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									Public Disclosure Authorized




                                                                            Document of
                                                                       The World Bank

                                                                   FOR OFFICIAL USE ONLY



                                                                                                                Report No. 25043-NI
Public Disclosure Authorized




                                                            MEMORANDUM OF THE PRESIDENT

                                                                                  OF

                                                THE INTERNATIONAL DEVELOPMENT ASSOCIATION

                                                                                 AND

                                                    THE INTERNATIONAL FINANCE CORPORATION
Public Disclosure Authorized




                                                                              TO THE

                                                                   EXECUTIVE DIRECTORS

                                                                                ONA

                                                            COUNTRY ASSISTANCE STRATEGY

                                                               OF THE WORLD BANK GROUP

                                                                                 FOR
Public Disclosure Authorized




                                                              THE REPUBLIC OF NICARAGUA


                                                                        December 18, 2002



                               Central America Country Management Unit
                               Latin America and the Caribbean Region



                               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.
                           Government Fiscal Year
                            January I - December 31

                              Currency Equivalents
                      Currency Unit        Cordoba
                       US$1.00       =     C$14.56

                          WEIGHT AND MEASURES
                               Metric System

                       ACRONYMS AND ABBREVIATIONS
BANIC     -   Nicaraguan Bank for Industry and Commerce
CAFTA     -   Central America Free Trade Area
CAS       -   Country Assistance Strategy
CEM       -   Country Economic Memorandum
CFAA      -   Country Financial Accountability Assessment
CFAP      -   Country Financial Assessment Paper
CONPES    -   National Council for Social and Economic Planning
CPPR      -   Country Portfolio Performance Review
CPI       -   Consumer Price Index
CPIA      -   Country Policy and Institutional Assessment
COSUDE    -   Swiss Agency for Development
EFA       -   Education for All
EMTAC     -   Economic Management Technical Assistance Credit
ENEL      -   Nicaraguan Power Company
ENITEL    -   Nicaraguan Telecommunications Company
ESAF      -   Enhanced Structural Adjustment Facility
ESMAP     -   Energy Sector Management Assistance Programme
ESW       -   Economic and Sector Work
FLAS      -   Foreign Investment Advisory Service
FISE      -   Emergency Social Investment Fund
FTAA      -   Free Trade Area of the Americas
FTI       -   Fast Track Initiative
GDLN      -   Global Development Learning Network
GEF       -   Global Environment Facility
GTZ       -   German Agency for Technical Cooperation
HIPC      -   Highly Indebted Poor Countries
IDA       -   International Development Association
IDB       -   Inter-American Development Bank
IDF       -   Institutional Development Grant
IFC       -   Intemational Finance Corporation
ILO       -   International Labor Organization
INIFOM    -   Municipal Development Institute
IMF       -   International Monetary Fund
INAA      -   Nicaraguan Institute of Water Supply and Sewerage
INTA      -   Nicaraguan Institute for Agricultural Technology
INSS      -   Nicaraguan Institute of Social Security
KfW       -   Kreditanstalt fur Wiederaufbau
MAG-FOR   -   Ministry of Agriculture, Livestock and Forestry
MARENA    -   Ministry of Natural Resources and Environment
MCT       -   Ministry of Construction and Transport
MDG       -   Millennium Development Goals
MHCP      -   Ministry of Finance and Public Credit
     Nicaragua- Country Assistance Strategy                     FOR OFICIAL USE ONLY

     MIGA            -       Multilateral Investment Guarantee Agency
     MINSA           -       Ministry of Health
     PAHO            -       PanAmerican Health Organization
     PCU             -       Project Coordinating Units
     PER             -       Public Expenditure Review
    PRGF             -       Poverty Reduction and Growth Facility
    PRSC             -       Poverty Reduction Support Credit
    PRSP             -       Poverty Reduction Strategy Paper
    PSIA             -       Poverty and Social Impact Assessment
    PSAC             -       Programmatic Structural Adjustment Credit
    SETEC            -       Secretariat of Technical Cooperation
    SIGFA            -       Integrated System for Financial Management and Auditing
    SILAIS           -       System of Local Health Care Centers
    SME              -       Small- and Medium-Scale Enterprise
     SMP             -       Staff-Monitored Program
     SNIP            -       National System of Public Investment
     SWAps           -       Sector Wide Approaches
    UNDP             -       United Nations Development Program
    USAID            -       United States Agency for International Development
    WBG              -       World Bank Group
    WBI              -       World Bank Institute
    WFP              -       World Food Program




                                 IDA                                             IFC
    Vice President:          David de Ferranti      Vice President:        Assaad J. Jabre
    Country Director:        Jane Armitage          Director:              Bernard C. Pasquier
    Sector Manager:          Emesto May             Manager:               Toshiya Masuoka
    Task Manager:            Ulrich Lachler         Task Manager:          Junko Oikawa


This document has a restricted distribution and may be used by recipients only in
the performance of their official duties. Its contents may not be otherwise disclosed
without World Bank authorization.
Nicaragua- Country Assistance Strategy                                                                                       iv

                                MEMORANDUM OF THE PRESIDENT
                                            OF THE
                           INTERNATIONAL DEVELOPMENT ASSOCIATION
                                           AND THE
                             INTERNATIONAL FINANCE CORPORATION
                                 TO THE EXECUTIVE DIRECTORS
                                             ON A
                                COUNTRY ASSISTANCE STRATEGY
                                          FOR THE
                                   REPUBLIC OF NICARAGUA

                                                       Table of Contents


Executive Summary

I.   COUNTRY CONTEXT                                                                                                   1

A. Political and Social Context ......................         -     .              ..                                 I
                                                                                                                       1.-
B. The Evolution of Poverty and Social Indicators ............    ......................                               2
C. Recent Macroeconomic Developments ...........................................                                       5


II. NICARAGUA'S GROWTH AND POVERTY REDUCTION STRATEGY                                                                  8

A.   First Pillar - Broad-Based Economic Growth and Structural Reform ........                                         10
B.   Second Pillar - Greater and Better Investment in Human Capital .......                  .....                     14
C.   Third Pillar - Better Protection for Vulnerable Groups                      .        .                            17
D.   Fourth Pillar - Good Governance and Institutional Development                      .     .                        18
E.   Cross-cutting Themes .............................................................                                20
F.   Economic Outlook .         .............................................................                          21

III. THE BANK GROUP'S ASSISTANCE STRATEGY                                                                              24

A.   Progress since the Last CAS ...........................................................                           24
B.   Portfolio Performance and Management ................                              ...........................    25
C.   The Process of CAS Formulation ....................................................                               26
D.   The Proposed Assistance Strategy ...........................                         ........................     26
E.   Core Diagnostic Requirements for Moving Towards a PRSC Framework                                            ...   28
F.   Institutional Arrangements ....................................................... .....                          30
G.   The IDA Assistance ..............................................................                                 30
H.   IDA Alternative Lending Scenarios ................................................                                31
I.   Bank Analytical and Advisory Services ..................                          ...........................     36
J.   Coordinating with other donors .......................................................                            38
K    Program Monitoring .............................................................                                  40
L.    CAS Risks .............................                   ......................................                 41
Nicaragua- Country Assistance Strategy                                       v




