;>OCXtan ; 4I14: I (;J,' )1-1 ( ThieWorl 'Mc N'T1.-.><, I !.@e ; IVV'3y:. (1'1:. The Worw 'I Vh A,M~' FOR OM1CIM] Report No. P-5598-NI REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED ECONOMIC RECOVERY CREDIT OF SDR 83.5 MILLION (US$110 MILLION EQUIVALENT) TO THE REPUBLIC OF NICARAGUA September 3, 1991 This document has a restricted distribution and may be used by recipients only in the performance of their official duties Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EOU IVA;ENTS (as of August 30, 1991) Currency Unit - Cordoba USs1.0 = C$S US$0.20 c C$l FISCAL YEAR January 1 - December 31 ABBREVIATIONS AGROEXCO = Agriculture State Export Company AFA = Rice, Beans and Sugar Food Package APP = People's Property Area BANIC Nicaraguan Industry and Commerce Bank WIN = Nicaraguan Mortgage Bank BND = Nicaraguan Development Bank BP = People's Bank CAFENIC = Nicaraguan Coffee State Trading Company CIT = Corporate Income Tax co = Cordoba Oro CORFIN = Nicaraguan Financial Corporation CORNAP = State-owned Corporations Holding Company CPAR = Country Procurement Assessment Report ENABAS = State Agricultural Marketing Company ERC = Economic Recovery Credit FASO = Fund for Assistance to the Oppressed FISE = Social Emergency Investment Fund FNI = Nicaraguan Investment Fund GVT = General Value Tax ICB = International Competitive Bidding IDB = Inter-Amer'.can Development Bank INAA = Nicaraguan Institute for Water and Se0trage HATONIC = Nicaraguan Cattle/Slaughtering Holding Company MDP = UNDP Management Development Program OECD = Organization for Economic Cooperation and Development PMA - Mother-Children Nutrition Program PTI = Personal Income Tax RUTA = UNDP/IBRD Regional Unit for Technical Assistance SCT = Selective Consumption Tax SOE = Statement of Expenses UNDP = United Nations Development Program USAID = United States Agency for International Development FOR OFFICIAL USE ONLY NICARAGUA ECONO2!C RECOVERB CREDIT PRESIVENT'S REPORT TABLE OF CONTENTS Paae No* Credit and Program Summary .. .4.. Part I. ECONOMIC ISSUES, PKLICIES, AND IDA ASSISTANCE STRATEGY . 1 Background.. . 1 Recent Economic Developments . . . . . . . . . . . . . . 2 Need for Adjustment and Constraints. 4 The Government's Strategy and Program for Stabilization and Adjustment. 6 Strategy for Renewed Growth . . . . . . . . . . . . 6 The Stabilization Program. 6 The Structural Adjustment Program. 7 medium Term Prospects .. IDA Assistance Strategy.. . 11 Part II. THE GOVERNMENT'S STRUCTURAL ADJUSTMENT PROGRAM . . . . . 13 Public Sector Reforms ..... . ....... . 13 Financial Sector Reform ........ 19 Reforms of Systen of Incentives ........... . 21 Social Sector Requirements and Poverty Alleviation . . . 24 Part III. THE PROPOSED ECONOMIC RECOVERY CREDIT . . . 26 Objective and Size of the Credit . . . . . 26 Conditions for Tranche Release . . . . . . . . . . . 26 Procurement, Disbursement and Auditing . . . 28 Co-financing and Aid Coordination . . . . . . . . . 29 Relations with International Financial Organizations . . 30 Technical Assistance .............. 30 Benefits and Risks . . . . . . . . . . . . 31 Part IV. EXTERNAL FINANCING REQUIREMENTS ............ 34 IFl Arrears Clearance ............... . . 34 External Debt Overhang. . . . . . . . . . . . . . . . . 34 External Resource Requirements . . . . . . . . . . . . . 36 Part V. RECOMMENDATION.. ... . . 37 This document has a restricted distribution and may be used by recipients only in the perfo-manc, t rf Au.h MfRmi,.l ,it... lc n..mo nnt nthAvwiqe he disflced without World Bank auth_: 2X! paSge No. ANNEXES A. Economic Indicators . ....... . . . . . . . . 38 B. Social Indicators . . . . . 50 C. Government Letter of Development Policy . . 52 D. Matrix of Actions ... . . . . . . ...... . . 64 E. Supplement&ry Credit Data Sheet . . . . . . . . . . 73 F. Status of Bank Group Cperations . ......... 75 NICARUAG ECONOMIC RECOVERY CREDIT CREDIT MND PROGRAM SUMMARY Borrower: Republic of Nicaragua Amount: SDR 83.5 million (equivalent to US$110 million) Executing Aoencies: Ministry of Finance and Ministry of Economy and Development Terms: Standard IDA terms with repayment in 40 years. and ton years of grace. E55Degription The proposed loan would support the Government's structural adjustment program, which is designed to (i) downsize and restructure the public sector, including the privatization of state- owned companies; (ii) reform the financial system to improve resource allocation/ mobilization through establishment of a competitive environment with private sector participation; and (iii) reform the incentives systems by eliminating barriers to private sector entry to production and trade, liberalizing trade, domestic price controls and other regulations. Benefits: The implementation of the structural adjustment program would promote growth through increased private sector participation, improved incentives for production and a more efficient allocation of domestic resources. It would also increase employment opportunities and help alleviate poverty. In addition, it would facilitate the flow of external financing and foreign investment. Bisks: The principal risks are weaknesses in institutional capacity to carry out the program, resistance on the part of organized groups to fiscal and financial restructuring, slow private sector respoase due to uncertainty regarding the property rights, and shortfalls in timely donor support. - ii - Disbursements: The proceeds of the loan would be disbursod in two equal tranches of SPR 41.75 million (US$55 million equivalent) each: the first tranche upon effectiveness (with retroactive financing of up to SDR 41.75 million), the second tranche after a satisfactory performance review expected around March 1992. REPoRT AND fEClowENDATION OF 58s PRESIDENT OF TEI TWIERATIONIL DOVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED ECONOMIC RECOVERY CREDIT OF SOR 83.5 MILLION TO TEE REPUBLIC OF NICARAGUA 1. I submit this report and recommendation on a proposed credit in the amount of SDR 83.5 million (US$2.10 million) to the Republic of Nic_ragua. The credit would be on standard IDA terms, with repayment in 40 years, including a 10 year grace period. The credit would support an economic recovery program aiming to achieve economic stabilization and renewed sustainable economic growth, as well as an improvement in living standards. The credit proposal follows the recent decision to declare Nicaragua eligible for IDA credits (IDA/Sec. M 91-131, dated April 16, 1991). The proposed operation would be co-financed with concessionary funds from the Inter-American Development Bank (IDS), the Japanese Government, the German Government, and the Swiss Government (para. 103). 2. The IDA credit would be the first to Nicaragua since 1980. Following the past decade of Sandinista rule, the February 1990 elections brought the Chamorro Government to power. The new Administration approached the Bank and IDA to support its stabilization and recovery efforts after a six-year interruption in relations between the two institutions. Since April 1390, Bank staff visited Nicaragua on several occasions, assessed the economic situation, and discussed with the authorities the elements of a program for stabilization and adjustment. The Bank and IDA also coordinated donor support, including Consultative Group meetings in Paris on December 3-4, 1990, and May 16-17, 1991. In the latter meeting, the donors agreed on a financial package to clear the arrears to the World Bank and the IDB. The Government resumed debt service payments and froze the World Bank arrears at the May 1991 level. The International Monetary Fund (IMF) is helping the Government to monitor a Stabilization Program launched on March 3. 1991. A stand-by arrangement, based on a track record of program implementation, is expected to be presented to the IMF Board during the first half of September 1991. The Government is also requesting Paris Club assistance for debt relief. 1. ECONOMIC ISSUES, POLICIES. IDA ASSIS CE aTEGY Background 3. The Chamorro admin'stration inherited from the Sandinistas a devastated econom-y. Production was well below 1980 levels, exports ran at about half of the pre-1980 leviel, hyperinflation was about 4,700 percent in 1989, international reserves were depleted, and debt had accumulated to around US$9 billion by late 1989. The administration has also inherited an oversized and extremely inefficient public sector which has crowded out private sector participation through a deep involvement in economic activities, and ownership of productive means. Many skilled technicians and managers had left the country. The tasks of achieving stability, economic revival, and the other prerequisites for sustained growth appeared daunting. Moreover, the economic agenda iad to be pursued in the environment of a fragile political peace. 4. During the preceding decade, the Sandinista government tried to establish a centrally controlled economy. Many privately-owned undertakings were confiscated or expropriated. The financial and external trade sectors were nationalized. The small remaining private sector was heavily regulated. Inappropriate macroeconomic policies and price controls distorted resource allocation. Gross inefficiencies in resource use resulted. Public sector expenditures trebled over the decade, reaching an average of 57 percent of GDP in 1983-87. The Government's resort to Central Bank financing fueled an inflation level which reached 14,300 percent in 1988. The contra war and a United States trade embargo compounded problems. Consequently, the GDP grew only moderately at the beginning of the 1980s. and declined every year beginning in 1984. Table 1 illustrates the economic deterioration of the 1980s. TAble 1 VICACU - GEOB MACDBOCONWC I10?d. 1979-1990 179-83 A1 1984 1985 l986 1987 1988 1969 1990 Annu.L teal Crowtlt fate op -2.3 -1.6 .4.1 -1.0 .0.7 -1U.0 -2.8 -4.4 Total CGeuu¢pt5 -6.a4 0.2 .4.:9 ..7 -2.6 -19.1 .9.9 4.2 AvWrI' Da stt ZUltad= S3 35 220 482 912 14.S1i 4,770 7.4i5 Ve. to Do. owet$*e 1^iation Ia 5S 30 335 747 1,347 35X451 1.489 13,490 qaont of Goode mg .9.6 -1.5 0.6 -14.) 3.5 -d.7 -15.2 3.0 gtort of Goode X aIS -2.4 -.8 -.1.7 -17.6 -1.0 -10.6 7.5 9.9 Rato. to ¢oP (2)' lloF tzrr ,.t c¢ (1. off. gra=*) .15.2 .21.1 .25.9 -20.6 -22.1 -51.9 -32.8 -X3.) R0- Cutteot coon? (*5 5?) -12.2 -15.0 *20.7 .19.4 -19.4 -47.7 -29.5 -31.1 Debt Indicaor. owal. utetr t Arrears (0S660)t IbOe Ottetandig 2.644 4.546 5.2S5 5 945 6 984 7.48 8.267 8.819 U,d1.au Long-terA DOD 3.151 3.900 4 616 5 321 4 262 6 773 ,546 8.064 Slort.te n-DCD 2/ 495 646 637 634 722 715 722 755 Total ZOD/ports GMS ("¢ono) *20 966 1.526 2.070 2.152 2.578 2.427 2.556 Total DOD/Cuivot OD(pertep ) 109 161 188 210 240 659 752 796 N@e-it,@i*l PuabU Seator (A. Z of Cur. GOP)e 51 toal Ba*e60 26.2 40.8 37.0 36.5 29.8 23.3 24.6 17.2 total up4eitare 41 38.8 62.6 59.8 51.6 47.9 49*. 29.9 42.8 ore so :l. t end alBak *ataf e.ttaate 25 WIotfl ll eattd e*o etcrcial debt. 3 "oom.li1pubcU setOr (WNPS) IlDee ga gWO .ret and piblic utility et6"TprAeO. I Lor 1979 ihd Central Covt. Iy. 4Z 1990 eztrabudgta7 eapenditue qutaieet to 12 percent of CDP are ImlUded. Recent Economic Develon1ents 5. The Sandinista Government launched an emergency stabilization package to curb hyperinflation in 1989. The program significantly reduced the public sector deficit by halving Central Government expenditures, dramatically cutting credit to the public sector, and frequently devaluing to create a 90 val-tif real depreciation of the Cordoba in 1989. The program failed, aIIh.ha.Jh inflation was temporarily reduced to 4700 percent in 1989 and the viarrot account deficit was slightly narrowed. In early 1990, a lame duck juve'rnment abandoned the program and pursued hignly expansionary policies. In only three months, ,;ublic sector wages were increased by 800 percent in nominal terms, while public sector prices remained fixed. The Central Bank financed resulting deficits and the Cordoba appreciated by 45 percent in real terms, as inflation accelerated. 6. The Chamorro administration has emphasized the importance of stabilization through a combination of fiscal and monetary policies, and the reduction of the size and role of the government as well as reliance on market forces. Central Government expenditures rose only by 2 percentage points of GDP in 1990 despite a doubling of the wage bill, mainly due to the Sandinista- inspired wage increases prior to the new Government's term. The financial performance of the public utilities improved dramatically after prices were increased and then indexed to the US dollar. However, the measures taken in 1990 by the Chamorro government fell significantly short of achieving stabilizatlon. Mainly due to a decline in government revenue by 7 percentage points of GDP, the overall public sector deficit widened to 43 percent of GDP. Domestic bank credit increased rapidly because of deficits in state enterprises. 7. In May 1990, the Government introduced a second currency, the Cordoba Oro (CO). It was pegged to the US dollar. Initially, the CO was used as a unit of account. However, subsequently it was used to pay a part of public sector wages. Loans and deposit rates were indexed to the CO and interest rates became less negative in real terms because the Cordoba continued devaluing against the US dollar (and the CO) on a weekly basis. Nonetheless, non-market criteria continued to determine credit allocation. The introduction of the CO in an inflationary environment also complicated monetary management. The fact that transactions were denominated in CO and effected in Cordobas, sped circulation of the Cordoba. Lax financial policies combined with enforcement of parity to the US dollar also depleted scarce international reserves. 8. Economic performance continued to worsen throughout 1990. This was exacerbated by political volatilities and persisting macroeconomic imbalances. The GDP dropped further by 4.4 percent. Inflation accelerated to over 7,400 percent due to unchecked monetary expansion and a large fiscal deficit. Despite improvement in export performance, the current account deficit remained high. 9. The most significant achievements of the Government in 1990 were the moves toward establishing peace and reaching broad national consensus on the main thrust of its economic policies, after an initial period of prolcnged strikes. The consensus-building efforts culminated with an October 1990 agreement. The "Concertaci6n Econ6mica y Social* between the Government and representatives of workers and employees secured a formal consensus on the need to implement structural reforms, including: liberalizing trade, removing state monopolies in the financial and foreign trade sectors, and returning expropriated properties to their rightful owners. The Chamorro administration demobilized and worked to reintegrate armed groups. In addition, the Government enacted significant policy changes in the areas of tax reform, tariff reform, and deregulation of the economy. 10. In 1991, the Government focused on stabilization and structural change. An extensive stabilization program was initiated on March 3. The Government sharply devalued the exchange rate and placed scrict ceilings on expenditures and credit expansion (paras. 22-24). The early results of the stabilization program are encouraging in terms of drastic declines in the rate of inflation (para. 26). The scanty available figures regarding output levels indicate that the economic decline has been arrested and that moderate growth may have ensued in 1991, thougn no trend can be confirmed yet. Need for AdIjustment and Constraints 11. The severely distorted economy requires rapid transformation of the whole economic system away from centralized management, regulations, public ownership and resource use, and controls to a free-market orientation with increased private sector participation. This economic transformation has to occur under the restraint of a major stabilization effort. Before structural adjustment efforts can bear fruit, sustainable relative price stability has to be established. 12. While the Government demonstrates commitment to stabilization and adjustment through the March 3, 1991 program and a number of steps toward structural adjustment, the economic agenda continues to face strong challenges. Some of these challenges are not in the domain of straightfo-ard economic policy. The effort to maintain consensus behind economic policids has consumed the Government's attention and required concessions by all economic actors regarding the content of policies. The Government, however, has achieved consensus to date in support of the main thrust of its economic policies. 13. The Government faces many constraints which will continuously test its political will and capability to implement its program for reforms. In an environment of hyperinflation, the restoration of macroeconomic stability necessitates drastic fiscal and monetary measures. Major expenditure cuts are required in the public sector. This wili necessitate a decline in the wage bill with consequences for real wages and the level of public sector employment. Also, special care has to be taken that essentia. government services and social sector needs are not adversely affected. The government's revenue raising capability has to be improved significantly. Moreover, credit for all types of activities will have to be severely constrained. The authorities a-e working to achieve the stabilization targets without curtailing the supply response and worsening the position of poverty- ridden groups. Failure in this respect would erode support for Government policies and disturb the recently acquired social and political peace. 14. Reducing the role and share of the Rublic sector in the economy constitutes a major challenge to the Government's adjustment efforts. First, the central government spends almost one third of GDP. This exceeds public - 5 - revenues, resulting in a fiscal imbalance. Second, government ownership of economic assets in all sectors and heavy public sector use of resources crowds out the private sector. The public sector monopolizes the financial system, owns a majority of the manufacturing firms, and participates in agricultural production by owning state farms. State enterprises operate inefficiently, are afflicted by highly politicized excess labor, and deperd on financial resource transfer to cover operatLonal deficita. Third, little room for private initiatives remains because the government heavily controls and regulates the economy, as well as monopolizes trade and services. Public sector cutbacks meet resistance from strong pressure groups opposing change. 15. Although the central government pervades the economy, its nolicv formulation. imnlementation and monitoring canabilities are limited. The deteriorated political climate has caused significant personnel losses in key areas over the last several years. Similarly, institutioral capabilities have eroded. Implementing demanding stabilization and structural adjuatment programs will strain public sector capabilities. Without substantial and immediate technical assistance, program implementation could fail. 16. The absence of a functioning financial system presents a major challenge to adjustment. The ineffective publicly owned financial institutions serve merely to channel Central Bank credit to the state. Formerly, the lack of credit discipline led to unchecked credit expansion and almost complete noncompliance with repayment requirements. The Central Bank has ineffectively used traditional monetary policy instruments. In addition, there is no ef?ective supervisory agency nor prudential regulations. While a program to restructure the financial sector has been initiated recently, establishment of a functioning financial sector will take time. 17. The uncertainty surrounding ironerty rights, land ownership, and land tenure, unless remedied quickly, could endanger the Government's ability to implement an adjustment program to obtain the necessary supply response. Since sympathizers of the previous regime retain control of many law enforcing offices, including the police, settling existing conflicts and enforcing property ownership rights may prove to be difficult. The privatization of properties confiscated or expropriated under the previous regime and agricultural production are especially sensitive to the property rights issue. 18. High unemnloyment, and strained labor relations also cause concern. While economic adjustment and restored sustained growth would increase employment in the medium to long-term, stabilization and adjustment will require reduced public sector employment in the short-term. Decreased employment levels and declining real wages could meet with strong resistance from the highly politicized organized labor groups. This would cause interruptions in production and a slowing down of economic recovery. The government's Stratecn and Program for Stabilization and Adiustment 19. Strateav for Renewed Growth. The Government's strategy, recognizing the interrelation between stabilization and structural adjustment, - 6 - requires carefully coordinated and sequenced actions to achieve the two goals. Achieving macroeconomic stability in an unstable macroeconomic environment is a precondition for successful adjustment, the authorities realize. in turn, economic stabilization, without a significant supply response through structural adjustment, would be short-lived. 