve their food security. In addition to cent of GDP and provides 27 percent of total this, IDA is helping the government to design and later implement a National Seeds Program that will employment. Most of Nicaragua's poor are address the chronic constraint of limited availability concentrated in rural areas where agriculture and use of quality seed in the planting cycles of is the main source of food and income. Nica- the most important crops (maize, beans, rice and raguan agriculture, mainly in hands of small sorghum). This new operation will also promote landowners, shows strong potential. Improv- the organization and business development of ing the food supply in domestic markets and small and medium farmers as well as provide them with training and technical assistance. increasing exports of basic food products Financial services will be made available for seeds could make agriculture a driver of economic production, processing and commercialization, and growth. the Ministry of Agriculture's technical assistance bureau (INTA) will see its capacity for research and IDA is helping improve the sector's productiv- seed certification strengthened. ity and competitiveness by assisting the Min- istry of Agriculture in adopting a two-pronged strategy that combines (i) actions to continue the rate of progress will have to accelerate. supporting the most vulnerable groups by Nicaragua's main challenges can be grouped delivering a package of agricultural inputs into five areas. (certified seed of basic grains and fertilizers) and technical assistance, and (ii) actions Maintaining macroeconomic stability aimed at expanding the supply of agricultural goods produced by small and medium farm- Nicaragua has made significant progress ers. To a large extent, such an approach is since the start of the 1990s on improving consistent with the recommendations issued and maintaining its macroeconomic stabil- for countries like Nicaragua by the World ity. Until 2009, the country had experienced Development Report 2009 and under the steady positive GDP growth averaging 3.2 Global Food Crisis Response Program. percent between 2001 and 2008, low inflation rates, stable exchange rates, declining inter- CHALLENGES AHEAD est rates, and a high level of international reserves and foreign direct investment. How- Nicaragua remains the second-poorest ever, the Nicaraguan economy has recently country in Latin America after Haiti. While been affected by a number of external shocks economic gains have reduced the scale and including Hurricane Felix, the rising interna- severity of poverty in Nicaragua, it is still tional prices of food and oil and the global unacceptably high with 46 percent of the financial crisis. All these factors, including population living below the poverty line. To the negative effects of continuing internal achieve the Millennium Development Goals, political strife, have undermined its current 8 performance resulting in the deterioration of efficiency and transparency of the country's the economic growth level, which in turn has public financial management systems. a major impact on the reduction of poverty. Currently the government is in intense nego- Building a competitive investment climate tiations to maintain its program with the IMF and is designing and consulting the reforms Despite real progress in recent years on meet- necessary to maintain macro economic ing the challenges of freer trade under the stability, while at the same time striving to US-Dominican Republic-Central America Free maintain the gains in education and health of Trade Agreement (DR-CAFTA), Nicaragua is the past several years. still not taking full advantage of global mar- kets because of infrastructure and regulatory These are particularly difficult moments for bottlenecks. New investment is needed to the Nicarguan economy given that several provide a reliable electricity supply and to vulnerabilities persist due to the current substantially increase the network of paved financial gaps in the national budget, stem- roads. Bureaucratic red tape still needs to be ming from the level of public debt, fiscal and slashed to provide predictable and transpar- trade deficit, and governance matters, among ent regulatory processes, secure property other factors. In this sense IDA should continue rights, and deepen financial markets, with to work with other donors on strengthening special attention to providing a level playing the macroeconomic framework by supporting field to help small and medium enterprises sectors that foster socio-economic growth, thrive. IDA will play an important role in this promote fiscal consolidation and increase strategic area through a new operation of poverty reducing spending while at the same US$20 million to support the development of time promoting transparent and effective small and medium enterprises. public administration. Tapping human potential Pursuing good governance and state modernization Nicaragua's people need access to quality education and adequate nutrition and health Because public investment and spending will if they are to enjoy the benefits of a vibrant always exceed limited public funds, careful global economy. Primary school enrollment planning is needed to ensure that what is has increased significantly, but children must spent, is spent well. Progress has been made be taught what they need to advance. Invest- as previously noted. The next steps could ment in secondary education will be very keep focusing on improving the professional- important to Nicaragua's future. ism of the civil service, expanding the use of financial management systems, providing In health, the big challenge is to continue to freedom of information that would allow citi- expand the coverage and quality of health zens to hold government more accountable, services in affordable ways. Child malnutri- and strengthening the quality and targeting tion, which remains alarmingly high, needs of public spending. IDA will be working closely immediate attention. Special efforts will with the Inter-American Development Bank be required to provide services to isolated and several bilateral donors to strengthen the populations along the Atlantic coast, includ- 9 ing investments in roads and clean water. IDA convinced of the value of reforms, no amount recently approved a $20 million operation to of financial or institutional leverage will provide water and sanitation services for the ensure that activities proposed by IDA or other rural sector, including the Caribbean Coast, donors are carried out and sustained. Within as well as $40 million new operation to bring this context, IDA analysis has played a critical water and sanitation to Managua's poorest role in identifying problems and solutions, neighborhoods. building political consensus, and generating momentum for reform based on a common Expanding economic opportunities understanding of country challenges. for the poor, predominately in rural areas and in the Caribbean Coast Going forward, IDA will carefully evaluate the country's political realities and take account To boost their productivity and income- of the limits to its influence. IDA is a strong earning potential, rural areas must be given and respected partner; however, elections the tools to compete globally. More funds are and administration changes interrupt policy needed for roads, telephone connections, dialogue and continuity. IDA will continue to land titles, intensification of agriculture and have to weigh and make trade-offs between agro industry, and promotion of rural non-farm what is considered optimal and what may be economy. Although IDA was at the forefront realistic and achievable in a fluid political of investment in the country's roads, nearly environment. IDA's comparative advantage in 80 percent of the network is still in poor drawing from and introducing best-practice condition. Energy and telecommunications programs from other countries is unparal- improvements are still needed in Nicaragua's leled. However, proposed activities based smallest towns and land-titling coverage on international practice must be tailored remains limited to a few areas in Nicaragua's to Nicaragua's political and social realities. northeast. Poverty statistics are especially There is no "one-size-fits-all" approach to alarming in the country's Caribbean Coast, development. home to the majority of nation's indigenous citizens. IDA has increasingly targeted new IDA's work in the education sector is evolving investments to this area but much more is from a fragmented, project-driven approach needed. to a coordinated effort supporting a govern- ment-led strategy. IDA's experience in Nicaragua underlines the importance of staying IDA's support to government planning strate- tuned to a country's political economy. gies for poverty reduction continue to be use- ful tools, and act as a catalyst for government In retrospect, the success of IDA's involve- planning especially in a time of crisis. ment in Nicaragua has hinged on local politi- cal consensus and buy-in from all relevant August 2009 government actors. When authorities are not http://www.worldbank.org/ida 10