BOXES

         Box 1: The Sub-Valuation of Nicaragua's GDP
         Box 2: The World Bank's Response to Hurricane Mitch in Nicaragua
         Box 3: The CFAA: An Example of Ongoing Fiduciary Work to Ensure a
                    Successful PRSC Framework

TEXT TABLES

        Table 1: The Evolution of Poverty in Nicaragua, 1993-2001
        Table 2: Nicaragua: Progress Toward Meeting the PRSP Targets and
                 Millennium Development Goals
        Table 3: Nicaragua: Key Macroeconomic Indicators, 1994-2001
        Table 4: Nicaragua: Projected Macroeconomic Indicators, 2002-2005
        Table 5: The IDA Base Case Lending Program (FY03-05)
        Table 6: IDA Assistance Scenarios for Nicaragua (FY03-05)
        Table 7: Status of Core Diagnostic Work
        Table 8: CAS Performance Targets and Indicators


ANNEXES

       Al: Key Economic Program Indicators
       A2: Country at a Glance

       B1: Country Program Matrix 2003-05
       B2: Selected Indicators of Bank Portfolio Performance and
                Management
       B3: Proposed IDA Base-Case Scenario Lending Program (FY03-05)
                and IFC and MIGA Program FY99-2002
       B4: Summary of Non-Lending Activities
       B5: Nicaragua - Social Indicators
       B6: Nicaragua - Key Economic Indicators
       B7: Nicaragua - Key Exposure Indicators
       B8: Status of Bank Group Operations/Status of IFC's Committed
                 and Disbursed Portfolio
       B9: CAS Summary of Development Priorities
       B10: Nicaragua - Key Environmental Indicators

       C:    IDA and IDB Support for Nicaragua's PRSP Objectives
       D:    CAS 1998-02 - Status of Advance in Implementing 1998 CAS
       E:    CAS Consultations with Nicaraguan Stakeholders
       F:    A Technical Note on Nicaragua's Fiscal Sustainability
       G:    Bank-Fund Relations Note
Nicaragua- Country Assistance Strategy                                                          vi

                          MEMORANDUM OF THE PRESIDENT
                                     OF THE
                     INTERNATIONAL DEVELOPMENT ASSOCIATION
                                     AND THE
                       INTERNATIONAL FINANCE CORPORATION
                           TO THE EXECUTIVE DIRECTORS
                                       ONA
                          COUNTRY ASSISTANCE STRATEGY
                                    FOR THE
                             REPUBLIC OF NICARAGUA

                                         Executive Summary


i.      This is the third Country Assistance Strategy (CAS) prepared for Nicaragua since the end
of its civil war and the normalization of relations with foreign creditors in 1991. CAS
preparation was delayed to await the preparation of a Poverty Reduction Strategy Paper (PRSP),
presented to the Boards of the Bank and IMF in September 2001, and to work with the new
Presidential Administration following elections in November 2001. The new government has
confirmed its commitment to the broad principles and priorities expressed in that PRSP, which
serves as the basis for this CAS.

ii.     Most of the priorities established and actions identified in the previous CAS were
pursued, in spite of hurricane Mitch. The Government succeeded in maintaining good portfolio
implementation. On the macroeconomic side, however, the record was mixed and the PRGF
arrangement negotiated with the IMF went off track in 2001. Efforts to strengthen the public
sector witnessed important successes, but also suffered a major setback in the wake of
constitutional reforms of 2000, which undermined the legitimacy of several key state institutions.
The new administration has begun to address these issues. The first PRSP Progress Report and
Joint Staff Assessment were reviewed by the IDA and IMF Boards in December 2002. A new
three year PRGF arrangement, designed to put Nicaragua's fiscal balances on a sustainable path,
was approved by the IMF Board in December 2002.


 iii.   This CAS presents a new framework for World Bank Group assistance, with the PRSP at
the center in terms of establishing the targets and objectives to be pursued. The planned IDA
assistance involves an increased reliance on program lending, beginning with a Programmatic
Structural Adjustment Credit (PSAC) and followed by Poverty Reduction Support Credits
(PRSCs) once the required environment for this type of assistance is in place, i.e. the public
expenditure program supports PRSP implementation adequately, and public financial
management and procurement systems ensure the transparent, economic and efficient use of
Government resources. Much of the required analytical work in this area has been completed,
and key fiduciary assessments are under preparation. Preliminary findings indicate that the
framework for providing financial assistance through a PRSC could be in place in FY04.
Complementing the PRGF arrangement with the IMF, the PSAC and PRSCs will provide
assistance that is conditioned on progress made in implementing specific measures contemplated
in the PRSP, which coincide with key actions broadly identified in the HIPC Completion Point
matrix.
Nicaragua- Country Assistance Strategy                                                             vii

iv.     Under this new framework, the bulk of IDA financial assistance eventually would be
provided under the PRSCs. Remaining IDA operations would consist mainly of technical
assistance operations to help implement specific measures contemplated in the PRSP and
highlighted by the PSAC/PRSC policy matrix, as well as small, innovative projects of an
experimental nature or for which the institutional infrastructure needs strengthening. The
implementation of this new approach will also require important internal administrative
adjustments in the form of enhanced cross-sectoral task team coordination, more intense program
supervision, a greater focus on analytic and advisory services (AAA), and an enhanced IDA field
presence.

v.      The FY03-05 IDA resource envelope for Nicaragua amounts to SDR90 million (or
approximately $120 million equivalent) in the base case. The high case would provide an
additional $40 million, and would be triggered on the basis of accelerated PRSP implementation
and good IDA portfolio performance, reflecting adequate institutional capacity to execute the
program.     Key lending triggers also include maintaining satisfactory         macroeconomic
performance, the quality of overall public spending on priority programs, implementation of a
transparent HIPC tracking mechanism and other institutional strengthening measures, and the
passage of key policy reforms required for the PRSP.

vi.     In tandem with IDA, IFC and MIGA will support the four pillars of the PRSP, with a
particular emphasis on the first pillar-broad based economic growth. IFC and MIGA will
pursue their objectives in partnership with the private sector through investment and non-
investment vehicles. IFC's approach in Nicaragua is to support private sector development
through activities at both the individual country and regional levels. In support of Nicaragua's
PRSP agenda, IFC will continue supporting Nicaragua's private sector in priority areas such as
(i) strengthening the financial sector and capital market, (ii) promoting foreign private
investment in Nicaragua, (iii) broadening private participation in infrastructure, and (iv)
reactivating growth in agriculture and industry. The scope of IFC's future investments will
depend on the improvement in removing the structural obstacles identified in the 2001 PRSP,
such as the fragile banking systems and weak property rights, and progress in addressing the
fourth pillar-good governance and institutional development-which will be critical for
improving investor confidence and doing business in Nicaragua.