20. The authorities recognize that structural adjustment entails immediate and simultaneous actions In several areas. However, proper policy sequencing is essential not to overextend the weak administrative capability of the Government across many areas. The authorities have sequenced their adjustment policies such that measures which can be implemented immediately with a relatively quick pay-off are given priority. Some examples are deregulating the economy, removing government monopolies in domestic and international trade, and abolishing intricate licensing practices. These changes, coupled with the maintenance of competitive interest and exchange rates, will encourage private sector participation. 21. Policy measures eventually will have to be supplemented by investment projects in productive and infrastructural sectors such as energy and communications. Meanwhile, the Government has initiated programs to cushion the impact of adjustment on the most vulnerable low-income groups (para. 91) and to address the immediate needs of the poor segments of the population. 22. The Stabilization Psoora. With IMF staff assistance, the authorities prepared a stab.lization program to reduce inflation drastically. Implementation began on March 3,1991. In the area of fiscal oolicv, the program aimed to reduce the public sector deficit to a level that can be financed by external grants and concessionary assistance, without recourse to domestic credit. This required deep cuts in the recurrent expenditures from the budget compared to 1990, and a major increase in the tax effort. No extra-budgetary spending would be allowed in 1991. According to the program, all public entities are denied access to net domestic bank credit in 1991. 23. The stabil iation program calls for strict constraints on domestic bank credit. The Government has instructed the Central Bank not to extend net domestic credit to the economy beyond available loanable funds. Monthly ceilings on Central Bank credit have been established. Also, the program aims to simplify the interest rate structure and indexes deposit and lending rates to the dollar. 24. The March 3, 1991 program devalued the exchange rate of the Cordoba Oro by 4V0 percent, from lCO$ per US$ to SCO$ per US$. The Goverrnunt also announced increases in: (i) public utility tariffs ranging from 150 percent for telephone services to 350 percent for electricity; (ii) prices of petroleum products by about 350 percent; liquor, cigarette, and soda water prices by 300 percent; and (iii) prices of primary food products (rice, beans, corn, sugar, oil, milk) and soap, produced and marketed by state enterprises, by about 300 percent. An average 200 percent wage and salary increase was granted to public sector employees to partially offset the impact of price increases. -7- 25. The ultimate success of the stabilization program will depend on the authorities' ability to achieve demanding expenditure and revenue targets. Through May 1991, expenditures have been limited to the targeted levels, which are compatible with current revenue and foreign grants. Tax receipts increased by more than 40 percent during the first five months of 1991 and will reach the target for 1991 easily. Thus, the drop in the tax revenue in 1990 proved a transitional phenomenon, resulting from the unusual political circumstances. 26. During the first five months of 1991, total Central Bank credit to the public sector and domestic financial institutions- the key factor behind high inflation in recent years- declined. This fact and the disbursements of foreign loans and grants led to a net increase in international reserves of US$93 million. In addition, the consumer price index dropped by 6 percent in May 1991 compared to April, indicating a moderation in price levels since the initial post-devaluation upsurge of March. 27. The Structural adiustment Proaram. Section II details the Government's structural adjustment program. However, a broad outline of the program is given in this section. The comprehensive program for structural adjustment was finalized recently in consultation with IDA staff. The program aims at a radical reorientation of the economy toward competitive markets and improving incenti%es to the private sector. 28. Fiscal policy aims to balance revenue and expenditures through selective current expenditure cuts and improved revenue gathering by the tax administration. To avoid fiscal account imbalances, the authorities will continue to use cash budgeting, continuousLy adjusting monthly expenditures to revenue. To achieve price and external reserve targets, monetary oolicv will try to balance money supply with demand for real money balances. The authorities will continue to constrain the Central Bank's stock of net domestic credit. Both deposit and lending interest rates will be kept positive in real terms. After the primary objectives of stabilization are achieved, interest rates will be approximated to market rates (para. 76). The Government exchance rate oolicy will be flexible in order to maintain compezitiveness in the tradeable sector and to stimulate export diversification. To ensure a competitive exchange rate, while adhering to tight monetary, fiscal, and wage policies, the authorities will monitor developments closely in order to act immediately due to changes in domestic and external factors. 29. The Government's program highlights reforms for the public sector, the financial sector, and the incertives system. Public sector reforms aim to reduce the government's size and economic involvement, while increasing efficiency lia public services. Regarding Dublic sector expenditures, the Government has controlled 1991 budgetary expenditures after an unsuccessful attempt in 1990. The authorities have targeted to cover all non-interest current expenditure with current revenue by FY93. To this end, the Government intends to reduce non-interest current expenditures by around 7 percent in FY92. Military expenditures are marked to bear the biggest burden -8- of adjustment, since they are perceived to be excessive. In addressing the public sector employment issue, the program initiated for employment reduction through voluntary retirement in 1991, will be continued in 1992 along with external assistance. The Government targets the privatization of some 350 state-owned companies. Already, several companies have been privatized mostly by returning them to their legal owner&. The Government has a time-bound action plan to privatize about 90 percent of state-owned companies by end 1993. 30. The Government is moving to improve the tax administration, in order to enhance the buoyancy of the tax system and to ensure the reliability of tax revenues. Some measures, such as those against tax evasion, would produce short-term results. Other measures target long-term institutional improvements, including the training of staff. 31. Financial sector reforms comprise a major share of the adjustment program. The authorities are planning to introduce competition into the financial system by including the private sector. The state-owned banks will be either liquidated, merged, restructured or rechartered as institutions providing services and credit to small agricultural producers and micro enterprises. In addition, a modern and comprehensive Law of Banking and Financial Institutions is going to be drafted to establish prudential regulations and facilitate the use of modern banking and financial instruments. 32. The third component of the adjustment program aims to restore a svstem of incentaives conducive to private sector participation in a mArket- oriented environment. Trade liberalization measures include the gradual lowering of nominal tariff protection to a range of 10-20 percent by end 1993. Steps are being taken to completely open foreign trade to the private sector, and remaining restrictions on imports are being removed and the foreign exchange allocation mechanism is being liberalized. The discretionarl, complex, and distorted tax system was changed significantly in the second half of 1990. Distorting domestic reaulatorv practices would be erased by reducing the extent of the government's involvement in the economy and changing the regulatory framework for state-owned enterprises. Moreover, the authorities will eliminate the remaining agricultural support prices. Medium Term ProsDects 33. The Nicaraguan economy has the potential to achieve fairly rapid economic growth over the next decade. This expectation is supported by Nicaragua's rich agricultural resources and considerable unused capacity, indicated by a much lower than recent historical average overall output. Also, the external markets of the last decade can be regained, particularly in the US, now that the embargo has been lifted. Successful implementation of the stabilization and structural adjustment policies, to be supported under the proposed credit, would achieve recovery and sustained growth. Another prerequisite of resumed growth is the maintenance of national peace and the resolution of the property rights issue. The Government has intensified efforts to resolve the potentially explosive property rights issue. With - 9 - private sector confldence, price stability, competitive exchange rates, and reformed fiscal, financial and incentives systems, quick recovery and respectable economic growth are attainable. 34. A base case scenario has been developed which assumes that structural adjustment measures would be implemented fully. GDP growth is expected to turn positive in 1991 and then gradually increase to reach S percent annual levels by 1995 and then stabilize at around 4.5 percent annually for the remainder of the decade. Deospite positive per capita GDP growth rates by 1993, however, private consumption per capita would recuperate more slowly. In the transition from stabilization to the resumption of sustaLned growth, public Lnvestment would play the dual role of buffering initial slow growth and of improving infrastructural activities to encourage private investment. Even with this growth performance, real GDP would only reach early 1970s levels by 1996. More strikingly, GOP per capita levels would not reach 1950s levels before 2000. Table 2 shows the projected macroeconomic scenario. ableo 2,aR4U MM U ICtDS . 1991-.000 1991 1993 1993 1994 19i5 1990 1997 19 1999 2000 Anal ul G.rooth Rates.., GDP 1.0 3.0 4.0 4.5 5.0 5.0 4.5 4.5 4.S 4.5 GOP par capita -2.0 -0.1 1.0 1.3 1.9 3.0 1.7 1.7 1.7 1.7 llationl Accmtc (A X of Cart. DP?* Total Coominptteo 113.2 107.7 105.7 104.5 103.5 100.5 98.8 97.4 96.1 94.7 fizblc Co.umaptlns 11.6 20.7 16.6 15.9 15.1 14.4 13.8 13.5 13.1 13.1 Private Coaaeua 91.4 87.0 S9.1 8.6 87.3 86.1 85.0 63.9 8.0 81.6 Total lu.tumnt 13.0 15.0 16.0 16.0 16.5 16.5 16.3 16.0 16.0 16.0 Publuc Su.et u*t 11 8.0 . 7.4 7.5 6.5 5.5 4.7 4.6 4.6 4.5 Privat Svtt 4.0 3.7 8.0 6 .S 10.0 11.0 11.6 11. 11.4 11.5 Zap.:: of Coo" & OS 28.0 30.7 #2.1 33.6 33.7 35.1 36. 37.8 38.7 39.6 luj.ort. of CGood* I IS 53.1 53.4 53.7 53.1 53.6 53.1 51.7 $1. 50.7 50.3 Ge .. Dotic Saving -13.2 -7.7 .?57 .4.5 -2.5 .0.5 1.3 2.6 3.9 5.3 Ron Y5acWl Public Sector (hA 2 of Core. am?)I ttal Cut 3a 32.4 33.5 33.7 23.9 23.3 23.0 22.7 22.5 22.0 22.0 Total Currvt EapOnditur.e 27.8 34.9 21.7 X0.8 19.8 18. 18.0 17.5 17.0 16.8 Capital Zzvau6itta.a 7.0 7.7 7.6 7.7 6.7 5.7 4.9 4.8 4.$ 4.7 8:1al 1s*.L * -13.3 .8.9 .5.4 .4.4 .1.9 -1.3 0.0 0.3 0.5 0.7 Balance of Paymeatet Enpor. of coo"a a US I.9 8.7 0.0 6.9 8.5 s.0 7. 7.6 6.4 6.4 lsarta of Goods & .6 .1 3.9 3.0 3.9 3.3 3.0 3.0 3.0 3.0 (As o of Current GDP) Reource Be .4o .25.2 .22.7 .31.6 -20.5 -18.9 -16.9 -15.0 .13.3 -12.0 -10.7 Cu rrat Account - Sntre t paYt. 21 13.0 .IS.1 -17.5 -16.7 -15.5 -13.9 *12.3 .11.0 .10.0 -9.0 MM$IQ GDF in tlS$ MUt. 1.421 1.489 1,578 1,714 1."88 3.065 2.336 3.444 2.666 2,909 1/ Include* UPP outtrpris. 2/ tIclude. offcial grantu to 1991. Sourcea W etaff .stt t-a. 35. As shown in the table, modest growth ls expected for 1991. Thie growth estimate is based on the predicted rapid reductlon in Lnflation, existence of algnificant excess capacity, and new opportunities in the external sector. The stabilization program launched in early March 1991, has produced positive results already. The public sector carries the burden of adjustment, leaving room for increasing credit to the prlvate sector even in the short run. Structural policy measures encouraging private sector particlpation in production and trade have been initiated. Foreign trade was - 10 - opened to the private sector in early 1991, and currently private traders are participating. Moreover, a full year's effect of the removal of the US trade embargo in 1990 will be felt in 1991. The agricultural frontier has grown since the end of the war, and there has been a massive transfer of idle agricultural land to ex-military personnel and former resistance fighters. The authorities expect a 25 percent increase in the production of basic grains this year. 36. The effects of structural reforms to improve resource allocation/mobilization and increase production of tradeables will take time. Moreover, private investment is expected to grow slowly. Although Nicaragua, a small economy, can be integrated rapidly into world markets, structural reform implementation will cause a lag in growth. Structural change will occur quickly in the trade and domestic deregulation areas because the main task there is to eliminate policy imposed barriers to production and trade. These reforms are expected to be installed by the end of 1993. However, financial sector reform will be more complex. It involves the difficult task of restructuring the state-owned banks. Similarly, the supervisory institutions and the privately-owned banks require time to be fully functional. Therefore, relatively high, stable GDP growth is not expected until 1995. 37. Maintaining a competitive exchange rate, in addition to far reaching trade liberalization and elimination of entry barriers to the private sector, will alleviate the anti-export bias and allow for a significant increase in exports in the medium-term. Overall exports of goods and non- factor services are expected to reach approximately US$660 million by 1996, growing at an real average annual rate of 8.6 percent between 1992 and 1996. This would be realized mostly through an increase in traditional exports, mainly coffee, cotton, and beef, products that will account for nearly half of total exports throughout the nineties. Coffee exports are expected to grow 10 percent annually, as a consequence of a slight Increase in the cultivated area, and considerable increases in yields, reaching levels observed in other countries of the region. However, only in 1996 will the export volumes of the seventies be reached again. Cotton exports are expected to grow at high rates due to an increase in the cultivated area. Even with these favorable prospects, by the year 2000, export volumes would still be 20 percent below the 1970.' levels. Beef exports should grow steadily at a slow pace, given the small number of cattle for slaughter. On account of less favorable outlook in world markets, sugar will lose its 14 percent share of exports in 1992 to 11 percent in 1996. Export volumes of bananas will grow fast, due to favorable price prospects and the possibility of entering the American and European markets. An expansion in the cultivated area for banana is expected both in the short and long run. The seafood sector has good export prospects, since almost all exports are based on fishing rather than on shrimp and lobster aquaculture. However, because of overexploitation in some areas, export volumes will continue to be below levels twenty years earlier. With measures to increase profitability, non-traditional exports, especially agro- industrial products, are expected to increase at an annual rate of nearly 10 percent. In the case of imports, trade liberalization will not imply a massive increase, provided that the Government maintains a competitive exchange rate. - 11 - IDA Assistance Strateoy 38. The present crisis, with its political, economic and social roots, presents formidable challenges to the implementation of a viable economic recovery and adjustment program. Like most IDA only countries, Nicaragua faces extreme poverty, a host of policy shortcomings, and weak institutions as it attempts to pre-condition sustained growth. However, Nicaragua faces three additional problems that compound the difficulty of its reform effort and argue for an exceptionally high level of concessionary support from multi- and bilateral donors. The first is that Nicaragua is emerging from a ten year military conflict that destroyed the country's physical and institutional infrastructure, diverted a high percentage of government expenditures to military uses, and contributed to a significant brain drain - amounting to some 10 percent of the population - mostly of professional and skilled labor. The war left large numbers of displaced and handicapped people that will strain government services for many years. The second additional difficulty is that the Chamorro Government is trying to dismantle completely the command economy from the 1980s. This means breaking down the state monopolies in internal and external commerce, rebuilding the insolvent financial sector, restoring property rights, returning businesses and agricultural holdings to the private sector, enacting major legislative and judicial reforms, and reducing the size of the state. Finally, the Government faces an extraordinarily high external debt burden and financing requirements over the next decade. Also, as of early 1991, Nicaragua's accumulated total arrears stood at $3.2 billion, more than twice the 1990 GDP. Though the Government has taken important steps to renegotiate its debt, this debt overhang remains constraining. 39. IDA must play a decisive role in both providing direct assistance and in mobilizing and coordinating adequate levels of donor support. Drawing on its comparative advantage, IDA will focus its assistance on: (i) helping first to address key macroeconomic and structural policy issues through quick disbursing operations; (ii) consolidating the reform process through a gradual shift to sector operations to support the Government's objectives of increasing the efficiency of resource use in the public sector, rehabilitating physical infrastructure and human resource development, and strengthening the private sector; and (iii) using the special IDA facilities to help improve creditworthiness and thereby contribute to restoring private capital flows. In leading the Consultative Group, IDA will seek to complement its financial support by: (i) helping organize and direct urgently needed technical assistance to support the Government's adjustment efforts; and (ii) assisting the Government to mobilize additional concessional resources. In order to enhance both these efforts, a Resident Mission will be established in Nicaragua later in 1991. This will back the Government in its implementation of the program and provide a direct line of communication in Nicaragua for the donor community. 40. This assistance addresses strategic issues critical to the realizat0.on of the government's economic development goals. Most importantly, there is a need to: (i) develop and implement an appropriate mix and sequence of adjustment and investment actions, including those for urgent infrastructure rehabilitation; (ii) strengthen the enabling environment for - 12 - private sector activities to ensure progress in the ongoing process of privatization; (iii) define and implement policies to address the structural causes of poverty; (iv) overcome the limited implementation capacity of the public administration through efficient use of external technical assistance and measures to attract qualified expatriates back to Nicaragua; and (v) promote the efficiency and effectiveness of external resource mobilization, given the likely dependence of Nicaragua on external aid in the medium term. 41. Given the need for profound structural reforms and to ensure a rapid tranafer of resources, the bulk of the IDA funds initially will be made available through quick disbursing, policy-based credits. These policy-based operations will be designed to attract cofinancing or parallel financing in order to maximize external resource mobilization. The magnitude of the base case IDA lending program is determined by the amount of available IDA resources. In consideration of the special circumstances facing the country, Nicaragua has obtained a special allocation from IDA under the Ninth Replenishment, for the three year period FY92 - FY94. For FY95 and FY96, the requirement for IDA funds would be reduced, as the external balance of the country is expected to improve. 42. Upon successful implementation of the proposed Economic aecoverY Cre-dit (ERC), a follow-up structural adjustment credit is proposed for early FY93 to help the Government to deepen the adjustment process. Like the proposed ERC, this second IDA credit is expected to be supported through cofinancing and/or parallel lending from other donors on concessionary terms. Based on an intensive and weSl-focussed economic and sector work program (see para. 44), sectoral operations also would be prepared for Board presentation as soon as basic macroeconomic reform had occurred and the adjustment process was in place. Depending on the size of the available IDA resources, pivotal operations in the social sector, agriculture and infrastructure are being considered for the period FY92-FY94. The former is essential to poverty alleviation and human resource development, and the latter two credits are critical to achieving sustained growth and a resurgent private sector. For FY9S or FY96, an environmental project is envisaged. Both the *fifth and sixth dimension" IDA facilities could be utilized to broaden the assistance program, encourage greater concessionary flows from other donors, and strengthbn burden sharing. 