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Monetary Program Reactivated

MANAGUA – After a year of persistent negotiating and deliberate macroeconomic adjustments, Nicaragua last week was readmitted into the International Monetary Fund (IMF) program for 2006, according to Finance Minister Mario Arana.

The reactivation of the IMF program, which had been frozen since October 2004 when the National Assembly approved a budget that surpassed the agreed upon fiscal-deficit level, will translate into $220 million in additional budget funding for this year.

The IMF program, Arana says, also sends a message of confidence to international investors during an election year, and will allow the central government to hand the next administration an orderly financial situation – something an outgoing government in Nicaragua has never done before.

“For the first time, it’s possible to think that a new administration will take over government with historic levels of tax income, public spending and international reserves, and all in an environment of economic growth, controlled inflation, low interest rates and a solid financial system,” the finance minister said.

In 2005, Nicaragua’s Gross Domestic Product (GDP) grew 4% and inflation was kept to single digits, despite the continual blow of soaring oil prices.

Deficit spending was kept to a record low of 1.7% of the GDP (compared to 8.5% in 2001), and international reserves reached a new high of $730 million.

In the last two years, Nicaragua’s once monstrous external debt has been reduced by almost $1 billion through the Heavily Indebted Poor Country’s Initiative (HIPC) and the Multilateral Debt Relief Initiative (MDRI).

“At the beginning of my presidency, Nicaragua had a gigantic external debt that represented more than 10 years of total export revenue,” Bolaños said during his final state of the nation address Jan. 18 (see separate story). “This heavy burden to carry made it difficult for Nicaragua to advance in the war on poverty. The good news now is that more than 80% of this debt has been forgiven; the amount that is left now represents only two years of total exports.”

The government’s structural adjustment programs are working, according to the finance minister.

“We are establishing a new truth: that without macroeconomic stability, there will be no sustainable growth,” Arana said.

“Instead of a roller coaster, we are looking for continued, sustainable economic growth levels for years to come.”

Macroeconomic stability, he added, has helped make Nicaragua one of the leading countries in the hemisphere for investment growth in recent years; not only in the free trade zones, but also in the agricultural sector, which is now the leading source of formal sector jobs in Nicaragua.

“Our country is in the most favorable economic-development position it has been in the last 30 years,” Arana said.

Still, structural adjustment policies can come as a bitter pill to swallow for some sectors of the economy, such as doctors who are currently on strike for higher pay. The constitutionally mandated 6% of government spending earmarked for education also needs to be rethought and more efficiently distributed, the minister said.

Arana says there is “no magic wand” to resolve the issues of better salaries and more funding for health and education.

Plus, this year’s upcoming elections mean another large expenditure for a government that must stick to a strict deficit spending cap in order to remain in the IMF program.

“The profile of debt continues to be vulnerable,” the minister said. “We have to be very careful in the future; all new deficit means new debt that we can’t afford.”

The macroeconomic situation creates a bit of a Catch-22, Arana explained: “What the people demand is work and salary. But to have jobs and a better salary, we need economic growth. For that to happen, we need investment. And for investment, we need macroeconomic stability,” which makes it impossible to give everyone a better salary.

“This is what we are trying to take care of: the common good,” Arana added.

To remain in the IMF program through 2006, Nicaragua must keep deficit spending to 1.7% of the GDP, and the National Assembly must ratify the tax-reform package during the first trimester of the year, Arana explained.

In addition, the IMF team will visit in August to review progress on a new sustainable energy law, the minister said.

“This is the work we have to do, and I don’t think it will be too hard to comply with,” Arana concluded.



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