vii.     The strategy faces several important political, institutional and economic risks. The
political risk relates to the possible difficulties in securing approval of key legislation needed for
the implementation of the PRSP. The weak judicial system and supreme audit agency pose an
important institutional risk which could undermine the private sector confidence needed to
restore vigorous growth. Weak financial management and institutional capacity limitations in
the line ministries also pose institutional risks to program implementation. Economic risks arise
from both external and internal sources. On the external side, Nicaragua remains vulnerable to
natural disasters and terms of trade shocks, either of which could derail its economic program.
On the internal side, a fragile banking system and high levels of domestic debt could undermine
the HIPC initiative, if timely corrective actions are not taken. As described in the final section of
the CAS, these risks appear to be manageable, as the Government has so far demonstrated strong
ability to address these risks and take actions to mitigate them, with the support of IDA and other
donors.
Nicaragua- Country Assistance Strategy                                                          viii

viii.   The following issues are suggested for Board discussion:
*       Does the proposed strategy adequately address the main development needs articulated in
        the PRSP? Do Directors consider that the proposed strategy fits appropriately within the
        overall programs of multi-lateral and bi-lateral assistance to Nicaragua?
*       Is the proposed gradual shift to programmatic lending through PRSCs - accompanied by
        small TA projects to support policy reforms and build institutional capacity, and a greater
        focus on analytical and advisory services - appropriate?
*       Are the triggers to move to a high case for lending appropriate?
*       Are the political, institutional and economic risks set out in the CAS realistic and
        acceptable?
Nicaragua- Country Assistance Strategy                                                           1
                          MEMORANDUM OF THE PRESIDENT
                                      OF THE
                     INTERNATIONAL DEVELOPMENT ASSOCIATION
                                     AND THE
                       INTERNATIONAL FINANCE CORPORATION
                            TO THE EXECUTIVE DIRECTORS
                                       ONA
                           COUNTRY ASSISTANCE STRATEGY
                                            FOR THE
                                   REPUBLIC OF NICARAGUA


1.      The last Country Assistance Strategy (CAS) for Nicaragua is dated March 18, 1998. A
new CAS had been planned for 2001, in line with the normal 3-year cycle, but was delayed to
await the preparation of the Government's Poverty Reduction Strategy Paper (PRSP). The full
PRSP was presented to the Boards of the World Bank and IMF in September 2001. Presidential
elections were held in November 2001, and the new Government that took office in January
2002 has confirmed its commitment to the broad principles and priorities expressed in that
PRSP.

                                   I.    COUNTRY CONTEXT

2.       Nicaragua is the largest country in Central America in terms of land mass, and the least
densely populated. Although more tnan half of the population now lives in urban areas, it
remains predominantly an agricultural country. The country's principal exports are coffee, beef,
sugar and shrimp/lobsters, maKing the country very vulnerable to terms of trade shocks. Non-
traditional, maquila exports (nainly in the textile/garment sector) are growing rapidly, currently
accounting for about 40% of total merchandise exports. Nicaragua's most important trading
partner is the United States, followed by the other Central American countries, with whom it
shares membership in the Central American Common Market.


3.       Nicaragua is one of the poorest and least developed countries in Latin America, with an
income per capita officially valued at $420 in 2001.           Most of the country's 5.2 million
inhabitants are concentrated on the Pacific seaboard and in the Central highiands, but high
population growth rates (2.7% p.a.) are pushing the agricultural frontier into the fragile lands on
the Atlantic side. This has accelerated deforestation, created environmental problems (bio-
diversity losses) and led to iningements on indigenous territories.           The combination of
geography and inadequate natural resource management in the face of population pressures has
rendered Nicaragua very vulnerable to natural disasters. In the last decade alone, it has been
afflicted by a major hurricane in 1998 (Mitch), volcanic eruptions, numerous earthquakes, a
seaquake (tsunami) and several droughts (related to El Nifio).


Political and Social Context

4.    Mr. Enrique Bolafios, of the Liberal Party, won the presidential elections in November
2001 by an unexpectedly wide margin, marking the third successive peaceful hand-over of
 Nicaragua- Country Assistance Strategy                                                                            2

 political power in Nicaragua since 1990.1 The elections allowed the Liberal party to retain an
 absolute majority in the unicameral National Assembly, albeit not a qualified majority. 2 During
 its first year in power, the new Administration's agenda has been dominated by a firm
 commitment to root out corruption and to increase transparency in the use of public funds. This
 effort has been widely recognized as an extremely            positive impulse for the country's
 development, but has occasioned some frictions with members of the previous Administration
 that for a while led to an impasse in the National Assembly.


 5.       The 2001 elections bore witness to a consolidation of the democratic election process, but
 marked a narrowing of political options: only 3 presidential candidates contested the presidential
 elections in 2001, compared to 24 in 1996.            The roots of this process date back to the
 fragmentation of the political party system in 1992, when the coalition of anti-Sandinistaparties
 that won the 1990 presidential elections fell apart. This fragmnentation made it difficult to sustain
 a broad consensus and often resulted in the paralysis of government decision making. The
 reforms of the Constitution and of the Electoral Laws in 2000 responded to this paralysis by
 raising barriers to the formation of small political parties, thereby encouraging the development
 of a two-party system. These reforms were carried out as part of an anrangement negotiated by
 the dominant Liberal and Sandinista parties, that is widely perceived as having further
 "politicized" various public sector institutions, especially the Judiciary. Whereas the fragmented
 political system of the early 1990s resulted in serious governance problems in terms of paralyzed
 decision-making that frequently erupted in violent disturbances, the current system poses
 governance problems in the form of reduced space for democratic participation, distrust of the
 legal system, and inadequate controls on govenmment.

 The Evolution of Poverty and Social Indicators

 6.       Nicaragua has made significant progress in reducing poverty over the last decade. The
 Living Standards Measurement Surveys (LSMSs) carried out in 1993, 1998 and 2001 show a
 continuous decline in the proportion of the total population living under the poverty line (Table
 1). The decline in the share of the population living in extreme poverty is especially notable,
 &fatlng from 19.4 percent in 1993 to 15.1 percent in 2001. The poverty declines were most
 pronounced in the nrual areas, where most of the poor are concentrated, and especially in the
 Pacific and Central regions. Poverty reduction in Nicaragua seems to be highly responsive to
 economic growth: the latest Poverty Assessment calculates elasticities of poverty to growth at
 1.5 for overall poverty and at almost 2 for extreme poverty for the entire 1993 to 2001 period.
 The same analysis also suggests strongly that agriculture and agricultural policies over the last
 decade were among the key forces driving both strong overall economic growth and poverty
 reduction. One key reason that growth in agriculture was so effective at reducing poverty is the
 fact that the vast majority of Nicaraguan agricultural producers are small-scale producers, many
 of them currently poor. In fact, the agricultural sector's rapid broad-based growth in the 1990's
 was possibly the single most important cause of the significant poverty reduction that occurred