43. This IDA credit strategy is designed both to support the Government's objective of economic reform and to marshall the external resources needed to carry out this demanding agenda. It is critical, however, that the program "stay on track." Should significant policy slippages occur, a reassessment would be made of IDA's assistance role in Nicaragua. Under such circumstances, IDA might be able to consider a much reduced level of core credit operations focussing on the alleviation of poverty and on the environment. 44. To establish a sound analytical framework for the proposed future operations and continuation of the policy dialogue, an expanded economic and sector work program will restore the Sank's knowledge of the Nicaraguan economy following the lapse in relations in the early 1980.. A Public Sector Expenditure Review is currently being undertaken which will be followed later - 13 - in FY92 by reviews of the social sector, agriculture and infrastructure issues. In FY92-FY96, work would focus on (i) the mix and sequence of adjustment actions (through studies on the financial sector, public sector decentralization and the regulatory framework); (Ui) reactivation of the private sector; (iii) poverty issues; and (iv) the environment. 45. For the past year, the Consultative Group has ocussed on emergency assistance, the government's economic recovery effort, and mechanisms for clearing arrears to the International Financial Institutions. In the medium-term, the donor community faces the difficult tasks of supporting the reform effort, and helping to close the financing gap of about US$425 million per year (see para. 123). Recent bilateral support has focussed on balance of payment support, but will shift in the future to areas such as private sector development, education, municipal development, and natural resources. 46. Currently, IFC has two investments in Nicaragua, a sugar plantation and a hotel in Managua. The corporation is exploring, with both local and foreign private sector sponsors, the possibility of developing projects primarily in mining, aquaculture, and private energy generation. II THE GOVERMT'S STRUCTURAL ADJS2ME PROGPAM 47. The proposed ERC would support the Government's policies contained LA the Structural Adjustment Program, which was designed in close cooperation with IDA. The program aims to reorient the economy toward competitive markets and improving incentives for private sector participation. The policies to be supported under the ERC are mainly in three specific areas, including: (i) public sector size and efficiency, (Ui) the financial system; and (iii) the system of incentives. The program is described in the Government's Letter of Development Policy (Annex C). The details of the program in each general area are given below. Public Sector Reforms 48. The Government's overall strategy toward organizing the economy and economic growth necessitates a major change in the public sector's role. While the state sector is expected to reduce its involvement in the economy in terms of ownership and regulatory responsibilities, the resources channeled through the public sector also must be reduced. Under the public sector reform, the program addresses issues that relate to public expenditures and revenue, public sector employment, and privatization. 49. The resources used in gublic sector exrenditures are considerably higher than internationa'. and regional norms and are inconsistent with the Government's adjustment strategy. In 1990, for example, central government expenditures, excluding interest payments and activities of public utilities and other public enterprises, were around one third of GDP. As a result, the - 14 - potential growth of the private sector was crowded out, the public sector was burdened by large management responsibilities, and the resulting fiscal balances were unsustainable due to shortfalls in revenue performance. 50. The distribution of public expenditures between current and capital expenditures raises additional issues. For 1991, approximately 88 percent of projected budgetary expenditures are recurrent, leaving only about 12 percent for capital expenditures. Personnel-related expenditures comprise nearly 50 percent of current expenditures. 51. The authorities already have reduced the size of current budget expenditures. Cuts were effected in the 1991 budget compared to the (budgeted and non-budgeted) expenditures of the central governmernt in 1990 (para. 22). The objective is to establish a balance between the revenue and non-interest current expenditures of the Central Government by 1993. Beginning in 1994, the central government is expected to be a net saver in its non-interest current account transactions. As a first step, the authorities have prepared, prior to Board presentation, a FY92 budget which reduces current expenditures to US$325 million equivalent in 1992 (para. 97 A.(i)). This corresponds to a current expenditure budget which is about 7 percent lower in current dollar terms in 1992. The level of current expenditxres will be reduced by another 9 percent in 1993. The implied deficit of the central government is entirely consistent with anticipated donor grants and balance of payments assistance. Therefore, the envisaged fiscal adjustment would support the objective of price stability. The authorities are prepared to make further downward adjustments in expenditures ro maintain the fiscal balance if there is a downfall in anticipated resources. 52. In the FY92 budget to be adopted by the Government, non-interest current expenditures would not exceed US$325 million equivalent (second tranche release condition; para. 97 B.(i)), compared with US$338 million equivalent in FY91. (This latter figure represents a major reduction in the FY91 budget adopted by the Assembly, and is in line with the targets of the stabilization program.) The budget reductions should be through carefully targeted expenditure cuts rather than across-the-board cuts. Therefore, savings will have to come through selected reductions in government activities. In the current budget, the projected expenditures in 1991 indicate a 45 percent decline in real terms in military spending and a 25 percent reduction in spending on internal security, compared to 1990. In the FY92 budget, with further cuts in the military expenditures, the share of civilian expenditures is expected to be around 87 percent of the non-interest current expenditures. While this corresponds to a 1 percent increase in the relative share of civilian expenditures, these are being reduced by the equivalent of US$16 million between 1991 and 1992. Expenditure reductions on vehicle maintenance and operation, water and utilities, and other areas will affect all spending units. Also, certain transfers from the budget, such as salary supplements, will be reduced. To achieve a more comprehensive expenditure restructuring, the authorities are undertaking a public expenditure review, with IDA assistance. The size, sectoral composition and distribution, and the Institutional aspects of public expenditures will be reviewed. Agreement on implementing the recommendations of the public - ;5 - expenditure review will provide the basis for the further restructuring of public expenditures (second tranche release condition; para. 97 S. (i)). 53. The Government will also undertake medium-term measures to strengthen the institutional capabilities of the line ministries and central ministries for better expenditure planning. Shortcomings exist in the current expenditure planning and monitoring practices. For example, links between the Ministry of Finance and the spending ministries in budget collaboration are unclear. A relevant macroeconomic framework for the preparation of a given year's budget is also missing. Moreover, the Ministry of Finance does not sufficiently monitor expenditures, except for a hoc decisions on cuts. Other institutional issues involve the inadequacy of budgetary formats, the lack of public expenditures coverage other than of the central government, and the process of project selection in the public sector. These issues will be addressed in the context of the public expenditure review (para. 44). 54. Public sector emplovment requires particular attention. Without a significant reduction in employees, expenditure restructuring objectives cannot be fully met. As a result of political pressures stemming from strong unionization under the previous administration, public sector employment swelled, particularly in low skill areas. As of end 1990, approximately 69,000 people were employed by the central government and more than 75,000 workers were employed in state enterprises. Public sector salaries are high for unskilled workers and relatively low for technical levels. This has induced a substantial outflow of skilled workers, leaving the public sector with an extremely large over-paid and unskilled labor force. Though unionization is illegal for public employees, this restriction was circumvented by the previous Government with the formation of the National Association of Employees, a de facto union. This Association obtained extremely generous wage increases in the last months of the former regime and exerts strong political pressure for wage increases. The Association has also extracted a concession in the Concertacion Agreement which restricts the dismissal of government employees (para. 9). 55. To surmount labor market rigidities, the Government has introduced an Employment Reconversion Program (with direct funding from the USAID) to release about 9,000 of the 69,000 central government employees, with an additional reduction of 3,000 In the defense sector during 1991. A reduction of this size would reduce the share of the central government budget in GDP by about two percent. The initial reaction of the employees to this voluntary retirement program has been encouraging. The processing of voluntary employment reduction in the public sector for 8,000 personnel has been completed prior to Board presentation (para. 97 A. (ii)). The Government has now agreed with USAID to include the general public sector, including the banking sector, in the Employment Reconversion Program. The Government plans to continue the Employment Reconversion Program in 1992, with a stronger focus on state-owned financial institutions, public utility companies, and state enterprises. This second phase of the program to be implemented in 1992, which is also expected to be funded by the USAID, aims to reduce public sector employment by an additional 10,000 people. At the same time, the Government will implement a freeze on hiring new employees to replace those who leave the - 16 - services through retirement and resignation. It will continue also to gradually raise the work day to eight hours in the public sector. 56. The recovery and maintenance of government revenue will play a key role in the feasibility of attaining the stabilization targets, as well as in assuring non-inflationary financing of the government programs. Major improvements are necessary to overcome the weakness of tax administratiQn. The General Directorate of Revenues and the General Directorate of Customs lack the organizational structure and the human capital base to implement a much-needed modernization program for tax administration. The high concentration of tax collections demonstrates tax administration weakness. In 1989, 84 percent of total tax collection was concentrated in 125 taxpayers. 92 percent of Selective Consumption Tax (SCT) collection was from 10 taxpayers mainly in fiscal industries, such as cigarettes and liquor. Tax collection is still heavily dependent on ad-hoc applications of SCT and the General Value Tax (GVT). 57. The Government has been working on a program to improve tax administration which will include organizational and procedural changes, as well as the formation of a team of well-trained specialists in tax administration, improving the judiciary process, and raising penalties for tax evasion. The Government has initiated an action plan, satisfactory to IDA, to improve tax administration (para. 97 A. (iii)). The Government has set up a separate unit within the General Directorate of Revenue to administer closely the taxes collected from the 280 largest taxpayers. This separate unit, will serve as a pilot project for the development of a modernized tax administration system. The experience from this operation will be extended to the entire system. Also, several customs posts recently have been relocated closer to the frontiers in order to improve collection. 58. The program for improving tax administration and enforcement includes both short and long-term steps. The authorities are planning by October 1991 to distribute and implement simplified tax declaration/payment forms and procedures, decree stricter sanctions for tax evasion and delinquent practices of businesses, and to revise the penalty structure for tax evasion and delayed tax payments based on the fiscal cost of the infraction and the lateness of payments. All tax administration and enforcement measures, as well as the full operation of the unit for large taxpayers, form a second tranche release condition (para. 97 B. (ii)). The customs valuation lists will be revised to reflect the changes in value, and will be updated on a monthly basis. 59. The above measures will provide a more reliable basis for tax assessment and enforcement. These short to medium-term measures will be supplemented by measures addressing the main institutional weaknesses in tax administration. To this end, the authorities are trying to develop automated management control systems and a computerized taxpayer identification system. l9so, programs are being designed to train Internal Revenue and Customs personnel. A project for technical assistance is under negotiation with the IDB. The Government will finalize the arrangements for technical assistance by March 1992, hire consultants, and start implementing the project to improve - 17 - tax administration. Initiation of these long-term programs is a second tranc£h release condition (para. 97 S. (ii)). 60. In addition to 15 public utilities, the new Government inherited approximately 350 companies engaged in various activities ranging from agricultural production to manufacturing, and from mining to trade services. These companies are collectively known as the Area de Propiedad del Pueblo (APP). The larger enterprises in APP were expropriated from the Somoza family while others were acquired as a result of the agrarian reform, the confiscation of assets "abandoned* by their owners, and through other means. The Government's strategy is to privatize APP companies, but retain ownership of public utilities. 61. There is considerable scope for improvement in the performance of publig utilities. Since they lack an overall regulatory framework, piecemeal distortional interventions are the norm. Public utilities have been given autonomy to set the tariffs for the services they provide, without having a framework to define their operation as natural monopolies. This allows them to pass on their inefficiencies and to realize monopoly rents at the expense of consumers and producers. They are also exempted from income taxes and from taxes on goods and services, including trade taxes. organized power structures and political agendas in these enterprises still remain highly influential. In additLon, management capabilities and technical skills are scarce and capital stock is run-down. 62. The necessary major restructuring of the public utilities will be based on the recommendations of a study to be conducted by the Government with grant funding and IDA support. The recommandations would help establish a regulatory framework defining the relations between the government and enterprises based on the principles of autonomy and accountability. The review would cover the establishment of efficient pricing practices for natural monopolies and would investigate the possibilities of competitive contracting-out alternatives to improve accountability in the operation of public utilities. Other areas include upgrading of management capabilities, improving the human capital base of public utilities, assessLng production capabilities to create a minimum investment program for upgrading them, and preparing action plans for implementation. The study is expected to be initiated before March 1992. Its conclusions and recommendations may be included in the follow-up structural adjustment credit (para. 42). 63. In addition to public utilities, the core economic activities in the country were nationalized by the former government, and put under APP. State control of production led to heavy political intervention, contraction of production, technological backwardness and excessive employment in both manufacturing and agriculture. By conservative estimates, more than 30 percent of GDP was produced by state enterprises, excluding those in the financial sector. The state controlled 45 percent of value added in manufacturing, 70 percent in mining, and a smaller portion in agriculture. 64. The orivatization of the APP enterprises is a major component of the Government's strategy for structural adjustment. Privatization involves the sale of companies legally owned by the government, the return of - 18 - confiscated companies to their legal owners, and liquidation. By divesting these entitios, the Government aims to reduce the share of the public sector in the economy, lessen its administration and management responsibilities, and earn additional revenue for the budget. The combination of a smaller role for the state and a reinvigorated private sector in a competitive framework is expected to create efficiency gains and employment. One of the earlier steps taken by the new Government was to net up Junta General de Corporaciones Nacionales del Area Pfiblica (CORNAP) and charge it with carrying out the privatization process. 65. The process of preparing these companies for privatization has proven to be difficult and time consuming due to legal, technical, political, and financial considerations. A major obstacle to privatizing the non- agricultural companies has been the procedure for determining whether the Government legitimately owns a company. The former administration established de fagto ownership of a number of companies without going through channels that are now regarded as legitimate. Consequently, the legal ownership status of each company has to be determined before CORNAP can either dispose it or return it to its former owner. This task, together with the work required to establish a data base on the companies under its umbrella, have occupied most of CORNAP's management time and resources. In addition, the Government's sensitivity to the demands of the labor employed by these companies has been a factor slowing down the process. 66. After a lengthy preparation period, CORNAP has developed a broad privatization strategy which has been adopted by the Government (para. 97 A. (v)). out of about 350 companies covered by this strategy, 152 are candidates for privatization through sale to private parties. Of the remaining companies, around 70 are to be returned to their legal owners, 50 are to be liquidated, more than 30 are to be assigned to some government departments, and the rest are to be partly privatized and partly returned to private owners. To date, 86 companies have been divested, of which, 23 given back to previous owners, 34 partly privatized and partly returned to owners, 26 either liquidated or assigned to ministries, and 3 fully privatized. The most important action completed involved privatization of three large-scale agricultural corporations, including the HATONIC (the largest cattle operation), AGROEXCO (agricultural export company), and CAPEI1C (coffee growing and processing). The properties of these corporations were distributed among the previous owners, workers, army retirees, and the demobilized resistance forces, based on agreement betweers the parties involved and the Government. 67. The Government's program will include 90 percent of state-owned companies in the privatization process by end-1993. The authorities have identifLed interim targets for mid-March 1992. By that date the process of divestiture will be completed in an additional 75 %ompanies, out of which 25 companies will be fully privatized, while devolution or liquidation will be completed in the remaining 50 companies. Finally, another 30 companies wll also have been prepared for sale by the same date (second tranche release condition; para. 97 B. (iii)). Once these interim targets are achieved, the relative importance of the state-owned companies in total GDP will decline from about 30 percent to less than 10 percent. - 19 - F&nsanial SetorF Refom 68. The Government considers financial sector reform to be central to the adjustment process and the stabilization effort because it has implications for resource allocation and money creation. Changes in production incentives implemented through the structural adjustment polices will create a demand for financial services that the existing state owned financial system cannct meet. A stronger and more diversified financial system concentrated in the private sector must develop based on free-market principles. 