Second Economic Recovery Project Report No: ; Type: Report/Evaluation Memorandum ; Country: Nicaragua; Region: Latin America And Caribbean; Sector: Macro/Non-Trade; Major Sector: Economic Policy; ProjectID: P007784 The Nicaragua Second Economic Recovery Operation, supported by Credit 2631-NI for US$79.7 million equivalent, was approved in FY94. The loan was closed in FY97, 10 months behind schedule, after full disbursement. Cofinancing was provided by the Government of Japan for US$37.0 million. Parallel financing was provided by the Government of Germany for US$13.3 million. The Implementation Completion Report (ICR) was prepared by the Latin American and Caribbean Regional Office. The Borrower's comments were included as an appendix. The cofinancier did not provide comments. The prime objective of the operation was to deepen the structural reforms supported under ERC 1. Specifically, ERC II supported the Borrower's medium-term stabilization program; downsizing and modernization of the state; financial sector reform; and private sector development. The credit provided quick-disbursing finance in three tranches for general imports. Achievement of the project's objectives was mixed. On the one hand, ERC II provided needed balance of payments support, which ultimately supported renegotiation of Nicaragua's external debt from US$10 billion in 1995 to US$6 billion in 1996. Moreover, during program implementation, domestic inflation and unemployment were significantly reduced, and export and economic growth accelerated. Public sector reforms led to the elimination of roughly one-eighth of all civil service positions, and privatization or liquidation closed nearly all small and medium public enterprises. Restructuring agreements were concluded with two major governmental ministries; the capacity of the Superintendency of Banks was strengthened; most property disputes were resolved; amendment of tax and fiscal policies was made more transparent; modest trade reforms were introduced; and a new Labor Code was approved. Improved consistency in managing macroeconomic policy, more rapid privatization of the large state enterprises, and continued progress toward establishing a properly- supervised, privately-owned financial system are among the remaining elements needed to consolidate the reforms supported by ERC II. The ICR rates project outcome as marginally satisfactory, institutional development impact as modest, and Bank performance as satisfactory. OED agrees with these ratings. The Region is also convinced that sustainability is likely, based upon its ongoing policy dialogue with the new Administration, the continued recovery of economic and export growth, progress toward concluding a new stabilization agreement, and GON decisions to move ahead on privatization of the state agricultural bank and reduction of the maximum import tariff. However, in view of the enormous challenges faced by the new Administration in completing implementation of the necessary reforms, and the risk of delays on key policy decisions, OED rates sustainability as uncertain, rather than likely, as in the ICR. The principal lessons are that: (i) when public discussion questions the aims and rationale for the adjustment process, IDA should be prepared, at the request of the Borrower, to engage in a national dialogue; (ii) reliance on quick-disbursing operations to support public sector reform, especially institutional restructuring, is questionable; and (iii) IDA should have moved more quickly to provide the Borrower with guidance on the design of an alternative system of rural credit. The ICR is of unsatisfactory quality. While providing a wide-ranging discussion of issues, a comprehensive annex of supporting tables, a satisfactory discussion of a plan of future operation, and Borrower comments, it suffers from incomplete coverage of key topics and analytical weaknesses. It also lacks the aide memoire of the completion mission. A joint audit of ERCs I and II, together with the Institutional Development Credit, is planned, pending closure of the latter.