  The next Presidential and Congressional elections are scheduled for November 2006, and municipal elections are
    scheduled for November 2004. Elections for the regional governments of the autonomous Atlantic regions
    (RAAN and RAAS) were held in March 2002 and are scheduled next for March 2007.
2 The Liberal Alliance (comprising the Liberal, Christian Path and National Resistance parties) received 53 seats in
    the National Assembly, the Sandinista party received 38 seats and the Conservative party has one seat. An
    absolute majority requires 47 votes, while a qualified majority requires 62 votes.
    Nicaragua- Country Assistance Strategy                                                                                  3

    between 1993 and 2001.                   Urban poverty exhibited a more mixed performance; declining in the
    Central region, but increasing in the Pacific and Atlantic regions3 .                             The Atlantic region, in
    general, experienced a deterioration in poverty indicators during 1993-1998, but this has been
    partly compensated with improvements during 1998-01. Although hurricane Mitch caused major
    human and physical damage, it did not significantly change Nicaragua's overall poverty profile.

    7.            If Nicaragua's poverty levels continue to decline at the same pace as during 1993-2001,
    the Millennium Development Goal (MDG) of cutting extreme poverty in half should be reached
    well before the target date of 2015. There are concerns, however, about the country's ability to
    sustain this pace. The decline in poverty from 1993 to 1998 was due mainly to extensive rural
    sector growth, boosted by high export commodity prices, the availability of unoccupied land and
    a return to normalcy after a decade of civil war. None of these factors can be expected to deliver
    a sustained growth impulse indefinitely, and indeed, Nicaragua's main export prices already have
    experienced a major deterioration since 2000.4 The fact that overall poverty has continued to
    decline over 1998-2001 appears to lw due mainly to the post-Mitch reconstruction boom, which
    also came to an end in 2001. This means that growth in the rural sector, where most of the poor
    are concentrated, is likely to be short-lived in the absence of new stimuli to sustain agriculturl
    output growth.     Moreover, future growth needs to rely on productivity growth, since the
    extensive growth pattem followed during the 1990s is reaching its natural limits and could result
    in major environmental damage if continued.


                     Table 1: The Evolution of Poverty in Nicaragua, 1993-2001 (percentages)
                            Extreme Poverty Headcount Index                          Poverty Headcount Index
         Region                                Change Change Change                               Change Change Change
                     1993     1998    2001     93-98    98-01   93-01        1993   1998   2001   93-98    98-01   93-01
    National         19.4      17.3   15.1      -2.1     -2.2    -4.3        50.3   47.9   45.8     -2.4    -2.1    -4.5
     Urban            7.3      7.6     6.2      0.3      -1.4     14.1       31.9   30.5   30.1     -1.4    -0.4    -1.8
     Rural           36.3     28.9    27.4      -7.4     -1.5    -8.9        76.1   68.5   67.8     -7.6    -0.7    -8.3
    Managusa          5.1      3.1     2.5      -2.0     -0.6    -2.6        29.9   18.5   20.2    -11.4     1.7    -9.7

     Urban           6.4       9.8    5.9        3.4    -3.9    -0.5         28.1   39.6   37.2    11.5    -2.4     9.1
     Rural           31.6      24.1   16.3      -7.5    -7.8    -15.3        70.7   67.1   56.8    -3.6    -10.3   -13.9
    Central
     Urban           15.3      12.2   11.1       -3.1   -1.1    -4.2         49.2   39.4   37.6     -9.8   -1.8    -11.6
     Rural           47.6      32.7   38.4      -14.9    5.7    -9.2         84.7    74    75.1    -10.7    1.1     -9.6
    Atlantic
     Urban            7.9      17     13.1      9.1      -3.9    5.2         35.5   44.4    43     8.9     -1.4      7.5
     Rural           30.3     41.4    26.9      11.1    -14.5   -3.4     _   83.6   79.3   76.7    -4.3    -2.6     -6.9
    Source: World Bank, Nicaragua: Poverty Assessment Follow-Up, 2002.

 8.      Over the past year, Nicaragua also has made significant progress in meeting its other
 PRSP targets, which are closely linked to the MDGs (Table 2). This development reflects the
 overall positive growth performance during the second half of the 1990s, the priority given by
 the Govenmment to improving the coverage of basic social services and generous amounts of
 donor assistance, especially ii the aftermath of hurricane Mitch in 1998. One exception to this
 general improvement in social indicators pertains to the illiteracy rate which in Nicaragua, as


3 The deterioration of urban poverty may be explained by the evolution of the largely urban-based manufacturing
      sector activity and Government employment, which slumped during the 1990s, in contrast to fie booming
      agricultural sector. The evolution of poverty on the Atlantic coast appears to be more of a cyclical phenomenon.
4   Accordingly, poverty has increased again over 1998-2001 in the principal coffee growing areas (Central Rural
      region), which are the ones that suffered the greatest price shocks; Table 1.
Nicaragua- Country Assistance Strategy                                                                                   4

elsewhere, has proved difficult to affect in a medium term time frame. There also are concerns
about the current pace at which access to reproductive health services (by persons of appropriate
age) and the coverage of water services are increasing. Both indicators have achieved their short
term PRSP targets in 2001, but these short term targets are extremely modest relative to the
MDG targets for 2015. Though not listed as a PRSP target, the indicators on child health related
to diarrhea also are an issue of concern because they appear to have deteriorated since 1999
according to the first PRSP Progress Report.

                   Table 2. Nicaragua: Progress Toward Meeting the PRSP Targets
                                 and Millennium Development Goals
                                                                 Actual Values          PRSP Targets   Trk?     Tareet
    Poverty Indicators                                    1993   1998    1999    2001   2001   2005              2015
                                            Data Source
    Extreme Poverty Ratio (%)                 LSMS        19.4   17.3            15.1   16.0   14.3     Yes       9.3
    Net Primarv Enrollement Ratio (%)         MECD        75 6   79.6            83.0   77.9   83.4     ves      90.0
    MaternalMortality                         MINSA                       148    125            129     yes        37
    Infant Mortality (/.O000 live births)     DHS                 40              31            32      yes        21
    Child Mortality (/1.000 live births)      DHS                 50              40            37      yes        22
    Access to Renrod. Health Serv. (%)        MINSA                      21.0    23.8   22.0    23     oartlv    1Q
    CThronic Malnutritinn (/)                 ISMS        237    19.7            17.8   17.9    16*     ves       7.0
    Water Coverage (%)                        ENACAL                     66.5    70.0   69.5   75.4    partlv    100.0
    Sanitation Coverace (%)                   LSMS        82.6   84.1            86.2   85.0   88*      yes      95.0
    Illiteracv Rate (%)                       LSMS        21 5   18.8       18-7 1 R5           16*     no
    National Strategy for Sustained Development                        (to be implemented by 2005)     yes
     Source: World Bank, Nicaragua Poverty Assessment Follow-up, 2002. (Note: Starred (*) items refer to 2004 targets.