69. By 1979, Nicaragua had one of the most advanced financial systems in Central America. A mix of state, private national, and foreign subsidiary banks offered many financial services, including eight deposits, term deposits, transfers, and insurance. Even the inefficient state institutions earned positive rents during the period, while barriers to entry in the financial system created high rents for the more efficient private sector. After taking power in July 1979, the Sandinista government progressively changed the structure of the financial system by eliminating private sector financial institutions, transferring control of state bank operations to a holding company (which evolved into the Corporacifn Financiera de Nicaragua, CORFIN), and progressively reducing to five, the number of financial institutions: Banco Nacional de Desarrollo (BND), Banco Nicaragiense de Industria y Comercio (BNIC), Banco Popular (BP), Banco Inmobiliario (BIN), and the investment lending institution Fondo Nicaragllense de Inversion (FNI). 70. The state-owned banks were also functioning in specific sectors. BND serviced the agriculture and livestock sectors, BNIC the induetrial and commercial sectors, BP the small scale sector, and BIN the housing sector. The complete specialization of the banks in 1985 further reduced management incentives to improve the quality or efficiency of their operations. Managers rolled over poor or nonperforming loans to maintain the flow of financial resources to targeted sectors. Moreover, periodic Government forgiveness or rescheduling of overdue loans and persistently negative real interest rates on loans eliminated any incentive for management to seek high return projects for their investments. 71. A cornerstone of the Government's program to reform the financial system is a restructurina of the state owned banks, along with the cessation of Central Bank subsidies and discounts. The Government initiated an evaluation of the state banks to outline a restructuring program, which has been adopted (para. 97 A. (vii)). The plan includes the following objectives: (i) a rechartering of BND and BP to noncommercial institutions within two years; (ii) the liquidation or merger of BIN with BNIC (second tranche release condition; para. 97 8. (iv)); (iii) the downsizing and restructuring of BNIC as a commercial banking institution; (iv) the restoration of FN1 to a second tier institution; and (v) the dissolution of CORFIN (second tranche release condition; para. 97 B. (iv)). The rechartered BND and BP institutions would be financed by external grants and domestic resources, and would deliver technical and financial services for agricultural development and small scale industry, respectively. Initiation of these steps is a second tranche release condition (para. 97 B. (iv)). The Government is aware of the importance of - 20 - eliminating special support to the putlic banks to attract competitive and universal private sector banks to Nicaragua in the short-term. 72. The Government has emphasized laying the legal and regulatory groundwork for a now Superintendency of the banking system. In April 1991 a law to create the Superintendency and Financial Institutions was passed. Regulations recently adopted address the ahortcomings in that law by reducing the discretionary powers of the Superintendency. The regulations will also reduce potential political interference in the functions of the Superintendent stemming from the role of the Superintendency 8oard (mainly composed of Cabinet Ministers) in the decision-making process. A Superintendent was appointed and operations of the Superintendency were initiated, both satisfactory to IDA, pr,or to Board presentation (para. 97 A. (vi)). According to the Government's plans, by October 1991, the Superintendent will have issued normatives to initiate private banking operations, and by December 1991, the Superintendent will have approved at least two applications for private banks (second tranche release condition; para. 97 S. (iv)). 73. The legal framework to establish a private sector financial system will be completed by creating a modern and comprehensive Law of Banking and Financial Institutions. This law will replace the outdated 1963 banking law and will authorize the privatization of state-owned banks. Until the law is drafted and implemented, the Superintendent will have to issue provisional and partial prudential regulations in order to issue licenses in the financial sector. The Government recognizes the urgency of completing the law as soon as possible. A draft law wiil be presented to the national assembly early next year (second eranche release condtitOn; para. 97 B. (iv)). 74. The Government recognizes that prolonging the current system of interest rate controls both precludes development of strong and diversified private sector banking institutions and major improvement in resource allocation. However, an immediate liberalization of interest rates while the economy is stabilizing, could disrupt economic activity and discourage the evolution of stable financial institutions. Therefore, the Government plans to pursue an interest rate reform with the following objectives: (i) maintenance of positive real interest rates in the short-term; (ii) introduction of a flexible interest rate policy by March of 1992; and (iii) gradual liberalization of interest rates for all financial institutions with the development of a multibar.k system under Superintendency supervision. 7S. The Government introduced a new interest rate policy in April 1991. At that time, deposit rates were established at 12 percent and indexed to the US dollar. Short-term lending rates were unified and indexed to the dollar at 18 percent. A second 30-day deposit instrument was introduced without indexation at 25 percent interest. The rate of interest has been progressively reduced since that time. Between April 11 and April 30, 1991, the Government attracted 47 million cordobas oro through the 30-day deposit instrument. The interest rate on this window of operations will continue to be reduced on a monthly basis as the rate of inflation declines. 76. Until stabilization is achieved and a fully functioning system is completed, the authorities will continue to manage interest rates, but with - 21 - greater flexibility. By March of next year, the Government intends to implement the next stage of its interest liberalization policy. Thi stage includes completely freeing deposit rates, maintaining a band on lendir- -ates equivalent to interest rates on loans of similar maturity in the US adj.-.. iad for country and currency risk, and pursuing a rediscount policy which maintains a uniform rate on rediacounts higher than the average financial system interest rate prevailing on deposits. These measures will encourage banks to compete for deposits and borrowers. Reogrms of Svstem of Incentives 77. The Government strategy will also focus on the system of incentives. Policy changes in the areas of trade regime, tax structure, and the domestic regulatory framework are needed. The Government inherited a trade reaime under which foreign trade was practically closed to the private sector. Incentives were significantly biased toward import substitution. The old incentives system, coupled with exchange controls and arbitrary variations in the real exchange rate, has caused a decrease in the production of tradeables and a reduction of exports to 50 percent of their 1978 level. During the past decade, most international trade was performed by the state trading companies. These companies monopolized exports of traditional products (coffee, cotton, sugar, bananas, cattle, precious metals, seafood and forestry products), and accounted for up to 98 percent of exports in some years. 78. On the import side, state-owned trading companies administered trade with the Eastern block and imports of international donations. In 1989, these companies accounted for 56 percent of total imports, including a monopoly on imports of oil and fertilizers. Import quotas and prohibitions existed only for basic grains and related products, while some export quotas and prohibitions applied to forestry, fisheries, and cattle. Private parties were marginally involved in foreign trade under discretionary allocation/retention of foreign exchange within a system of multiple exchange rates and arbitrary trade credit rationing. Private importers had to register officially at the Ministry of External Trade and had to get specific import permits from the Central Bank. Nominal import protection was nontransparent and widely differentiated. It ranged from 4 percent to 253 percent, averaging 48 percent. 79. The Government has moved boldly to liberalize and deregulate trade. After the drastic devaluation of the exchange rate, beginning March 3, 1991, foreign exchange allocation mechanisms were liberalized significantly. Importers need neither ministerial nor Central Bank permits to have aciess to foreign exchange. All exporters, except cotton and coffee exporters, have full access to the foreign exchange that they generate. The state trading monop)lies, which controlled virtually all export and most import trade during the 1980s, were eliminated by a decree in January, 1991, opening trade to private sector participation. 80. The authorities have also reduced trade protectionism and increased trade regime transparency. The ceiling on tariffs was reduced to 20 - 22 - percent, and most of the administratively granted import tariff exemptions were elaiinated. Transparency was increased by eliminating the SCT for domestic production and keeping it as an import surcharge for most imports. These measures lowered the nominal protection range to 3-143 percent and the average protection to 18 parcent, the second lowest in Central America. The dispersion was also lowered. Now 66 percent of tariff positions vary between 3 percent and 40 percent. 81. The Government recently announced the next steps for a coherent medium-term program of trade liberalization and deregulation. In accordance with this program, the Government has reduced nominal import protection to a 10-60 percent range, by a combination of changes in the SCT and tariffs prior to Board presentation (para. 97 A. (viii)). Only medicines, newsprint and books will be exempted from the 10 percent tax/tariff. Also, prior to Board presentation: (i) the Government has made a public announcement specifying that, by December 1993, nominal import protection will be reduced to 10-20 percent range, while the SCT and the stamp tax will be eliminated (para. 97 A. (viii)); (ii) the Government has approved regulations to ensure automatic registration for imports and exports (para. 97 A. (ix)). According to the program, by March 1992, nominal import protection will be further reduced to the range of 10-40 percent. This will be a second tranche release condition (para. 97 B. (v)); and (1ii) to lower nominal import protection dispersion and increase tax collections, the Government has established a timetable, satisfactory to IDA, to eliminate indirect tax exemptions including import tax exemptions and has removed income tax exemptions (para. 97 A. (iv)). 82. Regarding agricultural trade liberalization, the authorities have designed a price-based mechanism with variable levies for rice, yellow corn, and white maize (para. 97 A. (x)). The mechanism will be implemented before March 1992. Simultaneously, all remaining quantitative restrictions on food and grain imports will be eliminated prior to second tranche release (para. 97 B. (vi)). The Government's trade liberalization program will establish free- trade status for exporters by exempting them from import and domestic indirect taxes through a decree on export promotion which will be fully applied by March 1992. To liberalize the foreign exchange market, the same decree will eliminate foreign exchange surrender requirements for exporters. 83. The new Government inherited a highly discretionary, complex, and severely distorted tax syst that compounded distortions in the trade regime. The Corporate Income Tax (CIT) had highly differentiated and high marginal rates, ad hoc exemptions, and incentives. The Personal Income Tax (PIT) system compounded the above distortions through multiple bases, excessive brackets, extremely high marginal rates, double taxation of dividends, and exemptions for interest income. The GVT aimed to be a value added tax, but because of its multiple exemptions, multiple rates, and weak administration, arbitrary distortions throughout the economic system resulted. The SCT exacerbated distortions because it was applied to about 700 goods with differential (higher) rates for imports and extremely high rates for the fiscal industries (soft drinks, beers, rums, cigarettes, and oil derivatives). 84. During the second half of 1990, the new Government enacted a broad tax reform to address most of the above distortions. It rationalized the - 23 - incme tax regime by eliminating some tax exemptions and most fiscal Incentives. To do this, the Government unified the CIT rate and equalized it to the maximum PIT rate at 38.5 percent. The PIT was simplified and changed to a global base. To increase the income tax base, the Government implemented new presumptive lncome tax collectlon methods. The GVT base was extended to additional servlces and the rate was raised and unified at 1S percent. The SCT was elLminated for all but the fiscal industries and the tax on imports was retained as a temporary surcharge. Indexing the tax system to the Cordoba Oro was an appropriate transitory solution to avoid the Impact of high lnflation on tax yields. In addition, by the end of 1990, the Government improved the wLthholding and advancement system of Lncome tax collection to minimize the lag between accruals and collections. This improvement aimed to avoid the possLble negative effects of accelerated inflatLon on collections. In June 1991, the Government reduced the maximum rate of PIT and the flat rate of CIT to 35.5 percent. Gradually, the Government will continue lowering it to approximately 33 percent. This internationally competitive rate would not deter foreign investment nor the repatrLation of capital from Nicaraguans abroad. The tax system currently conforms to International standards and has the basic safeguards to avoid lagging collections in the presence of - accelerated LnflatLon. currently, no major additional change in the tax system is required. 85. The thlrd aspect of the pollcLes to improve Lncentives entaLls changes Ln domestic reoulatorv practices. Some state-owned enterprLses have had a de facto monopoly in productLon and trade, for example, the sugar, bananas, and slaughtering house sectors. State-owned enterprises in natural resource sectors have regulatory powers to limit market entry and exports of private sector firms. The Government has also inherited a system of generalized price controls, closed markets, and interventlons by the ENABAS in regulating agricultural products and derlvatives. In addltlon to the measures to liberalize imports (para. 80), the Government has lifted domestlc prlce controls, with the exceptlon of fiscal Industries, and petroleum and publlc utilities. However, for a reduced group of basie staples, the authorities set prices in government-owned retaLl outlets as part of the strategy to alleviate inflation. 86. Though BNA8AS Lntervenes much less ln the market, lt still dominates the domestic and foreign trade of basic grains. ENABAS has privileged access to the import permits that regulate basic grains. This enables it to control the domestic supply of basic graino and to establish its price support policy for domestic grains producers. This intervention has caused wide fluctuations in nominal protection for basic grains. The Government is aware of the negative effects of ENABAS' market interventLon. Policy changes belng introduced are designed to encourage competltion in the international and domestic trade of baeic grains. 87. The Government will eliminate de facto state production and trade monopolies via the privatization of state-owned enterprises in sugar, bananas, and slaughterlng houses. The state institutes for mining and fisheries will be transferred to the Ministry of Economy, after separating its production and trade activities. The Ministry of Economy is studying ways to regulate natural resources. - 24 - 88. The Government plans to eliminate transitory price setting adopted for selected products in Government owned stores before March 1992. Prior to March 1992 the Government intends to present an action plan to phase out price controls of the fiscal industries and reformulate the SCT, thereby confining it to lwuxry and sin goods regardless of origin. The legal framework permitting generalized price controls will be abrogated by the same date. 89. As part of its overall development policy, the Government's plan to reduce and change the role of ENABAS calls for support prices for all to be eliminated by August 1991. ENABAS will buy grains at market prices and offer storage and related services to private traders and producers for a fee. It may also rent out part of its facilities. In addition, ENABAS will offer private traders the service of importing on their behalf (bundling orders). ENABAS will stop trading in all but basic grains. A program for privatizing its retail and wholesale outlets will be prepared by the end of 1991. According to the Government's plan, at least 20 percent of its assets will be sold to wholesalers or distributed as part of severance payments to ENABAS employees by March 1992. The remainder will be divested before the end of 1992. The Government is designing a medium-term strategy and an action plan for redefining the future role of ENABAS. ENABAS' intervention in regional grain markets will be restricted to markets where private competition is insufficient and ENABAS' facilities will be privatized and/or leased where competitive private participation is ensured. Social Sector Reauirements and Poverty Alleviation 90. The recent economic decline has caused sharp deterioration in nutrition standards and the provision of basic services. Since 1985, calorie and protein intake per capita fell by 30 percent. They were 14 percent and 25 percent, respectively, below minimum recommended levels in 1989. The infant mortality rate, at 61 per thousand, is high by Latin American standards. Education coverage also remains poor; 24 percent of the children 10 years or older are not enrolled in school. An even greater percentage attend school irregularly. The dropout rate is high, especially at the primary level. 91. Nicaragua, with one of the lowest per capita incomes in Latin America and years of deterioration in the provision of basic services, cannot afford to wait until the end o; adjustment to address the needs of the vulnerable segments of the population. Moreover, these groups will be affected adversely by the implementation of the stabilization program, which includes cuts in public sector employment and spending, as well as price adjustments. The Government has already taken initial steps to attack poverty. in November 1990 it created the Social Emergency Investment Fund (rISE) as a mechanism to channel donor funds toward urgently needed social projects. FISE operates directly under the Office of the Presidency and serves as a financial intermediary with auditing responsibility, but not as a project executing agency. It channels resources for primary health care, primary nutrition, retraining and micro-enterprise credit. It tries to stimulate local governments, private sector grass-roots organizations, and NGOs to participate in projects. - 25 - 92. PISS has identified areas of critical poverty and targeted resources toward these most critical areas. The fund started its operations, mobilizing US$15 million from the external and local donors. It has committed US$4.5 million in the first quarter of 1991; 32 projects are already underway with an additional 62 projects scheduled for the rest of 1991. For FISE to continue, additional donor funding is required once the available resources are exhausted. 93. The Fund for Assistance to Oppressed Sectors (FASO), a more recent government creation, will provide immediate relief to poverty groups. Some pledges have been made to PASO by nine OECD member governments, but no program has yet begun operations. For now, the Vice Ministry of Social Affairs, an integral part of the Office of the Presidency which is managing PASO during its initial phase, has received UNDP and bilateral assistance. This will help strengthen social sector management, monitoring, and evaluation to prepare for efficient use of donor assistance. 94. The Government also needs to address severe nutrition problems of the poorest segments of the population. In 1985, 31 percent of the population was classified as poor and 23 percent were living under extreme poverty. The poverty status is certainly worse today, after two failed attempts at stabilization and continuous deterioration in production and employment opportunities since 1985. The authorities are addressing nutrition needs bys (i) retargeting eligibility to AFA (a food delivery program) to reach the poorest segments of the population; (ii) gradually eliminating food distribution in the work place and increasing distribution through health centers, NGOs, and churches where the poor can be reached; (iii) improving the logistics of the World Food Program sponsored mother/child program (PXA); (iv) increasing the nutritional content and improving targeting of the "glass of milk program" by introducing a solid enriched food or cookie to accompany the glass of milk; and (v) developing a weaning food to replace the currently used food (watole") that has very low nutritional content. 95. Despite relatively high public spending in the past on health and education, the quality of services remains low. IDA is preparing a social rsector operation which would support social sector rehabilitation and improve sector management, human resource development, basic infrastructure needs for classrooms, health posts, and health equipment (para. 42). III . THE PROPOSED ECONOMIC RECOVERY CRED1T Objective and Size of the Credit 96. The proposed ERC aims to support the Government of Nicaragua in its endeavors to arrest the ongoing decline in the economy, to achieve lasting price stability, and to revive economic growth on a sustained basis. This is to be achieved with deep structural reforms that would help reorient the economy toward a competitive free-market. This will necessitate changes in macroeconomic policies, the public sector, financial sector, and the system of - 26 - incentLves. The proposed ERC focuses on the most important areas of reform as described in previous sections and summarized ln the Matrix of ActLons (Annex D). an shown in Annex D, the Government has taken considerable up front actLon to implement lts program. The size of the Credlt iL relatively large at SUR 83.5 million (US$110 milllon equivalent) ln order to respond to the Government's demonstrated initiative, play an important catalytlc role ln mobilizLig external assistance for the clearance of arrears to the international fLiancial LnstLtutLons, and provlde sufficlent program support. The operation wlll also recelve slgnLficant co-financing (para. 103). ggnitions fAz ftanche Release 97. The Credit proceeds will be dLsbureed in two tranches, each tranche being SDR 41.75 million (US$55 million equlvalent). The closing date will be end-December 1992. The flrst tranche will be avaLlable for dLsbursement upon credlt effectlveness (para. 98), and the second tranche will be avaLlable for dLsbursement after six to eight months and the completlon of the second tranche conditions. A summary of the proposed actlons to be supported by each tranch. release is presented below. in addition to the monitorable actions specified below, the release of both tranches will be contingent upon the maLntenance of an approprlate macroeconomlc framework and satisfactory performnce in overall program implementation as outlined in the Letter of Development Polliy (Annex C) attached. A. Polic actions tke before woard .rosntatioma (i) Central Government non-lnterest current expenditures in the proposed FY92 budget were reduced to US$325 mllion equivalent; agreement wLth IDA on the composition of the proposed budget of the Central Government for FY92 (paras. 5I, S2); (iL) The processing of voluntary employment reductLon ln the public sector was completed for 8,000 personnel (para. 55); (111) The Government initiated an action plan, satisfactory to IDA, to improve tax administration with specific emphasis on General Value Tax (GVT) and income tax collectLon (para. 57); (iv) Income tax exemptions were removed, and a satLsfactory tLmetable was approved to phase out indLrect tax exemptions Lacluding import tax exemptions (para. 81); (V) The Government has adopted an actlon plan satisfactory to IDA, to privatize CORNAP enterprises (para. 66); (vi) RegulatLons for the implementatLon of the Superintendency Law were adopted, the Superintendent was appointed and the - 27 - Banking Superintendency activities have been initiated, all satisfactory to IDA (para. 72); (vii) The Government adopted an action program, satisfactory to IDA, on restructuring of state-owned banks, along with cessation of Central Bank subsidies and discounts (para. 71); (viii) The Government lowered nominal protection in the trade sector to a range of 10-60 percent through a combination of reductions in the levels of tariffs, SCT, and stamp tax; and it announced a target tariff range of 10-20 percent and elimination of SCT and stamp tax on imports by the end-1993 (para. 81)S (lx) Arrangements for automatic registration for importers and exporters were approved (para. 81); and (x) A proposal was presented to IDA for a price-based mechanism with variable levies for rice, yellow corn and white maize (para. 82). S. Policy actions to be taken before second tranches I) Adoption of (a) FY92 budget with reduced Central Government non-interest current expenditures less than US$325 million equivalent and (b) agrement on implementing the recommendations of the joint government-IDA public expenditure review (para. S2); (ui) Implementation of measures to strengthen tax administration, including (a) full operation of unit for large taxpayers; (b) issuing of decrees on sanctions applying to delayed payment and non-compliance; and (c) initiating programs on automated anaagemnt control system, computerized taxpayer identification system, and training programs for Internal Revenue and Customs personnel (paras. 58-S9). (iii) implementation of privatization of CORNAP state-owned companies through (a) completion of privatization of additional 25 state-owned companies; (b) finalization of devolution, liquidation, or assignation of another S0 companiesu and (e) initiation of concrete steps towards the preparation of an additional 30 companies for privatization (para. 67). (iv) Carrying out financial sector reforms including, (a) liquidation or merger of Banco Inmobiliario with Banco NicaragUense de Industria y Comercio, (b) dissolution of Corporaci6n Financiera de Nicaragua (CORFIN), (c) initiation of steps towards the restructuring of Banco Nicaragiense de - 28 - Industria y Comercio, Banco Nacional de Desarrollo, and Sanco Popular according to agreed ac'Zion plan, (d) submission to the National Assembly c-r a draft law, satisfactory to IDA, on Banking and Financial Institutions, and (e) issuance of at least two licenses to private banks (paras. 71,72,73). (v) The protection resulting from combined tariffs and taxes that apply to imports in Nicaragua will be reduced to a minimum of 10 percent and a maximum of 40 percent, except with respect to medicines, books and newsprint which may be exempt from such tariffs and taxes or subject to tariffs and taxes at a combined rate lower than the minimum rate referred to above (para. 81). (vi) Replacement of import quotas on rice, yellow corn and white maize for a price based mechanism with variable levies, satisfactory to IDA, and elimination of remaining quantitative restrictions on food grain imports (para. 82). roc-urement. Disbursement and Auditina 98. The proposed ERC of US$110 million would be disbursed to reimburse the CIF cost of general imports (goods and services), excluding goods and services financed by other multilateral or bilateral sources, luxury goods, mil3ary equipment and other goods specifically prohibited in a negative list defined under the Standard International Trade Classification (SITC). In view of the large number of policy actions taken up front by the Government, and based on the financing requirements of the program, retroactive financing not exceeding SDR 41.7S million (US$55 million equivalent; 50 percent of the Credit amount) is recommended for eligible imports made after November 1, 1990, and before the date of the Agreement. 99. Because of the lack or inadequacy of procurement procedures, a conservative cut-off limit of US$3 million equivalent has been adopted for International Competitive Bidding (ICS). Therefore, Imports made by publLc and private importers valued at the equivalent of USS3 million or more would be procured under simplified ICB procurement procedures in accordance with IDA's procurement guidelines. Public sector imports valued below US$3 million equivalent and above US$1 million equivalent would be procured on the basis of advertised competitive procedures satisfactory to the Association. Public sector imports valued at US$1 million equivalent or less may be procured through comparison of price quotations from at least two suppliers eligible ' under the Guidelines. 100. Import contracts by private importers, valued at below US$3 million equivalent, shall be awarded in accordance with established commercial practice, requiring comparison of price quotations obtained from at least two eligible suppliers, except in cases where direct contracting is considered appropriate under para. 3.5 of the Guidelines for procurement. Alternatively, such contracts will be subject to pre-shipment verification of quantity, - 29 - quality and price by an independent inspection firm acceptable to the Association. 101. Applications for disbursement corresponding to all import contracts paid after November 1, 1990 and before March 1, 1992, below US$3 million equivalent each, shall be supported by a certification by an independent inspection agency acceptable to IDA on the reasonability of the price paid. In the case of crude oil imports, expenditures under ongoing supply contracts entered into by Nicaragua would qualify for reimbursement under the Credit of an amount not to exceed, per unit, the reference price per unit established in commodity markets as reflected in Platt's Oilgram for the relevant shipping date and type of oil. 102. The Central Bank would administer the ERC and be responsible for the collection and review of relevant procurement documentation, ensuring that only imports that meet the eligibility criteria and agreed procurement procedures are included in withdrawal applications. To assist in this work, the Central Bank will retain an experienced procurement consultant. Disbursements against contracts valued under US$1.0 million would be made on the basis of statements of expenditure (603). The procurement documentation would be retained by the Central Bank for review by IDA as required and by the auditors to be appointed for the auditing of expenditures at the completion of each tranche. The submissior. to IDA of an audit report on the first tranche would be a condition of disbursement of the second tranche. Full procurement documentation would be required with withdrawal applications for individual contracts valued at US$1.0 million equivalent or more. Withdrawal applications would be consolidated and submitted in amounts not less than SDR 190,000 (US$250,000 equivalent). Contracts for imports valued under US$5,000 equivalent would be ineligible for financing under the loan. Co-financina and Aid Coordinatio_n 103. As indicated in para. 2, since the now Government assumed offtice in April 1990, IDA has played a lead role in aid coordination for Nicaragua. Five donor meetings were convened, including the Consultative Group meeting in Paris on Xay 16-17, 1991. Seventeen bilateral donor representatives and eight international organizations attended the meeting in which agreement on arrears clearance was obtained. The IDB will co-finance the proposed ERC with a US$110 million credit to be disbursed in two tranches. The Governments of Japan (US$70 million), Germany (US$17 million) and Switzerland (US$ S million) will co-finance the program. The US Government has pledged more than US$S00 million in 1990 for a two-year support, of which some US$300 million has already been disbursed. Other bilateral support will come from, among others, the Nordic countries, Germany, Canada, France, the Netherlands, and Austria. Mexico, Spain, Colombia, and Venezuela are supporting Nicaragua's reform program through bridge financing for arrears clearance. - 30 - elationS with Intgrnational Finangial OrganizAtions 104. IDA has worked clouely with the IMF and IDB staff in carrying out a policy dialogue with the authorities and toward the preparation of this credit. Regular meetings were held at Headquarters and joint field missionu were organized. IDB staff participated in IDA missions for the preparation of ERC, including the June 1991, appraisal mission. IMF staff have also overlapped with IDA missions. The IMF has helped the authorities to design the new stabilization program and to monitor implementation. The track record established on implementation will provide the basis for a stand-by arrangment with the IMF to be presented to the IMF Board during the first half of September. The IMF has also been asked to consider Nicaragua for ESA? eligibility. The anticipated stand-by and ESAF arrangements would provide important additional financing for the Government's program. Techical Assistance 105. Technical assistance for implementing the program is crucial. Though rDA will not finance the provision of technical assistance, through its leadership in the Consultative Group and its oversight of the adjustment process, it will help organize and direct technical assistance. To facilitate IDA's policy dialogue, ERC implementation, and technical assistance coordination, IDA will set up a Resident Mission in Nicaragua later this year. The Resident Mission will provide support as the Government implements its reform program and help identify institutional weaknesses and human resource requirements. A number of initiatives have already been underway, to address the immediate shortcomings in implementing and monitoring the reform programs and strengthening the institutional framework. To meet the short- term requirements of supporting the stabilization and adjustment program the Government has followed a two-track approach. It has been working through the Consultative Group to identify a minimum set of actions for which short term technical cooperation can provide a useful basis for decision making. Additionally, recognizing that this approach only addresses the immediate gaps, the Government has been working with the UNDP, IDB, selected bilateral agencies, and the international financial institutions to strengthen key ministries. 106. A number of critical tasks will be carried out using, to the extent feasible, the short-term resources that have been made available in recent months. To support the reconstruction of the financial sector, for example, technical cooperation funds will be used to design the banking regulatory framework, and organize the Superintendency of banks. An evaluation of the loan portfolios of the two major state owned banks, as an input for financial sector reform, has already been completed. An external debt management strategy and a related accounting system are being developed. The IDA Public Sector Expenditure Review is expected to recommend, inter-.ga, reforms in the 1992 budget cycle. In agriculture, the UNDP/IBRD Regional Unit for Technical Assistance (RUTA) is tackling the issue of property rights by reviewing a cadastral system. It will also evaluate the Government's proposals for developing and disseminating agricultural technology. In the public utilities, a management audit has been completed in the water company - 31 - (INAA), where Initial efforts in infrastructure rehabilitation are likely to take place. 107. The UNDP and USAID currently are providing longer term technical cooperation funds to staff key ministries. As the implementation of reform programs gets underway, however, ministries will need to add other functions and skills. The Government has entered into consultations with the UNDP Management Development Program (MDP) to provide funds for additional staff. It expects to have these staff in place within six months. In the Ministry of the Presidency, the staff would serve as a small secretariat to the Economic Cabinet to improve coordination across various ministries in the implementation of the program. Other staff would be assigned to the Ministry of Finance to implement budget reforms, and improve expenditure planning, disbursement controls and project evaluation. Other staff would be assigned to customs and revenue offices. In the Ministry of Economy and Development, additional staff are needed to improve the data collection and processing capabilities of key economic indicators, such as price indexes and other short-term indicators of economic activity. The Ministry also needs to strengthen its regulatory capabilities, in particular in the area of natural resources. In the Ministry of External Cooperation, staff are needed to coordinate the technical cooperation process, negotiate with donors, and ensure that conditionality on these grants is met. Finally, the IDB and the IMF have joined together to provide longer term technical cooperation resources to the Central Bank to support macroeconomic policy and to develop accounting and management information systems. 108. Over the longer term, the Government will need to deepen institutional strengthening by developing a merit-based civil service reform and more efficiently utilizing new analytical skills. This is essential to the recruitment and retention of a highly professional civil service, staffed by Nicaraguans. As a first step toward these goals, the Government plans to revitalize the Public Administration Institute under the proposed UNDP Management Development Program (MDP). enef£its and Disks 109. Egonmic. Benefits. The proposed ERC and the associated co- financing will enable the Government of Nicaraqua to implement vital structural adjustment policies, at a time when domestic resource mobilization and foreign exchange to finance are inadequate. These international resources, the adjustment program of in Government, and the re-opening of the U.S. market will permit a rapid, but modest, supply response in the short-run. Without such recovery in supply, stabilizing prices would be impossible without recourse to massive external resource transfers. 110. Implementing the policies supported by the Credit can streamline resource mobilization and use in the medium-term. Reducing the size of the public sector, reforming of the financial system, and deepening trade reform, will reorient Nicaragua's productive structure toward activities with comparative advantage. Establishing an encouraging climate for investment - 32 - through sustained stabilization and deregulation/liberalization will induce large-scale private sector participation in the economy. Increased economic activity, coupled with properly functioning markets will alleviate unemployment. Finally, maintaining a sound macroeconomic environment and fully implementing structural adjustment measures would prompt external financing, and private foreign investment for long-term sustained growth. 111. Ptvertv Alleviation Effects. The Government's reform program should contribute significantly to reducing poverty. In the short-term, eradication of hyperinflation, would arrest the erosion and wild fluctuation of real incomes of the poor. The price stabilization since March has created according to preliminary estimates of the cost of living a relatively less expensive minimum consumption basket, in real terms than before the stabilization package. Land distribution to ex-militia. ex-contras, and workers will also improve the standard of living of these groups. FISE is targeting public work programs to the poorest segments of the population, easing the burden of adjustment. 112. In the medium-term, the structural adjustment program, will also alleviate poverty. The real devaluation, by impacting the profitability of agricultural production, will benefit many low-income rural groups. Trade liberalization and deregulation will reorient the productive structure toward labor intensive activities. Thus labor demand will rise. Moreover, an overall resumption of efficient growth in line with Nicaragua's comparative advantage, will create productive employment. 113. InuiKauaang l U1fg.ctg. The main environmental issue in Nicaragua is the erosion of forests and woodlands. Erosion is rampant in the heavily populated Pacific slopes. The topography and the nature of the soil there make the land very vulnerable to inappropriate agricultural practices. Between 5 and 10 percent of all agricultural land is estimated to be "seriously eroded* or "degraded". The rate of deforestation is high, as forests and woodlands are disappearing at a rate of 2.2 percent per year. well above average for the Central America region. Primary tropical forest is being cleared at an even higher rate. In addition, widespread and uncontrolled use of pesticides, particularly in cotton production, and the serious chemical contamination of Lake Managua challenge the environment. The project will have an indirect positive ; 'pact on the environmental issues. The regulatory framework for the administ ,tion of natural resources will consider restrictions on the exploitation of natural resources, specifically of forests. Also, realigning relative prices to their international levels will avoid excess use of pesticides and damaging chemicals in agriculture. 114. Risks. Given the actions taken to date, little doubt remains about the Government's commitment to the program of stabilization and adjustment. A far-reaching stabilization effort has been in place since March 3, 1991, and important steps have been taken towards structural adjustment. Nonetheless, given the magnitude of problems, the Government's limited implementation capability, and the fragile nature of the peace among the opposing political forces, the proposed operation faces a number of serious risks. Politically strong groups, including the military, may resist deep - 33 - cuts in budgetary allocations and slow down fiscal adjustment. Organized labor, highly politicized by the opposition party, may resort to strikes and work stoppages to obtain higher salaries and resist cuts in public sector employment. If the issue of property rights is not resolved, the private sector may be slow in making new investments, or expanding and modernizing the existing capacities. In the area of privatization, domestic and foreign investors may prove reluctant to tender offers for state enterprises if employees continue to exercise effective control over them. Also, established political/economic interest groups and the employees working in state-owned banks may resist financial sector reforms. 