9.        Looking toward the future, progress in Nicaragua's social indicators is constrained by the
extremely low levels of social spending, which reflects mainly the country's overall low level of
income, thus further emphasizing the need for higher, sustained growth. Even though per capita
social spending increased by 50 percent in US Dollar terms in the aftermath of hurricane Mitch,
it still remains far below the average for Latin America. (Social spending as a share of GDP
appears to be higher than the Latin American average, but that is due to the sub-valuation of
Nicaragua's GDP; Box 1.) This necessarily directs attention to the need for sector reforms that
aim to bring about a more efficient use of existing resources, as well as on resource growth
thrmugh higher GDP.

 10.     Core Labor Standards. Nicaragua has ratified all seven of the International Labor
Orgazization's (ILO's) core labor conventions, and its legislation generally complies with the
  LO core labor conventions on forced labor. There are no indications of the p-actice of forced
labor. In many areas, however, law enforcement is weak and further measures are required in
order to ensure compliance with the commitments that Nicaragua accepted in the World Trade
Organization Ministerial Declarations and in the ILO Declaration on Fundamental Principles and
Rights at Work adopted in June 1998. Problems have been reported about adequate enforcement
of trade union rights (particularly in export processing zones), about discrimination against
women (as reflected in pay differentials and in women's reduced presence in higher occupational
positions in the private sector), and about the prevalence of child labor in the informal sector
(including the production of export commodities).            Given the extent of poverty and
unemployment in Nicaragua, the PRSP has focused attention mainly on employment creation,
rather than on the quality of employment Two upcoming initiatives that could shed more light
into the issue of labor standards are a study of youth employment in Nicaragua, b be conducted
under the Bank's social protection lending activities that support the social investment fund
(FISE), and by an investment climate assessment to be conducted jointly by the Bank and EFC.
 Nicaragua- Country Assistance Strategy                                                                                 5

                             Box 1: The Sub-Valuation of Nicaragua's GDP

 The official national income accounts significantly underestimate Nicaragua's Gross Domestic
 Product. This observation emerges from the 1993 and 1998 Living Standards Measurements
 Surveys, which yield total private consumption figures that are significantly higher than is reported in
 the national income accounts. The Central Bank of Nicaragua is in the process of revising the
 national income accounts, by modernizing the data-gathering process and correcting relative price
 distortions that had marred the earlier figures, and plans to have the revised figures available by
 March 2003. While the sub-valuation of GDP has raised questions about Nicaragua's eligibility for
 IDA and HIPC assistance once the revised figures are presented, it is unlikely that the corrected
 figures would boost Nicaragua's per-capita income above IDA operational thresholds. (Although the
 sub-valuation of GDP is widely recognized, the figures in this report continue to refer to the official
 national income figures to avoid confusion.)
 The World Bank, "Improving the Poverty Focus of Public Spending", Nicaragua Public Expenditure Review, Dec. 7, 2001.


Recent Macroeconomic Developments

 11.     Following a decade of economic and political disarray in the 1980s, Nicaragua has
advanced far in restoring a stable, private sector-led, market economy. Hyperinflation was
halted in 1991 and economic growth reemerged in 1994. Trade barriers were progressively
lowered to open up the economy, FDI increased until 1999 from minimral levels in the early
 1990s, and by 1997, private investors overtook the public sector as the main source of capital
accumulation.      The oversized public sector inherited in 1990 was reduced through major
contractions in the public sector labor force, cuts in public expenditures, and the privatization or
closure of most state-owned enterprises. Other reforms included the modernization of financial
sector legislation and prudential norrns, closure of all state-owned commercial banks,
privatization of public power and telecommunications utilities, strengthening of regulatory
agencies for public services, restructuring of the public sector, initiation of a comprehensive
pension system reformn, and reforms in public administration through the creation of a single
treasury account (Caja Unica) and introduction of a modem financial management system.
These measures were accompanied by the creation of various social funds, most importantly the
Emergency Social Investment Fund (FISE), to direct resources to the poor, and steps to reform
the social sectors, particularly health and education, to improve the quality of services within a
highly constrained budget. As a result of these efforts, significant progress has been made in
reducing many of the most visible structural constraints on economic growth and development.
A number of structural issues remain to be addressed, however. These are well-recognized by
Government and are discussed in Section II below, which describes the Government priorities as
reflected in the PRSP.


12.     By 1997-98, the Nicaraguan Government, having accomplished the structural reforms
described above, was well-advanced in the process of restoring fiscal discipline, rebuilding an
adequate reserves cushion and reducing the country's dependence on foreign aid. This program
received support from the IMF, via a 3-year PRGF arrangement which was initiated in March
1998, and by other partners, including IDA. The process of fiscal consolidation was interrupted
by hurricane Mitch in October 1998. However, Nicaragua was able to rebound quickly from the
physical damage caused by the hurricane, due largely to a massive inflow of foreign aid that
came in response.    In addition, as one of the world's most indebted countries, Nicaragua was
Nicaragua- CountryAssistance Strategy                                                                                6

declared eligible for HIPC relief in 1999, and reached the HIPC Decision Point in December
2000. At the time, expectations were that the Government would negotiate a third-year PRGF
arrangement with the IMF for 2001, and that the HIPC Completion Point could be reached by
late 2002.


13.      As the post-Mitch boom came to an end in 2001, economic activity slowed 5 , and the
Govemment was unable to rein in spending commensurately, resulting in large fiscal deficits and
a weakened intemational reserve position. The economic and monetary situation was further
aggravated by the failures of several major banks, which had to be intervened, forcing the
Central Bank to issue domestic debt to avoid a run on deposits. The Govemment was unable to
take necessary corrective measures, in part because of political concerns linked to the
presidential elections in November 2001, and the 3 rd year arrangement under the PRGF was
abandoned. A less demanding Staff-Monitored Program (SMP) was agreed with the IMF for the
period of June-December 2001, but even that program was not complied with, and most of the
agreed targets were missed by wide margins. As a result, the projected HIPC Completion Point
date slipped into 2003.


 14.     The fiscal indiscipline of 2001, combined with external prices shocks (oil, coffee),
exacerbated Nicaragua's already large macroeconomic imbalances.                The most pressing
imbalance in the short and medium term is the large fiscal deficit and the large public debt
(Table 3). Another imbalance that stands out is the huge external deficit This mostly reflects
the country's large fiscal deficit (which is beginning to be addressed) and the large supply of aid
that Nicaragua has received in the past and is continuing to receive. The large inflow of foreign
aid has propped up the real exchange rate, resulting in a "Dutch disease" phenomenon, which has
encouraged extremely high domestic absorption rates and may have dragged down the country's
competitiveness. 6 The adverse impact of an appreciated real exchange rate on growth is offset to
some degree by the competitiveness-enhancing impact of the capital investments that are made
possible by the aid inflows. The precise degree to which competitiveness is in fact enhanced
depends critically on the efficiency of donor assistance - an issue that should receive increasing
attention in the coming years, together with other pressing issues, such as the fiscal deficit and
high public debt.