115. However, the Government has established a consensus behind the program, as demonstrated by the statements of the ruling coalition and the opposition party representatives in recent donor meetings. This support is expected to continue, as long as the Government can demonstrate early success with the program. At the same time, the authorities have demonstrated their resolve to establish property rights and the rule of law. This would promote private sector trust in the economy and in the system of incentives. 116. The success of the program also depends on the timely availability of donor support. Given the large financing requirements and the huge external debt to be rescheduled, mobilization of donor assistance is challenging. Any major shortfall in the size and timing of this effort could prove extremely damaging to the program's success. However, the donors' response to Nicaragua's program in recent meetings has been encou:aging. The authorities are now taking a very active posture in soliciting donor support. IDA will continue to play a key role in the coordination of such offorts. 117. Another potential risk to the timely implementation of a difficult program is weakness in the administration at a technical level. To alleviate shortcomings in the implementation capacity of the administration, technical assistance programs are being designed and put into place by bilateral and multilaterao organizations (paras. 105-106). This will allow the authorities to implement the reforms more speedily and effectively. The Government is expected to assemble programs to alleviate managerial and administrative problems in the medium to long term, again with the help of technical assistance programs. V. EiBm NaM 2FiKCXN R3QURE.M t 118. Nicaragua's economic recovery and medium-term growth will depend critically on adequate external financing. After having addressed the arrears problem (para. 119), Nicaragua needs to reduce its external debt overhang problem so that it can begin to manage its annual debt servicing and mobilize external financing for its program. The country's resource balance deficit as well as debt and debt servicing burden are expected to remain high by international standards through the remainder of the 1990s. Under the projected base case scenario (Table 2), Nicaraguas resource gap would be 20.1 - 34 - percent of GDP during 1992-96, and then fall to an average 12.7 parcent of GDP per annum in the 1997-2000 period. XFX AM=ars Clearance 119. Notwithstanding the magnitude of the debt burden, arrears to the World Bank, IDA and the IDB represent the ixmediate constraint to the flow of international assistance. As of April 1991, arrears to both institutions were approximately USS340 million. Beginning in May 1991, Nicaraqua resumed debt service to both institutions. With the arrears effectively "frozen" as of May 1991, the clearance process is expected to be finalized by September 1991. Clearing the arrears to the international financial institutions is part of the overall financing program. The process will consist of three parta: (i) a relatively short-term bridge loan of approximately US$195 million, provided by Mexico, Colombias Spain and Venezuela that would be repaid from the first tranche disbursements of the IDA, 1MW, and IDS fast disbursing operations, and other cofinanciers (Japan, Switzerland, and Germany); (ii) some US$30 million in longer-term loans to be provided by Venezuela and Spain; and (iii) specific contributions made by bilateral donors for the purpose of arrears clearance for the remaining US$115 million from the USA, the Netherlands, Germany, France. Canada, Switzerland, Norway. Korea and Denmark. External Debt Overhana 120. At the end of 1990, Nicaragua's total external debt amounted to US$10,585 million (including US$4,110 million in principal and interest arrears) of which US$7,081 million (67 percent) was owed to bilateral creditors, US$1,300 million (12 percent) to multilaterals, US$1,867 million (18 percent) to commercial banks, US$71 million (0.7 percent) to suppliers, and USS267 million (2.3 percent) to other creditors. To illustrate the gravity of the situation, if Nicaragua does not get debt relief on favorable terms, the outcome is illustrated in Tables 3 and 4. Under the assumptions that all arrears are cleared in 1991 and all debt service as due is paid to all creditors, the 1991 financing gap is projected at US$3.2 billion (Table 3); of this. US$2.5 billion is paymaet of non-multilateral arrears. Assuming further, that Nicaragua would service its external debt obligations as due throughout the 1990., the country's external financing requirements would grow from US$887 million in 1992 to US$1.8 billion by the year 2000 (Table 3); the average annual financing gap would reach a staggering USS1.3 billion (63 percent of GDP on average) in the 1992-2000 period. The foreign debt would be on average five times the country's GDP for the remainder of the 1990. (Table 4). Cape of this size are obviously unsustainable and cannot realistically be financed. Measures to significantly and drastically reduce Nicaragua's debt burden will have to be found. 121. The Government has taken a number of steps to address this situation. It has renegotiated its debt with Mexico and Venezuela (totalling some US$1.3b) on highly favorable terms (including substantial debt reduction) and hopes to reach a similar agreement with the USSR and Eastern Bloc countries (USS3.7b). It expects to begin negotiations with the Paris Club - 35 - donors later in 1991 as part of its debt management program. At this stage it is not possible to predict the outcome of these discussions. Commercial bank negotiations have also not yet begun and are unlikely to occur before 1992. Table 3. Projected Mase .i Plan. 1991-2000 1991 1993 1903 1994 1993 19#6 1i9t 1998 1999 a0 aroc" Plensucn BquirV uo (3.962) (1.035) (1.010) (1,330) (1.290) (1.491) (1544) (1.6921 (1.034) (3.036) _...... .. . 0.._.. seure 54. (357) (330) (342) (351) (337) (330) (136) (326) (331) (311) ekt n.lute:ro factor twaoe 10 16 16 13 14 13 It a 4 (1) lutoot Pq.eat . * 290 414 490 693 636 7m5 814 896 989 1,0U Aorttsitio P omto a1 1.533 362 174 378 370 406 390 462 332 610 1lup at 3oeowo 0 (18) (21) (24) (23) (14) (13) (16) (17) (18) 8arw"e 3.962 1,035 1,010 1.330 I,s" 1.492 1544 1.692 1.834 2.026 Prvate ftot.ro 30 s0 so so 50 50 so s0 50 30 Officil Capitol Griat. 403 0 0 0 0 0 0 0 0 0 not pico.t nrotueut t10 30 40 s0 60 73 90 103 130 13 PIpeln Debiareoe t 188 68 0 0 0 0 0 0 0 0 Pnone i pbl 3,331 887 930 1.123 1o88 1,367 1,404 1.537 1.684 1,841 *i Include. debt service on *rre s r existing debt, m pIpelne di ete ed an gsp t4ne . bI &4ccute for Gloaranc of *rore to *11 eoditore. eacp soot Sl94.6oi eqorsr. in 1991. Ituanql" S&P to= o*re 20 yoge asturity. 5 year Sreac. sad 82 p.. ntoret rot. table 4: "not=0U GAP An0 C3nuflu1 nU 3*2206 1991.3000 (us$ 0531400) (Debt S*evu* es duo) 1991 1992 1993 1994 199 I" 199? 1996 1999 1000 financing Cap 3.33S 887 920 1,32 ,180 1.367 1.404 1.S3 1ts, 1.841 total Debt of 6.327 6,948 7,694 8,646 9.57? 10,518 11.531 12,606 13u,n7 14,90n .ota Aeniotie Paymens .,325 s82 174 278 370 40 n 462 332 610 Tout laterest Payon-t. 390 414 490 693 656 7n 814 896 989 1OU Ta,l Debt Servie paets 3,615 696 64 970 936 1.14 1.3t 5 1.337 s1t51 1.606 DebtiODY 443 466 487 s0 306 s09 316 516 316 15 eebaltapono 1.539 1a46 1,464 1"491 1,447 o3se9 1,360 1317 I389 1,260 IntarootIOflP 30~~~g 38 31 40 33 36 36 ST 37 37 wntereotJ~.rte 71 87 93 119 99 98 96 94 9S 91 Debt Se,vtaoJODP 254 47 42 37 49 35 U4 56 37 5s Debt Ser'vicelEspotta 686 147 136 167 140 153 142 143 142 142 St OEeUOO eeat win t 'Jtasetee lExternal llesoutce fltecureDleuts 122. Two debt reduction and debt managment scenarios have been developed to illustrate the impact of debt and debt servicing reschedulinglreduction on Nicaragua's external. financing requirements during the 1990.. Both scenarios assume that arrears to the IlIs (IBRD, IDA, IDB) will be cleared and debt servicing to those institutions resumed in 1991. Under the "Toronto like" scenario, principal and interest on bilateral debts (excluding Mexico, Venezuela and the former Eastern Bloc countries for which negotiations have been completed or are nearing completion) are assumed to be - 36 - reschediuled approximating Toronto terms.11 The external financing gap i8 reduced to an average US$648 million per annum for the 1992-2000 period. While this is less than half of the "payment as due" scenario, it is extremely high 'atsidering the level of external finance likely. Table 5 flMICIGW CU1 U RD CaOMituS, uS. 1991-2000 (US8 tuteno) (tTerato-ld^ Sneneato) l991 1992 1993 194 195 1996 1997 1098 1909 ZO00 at=ne g cap 14 507 628 657 679 6S6 669 675 676 678 Toeal Debt *1 6.141 6.716 7.324 8AO 8,740 09.3S 10,01 10.t47 11,281 11,918 Total tmotttetten Payment. 357 71 7J 72 70 60 62 69 62 61 Total Zn;.;.. Pyment. 40 *45 299 32S 134 180 408 427 450 471 total oebt Sorem Payment 397 316 372 398 425 440 470 496 Sll 533 Debtlap 432 451 464 4n 443 454 448 436 423 410 DebtIEwpote 1,506 1,414 1.394 1393 1,323 1,247 1,182 1,I11 1,057 1,001 ntarwestloPp 3 16 19 19 19 18 18 17 17 14 nt;e.tIlBports 10 52 S7 56 54 it 48 45 42 40 Debt ServcIGDP 2S 21 24 23 2S 31 21 20 19 18 Debt SeageeiXpogte 97 66 71 49 44 $9 55 is 48 45 SOa?cO V.o6 Bcank ottaatea. 123. The second alternative debt reduction scenario (called "Beyond Toronto Terms") incorporates deot forgiveness on the arder of two-thirds of the bilateral debt stock (again excluding Mexico, Ve1"ezuela and the former Eastern Block countries). That brings the projected financing gap down to some US$425 million per annum for the 1992-2000 period (from US$450 million in 1993 to US$405 million in 2000). Table 6 shows the details of thi, scenario. The debt forgiveness element lowers the debt/GDP ratio to sme 210 percent on average in the 1992-2000 period. Interest payments are reduced drastically to some 10-20 percent of exports during the decade. Table 6. MM= W AM CSMI1CU S -OS 1991-2000 ("Dpyad taonftoo Tons) 1991 1992 1993 1994 1993 1996 1997 1998 1999 so20 VInAnein Gap 14 326 450 463 468 441 431 426 415 485 Tatal Debt al 6,141 2,837 3,s33 3,683 4,098 4,493 4.872 5,237 S,594 S5947 toa htatt an ents 357 S9 92 91 89 79 81 S8 81 80 Total tnzreot Payment. 40 65 101 113 123 136 131 159 170 180 Total Debt sorele paepet 39 154 193 204 214 215 232 247 2352 260 Debt/GDP 432 190 0SW 213 11? 218 218 214 210 204 Debtiftporte 1.S06 597 615 635 620 597 s5 547 526 SaO Zntortoo/pt 3 4 6 7 7 7 7 41 6 6 Znto;eetllqotso 10 14 19 19 19 1 1iS 17 16 is Debt S.lIGDP 28 10 12 12 11 10 10 10 9 9 Debt Sertvelftprto 97 32 37 35 2 29 27 26 24 22 */ei ama teatnn n gd-u aoeareor. ~- -~ - Seaac . Vorld Dan oetstaeto. / Bilateral debt is rescheduled, with 14 years maturity. 8 years grace and 3.5% interest p .a.. Nicaragua's interest payments would approximate those under an application of Toronto terms to all bilateral debt. - 37 - 124. While the above two scenarios (particularly the last one) reprosont a significant improvezent over the "debt service as due" case, it is evident that Nicaragua's economic program will depend heavily on additional external financial assistance for the foreseeable future. The donor community has alroady expressed a considerable interest in supporting Nicarsgua. It bas been demonstrated that aid flows of around US$400 million per amnum realistically may be mobilized through the Consultative Group mechaaism, if the Government stays on course with stabilization and adjustmuet program targets. Therefore, it appears possible to finance a gap on the order implied by the "beyond Toronto-terms". Since the first year's external financing requirements are basically mat, timely efforts are needed to ensure the availability of external resources in 1992 and beyond. IDA will continue to play a key role in this process through the Consultative Group mechanism. V. RECOMMENDAT!0N 125. I am satisfied that the proposed credit would coWply with the Articles of Agreement of IDA and recommend that the Executive Directors approve the proposed credit. LeAvis -. PrestO PresiDent Attachments Washinoonf, D.C. September 3, 1991 -38 - UICMAJAW -- Ktey tedicsatos fas* Case Proejction a./ (t e t"eUt oftms ntd LOtust est.Prjc; 198 1987 1988 1989 199 1991 199 193 1991 IC.. Reat Crawtih Rteess areas a- -tic Predic COOP) 4.6 -0.7 -15.0 -L.8 -4.4 1.0 3. 4.0 5.0 S., cross Oaws'tic Incea" (COY) . .. . .. -6.? 1.3 5.0 3.9 4.9 i.... iteal per Capita Growth Rate". Cross Dostic Product (00) 1.3 -4.1 .17,5 .5.9 -7.3 -Lo0 .0.1 1.0 1.9 1.? Total Consuition 16.71 *3.6 .19.1 .9.9 -6.2 -0.9 -2.8 -1.2 -0.2 0. ! Private Consuytien 13.9 *6.5 2.2 -I0.? -S.1I 1.7 -3.8 3.i 0.3 -C., Oent wid Debt Servics CLT10114T). b./ Total OU CUSSe) 1,964 ~~~~~~6.984 7,488 8,26? 8.819 6.275 6.948 7.494 9.55? i&.gs: OCO/CDp 163.7 464.7 56.3 624.9 658.4 441.7 466.5 487.5 s06.3 S15.3 Oebt Service (USSR) *.. . .3,61S 6,4 W O 1,69* Debt Se-ieIpra.. . . . .86.5 146.5 126.3 140.2 143.5 Oebt Service/UP. . * - . 254.5 46.7 42.1 49.1 58.3 Intereost Surden (LT.IlNP.5T): b.1 interest Paid CUM5) .. . . .. . 9 414 490 656 I,0m Itirersc/titports,. . . . . 71.1 87.2 93.3 99.4 91.3 Interest/CoP . . . . 20.4 27.8 31.0 34.8 37.3 cross su"tw t/G0p C., 16.8 15.8 13.0 13.0 1I. 12.0 15.0 16.0 .16.5 16.: ICOUs Can. year Lag) .. . .. . . 3.7 3.3 3. f Domestic Savngs/UP C./ -2.3 13.8 U2.6 .11.7 -12.8 -13.2 -.7. .5.7 -2.5 5.3 sop Reseoiaoe Balance/ -36.0 -37.9 -39.6 -34.7 -25.8 -35.2 .23.? *Zt.6 -18.9 -10.7 Rlational Savin.g/0p . . -28.1 *14.S -14.7 2.8 -27.7 -28.8 -31.S -Is.* VWP curent Account SaVskenlo 41.1 .46.i -51.8 -56.9 -40.3 -42.7 -39.6 -39.3 -41.6 -45.3 -42.8 Gtolvereut Invesuinnt/GDO eJ 4.5 . 4.? 3.7 1.3 6.2 71.5 7.4 6.5 C.5 4oensn SinWGs/U ..- 36.8 -17.? -29.9 -5.4 -1.4 2.0 3.6 5.2 Private tnvestinnt/0P@/101 . 10.3 10.3 11.7 5.8 .7.5 8.6 10.0 11. Private SevingslP -3.0 -9.5 0.2 -25.8 -26.3 -30.S -35.1 -33.8 Govsnsuw: ReverAssunoP 29.8 23.3 24.4 17.2 22.6 23.? 23.9 23.5 22.2 Gour xn£peniditurce/ap . 47.9 '9.8 29.9 42.8 34.8 32.6 29.3 26.5 31. Sudget Deficit C-) or SurLI/SP . -18.1 -26.5 -1.3 .35.6 -12.3 -8.9 .5.4 -3.9 0.r Cansualer Price Mudo C% rimt" rate) 35.0 912.0 14316.0 477.0 7415.0 2850.1 40.9 20.3 11.2 10.0 coo Aef lager (2 growth rate) 3V.0 52.0 1323.0 589. 7415.0 28501 40.9 20.3 11.2 Id.* leal Exchange Rate, (1939.10) 42 3.391 167 100 163 132 132 132 153 132 Teoi, of, Trodis Index (1989*100) .. .. 1600 9 92 9 99 96 96 latports (CUPS) VoLuo Groth Rate -40.4 -1.0 -10.6 7.5 9.9 3.9 8.? LO 81.5 6.4 Lm#orts CCaiFS)/UP 41.0 31.6 .5. 25.? 28. 28.0 30.7 32.1 33.7 39.6 luiprts (amps) Volta. GrowtI Rate 81.6 3.5 -5.7 -11.2 0.3 2.6 6.1 3.9 3.9 3.0 tiiporgs (Ours)ICP 77. 59.5 62.6 50.4 53.8 53.2 53.4 53.7 52.6 50.3 SOP Currant Account laiwm (USM) C.1 -554.0 -77.1 479.4 -53.7 -571.6 -562.8 -185.? -656.4 -855.5 -1246.2 Not Reserves CUMN) -I08. *814.3 -80.9 489.6*1S. -1087.8 - 1070-I .2 -1049.5 -1004.0 -925. Oross Reserves (Nanthe itsrts) . . 0.8 2.1 1.3 1.3 1.5 1.7 2.0 2.0 .A ........... ..........I----------------------0....0............. *.i/ 9st iamt.d wd projected data we. based an bi.14Q 'tetiests, UeSce for debt data. b.1 Figures for projected years based! an Firencfng Scenaio A5" DM*. This scwenai actedis debt to tense 3agerum Bloc cetwntries aid Latin American Oftlaporters. a.1 OfficiAl datea n gros dwstf a investmsnt for 1988-90 wer adjusted *e to everasfgiason In the national oaccwts. 8./ Figuaes for proJected yeim besed on RNW Financing Scenaio (Arve" A4). Issoudes official, grants. *.I Public tnvestment refers to Rmn-Finumist Pulic Stetr (flly, i.e. eactudes APP enterpise. Private Investment smetes up for the d1ff erence. - 39 - UICARAWA - N*TIOUM ACIITS "aiIX A1 .............................Pa.eof 3 Part A: Curreti Price Det% (AS PteceAtse of 0P) lase Cm Pr tectioA Per Capita GNP in jll ca. 100 (199) Ni0Syesr Poputstitsh 3.86 mittLlit ~~~~........... ..................... *-. -¢w .............................................................. Actl Ws. Proiected .................. ..............................- . --................................................................-* o.e s 1980 1987 198 1989 1990 1991 1992 1993 1995 IC:= gerss oas:ic Pedoct 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 1o;.; tiaKres (oMfS) 43.3 13.8 62.6 10.4 13.8 53.2 53.4 53.? 13.6 50.3 laparts CONfS) 24.2 11.8 23.0 25.7 23.0 23.0 30.7 32.1 33.7 39.6 R sU&rce 9 terG 19.0 -2.0 *39.6 *24.7 -31.5 -25.2 -32.7 -21.6 *18.9 -la.? Total axpnwditurs 119.0 102.0 139.6 124.? 135.0 125.2 122.? 121.6 11O.9 110.T Total Cornagption 102.3 86.2 124.6 111.7 112.8 113.2 107.7 105.7 103.5 94.r Icnfm 19.? 34.2 35.3 23.3 24.0 21.8 20.? 16.6 15.1 13.t Private 82.5 52.0 89.3 88.4 86.8 91.4 87.8 89.1 87.3 $1.6 Gross Ooostif tZvecst t 1/ 16.8 15.8 15.0 13.0 13.0 12.0 15.0 16.0 16.5 16.0 Governnt .. .. 19.4 16.9 6.1 8.0 9.3 7.4 6.5 4.5 privt .. .. -4.4 -3.9 6.9 4.0 S.7 8.6 10.0 11.5 W.om.ranAn fltem: Domastic Saving -2.3 13.8 -24.6 -11.7 .12.8 -13.2 -7.7 -5.7 2.5 5.3 I/ ff lealt data for 19w-90 wer adjusted je to owvretition in le nationalt aomts. Private investment incudue fincres In stoks for historical Years. Part 0 Contat Price Oat& (mittlion of .ardobes, 1980100) ........... ..................... ................................................. Actlel Lot. ProjcWted ................. ................................................... ....... ......... ............................................ 1980 19l8 13 1lu9 1990 1991 1992 1993 199 300C ................................ ................. ............................................................................... Gros O stit Proct l0,?" *1,100 17,936 17,433 16,66 16.833 17,338 18.031 19,M78 24,774 teprts (PS) a.999 6,430 6,063 5,142 3,29 1,4 51 5,993 6,414 7,456 tSports (=Fs) 5,039° 3,250 2,907 3,125 3,43 3.531 3,89 4,146 4.07 6,96 surc aance . (3.960 (S3,80) (3,156) (2.017) 1861) (1(902 (1,929I (1,67 (1,517) (470) Totat lipwrdi Uar 24,79 34,280 2,03 19,4SO 18.52 1O,73 19,267 19,8" 21t303 25,24 otsl Cont1iitc an gEpidtues: 21,20 19,61? 16,415 15,316 14,770 15,252 14,787 14,71 15,6L1 18,=3 I 4,103 1O,M 6,48 6,156 5,811 5.37 5,376 4.472 4,421 4,756 Privite 17,t16 9,395 9,935 9,160 $,959 9,855 9,381 10,403 11,220 13,614 total tnvesnt bpenditw053 3,490 4,663 4,675 4.134 3,77 3,503 4,510 S, 5,61 6,87 Pri"t, .. . .. .. .. . . rer-of 1Tre (IT) affect . . . UVs$ $o_s: f .. .. . .. ..... _etio $svinvs CT Adjusted) - . .. .. .. ........................................................... ......................................................... Iot4. PreUtsIrouy nd projected dot re based en ROMN estientes. - 40 - UICAIAWA - rAT0u;A ACCOWTS AUNEX A1 ;;rt......................... Cs f sf3 Port Ct Value AWs by Suetr (Seterl Sheros fn Prcent) asso Cose Proje:tfon Actuat git. P td ............ ..................... ....... ....... ............. ... ....................... 1980 1987 1988 1MO t19 1991 1992 19 9 X:: ........................ ..... ...................................................................................................... o*. ............. -@--*^*--.X6..*--***o-*^^- Agricwttwu 23.2 2O.9 29.1 31.0 31.3 . In6try, of tAIcS, 29.3 22.2 21.9 20.4 20.2 .. .. Pining 0.7 0.4 0.5 1.1 0.8 .. .. .. "aufeestwing 25.6 is.? 17.8 16.1 16.3 . . .. setvlce. 47.5 4.9 49.0 48.8 48. .. .. ... TotUl 100 100 1 100 100 I00 1 100 100 lC: ...... ....0.......I................. .1 .............................................. Ps" 0: Long-Tem Growth Snate (Avvor9e Am Growth Sat".) ................................................................................................................................. Actual Lgt. Projeted ................................................................................................................ 1970.73 1973-80 1980-6 198449 1990 199@095 1995-2000 B. iatfonal AccWAt Goth (Contant Pries) =...*........................ &e oaustic croat ap. 5.1 *4.2 1.9 -4.3 .4.4 3.5 . *.6 ricuttwe 4.9 -4.7 3.0 -51 -3.4 Ist ry 6.0 -4.1 1.9 .6.3 ,4.8 (of %hich Nanfa4cturit") 5.9 *0.9 la *?.3 -3.3 Serices 1/ 4.6 3.9 1.2 .2.8 .4.7 pwts Of 03n 6.0 -5.4 -2.? -.9. 9.9 7.4 ?. 1iorts of UP$ 5.4 9.0 *5.4 -5.? 3.0 3.9 3.1 totat SNp,iture 4.5 -0.1 0.3 -3.7 .4.7 2.6 3.0 Tot CsOWnMen 4.? 0.4 -1.2 .4.0 -3.6 1.8 2.a Private CWWA imR 4.5 -1.9 9.5 -4.6 -2.2 3.5 3.0 corZ l cSewioat 6.? 1S.9 20.8 .3.1 .5.6 -5.3 1.5 troe Oo,tfc Westmnt 3.3 -2.8 8.4 -2.4 -9.1 L.5 4.0 fIsd Ivest t . 8.4 .7 8.4 .2. -10.2 15.1 4.0 cepetty t Iwtt .. .. .. .. . eo omotis i . . .. .. 4.7 3.? 4.6 Geo" Natioal tl _ *. .. .. -8.6 0.5 3.0 tP Notiott Pro *. .- .. 5.9 0.3 3.1 . .................................................................. 1t tudss eteCtflty. No a water. V/ Sclus owrnt trawfeet. .. .. .. .. .. .. *v AJ3wlP8X~~~~~~~~~~~~~........ .................................... ..... .. ..,.. ....................... OOL act cot CIA COL 1* 0 ** *- *- s*s *- ** *- s w}X) }~~~~~~~~9"^jo .. ,. s~~~~~~~~.0 (S.o .. ..3sjxeft ......................... ............. .................................................................. *0 ....... ........................ ...................... ....................................... .:........ ..~~~~~~~~~~ssetu ..AD ......001 .to w.£ 0t0 ..................... .......... ............0 -.. W*zt ....................... ....... *- *- *- *- *- SK 9|>$ °9 act "t WI'@ -°l * }A *- *- ** * -* *- t" ~~~~~~ot ol;|- allt 90-0 1" XL ZOW*llt 8gU£ lf ;|[ 0|l 00ot 't U'Lt oLO- t -:;PE~~~~~~~~~~~M OU "It 66,1 9010[ - * 00 fttUN 0M9 SU b £DOt ALZ PU Go 0019 E£l' 6010 ZUN* UAIID 09t-&U tus lawt 0M O" nbl; cot "It 111 sol 0 0130} YXA 6"7 tt "2Stt "a O/U act 4tS* 0 se t-0 °931fo 0do ................................................................................................................................. Om 6"t C0t 2Zz Mt6 O"t o"6t 996 1196 09 .............................. ........................................I.......................................................... ....... ............................ PawfUd ~ ~ ~ ~ ~ ucs16 $3weavlsa3 .............. ............................... ..... ,,,,,,........ ..................................... Vo.- t-0 V£ 81-Z 1 t S- *;vw *'f 8,-§ V%7 u01doM 43AU V° ?,o tZIL l-g 6-.0- 1-9- 0-0;^ 1-6t. 42- CI VDMNW I° } 1A0 z & * | ~~Olt V-- -- 0s t-9- iletv t'-£ t-t *$aiJd 304J" so do Ol 8t Olt t-O t-t 9-- t9* Vt 9.- 00 l't Ue+ 3 ezoOd Olst- 93 ?IC 9- t- to- 19'V- 9 0 S 6, U£¢1 3U28u l 193o ..o . .. **10S cltot V6- S 1 CO $'t 21,9 .t Lo.sL .0 I'll no * t^.," .................................. I................................................................................................. ....... ....................... ........................................................................II ....I.......*............................. *;i; .......... t I ....t *,----.--- ......... - ITInwS 1 t*1 - 42 - WsCAEAQA * 53118*1 73*0 AuS5 Az A: VotM, V I Pqe t of 2 los Co P,rojection ... .., .. -........ ....... .......... -*. .-................... --............ *e .w..-,.................- ................. A4tkJB get. Projecte ..................... ............ ...... ..................... *. s........ -.**............. o-^** 180 1O96 t196 199 1990 199 1992 1993 199s a ........................ .............. *..................................................... .................... voLum. tric. 1980t100 NecIbC i." 1RpSrtS# Coles 100.0 61.4 67.4 73.2 81.6 46.9 76.9 8I* 102.3 1W.? Cotten 10.0 *35.7 177.2 124.8 122.9 135.8 16.7 19.9 281n 4.9.2 5 ttt 1i0.0 61.0 55.? 125.6 1I7.J 22.1 235.1 22S.1 229.? 253.. Sbring 100.0 29.2 30.? 40.7 *.5 41.1 47.2 54.3 69.9 119. " 100.0 33.4 46.6 99.0 14.4 143.2 147.5 151.9 161.1 186. iwwss 100.0 70.0 67.8 61.1 8.8 W9.2 112.9 129.8 171.7 2.7 cold 100.0 46.3 51.9 94.0 43.3 79.9 6.3 94.8 90.0 tO0.i Men-Tyeaditinel & Other 100.0 .. .. *- .- * . .. .. totatl Merc. *groom (909) 100.0 *- .. * - .. .. .. vatl-u*rvre"t Prics CMU mitLifn) -chansise 1*0 £ tst toffee I 133 a 90 46 59 71 61 116 h Cotton 30 46 53 as 3 41 50 a3 95 "St 30 20 05 1? 35 37 5 54 46 p,iuo 27 12 9 1a 10 14 17 so0 2a Ss Ref 59 1I 19 41 a 6 74 87 129 stnan a 8 't Is 3I 23 P. 31 36 , 48 6 Old $3 i2 13 S1 14 1a 19 0 24 3 on.Teaditfonsl oth0 103 43 3? 61 71 u o 9 130 233 fotut Neh. tpt (99) :* 236 290 321 342 400 572 1,07. Voltaw tnilc 196.100 N.echan4iso 1_ts:s Feod .. .. 100.0 6.3 .5 14t.1 143.6 147.1 155.6 179.1 Ostem Cow oe Ga wk 100.0 57.6 94.7 94.4 96.1 9.4 104.1 119t. . , o W.. .. 100.0 7O.O ".5 W67.3 109.2 111.1 118.3 134.1 Atmite o n.*. .. .. 100.0 73.9 52.6 52.4 5.5 55.0 58.8 69.4 coIethl .. .. OO100.0 .2 67.8 67.6 51.2 67.4 9.4 110.0 Tota .fts Us. InrtC .. . *100.0 77.8 79.2 60.2 5.1 8.5 94.7 110.1 Vat -Cwuert PiIeo CU Nit 11tf1) Nerchiumiss uportu Food 9 o5 9 140 1" 153 Ise 182 2 5s =t3 CVsirbooft 43 35 7 16 2? t 9 30 St 36 5 PM. a bergw 174 12n 109 8 114 1a20 1a 113 135 231 Inteiddeto goods n.e.f. 30 336 256 1 143 1s0 1ss 16 189 3174 Caitca Goods, 10a 2 334 176 1O8 176 35 236 2n0 3 Toaletu". Imports ClPIf 88 424 720 S8 5 620 655 700 an3 lens of ;rode Indiaos 1989.10 rer t_adis e .l.wr .rfee 100.0 97.7 100.5 107.1 109.8 116.9 1t4.7 Oe"Wso Iosrt Priage 100.0 107.7 109.4 108.0 111.0 131.? 14 M han ?i ot * r e. .. ld. 100.0 9.6 91.9 ".2. 9.0 94.0 96.0 . ............*............................. .......................... I/ IitnSs Valu*d At f..b. fea 196.00 I.' - 43 - ............A ...... . O.. ,NE a 2f S: Shoef Totat, wW0rou ams gm C&S# P?oio?tai- t1two of Nefeha4ts gxeEoca capto d rt1oSt VetIvn Wd Itporta (in cunmnt ricu) are"", , Rates Actul CST. ProJected Actuat gt. ProJested ........... .............. ................ .............. ....... ....... ................. .... ................ 1960 1990 199 2000a 1930-69 199 1909 19952C0 .............................. ................................................. , #e**.............................. Nerchndis gaports Cx. S p.c.)% Cefe. 37.2 21.0 20.2 2L.5 -3.4 IIA4 4.6 , Cotten 6.6 11.4 16.r la.? 2.5 *l.5 18.0 12.1 Sugar 4.6 10.8 7.? 6.1 r.6 49.5 4.1 2.0 __rip *6.0 3.1 4.6 SA4 .9.5 *30.0 19.? 11.4 seef 13.2 20.1 t5.2 12.0 80.1 '5.6 2.2 3.0 SwAn. 1.9 7.2 8.4 6.0 -4.2 24.5 15.2 10.2 Gold 7.2 4.4 4.2 3.1 *@.7 -32.8 7.3 3.o lion-fradftionst & Oth- 23.1 12.0 22.8 12.2 .. 12.? 10.1 6.3 Total Rrch. JPOs CtFO) 100.0 100.0 100.0 100.0 .. 13.4 6.3 8.0 Nerchandf SO tpoets t1%, P.O.): ewd 4.4 23.6 22.2 21.3 .. *4.3 1.9 2.6 Other Cruonrw COCOs 4.9 4.6 4.3 4.2 .. 44.3 1.9 2.8 POL t. Other EiWrg 19.8 19.3 16.4 19.0 .. 17.3 5.5 2.8 ntermt aed Goods n...i. 38.5 24.1 23.0 * 3.3 .. *32.9 2.2 3.4 Capital Goods 12.4 23.3 34.1 32. .. -11.0 7.1 2.9 total Pterh. I90rnts (Ctf) t/ 100.0 100.0 100.0 100.0 0.4 4.2 S.^ ............................................................. .............................................................................................. I/ S _ts valwed at f.o.b. for 1990*2040 C: Toa In Nmtfeer 11"Wess t......................................................................................... ....................................... Aeulat 1st. ProJected ................................. ..... .............................. * ......................................... 1910 196? 1la 19"9 1990 1I99 1992 1993 1995 2000 ..................... .............................................. . ............................. V.tum tu1ia 1969O100: eipoets of Nontactor Serviest .. .. S t100 100 102 106 1t0 119 1C5 tIqOts of M@nftetot Sefvie S .. .. .. '10 101 102 104 10? 114 135 USS Price Indices 1969.00: gEpots of ionfator Serviess .. .. .. 100 106 I 113 M1 126 15 laorts of fonfctoer seriec .. .. ,. 100 106 *t1 113 ttt 126 155 ................................................................................................................................. .e~S. C . * - 44 - UICAAA@AA-ISLAN a9 PAY96N?5 AIUj3A .......4 .. .. ** ........... 2 se Ca"s Projeetifo . .......-.....-.*.*.-.-..-..*-.-*- ....................................... **--.................... .......-- v+...*..................... Acttia is. Projected 1O t196 19 1969 19 19t9 1992 1993 199 r':: ........................* . ...... ................................................................................................ A. so of Cro* oo"IF 402 325 315 341 375 398 Is? 506 7 1,1t; 1. Heorhanse (IM) 45 2f 36 290 321 32 40 47 572 1.071 2. ll -rosctor SrYicas *? 30 7? 51 53 56 ST 59 ' 0. t@rts 0 e td5& S?: 2ip. 04 1" 5as ? 10 1 71 79 us 90 1,42 2. "erthw4CiFO) 616 34 no20 " 192 0 653 700 an 1,2t3 3. unpgegar Services 1O 161 135 119 128 135 10 14 111 aw C. esurce *tB Se (43) (570) (543) (336) (US) (35) (336) (342) (337) (311 0. met ftor Incoes (122i) (206) C(237) (206) (226) (355) (29M) (365) (349) (95. 1. factor Receipts 19 1 2 7 10 10 Is 19 24 3; 2. Pactotr Patnets I. 1L1 209 239 23 236 265 316 S" 572 1,0- S. Total Interest pmSents 120 209 239 213 236 2 314 361 563 9 t. N1t Cgrrteunt sferss 2 .. .n .. 0 50 la 50 50 50 1. Curet ReciptS .. *. .. .. .. *- .. a. 9orkers' leittenates * .. .. b. Otr Current Tro fs ." *- *- .* . Curret Payments .. .. .. .* .. *. .- . Current £ccourt 8aln.2 t-r 1. *efore Official rets (53) (78 (79) (CM) (521 (5 (586) (656) (656) 1,246 2. OfficIMt Caofat lrtS 122 135 19 169 202 61 0 0 0 0 3. Atter OffttitCl Crnts (430) C(3) (590) (6) 3M) (G1) 5) (6) (856) (1.246: S. Lonq-Ter Capit4l Iflau n.*.I.t 6 m 382 241 214 1SO 6o 677 S 1.245 1. etec Oirect tw t (138) 76 106 (37) (1) 10 30 40 40 135 2. Not LTU troWin 94 90 2 t1ol) (225) (6?) 5 63 17 1130 S. Disburuemnts 2.9 m 490 26 2 221 16 1604 1.20 1,411 1:73S b. Rapa1_ts 1./ (201) (40) (2) 387) (446) (816) (61 C7 (5% (dOSt 3. Ol~ LT Infnow (not) 10 37 V7 379 44 7 to) (0) 0 0 V. Totalt Other tm (rt) 149 (14) 322 3 (63) (6) (0) (0) (0) (C0 1. Wet 'r:t Tom Capital n.s.( 3./ 13 193 32? 206 24 (6) (0) (0) (0) (C) a. Iterest Ar rs .. .. .. .. b. OMa Iet ST Capit * *. *- 2. Captt FlOW n.o... 75 a 0 0 0 0 3. vro ad a sists 61 (215) (25) (150) (26?) 0 0 a 0 0 t. Ctange in got teserve 217 120 (13) 66 216 O, (14) (21) (n) (18) to) fadcate inerasel 1. Iet Credit ft. tile (NP .. *. *- . . *. ..-* 2. Qeserve Chang" ne ** *- * *- *. 3. [serow Aceowlt *- *. .. *. .. ........................................................................ ........................ ......... ........ ....................................................... -- 1./ &&$ed en mm ffir. Klnr sc0neri. (Atm "), tb& my differ Erm Ce Inlesters table as welt a test tbtes. 2.1 tIncudes Vsi#iUtif . flow itn fo projected years. saw eon u financing scenario. 3./ Incltes USS3IS lit*. of pstpnn of mlttitteral wrras in 1991. - 45 - NIICSIUAS * SALCE OPF PAYrThVS ANINX A3 .................................* Page 2 of 2 (USS mIttions) lase case Proiect,o. ActMAl Est. Projected ................................. ........................................ . .................... ................................. - 19MO 197 1M 1989 1990 1991 192 1993 1995 20c J. As Shares of GP (current S): 1./ 1. tesrce Saln *s.O -36.0* -37.9 . 24.7 -25.6 -2.2 -2.7 -21.6 -18.9 .1o 2. ILT interest PAYMOnts 10.01 13.9M 17.5S 16.11 17.6% 16.7 21.12 24.11 29.81 33.r2 3. Cwrrent AocoUft BaLacse 46.01 651.81 56.81 .40.3% -42.X -39.61 -39.31 -.41.6 -45.32 -42.re 1. LT Capitat Infltow (lie 0) 5.32 35.72 27.9X 16.21 16.01 10.6" 40.52 42.91 4.51 43.5S 5. Net Credit from the ot0 0.01 0.0X 0.02 0.01 0.01 O.2 0.0¢ 0.01 0.0X 0.:: i. forefgn txchunge Reserves: 1. Gross s*erves (eactuing od .. .. .. .. .. .. ..g. .. 2. cold (d-Year Londo price) .. .. .. .. .. .. .. 3. aross Res* ees intcludirg gold) 0.0 0.0 58.? 116. 7:5.2 81.8 99.4 120.1 165.6 243.' 4. Net Res. In nths Imprts .. .. 0.8 2.1 1.3 1.3 1.5 1.7 2.0 2.1 L. echange Rates: 1. in Noninal rTerm 2. (CS/US): a. Primery (Officalu) Rate Annual Average 0.01 0.0? 191 15655 60819 4.33 7.50 8.66 10.29 13.49 -ndo O-a 0.01 0.07 920 3150 3o .. .. ..0. . b. MP Conversion factor 0.02 1.79 223 134 96"02 5.42 7.50 8.8 10s29 13.4; 2. In Real Term (base 1989J100): a. ON (PAC astiusteal 78 94 101 100 106 III 113 115 126 1'5 b. Index Rtel Eachange Rate (USSCS) (Inease a sp.) 42 33f 167 100 163 132 132 132 132 13Z U Muoranm Item: CP (USS million) 3./ 1200 150 131 131 1339 1421 1489 1578 8S88 29CC UP curr. cordobs 4./ 0.021 2.696 30 17112 12960 769 111t1 13978 19426 235 =................................................................................................................................ ./ 8asd o Mfinfnacin seario Sbmx A4), thus wy differ Iro Ke Indicators tatbe as welt M text tables. A.1 ts in New Cordoba$ wjibS wee Introduced with the entar reform in 1988; Id In Crdba Ore fe 19912000. The MP conersion factor is et "ml to the imtleft noninal echane rate. 3./ The 1960 USS GOP we convrted #ro the local currency with th paralel psrket exchang rate. In _AsRqwnt years. us5 dollar GOP is a proct of that years change in rlt the d,onge fn the 0-5 ONw LOC weights for that ver. and the previous Wr Us dotllar GP. 4./ In blilion N" Cordobes thru 90: in lifon CrOd Ore for 1991-2000. - 46 - UICARAGJ I PTIhUMI. CITAL AiSOS 061I./ AMiE A- gaws, CasePrjctw (US nit I leam) Actual We. PPojCStd ¶980 I"?7 196 1959 ¶99 1991 M 1992 ¶9 1995 2Se:: A. OfsSgreWFltSZC I. 0P%ailo & R.Guar. LT l. . 8.9263 22. 8.0 67.9 0.0 0.0 0.2 01f4edM Credftors . .264.6 281.2 220.8 188.0 67.9 0.0 0.0 0.2 NultilatersI.. . 11.2 4.0 1.8 16.0a 0.0 0.0 0.0 0.2 of which 183 . . 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 of which IDA . . 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 Ullaggrat . ..273.4 277.2 219.0 172. 67.9 0.0 0.0 0.2 Privael creditors . .. 1.3 5.1 0.2 0.0 0.0 0.0 0.0 0.2 suppUers . .. 0.0 3.1 0.0 0.0 0.0 0.0 0.0 0.2 pinagicia Markets . .. 1.3 2.0 0.2 0.0 0.0 0.0 0.0 C.. 2. Privect Uon-Guar. LT . . 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.: 3. Toatal LT 0isbjrswmnts . 618.9 286.3 221.0 188.0 67.9 0.0 0.0 . 4L. imP Piarchatse . . 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0 S. *et Shart-Term Capital . . 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.: 6. unicaent i fl so ulrces . 0.0 0.0 *0.0 -18.9 1336.1 1261.. 1411.4 ¶734.7 I. Publi fe P.Ouat. LT . . 253.8 387.0 438.1 809.0 82A.6 623.2 590.0 228.' Off icio Creditors . 120.9 152.4 270.5 62¶.0 120.6 6`17.6 586.71 US. . Multi laterat . . 34.5 36.8 36.5 40.9 487.9 76.0 70.5 44.5 of which 18* .. * 3.1 8.8 7.4 11.1 ¶1.3 11.4 9.8 4.5 of which ICA . .. 0.3 0.2 0.3 0.7 0.7 1.1 1.1 1.7 si Lateral 8. . 6.4- I1S.7 234.0 580.1 672.7 541.6 516.1 ¶13.9 Private Creditwor. . 162.9 234.6 ¶67.5 188. 105.9 5.5 3.3 0.:. SupplierS.. . 0.6 6.7 5.2 31.4 11.1 5.3 3.3 0.0 Pinanoial Marksts . 162.3 W2.9 162.4 1S6.6 94.8 0.3 0.0 0.2 2, Private Ucn-Iiar. LT . . 0.0 0.0 8.3 6.7 4.2 4.2 4.3 0.4 3. Unidentified Sou?eO a. . 0 0 0 6 0 -0 376 4. Total LT ioepsoot MIS.28. 387.0 446.4 815.? 830.8 6V7.4 594. 605.2 S. iMP SepureSeses.. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 6. Amortizatient Arrears.. . 273.4 373. 40.9 786. (0.0) (0.0) 0.0 0.2 C. Interest: 1. Public A PAGumr. LI . . ..29.3 212.9 22.2 261.4 258. 221.1 144.0 65.7 Off iciat Creditors. . 126.1 118.3 1.48. 20.1 245.2 219.5 14a.4 65.7 Multi latwers "A, 4. 36.9 3V.0 23.9 22.5 63.8 32.6 13.3 of which 550M. . 21.5 20.1 20.5 7.8 6.8 5.5 3.9 0.7 of which ISA . . 0.4 1.4 0.4 0.3 0.3 0.3 0.2 0.2 Silateral .. . 1.6 811.3 123. 206.2 222. 170.7 130.9 52.4 Prfvat. Creditor . . 113.2 94.6 62.2 31.4 13.4 1.5 0.5 0.0 Suppiters . . 1.0 5.6 2.4 7.9 5.4. 1.5 0.1 0.0 ffnwoeial Markets . 112.2 89.0 59.8 25.5 8.0 0.0 0.0 0.0 2. Privset Mon-Gupr. LIT. . 0.0 0.0 7.0 2.3 1.4 Is3 1.2 0.1 3. Total LT tnterost .. ..29.3 212.9 234.2 263. 260.0 222. '165.1 45.8 .4. top Service charus" . . 0.0 0.0 1.9 2.4 2.4 2.4 2.4 2.4. S. tnterest Paid an ST Debt . 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 6. Unfdentfifed S&OtOe . . 0 a0 0 -I 5a ¶56 395 916 7.Total (Olt seurow) . . 239.3 212.9 236.2 265.4 314.3 360.8 562. 9843 8.tnterest Arrlears .. ..22.2 20.6 224.2 245.8 (0.0) (0.0) (0.0) (0.0) MeuOI Tot. AITears CAmort.*Int.)% ... 07.6 58.31 665.1 1032.6 -0.0 ,-0.0 0.0 0.0 .. !..................................................... 1.1 eased an ONM flo frhoi¶ scefWsr. This scenaio incudes debt to all Gcrfedtrs, Mind ssss WN- arars clarae if 1991 to ISIS tSA end log only, wd debt servi ce pa)umnt to all creditors for 199 and beyond - 47 - MICAli I EXTE L CAPITAL Ul ga 1./ ......I .............. ........ ANM--e**-^*--*t$ IMs* Case Projection (USS Millions) Page a of .............................. .......................... ....................................................................... @ *@vsvo* OttI . 1.t. Project.d ~~~~~~~~~~~~~~~.................. . ....... ...........................................................I................. *.--M@4**X*s^¢- O. Inerna Det (Do"S 1960 196? 191 1939 1990 1901 1992 1993 1iS 20 1. PiblrI S P.C mr. I.t .. .. 6.705 7479 7,o9 7,m3 6,619 5.996 4,565 S. . Official Credtors .. . $ 5,30 6.130 632 6.199 15154 4.989 3.56 1,9ss IPuttitlaterat .. .. 11 976 1,045 1.020 97 69 m 4 Of wich t6 .. .. 119 19 19S 18 136 125 10 7t of whi0h .. .. 5 59 59 S 5? 56 14 48 itatet .. .. 4,489 .154 5.1? 5,179 4,574 4,032 2.114 1,412 Private Creditors .. .. 1,333 1,349 1,367 1,17 1,07 1,06? lea5s 1.05. s fpp .. .. 30 43 6t 29 1I 13 4 ¢: fineswiol #ea*kets 3 .. 305 1,30? 1,346 1,149 1,055 1,054 1,054 1.0*5 2. Prfvste Rn w.Lt .. LT68 6? 65 9 54 50 42 39 3. total Lwq-ro .. .. m6.773 7,5 6.064 7,43 6.673 6046 4,606 3,03. 4. P Credit .. .. 0 a 0 0 0 a 0 a S. s rt-ToDt .. .. 715s 2 715 735 755 n35 735 71 6. UnIdentifed ores .. .. O 0 .0 19 131? 25n2 56e j13; t. Total t al sOtt s ) .. .. 7r40t 626 6,39 m17 o6745 932 11,00? 15.9i8 S. AccwIeted Arrears .. .. 256 3067 46,034 4131 4 1 4.T11 4,31 4,7n1 A. Interest * ... 11" 1.330 1.76? 1,824 1.8t4 1.824 1,824 1,U2. . Anrtiatn .. .. 1,373 1,75 2,2? 2,927 1,9 2.9? 2,927 2,92? 9. Total Debt * cM. Arr1 .. .. ,6 9,99 10,56 9,9196 10,570 1I.0? 12.631 17.743 Sher* of P*tic It 0D0: 1. an CaessSionMt Tom .4 . . .. .. .. .. .. 2. VitO Veriable tnt. Rates . .. ** .. .. .. .. 6. gank ae IDA Ralfti ...................... 1.13 to total LT 0D Cltni 3) .. .. 23 2.12 a.0 2.02 2.01 2.1t 3.33 2.3: Z.10 to totat LT 0D (tine 3) .. .. 0.91 0.l1 0.7 0.5 0.91 0.95 1.33 1.;; 4.1840 to total LI OS lifne 3) .. 9.0 9.4 6.0 2.9o 2.1 2.52 2.42 1.. 5.iO to tout LT 0$ (Line 3) .. 0. 0.A 0.33 0.11 0.11 0.1% 0.33 0.31 P. D-tot4apts GU ..................... 1. Lon*TeO Dbt . .. 2136.31 2171.91 209.0 182.72 1444.61 1130.72 697.42 2S.0. 2. US, Credit .. .. 0.0 0.0 0.0 0.0 0.01 0.01 0.0 0.0. 3. Short-Tom Debt .. .. 2I W.41 207.71 19.1 18.1 M 8 143. 114.n 130.1% 4. LT.INF? OQ . .. .. 2561.72 579.71 a392.5 2001.5 1563.42 1294.42 611.6 653.1% S. Totat DObt * Arest V ... 2735.01 V62.4 M25.42 2451A.6 M e.n 2133.01 1942.61 3 .r. ;. D0-to.-urren @D 1. ttr *J.. .... ......................... .X§OS Z2 g5 4*0 O 2. 172 1. Long-Tem Debt/OP . . 494.01 575.42 602.5 5.3.51 448.01 33.01 24A.011 17702 !. IMF Credit/OP .. .. . .0. 0.0 0.01 0.01 0.01 0.0O s. short..erOda/to .. .. 0% w5.11 5.61 5.4 53.1t so.n s.6 4.0 44.0 .. LT*11T QD/GP .. .. 5.11 24.91 6.4 S7.6 49.7 430.651 2 .0 221. S. Total Debt Aeas . .. 3.51 M.4 790." 7. 709.41 710.01 1Y7f 1033u.3 6. D*t Irviee/zpets M ............. ........ 1. tfea C aia rt T .. .. 143.01 1n.71 In." 262.1 M8.4 160.71 114.1t 50.7 1. Privat. E-u te LT .. . 0.0 0.01 6.01 2.5 1.5 1.11 0.01 0.1S S. Totat T Debt Service .. . 163.01 12.71 176.91 64.7 2W9. M1.n 11.01 115.*7 ;W J,I.t topwrebases'Serv.Chgs.. .. .. 0.01 0.01 0.51 0.61 0.51 0.51 0.41 0.43 i. lwttes Only on ST Debt 0.0X 0.01 0.O1 0.01 0.01 0.0 0.08 0.0 $. Totat (Ltu IM.t* tat.) .. .. 16.011 M7.71 17.42 245.3X D0.1X1 lf.2 i15.31 116.1S . hitoeret Seuden Ratios ......................... 1. Total lteesUtAW t OP .. .. 17.1 164.1s 17.41 16.7X 31.11X 4.11 29.1 57.4 !. Total Int t/ rts .. .. 75.51 61.3 61.4S 4S.12 4.5 72.5 65.2 169.7? ...................................................I .................................................................,,,,,,,,,, ./ lased on RM fifracing scnsrio. tfis scemio Iltdes debt to all creditos, dssms erears etoarm In 1991 to left, IDA aWd 106 only. en ddeb sevfce psyments to alt redMitors fow 1 VW beoye . - 48 - MICARAGJA PAUC FIVANCS . ..............-..-.-- ANlNx Al la" pageP Ij. ofr I. ..... .............----. **vh***-*-v^X**-^*-.................................................................................................... *w^m*................. x* Actgl tot. Projected 1. Cone oiated con*Pastian{t --- ^ v** *-o---****.,,,,, Ptibl 10 Sector 1935 1987 1938 1969 1990 19 1992 ¶993 1995 2: .......................... .............................................. - -*-s.........................................* *v--*^*.v* As puroent of Currnt CDP: A. totl Current QOceipts 36.8 29.7 23t 2 24.3 17.1 22.4 23.5 23. r U3 22: 1. Ta a Neee 3.5 23.5 21.7 21.7 16.? 18.7 19.6 19.6 19*3 tg j 2. 4ontax Current Receipts 2.3 2 1 1.4 2.4 1.2 2.1 2.1 *.21 2.1 2 3. Op. Surpu of Pu. nt. 0.3 *0.9 0.1 0.2 1.2 1. 1.8 2.0 2.0 1.S 8. Totat Current Expenditures a./ *7.7 41.3 42.6 26.0 4¶.3 27.8 24.9 2I.r 19.8 16.8 1. Consumotion 39.3 36.2 33.3 22.6 35.9 21.3 20.7 16.6 15.1 13.! 2. trasfers .. .. 5.6 6.0 4.2 5.1 4.6 3.? 3. interest b.I J *. C. sudgetary Saving, '10.9 - t *9 1. r 2.2 -3.6 -1.4 2.0 3.6 5.2 O. Capital Esp. & Not Lending 12.1 4.5 7.2 3.9 1.t 7.0 T7 7.6 6.? 6.7 1. 8u9etary tvestment 10.3 S.5 4.7 2.7 1.3 6.2 ?.3 7.6 6.3 s. 2. Capital Transfers 1.8 1.0 2.5 1.2 0.1 0.8 0.2 0.2. 0.2 0.4 I. Capital Reverev 0.2 0.1 0.1 0.2 0.1 0.3 0.2 0.2 0.2 0.2 f. Cs ial Satlae Finaewwd by' -22.8 -18.2 .26.5 .3.4 .25.5 -12.2 *8.9 -3.4 -2.9 0.7 Official Capita t,rants 0.6 0.5 0.6 2.9 13.2 12.2 8.9 5.4 2.9 0.0 2. External sorrowi f (neot 0.1 0.1 0.7 0.1 0.0 0.0 0.0 0.0 0.0 *0. 3. Oinstic FinancIng 22.0 17.3 25.2 2.2 12. 0.0 0.0 0.0 0.0 0. O . CoP (cuwr. Cordoeb) c/ 0.11s5 2.696 la0 17,1 120 602 7,697 11.171 13,t78 19AU26 39.235 3I. Total PubliC *ecter d./ _....................... Ovralt Batlme. (deficIt -" .44.0 .37.2 -54.4 .3.9 0 S5.9 -28.2 .. Non-fInenel*at "lIt Sector *22.8 -18.2 -26.3 5.4 -2S5 -12.2 -8.9 -5.4 -2.9 0. *est of blf e etof -13.1 t 9.4 *3.2 *4.9 -14.8 -2.0 .. Central ank loss"2s 2.8 -5.0 6.5 11.9 *1.8 -0.4 0.0 0.0 0.0 0. Ufp.id foreign Interest -.3 -4.6 -14.2 -16.7 -13.8 -13.6 .. fInancing 44.0 37.2 54.4 38.9 33.9 28.2 ' tertl FinAming '.1 18.7 22.1 24.1 19.1 135.7 Oom.stic Pirnuing 18.0 31.7 11.9 23.6 -1.1 Foreion Grants (civilian) 0.6 0.5 0.6 2.9 1.2 13.6 9J 3.5 2.6 0.0 Foreign Grants ailitary) . . .. 12.0 0.0 0.0 0, 0 0.0 0.0 ............................. ............................................................--.-....--. --.-......---..------........................ ./ in 1990 includes 12 percent of GOP it oxtrabudge:ary oilit ry outtlay fInnrcd with orants fran tastcrn Eurpan Cotuntties. .J To e determined. ./ Mun nts In billion New Cordobes which wer, Introduced with the monetary reform in a, cnd in dittien tCodb Ore for 91-20C0. 1 Excludes emproprieted prAoctiv e torpriss (AMPP). Rest of th pbtie s*eter include the stte oil anpny, foreign trade enterprises, and expwndItures finavced by external lines of credit. .1 tnetudes tb counterpart of unpaid foreign interest. - 49 - EICARAS * WKY AO ChIT ........ Ao g ow Pmctton 1** t ................................................................................... 4.......-- . .....-............................ Aetwi SJ lsttmt.g ................................... ..-- 1945 r o 1987 196 139i ..............................- ........................ *...................................................................