15.     Immediately upon assuming office, the Bolafios administration has begun to address
these issues, and began discussions with the IMF on a PRGF arrangement. A new three year
PRGF was approved by the IMF Board in early December 2002. The program envisages a
substantial fiscal adjustment and reduction in the exchange-rate indexed stock of domestic
central bank debt, which are expected to take place through a comprehensive tax reform, and
amended budget for 2002 and a program to recover assets of previously intervened commercial



5 Private   investment as a percentage of GDP declined sharply from its peak of 22.2 percent in 1999 to 14.2 percent
      in 2001.
6   The large external deficits do not appear to be signaling major problems with exchange rate policy. The authorities
      have maintained a crawling peg policy since 1994 that kept real exchange rate behavior fairly stable, except for
      the one-time real appreciation (on the order of 15 percent) in 1999-2000, which was likely reflecting the post-
      Mitch surge of foreign aid. But this trend has not continued in 2001-02, as aid flows have been declining toward
      pre-Mitch levels.
Nicaragua- Country Assistance Strategy                                                                               7

banks. These measures are designed to put Nicaragua's fiscal balances on a sustainable path. 7
I line with program targets the Government has already passed the first phase of a tax reform
and has revised the 2002 budget by a significant amount. Also the Government has succeeded in
passmg in the National Assembly the school autonomy law and the general health law which
create the legal framework for the modernization reforms in the sector.


                   Table 3: Nicaragua - Key Macroeconomic Indicators, 1994-2001
                                                      Ave.                                Prelim. Prelim.
                                                    1994-96      1997     1998     1999    2000     2001
                                                                        percentages
 Real GDP growth                                          4.1      5.1      4.1     7.4   5.5         3.1
 Inflation rate (CPI, e.o.p.)                            11.9      7.3     18.5     7.2   6.6         4.7
 Unemployment Rate                                       16.7     14.3     13.2    10.7   9.9
                                                                 annualpercentagechange
Exports, f.o.b.                                          36.1     23.4     -0.6    -4.9  18.3         -8.1
  Export volume                                          22.2     22.6     -2.3     9.3  15.1          7.3
Imports, f.o.b..                                         16.2     30.6      0.9    23.1  -3.2         -1.1
  Import volume                                          12.4     33.0      8.6    15.9  -9.7          3.1
Terms of Trade ( - = deterioration)                       8.9      6.8      7.7 -19.1    -4.0       -11.2
Real Eff. Exchange Rate; e.o.p. (- = deprec.)            -5.2      3.5      2.0      1.6  6.0         -0.6
                                                                       Percent of GDP
Trade Balance                                           -25.6    -40.4 -39.2 -52.3 -41.4            -41.4
Current Account Balance                                  44.1    -39.8 -37.2 -47.9 -38.2            -37.7
Current Account Balance (excluding interest)            -19.0    -29.1 -26.9 -37.7 -28.0            -26.4
Public sector balance (before grants)                   -14.2     -9.7     -7.4   -15.7    -15.4    -21.0
   Grants                                                 7.5      5.2      3.8     8.7      7.3      6.3
Public sector balance (after grants)                     -6.7     -4.5     -3.6    -7.0     -8.1    -14.7
   o/w Central bank profits                              -0.2     -0.5     -3.3    -1.7     -1.5     -2.0
Gross domestic investment                                24.7     30.5    33.8     43.3     34.9     30.4
 Public                                                  15.7     13.7    13.0     21.1     19.0     16.2
 Private                                                  8.9     16.8    20.8     22.2     15.9     14.2
National savings                                          4.5     -4.6     2.3      1.4      2.5     -3.1
 Public                                                   1.6      4.0     5.6      5.4      3.6     -4.4
 Private                                                 -6.1     -8.6    -3.3     -4.0     -1.2      1.3
External savings                                         29.0     35.1    31.5     41.9     32.4     33.5
 Gross International Reserves (months of imports)         1.4      2.3      2.3     3.3      3.2      2.3
Source: IMF and Central Bank of Nicaragua




7 Based  on the model of fiscal sustainability developed in Annex B of the Nicaragua Public Expenditure Review,
    Nicaragua's large public debt is clearly not sustainable with the currently low level of GDP growth and primary
    fiscal surplus (after grants) of 2% of GDP estimated for 2002. Under the IMF-supported program, the size of
    Nicaragua's total public debt (in present value terms) is projected to decline to shortly over 50 percent of GDP
    by 2005, assuming that the corrected value of GDP is larger than the currently sub-valued GDP figures by a
    factor of 1.7. This level of public debt would be sustainable with a primary fiscal surplus of 2 percent of GDP if
    GDP growth of at least 5 percent per annum is reestablished and donors are prepared to continue extending
    concessional credits in similar amounts and conditions as in 1997-2000; see Annex F ("Note on Fiscal
    Sustainability").
    Nicaragua- Country Assistance Strategy                                                                          8




              H. NICARAGUA'S GROWTH AND POVERTY REDUCTION STRATEGY

    16.      PRSP Development Priorities and Agenda. Since 1990, Govenmment policies have been
    guided by the vision of a stable market economy in which the private sector becomes the main
    engine of growth and poverty reduction. During the early 1990s, these policies focused on
    restoring peace, ending hyperinflation, and transfomiing a command economy into a market
    economy.     As the economy stabilized by the mid-1990s, attention shifted toward growth.
    Poverty reduction efforts intensified in the aftermath of hurncane Mitch, while the Government
    initiated an intense dialogue with a broad spectrum of Nicaragua's society.8       These efforts
    coincided with the enhancement of the HIPC Initiative and led to the preparation of the
    Government's Poverty Reduction Strategy Paper (PRSP), which is the basis for this CAS.
    Recent IDA support to the Government's PRSP preparation included two core non-lending
    products: a Poverty Assessment (FY01) and a Public Expenditure Review (FY02).

     17.    The PRSP rests on four pillars: a) broad based economic growth with an emphasis on
    productive employment generation and rural development; b) greater and better investment in the
    human capital of the poor; c) better protection for vulnerable populations; and d) the
    strengthening of institutions and good govemance. These four pillars are intertwined with three
    cross-cutting themes: a) a reduction in environmental degradation and ecological vulnerability;
    b) an increase in social equity; and c) further decentralization. Although prepared by the former
    administration, the Bolanios administration has expressed its support for the PRSP, indicating that
    in response to recent developments it plans to give particular emphasis on the first and fourth
    pillars of the strategy . It has also emphasized the need to revise the criteria used for allocating
    resources, such that both the poverty map and assessments of the productive potential of program
    beneficiaries should henceforth serve for program targeting purposes. This change in emphasis
    is driven by the following considerations: the fiscal adjustments contemplated under Nicaragua's
    macroeconomic program may well exert a recessionary influence on economic activity in the
    short run, which would threaten the achievement of Nicaragua's poverty reduction targets, given
    the sensitivity of its poverty indicators to the GDP growth rate (para. 6). Therefore, a major
    challenge facing the Nicaraguan authorities is how to restore growth in the absence of fiscal
    stimuli and in the presence of an appreciated real exchange rate due to the significant donor
    presence.     To meet this challenge, the Government is looking toward fiscally inexpensive
    measures to improve Nicaragua's private investment climate, as well as measures to improve
    governance and public sector management.            Improvements in governance-including better
    defined and enforced property rights, clear rules of the game and transparent management of
    public resources-are seen by the Government as crucial for restoring investor confidence. At the
    same time, a strengthened public sector management and better capacity to coordinate aid are
    crucial for increasing the impact of public expenditures and minimizing the macroeconomic drag
    on competitiveness associated with aid inflows.

    18.     Progress in PRSP Implementation.               The Government has made good progress over the
    past year towards PRSP implementation and towards achieving PRSP goals. The Joint Staff
    Assessment of the first PRSP Progress Report (Report No. 25104-NI dated November 11, 2002
    and IDA/SecM2002-0545/1 dated November 19, 2002) describes that the country is on the way

8Although the PRSP was prepared with extensive and broad-based consultations, recent consultations indicated that the
    familiarity among different groups with the contents of the PRSP was uneven, suggesting a need for making
    additional efforts to ensure wider participation in future revisions of the PRSP; Annex E.
Nicaragua- Country Assistance Strategy                                                           9

to reestablishing a fiscal track record and considerable advances have been made in improving
governance and strengthening public expenditure management, including the development of
tracking mechanims for poverty related spending, as contemplated under the fourth pillar of the
PRSP. Further efforts to accelerate and improve the implementation of the PRSP are needed
however, especially with regard to growth and employment promoting measure, especially in
rural areas, as envisioned under the first pillar. The implementation of some key institutional
reforms have been delayed, such as the civil service and pension reforms, and the programs to
improve land security. Important progress was made in implementation of the second pillar with
the approval of framework laws in health and education, but the associated institutional reforms
in these social sectors have been advancing slowly. Finally, a national social protection policy is
needed urgently to ensure successful implementation of the third pillar. With respect to the
cross-cutting themes in the PRSP, incipient progress has been made in reducing environmental
vulnerability and decentralization, but nothing is reported in the PRSP Progress Report in the
area of social equity.

19.     The PRSP's four pillars and cross-cutting themes are described below, together with the
planned World Bank Group assistance in support of each of these. The IDA assistance to
Nicaragua involves an increased reliance on program lending, beginning with a Programmatic
Structural Adjustment Credit (PSAC) that will support key reforms that are needed achieve the
PRSP targets. IDA's assistance strategy contemplates a move towards programmatic lending
through Poverty Reduction Support Credits (PRSCs) once it is clear that the required
environment for this type of assistance is in place, i.e. that the public expenditure program
supports PRSP implementation adequately, and that public financial management and
procurement systems are in place to ensure the transparent, economic and efficient use of
Government resources. Some of the required analytical work in this area has been completed,
but key fiduciary assessments are still under preparation. Preliminary findings, however,
indicate that the framework for providing financial assistance through a PRSC, could be in place
in FY04. Complementing the PRGF arrangement with the IMF, the PSAC and PRSCs will
provide assistance that is conditioned on progress made in implementing specific measures
contemplated in the PRSP, which coincide with key actions broadly identified in the HIPC
Completion Point matrix. The move towards programmatic lending would undoubtedly improve
the impact of public programs through better donor coordination and stronger country
ownership, and goes hand in hand with the transition toward sector-wide approaches, which is
being advocated by the Nicaraguan government and many donors.

20.     Under this new framework, the bulk of IDA financial assistance eventually would be
provided under the PRSCs (which would be larger in value terms than the PSAC). The main
reforms and policies that are to be supported by the PSAC (and eventually PRSCs) are described
in the context of each of the PRSP's pillars. These are followed by a list of ongoing lending and
non-lending assistance that supports those polices, and the proposed new lending. To support
PRSP implementation, IDA expects to carry out a proposed Poverty Assessment Update
(FY03), a Poverty and Social Impact Analysis (PSIA) (FY04), and a Country Economic
Memorandum (CEM)/Development Policy Review (FY04). Once IDA's investment assistance
is provided under a PRSC framework, remaining IDA operations would consist mainly of
technical assistance operations to help implement specific measures contemplated in the PRSP
and highlighted by the PSAC/PRSC policy matrix, as well as small, innovative projects of an
experimental nature or for which the institutional infrastructure needs strengthening.
Nicaragua- Country Assistance Strategy                                                                        10

First Pillar - Broad-Based Econoniic Growth and Structural Reform

21.     The first pillar-Broad-Based Economic Growth and Structural Reform--was designed to
address the constraints to growth identified in the PRSP. These include:

    *   the large fiscal deficit and public debt, which represent a major source of macroeconomic
        vulnerability,
    *   the fragile banking system, which faces high administrative costs, low capitalization,
        over-concentrated branches, a short-term, skewed deposit structure resulting in an
        incapacity to provide medium and long-term financing to productive sectors,
        underdeveloped capital markets and limitations on collateral guarantees,
    *   weak property nights, which represent one of the main factors inhibiting development of
        land markets and other productive assets, as well as investments in, and the
        diversification of, the rural economy,
    *   technological backwardness, which places major constraints on productivity growth,
    *   low human capital indicators, which inhibit the absorption of new technologies and
        contribute to the country's poverty levels,
    *   poor physical infrastructure, which translates into higher production costs for the private
        sector and, hence, lower competitiveness,
    *   high vulnerability to natural disasters and socio-econonic shocks, which results in
        periodic destruction of assets and economic disruption, and
    *   the low efficiency of public expenditures.