*vs***,- A.As seam 4t CawP Cl09: itw booty (3) 4*.5 3.3 62.6 21.6 21.1 Ienow * easi ISfv C3'35) M.5 3.0 4.? 24.7 21 ttoel let D_mtfe Credit 77 3 64 12 91 To Gover,i trot) (32e) 45.0 1.0 70.0 42.6 ".6 To OffeiMt 54titi. (333) .. .. .. To privote kite (M) R3 1.3 15.6 9.r u2l Not reign Assts (Sin) b./ -56.9 40.5 -426.0 546.5 .59.2 Alt Otlte tge twwt) -39.1 -1.1 65.9 519.0 533 3.Offsts to opmaoA f o: net foref on Asets b./ ...42 -2.21 .. *25.2X .22.S3 Credit to ove t 6J. 21.43 .. 175.42 M credit to oftfIial Eftit*es * * Credit to Privete Stor 40.6 46.1S .. 9.92 .62 et oter Asts S Liabilities M.5 31.71 .. 2141.02 20W . tnerees Inin ony Ousiiey 100.01 100.01 .. 100.02 100.02 .**.......&.............. 1....................................................... .......... s.1 kgfming 19 there fs * brook fn te comerabitty of te dsu. s./ Snctlide L&Wtets reign Lfeblitties. ?age :! _Z Sodl lgdiass of Devedop"sms Mo0 ax.N> ~ ~ ~ ~ ~ ~ .iCrP Ps ~~~~~~~~~~~thu 240 3370 Z 31 G"i i = TesKa;vwudfaw44 _Yb2 . . 3.. pX_t: O Pq _9 _ $1.14 SS19 63ats10 WS8N~~~~~~~~~~~~bt ii. . i2 19 7 3.^ .2 _w_a pi_ 10i .. _ob 1* .1. * . d 13Mds 1t . CU_rboo :u pw tmP 49. 41L' i38a 6 UAWI 1011^ _0 t21 m X R W :U*{_f 31-6 3 § 1;3 1*" no r 1_ b le d M ptbmot=1149, 371 iI3 45u} 4"24 U rA 3 af - q 0_ ,~~~~bw OV, M4 15. Ad 1 6 _w~~~~fn _L A_ 67. 69 _ - _wwwl4 .__ ..6 4.0 24A 911 - j1 - . Sex 3 ?age " ~f SodS jdimrs @1 Develpmet. IWo Nicrapa U3-io lszW Law te 'emu_. - _ VICOA DPOVMT ¢pwraplA(t"w a197) 330 630 1350 t32 3,80 TbmI pub.t6 mom. A Sla e10w thaebd _ b UIS .. , .q, S bo w 2D o.aait_l .. 9 .. Sbm so 40n obiwaIM29 .. .. AaU "01'uI31b ..m uw , . S .p . .. q a a_ km. .v. .a. _ . Piwaie of _wmaa (.darS) -d&prw .. _1 Mm. 5* mR. mi. _gg _ . Ma. erna. _aw 4 5 _j _75 _~ 27.. e~~am 2~~~$~ U41S 2.7j Z!4 236.71 R-^ Ad _ ns _ *IDP- , *. _ ad awams-b 3 Id mdw p__ sonvAnom W4.ap" Ii 172. 20. USA 67.1 $4.7 1i.5?. U__ *dhiI _ _ .. T,_Sednuald Safoa __ t4 X Sl $. S PSinimbOqI tild * _ .. - ... TonI 1u_nIr _ US 4 1 1 3S P~.1aa_rip -w u d t_*___. ~~~_t^_ _ * d * ~~~~~~~~~~~~~~~~~1 it 17 an - A Old du)4M1 Ibw (minw ) its~. 33A 3. os 2 ~~~*auiegy 0.@ 99 tWA atA ?umZdmn_asina *dm~ _ 9. - dS. "14 39 S - 4 1Ai 5 I4 * dMMi 9 du - Se 5t 45 - - f -d 2___~~~~~~~~~~~~3. 4_5 -62 - Annex C ?a&e 11 of LET"ER OF 0ZJZ OP-yXVT POL:CY 11 33. Domestic Deregulation. A very significant reduction of gcvernment intervention in the economy, and the development of open and competitive markets, a:e necessarY conditions both for a more efficient use of resources and for creating a favorable climate for the reactivation of private economic activity. Where government intervention is necessary on social or economic grounds, it will be done under transparent and equitable rules. while simplifying bureaucratic procedures to the greatest extent possible. In this coutext, the folLowing actions will be taken: The legal framework permitting price controls, except for natural monopolies, will be abrogated before March 1992. Transitory price setting adopted for selected products in Government-owned stores will be eliminated before March 1992. An action plan to phase out price controls of tho fiscal industries and to refomulate the Selective Consumption Tax. confining it to luxury goods regardless of origin, vill be prepared before March 1992. The state institutes in charge of regulating exploitation in-mining (8INZ) and fisheries (INPESCA), after separating from them their correspoanding production and trade activities, will be transferred from CORa to EDE before August 1991. Terms of reference for studies to design the regulatory frameork for the management of natural resources will be prepared by September 1991. This regulatory framework will be implemented before March 1992. Any regulatory entry barriers to the private sector in other activities still remaining under CORNAP production monopolies (sugar mills, export slaughtering houses, bananas for export) will have been eliminated before August 1992. Social Sector Prorams - 34. Two programs have been established to ensure that the burden of stabilization and structural adjustment does not fall most heavily on the poor. The Emergency Job Creation program is administered by the Emergency Social Investment Fund (FiSE) that was cteated in November, and a campaign for social protection of the most vulnerable groups (will be *dainistered by the Fund for Attention to Oppressed Sectors (FASO) t Emergency Job Creation. The emrgency job creation program (FISE) is expected to generate the equivalent of 30,000 man-years of temporary employment At a total cost of USS 62 maillion in 1991, and 40,000 man-years at a Cost of 1S$ 83 million in 1992. Protection to Most Vulnerable Groups. The campaign for social protection (FASO). with a projected budget of uS$ 87 million in 1991 and VS$ 103 milliot in 1992, will create additional social safety nets for the mst vulnerable of the societys - 63 - .Anex C ?age !Z o.; LETTER OF DEVELOPMESEN PCLtCY 12 Emrgency feeding programs will be di:ected toward rural and urban cMild care centers. homes for invalids and the elderly indigent, and orphans of war victims. A totsl of 40.598 persons are expected to participate in the feeding program. Occupationa. training for the unemployed will target 20,000 vorkers laid-off as of March 1991 and will provide them with training, free transportation and foodstu''s du:ing the duration of the t:rining. A microenterprise credit program for 10.050 people will promote and protect micro-entrepreneurs working in the informal sector. The small busizess people will receive technical and managerial training programs and credit through the micro-fund of the Banco Popular. A special health support program will be added in 1992. tIZ. CONCLUSIONS 35. The Government of Nicaragua is coitted to pursuing policies which lead to renewed and sustainable growth and an improvement in living standards for the citizens of Nicaragua. The actions and policies outlined in this letter of development policy will support both of these objectives. Since taking office in April 1990. the Government led by President Chamorro has demonstrated its comitment and political will to initiate both stabilization and adjustment measures under extremely difficult conditions. To ensure the successful completion of these programs, howver, adequate financial and technical assistance from the international coiumity are needed. In this coantest. we request the World Sank's final tal support foL the implementation of our program for economic recovery and adj Atment. Ministro de Economia y Desarrollo * Inex; - 64 - Matrix of Action.s Page 1 of 9 ~[sEss _ *AMinmmn .it0 . . * *U IWUT I I A~~~~~~CTIO NS ACoP ACTIMN TO K A00110 SEP05 N"ZEGIAtIONS EpolI" OMO UNESTATIO Ue "men Ii I &¢"i ui Aintai A stebitiIgtiot ,rwm"M has Msinte of an of an ftrO ic b l e" initist5; COrOC ge was aWrWi*toe m.ro.enic i,rWiste muroscume fruSft C@msitVnt c vItUd by 4AG WfCWt. ffgt_ , nctidA fisa"l frinwok CSiUw trm with tho oJactiWO Of defisit i dstie credit s .aiLi) price stability, tram Expuiturw toreted in e$tlirn eeistont with am *xiagg rate line with exscted revenue. stabilization ojctivl Setisfactor prov lit ralitztion, Ve (Beag PrPtat i tatiGn (IM asgeg of pevflts Adopted Cah hbipting tg agition). Owili,ri f . procres for *phndit- urge. Naintonne of achangeo rate poticy w0ic" is Monthly Creit celfr4a for cwmiatent with eaprt Centratl an creditS cetitivenms, Kg idleh -stablished. reftlcts changes In :tsry, bsllw of pos_ts, wi trade wd foreign eschw reserve indicators. atisfsctocy Pr0re itl_nttion (cgg T*ntative date for second tranulie release. Anne% D - 65 - Matrix of Actions Page 2 of 9 iS8UI AnD OsCTIKS A S AfOPI ACTONS TO 5I ADOfU U NWOTATISM al SO= D1u0=B AMC 992 PRISSUTATION _ I Larpe lso of public ludgeI ty expa4ttuaee k4dctio. of Ceautal Adoption of: aector with hiu for F191 haver bee Gaverwat aon-Vate st total ouperdt- restralnd, LUdU* a curra*t expoaditumo In (a) 1192 Budget with urea/Dop ratio and signficant reductio In the prood nY92 budgt reduced Ceutral current dutary anodlrurse. to less than V5$325 Gover=oUt non-intereat expelturlGOP ratio nilos equivalent curret exnditues (&rd Presentless 0 thn US$325 cmdA milmli"Uoevale-ts (Scn tnui caa4h11ha) VWd (b) An actio plans. att.SfectoY to IDA. bas on recoinndatioa. of the joint Govers_entID public oz.dltue Weak Institut4n-I 3apscity to puln ad monitor public ezedtutos Annx - 66 - ~ ~ ~ ~ tatrix of Acti.ons -66 - Page 3 of 9 iSSgS - OMICftVlS Auto" WTB ACtSollS T1 a #Om WP@ut SO@?Iatgg " 396-6OMU 36IUNIAIS NICK6 60A 1992 _zai /1 11_ soctf J Neti t l %IR1 igeb SiOt lion to . sItSt*i 1 0woe v1 to? of a5. *itst _ bill. 4refts Mw olio kt ruip.111 of 5100 a os Aotic UCtOt ilitwyffiC. Work force No flaitot. reellotttin of dSOM tlaor to Institutin of * hirinw prOative _u tovt freez in Central in too rivate $tor, bovortnt. trzables. Zntroatiw. ofa C_cff of tlw atermi lV fw" proeeit. of. lot.wtey 'oloowit reowwenien onitwow rsatiuo n fa O vw_ ~ to "tome Pat Itc setow fo of 0,000 ace t rl rat (am moire an aUitiens 3.000S altits" prsemet Prbosrth oI f aenS uit tory prore Ptah Ito .atewd mloto In Iwwmlinent tao remslevn prmegra to thi ostien ptwm fwr taret od to.m0 loee prora i nsludtlnu aSI%. pti utlit I0$$ uath bdl s___. - L! - ~~~~~~111 ii II ..jtiII . _ 6, _ *Mact:x of Action.s Page 5 of 9 cr WI ~~~~ACTIO *ArnE AYU to U ME T MOjo? e tiof of the Establishd CORSAP and Adeot en action plan. itl_wntation of priwatitotion Iits of stot* ew@w it with resD"o satisfactory to IDA. to vlan incttiIVw: Caltion of .nterwist sector. ibitity for both negino privatize CUONP privatization of an iti.ot u pwivetialng "out 350 ensrprbie 5 2 State Rme enterrise; stat terprvse. _ gn e tis). devOlusiO", liquidation or ouick sates of state m tie no r O5 oternri"s to redue t * ; w1 f" Str_ the strcturat deficit stuy* cwpeted on taken encrttS St towrd te of the palic sector. privatization strategy. proWt tioA of 30 aditiwil to encourage privete enterprise feor privatiution sctor P r"icipatiors ( , ame to gterate Strategy for divestiture is worked out. W Clarify snd garate canies he alred* private property rigts been returned to preVio to rene INertainty oawrs. tiqideted or aW foster private privatized, ractuding one invostmnt ai growth. Large grOO of aericultural entewris *-Ntotl* ) - 69 - Matrix of Actions Page 6 of 9 tSdSS lAl OsJEcTlviS ACT01 ADCE, ACTIONS tO U AOTID ,__________________ fF~t IA7IONS 31'1 moo10 PEIIIIATIOM 3 1 "me!S 1!99 Inacrase ad mintain Tax reform gaosurs were t*a rv~' to onure inoteted, iretling objectiv of ra*tien in the nmer stgiltil&itJo aid non- of brecit ts in persona tnft.tialry finenc* of inewe tsx. wV dmiA-tterml govrlwnt regtion of top rates program. for persawI aid coporate incoe taxes. Withholding provisisn Rlneval of icm tax betisfctwy progress were iwrowd, VW new *xseptis, and aeprel of in imptamntiid the preswut;ve int%ies were a progrn to ohs" out aetion pt1w to ~ irtro"ed for both of indieect tea ea0tiuw out ildirest ta abov ta". intudWir4 i1rt tao_ atiOi. eati g i The Ga@rarl Volvo Tax bose wa expended a* the rate increaed to 15 percent. Aftiniistrati iety granted ta exemptions were *liainated. SiWtlify VW streithan Adeption of e plon, initiation of on ction ltation of tax dinistration I.tisfactory to IDA, to plan, satisfastory to I0DA, m_sne to ot _it~ improve tax to ijpoe ta ta ainiotrttion adsinistretfon with ainistratien with islutdie: aephasis ion GM aid e owif is *"*"is on WI (a) fAt opeaIon of tncm Tax Collection. aW Ino tam eel etllo etew wlit fw tam (|"d ltrs Lun l ta_vet: Prepration of a pilOt figult=). (b) isawas of project to reister NW desroso on auwiei cotl et tams frn tlr lying to deloWi tax pews. pos - -. .e) relotein of GlAtin Paste idieste ini the action pLon ad (d inAtiation of ppser on WAuaatid amnngionet "ontrot, aarpwiaad ta,xyor iduwifflcetion $"to% ad treainig pow_ faw Internal Rqewa tod 11t pww fin'" tcl3 Annex D _ 70 - 1at:ix of Actions Page 7 of 9 IA_L m jstsSS AID CUJECTII ACTIOIS ADPE ACtIOND_ TO~ a MMPTE ___________________ REfOSF NEGOIATIOSS MEBono M M P AIOS Ufa" MM I ,1oo the oltocation Established diposit Adeption of - of *irisJt POreoues interest retos at 12 inutet r, t oti, y by ratiwalaiinl percent VW lefiiw dieh eprolimses f"eiatiW an baning rates at 18 percent rd fate to carket activities and by tied both to eollar. rates, by setting M tAthefing tns rwtn a Ww for tloin ants of wanetary Introwed a wthlY rats ad freeiwn the controt depit rate for tnw- dePosit interest indexed d0spoftS. rates. lwrow the off iciCey Aa4sly eWprovda Adptiin of regulatius. Preoration of of fiuauial bill for setting upa satisfactory to IDA, for trasitory emitivw interesaiation through Strintenooncv. the iaplmsioatin of the to establish the ovetom t of 0 SSrintelcy ltw. ncsar ntiel profit oriented. AO intment of a re etlatsif. private sector btsed s.rintendent ai stwt-te fifemiat system. of Supsrinteedsndy activities (l3u Pres-taigt caitia) Adption of an action proeran "titfactory to IDA, fer te rstrwtswing of state-oa, b 1", cang Carrying ot of with ceation of Centrat finanial swto SMM s.*sidtes ad reforn liwijding. dfwco st espt for (a) l1qudldtiwi or gioture NW Si mew of sueo ant1rwou (Bard lftwI.1lbrle with P - tign ctfow}. IN IwearA de lndotrie y Ciercio; (3) dissoltion of PreWat1on of ter of Corpwocion refwave for dswlpte finwierem d aid iapisttr the Irnm Utee (fc Io L fhr Uw*tn ad (C) dmontrati on Pfrtwial Imttutluu ciftet stq# t_rd ditch Idntiffes a to_e, a te rttwtwifr of technical asfostaiw SauceU arewin de firamine suomr. ad lidAtrie y Cmseoe, tiontable. Sllce Sacrat do .eerele, ad Sm Peolar ledfri to ofeod plau; .d) Submision to the Matiami Assly of a bill. etisfactory to IDA, on B"In d firancial lmtitutin VW t~~~~~~~~~~~~~~~~~~~0 G;;;We 1 tb .. I§_~~~~~~~~~~~~~~~~t=o to stut-up tmtituttu (a 4,~~~~~~~~~~~~~~~~t_1t = -7?1 - .1crox f Ac: .ons am eB Page 8 of 9 IWJfS meO OSJlI CtYS AtCTSO NSPtTO CtS tO SE ADP SnP03! NEGOTIATIONS SftEllt WVN "ESENTATON UPOlil5 NaICH ¶992 ra tt wtrad Oeregulation Coroolidte th l diversificatlo of oeee onm izpot VWd *aor_ts to ewur tr_tn by ineres ing export trede to tnl pes O of S iWS* privat* sector prive. sector. g ernt prptionl in tre. inttrtontlin it torsign trad. After the detution Allow futl fOreign eaCilng Achiee full currnt of the Corous, foreign retention for eaporters accout eacheng elloe tian uaaWr an OftS :t Promotion convertibility of the mcnanim were DOcree. cordabe. significently iberl i tzed. *li j-eting ministerial an Centrat Sen ponits or d oportors, aa giving de-fato full aess to foreion e'hange to exoters (except cotton VW coffe tooaprtere). noe to a me iai fore, jegt I anon i the Loewing ninal eotection Lowering of neist trwooerren: aE lowr dieprsion 4w avrae in trade ser to a range protection in tw, inet protection Tbesie triff rates. of lat-am thrhp* a tram enter, to a strctwe. cinetien of riati1 r ae of° 1ofI4OI Itiinstion of In the tlwes of ta ,ffs* threh* a ctintfon selective coewitien C, wi st: tea; si of reeat:ie In tea on a Asr of aiwtsnt of a targt ltove of trifft, ioerts. tariff ruWV of 1D"-2OS ud SC wi st te @tilnetion of UCT asd (I raofls Conclusion of a free sta ta on iorts &y te .i.U.). trade agret with eu of 1993; i eroal Mexico to bIDm fully of arragmnta for uWrtiool by 19,6. automtic ristration for i"*t wi orts (C Pr¶atatio eoasition. Dewlop action plan to Satisfactoy progrea prvde fr trade stat., In te ieplnmttiWt I.e., e. aien of tariffs of th actin plan ws Iedirmet tam, for for giving fr trab exporter. status to e rtrs. esiign a prico.beaad nchansii with variable Saeuit of id"t levie fr pige, Yellow qiea on rice, corn as dft mile (I Vellow corn w i COite Proumntatian caditian) * miae for a price boomd sumcaii with wettable levies, satisfetory to IA, md elimination of remaining mtriaipson feod grin ltwto (IS*L ____________________ ___________ 'Nh odto AnOex D -72 - !Iat?lx of AC:ions Page 9 of 9 #lawS An ONJECTIVUs ACTIONS APTED AClTOS To gg QDTU _SOEUE NEfOTtATIMON ;EPONR SO PSIENATAtOU SEFON NCW 1992 CAfa Wm cOtU5UV Elidinwtin of t Abogtion of the minimize static and detie price eintrols lel fr_m act *~ic wetlf"e lo"*& Ot than thos of psitting price oscasiSew pervsitve p"ic ueitili,i cantpols, et for stte intervention the Ifsat irotrio nwtural mempoliss. s*nvt of trsitery price settin sgaps. fo sel t eted prots in govon"MMlnd st*re*. Prgwa on action plun. satisfacy to IDA. to I price eantrols of tCM fiscal imstrises sW to oofoualata as tsI esterilog It to w11~~ 30. abropt:isn of legal eupert eanapaLise for sallowin private sector access to export gliae|tifwn of brpliO to entry to natra amwam regulations fras msea nttrpriOO5 tO the Kinistry of Ec. n. 3epin,tasi.n Of tce Ppare gem of Vetere= stu*'o fiuifigon a for sties a tot reptatory frapck uwaltorwy I resck of for "a mnwmwt of naturalressaewe. atral raoasjm. ltimiatim of oawot gisstis onS prig"s for b sftim. t- in stu bt mlAA to bgin of feing basli Veind. service1 (Starap. bl In E. le~~~~~~~~~~~~~~ipanor do )s sed to PMs Presawt a Poere or factitltes Ito privaet priwatisfuo INAA .mttrpre rs. reita Wi imle"s euslots tiut at (lGat akofts wi ll .e "id to privet, parties or to lrerfs by brib IM: - tOo .'miMiw will be divte te the WV of 192. Prsen 4" wtian pltn to rsfin, t" future rolt of NMAS. -73 - ANNEX E Page 1 of 2 1UCARAG-UA- Economic, RecovEry Crdi Suiol.entarv Credt Data Sheet SeetiQn S. Timetable of Rev Evofts (a) Time taken by the Country to prepare project: 7 motthu (b) Project prepared by: Ministries of Economy, Finance, and the Cantral 8a-k (c) First Presentation to the Banks January 1991 (d) Departure of Appraisal Missions June 1991 (a) Completion of Negotiations: July 1991 (t) Planned date for Effectivenests September 1991 Section 11: S*cial DAnk In1i"emntAti2n Actigns None Se_tion UI: S92ci&l _onditions: Release of the scond tranche would be contingent on satisfactory progress in the implementation of the lovernent *structural adjustment program, including the maintenance of a supportive macroeconomic framework, and fulfilling the following conditionas (i) Adoption of (a) FY92 budget with reduced Central Government non-inteicet current expenditures less than US$325 million equivalent, and (b) agreement on implementLng the recommendations of the joint Government- IDA public expenditure revLew, (ii) implementation of measures to strengthen tax administration, including (a) full operation of unit for large taxpayers (b) issuing of decrees on sanctions applying to delayed payment and non-compliance; and (c) initiating programs on automated management control system, computerized taxpayer identification system, and training programs for Internal Revenue and Customs personnel. - 74 - page 2 of 2 (LiL) xmplementation of privatization of CORNAP state-owned companies through (a) completion of privatization of additional 25 state-owned companies; (b) finalization of devolution. liquidation. or assignation of another S0 companies; and (c) initiation of concrete steps toward the propasation of an additional 30 companies for privatisation. (Lv) Carrying out of financial sector reforms including, (a) liquidation or merger of 3anco thmobiliario with Banco Nicaraglense de Industria y cmezrcio, (b) dissolution of Corporacifn Financiera de Nicaragua (CORFtN), (c) initiation of steps toward th restructuring of Banco Nicaragfienae de Industria y ComercLo 8aneo Nacional do D-earrollo. and Banco Popular accordlng to agreed action plan, (d) submission to the National Assembly of a draft law, satLsfactory to IDA. on 3ankilnq and FinancLal Institutions, and (e) issuance of at least two licenses to private banks. (v) The protectLon resulting from combined tariffs and taxes that apply to imports ln Nlcaragua will be reduced to a minimum of 10 percent and a maximum of 40 percent. except with respect to medicines, books and newsprLnt whlih may be exempt from such tarlffs and taxes or subject to tariffs and taxes at a combined rate lower than the minimu rate refrred to above. (vl) Replacemnt of import quotas on rice, ye llow corn and white maize for a price base mechanlsm with variable levies, satisfactory to IDA, and elimination of romainlng quantitative restrlctLons on food grain itports. V. Aanex F - 75 Page 1. O 2 8:A?ss or aam GiOu, OPUA?:0II5 IN HICAM . ..... .................. . .. (As of Maveb 31, 1991) Amaaa: In US$ uillUso (lse e. 000t1o4) Cee4ttl fiscal Loa" No. Tr $ rvower rw e lank I th dsbuisod ,,,,,,,,,........ ....... .......... .... ...... _. .................. ........... ........................ ,. .-------- ........ ....... ..........___ 28 loase and 5 credits fully disbureed 229.41 39.74 Ttoal 229.61 5974 of wieWb bas bees repaid 72.50 a." _ _--- ........ ...... Toal am bald by sad & D4 aS7.U t $.06 Auest "od s 5.62 Of tUb bas beea repaid? 5.62 Total dtbu.ed 0.000.00 0.00 ---------------- ............... _ ...______ W*e VC391 (a1-..o0) ,or a, 155 Annex F Pa3e 2 o: 2 5. Sitesst at *ste sts As ot MAvCC 31, 1991 (US$ gUsa) ...... . ........._._.-.-........................... ...... --_--_--.__ ........................... _-...__.._ _ fis.c -.--04wt68 pw*a-....… Tear ObTgov ypa of Satssta La" zq"ty Total ,----- - . _.X. ..............._....... _ ._.._._,.__... -__-- ----- 1941 TetSLls Fabt acato de Vicstata , S.A. (TAZ=) TeZsIs Wl. 1.00 1.07 2.07 1976 Icsts,cus, Suatr stae. Limited (ISI.) Sags: Wll 6.50 0.00 6.50 1976 Po," dl SoL otl 0.70 0.20 0.90 eefl.. 0 . .... ....... Total giSas wLtRto 4.20 1.2 9*.47 Less. eanaelA:tS., teM ttas. wspayswts ad .ale* 6.20 1.27 9.47 -*a~a... . *.. .¢--.. Toual cowmL.ae a"s bal by 210 0.00 0.00 0.00 .._.....--__..........- . ..... --._..__ .....-. WC Zw._est. sUZCOs91 Ja. 1X, 1951