22.      To address these constraints, the first pillar focuses on the implementation of a
macroeconomic program of continued stabilization and structural reform, including privatization
of remaining Govenmment-owned utilities, actions aimed at modernizing the rural economy,
fostering small and medium businesses, the development of the Atlantic Coast, and the
promotion of strategic productive clusters. 9 This pillar clearly relies on an aggressive private
sector response, which will require equally aggressive measures to motivate private investors,
who are currently being very cautious in the face of an uncertain economic and political
environment. The PRSP expects the future economic expansion to be led by urban services
(such as tourism, banking, comrnerce and communications), but the success of poverty reduction
requires a special effort to ensure that the rural economy expands as well. With that purpose in
mind, the PRSP focuses on the following actions:

    *   Improving incentives for rural development through the elimination of price and cost
        distortions. The government has eliminated non-tariff barriers and reduced most import
        tariffs to within a range of 0-15 percent (the main exceptions being chicken parts, sugar,
        basic grains and powdered milk). Further reductions in the anti-export bias facing rural
        producers are expected to come mainly from the free trade agreements with Nicaragua's
        major trading partners.
    *   Securing property rights and improving the operation of rural factor markets to encourage
        private investment. Efforts to modernize and accelerate the operations of the land registry
        and titling systems are crucial for securing property rights, which in tum is a pre-requisite
        for attracting more private investment.       The government also plans to revise bank


9 Several of these growth constraints are being addressed under separate pillars, notably the low levels of human
    capital (Pillar 11) and the low efficiency of public expenditures (Pillar IV).
Nicaragua- Country Assistance Strategy                                                                                 II

         regulations to widen credit access, fornalize non-conventional financial organizations
         and improve the operations of its own rural credit fund.
       * Increasing investments in rural infrastructure. Better and more rural roads are required to
         lower the costs of inputs and raise sale prices to farmers while facilitating the delivery of
         social services. Rural electricity and telecommunications coverage need to be expanded.
       * Implementing programs aimed at small and medium-sized producers through a strategy
         to foster competitiveness in several strategic clusters with high growth potential, such as
         tourism, textiles and clothing, and forestry products.
       * Promoting the adoption of improved production technologies to raise agricultual
         productivity growth, and
       * Completing the pension reform and financial sector strengthening activities

23.      The promotion of foreign direct investment is an important development platform for the
new President, whose first official actions included convening, the day after his inauguration, an
investor conference to discuss Nicaragua's potential as a. host for FDI. The new government
needs to follow up its private sector-friendly rhetoric with actions in several areas that require
special attention for improving the private investment environment.                This includes, (i)
developing a more proactive foreign direct investment promotion capacity, targeting specific
sectors, (ii) strengthening the entire network of agencies involved in promoting and facilitating
investment in Nicaragua, (iii) strengthening of technical training activities in close coordination
with sector targeting programs, (iv) improving the infrastructure network related to foreign trade,
(v) developing ESW in support of regional initiatives to advance regional cooperation, especially
in trade and in setting uniform standards, and (vi) improving Nicaragua's image vis-a-vis the
international business community.         Though far from ideal, Nicaragua's political and investment
environment is not significantly worse than those in the rest of the region, but its image still
suffers from the anti-private sector policies in effect two decades ago.

24.      There are several other recent structural development of relevance to the implementation
of the first pillar of he PRSP. First, domestic public debt has grown very rapidly in recent years,
threatening to undo the debt reduction benefits projected from the HIPC initiative (see footnote
No. 7). Second, Nicaragua has been hard hit by the significant fall in the real price of coffee,
which represents the single most important export product and the largest source of incomes in
rural areas. Given the prospects that prices will remain low in the future, coffee producers will
need to improve productivity significantly and reorient production towards specialty coffee
markets and more generally to new products and markets. Finally, a recent development with
potentially far-reaching implications for Nicaragua's future development is the increased
willingness by the United States to establish a free trade area with Central America. The
prospects of greater market access for Nicaragua could become one of the most important forces
driving investment and growt, even though it is also likely to require important adjustments
among many sectors of society. 10


25.     The Government, as well as many donors and civil society commentators on the PRSP,
consider that this pillar needs to be strengthened in order to assure that the rest of the poverty

'0   Prospects for a US-CA Free Trade Area improved sharply in October 2002, with the US Trade Representative
      formally notifying the US Congress that it plans to initiate formal negotiations in early 2003, as well as a strong
      offer of cooperation aid support for institutional strengthening for CA countries that may have problems
      preparing for the negotiations and implementing agreements.
Nicaragua- Country Assistance Strategy                                                         12

reduction strategy is sustainable. Accordingly, the Government has been revising its priorities
under this pillar, putting particular emphasis on the acceleration of economic growth, raising
productivity, better risk management and a cluster development strategy to enhance
competitiveness. At the same time, the more recent structural developments mentioned above
are being taken into account in the PRSP implementation, as described in the first PRSP Progress
Report and contemplated under the Government's macroeconomic program supported by the
IMF.


26.      Bank Group Assistance. As an integral part of the PRSP's focus on broad-based growth,
IDA, IFC and MIGA will work closely together on this pillar, aiming at a stronger private sector
response and infrastructure development Given recent integration initiatives associated with the
Free Trade Areas of the Americas (FTAA) and a possible Central America Free Trade Area
(CAFTA), and the increasing possibilities of the greater market access for Nicaragua and other
Central American countries to the more developed NAFTA partners, competition is expected to
intensify among the Central American countries.         In this context; logistical improvements,
including the time and costs required to receive certain trade-related services, is expected to
become increasingly important to Nicaragua. On IDA's part, the proposed PSAC, and later
PRSCs, would provide assistance for the implementation of this strategic pillar that would focus
on policies to facilitate cluster network development and on measures to improve the investment
climate through the strengthening of property rights, completion of the ongoing privatization
programs and the pension reform program, improvement of public infrastructure services,
strengthening of the financial system, and development of a clear competition policy. Given the
concentration of the poor in rural areas, IDA's proposed assistance strategy would also continue
to support improvement of the performance of the agricultural and forestry sectors which are
essential for sustainable poverty reduction.


27.      The activities under this pillar are supported by various ongoing lending and non-lending
operations, which have had a strong rural focus. The ongoing lending operations are the Second
 and Third Road Rehabilitation and Maintenance Projects (Credits 3085-NI and 3464-NI)
approved in FY98 and FY01, respectively, that seek to improve road infrastructure; the Pension
and Financial Market Reform TA Project (Credit 3344-NI) approved in FY00 which
supports the development of an actuarially sustainable pension system and the strengthening of
the Superintendency of Banks; the Telecommunications Sector Reform Project (Credit 3291-
NI) approved in FY00 that is helping to strengthen the policy and regulatory environment while
the state telecom enterprise, ENITEL, is being privatized (ENITEL was privatized on December
 18, 2001, with technical assistance under this project, when 40 percent of the company's shares,
plus management contract, were sold to Telia/EMCE, a Swedish/Honduran consortium); the
Competitiveness Learning and Innovation Project (Credit 3456-NI) approved in FY01 which
is assisting in the development of business clusters and measures to improve the overall business
climate; a Sustainable Forestry Investment Promotion Project (Credit 3160-NI) approved in
FY99 that supports the development of private and communal forestry activities; an
Agricultural Technology and Technical Education & Training APL Project (Credit 3371-
NI) approved in FY00 that aims to develop a market for agricultural technology services and
rural training systems as engines for raising rural sector productivity growth; and a Land
Administration Project (Credit 3665-NI) approved in FY02 that seeks to improve the security
of land tenure.        Ongoing noi-lending operations include two advisory services tasks, a
Commodity Price Risk Management (FY03) task and a Rainfall Insurance Development
Nicaragua- Country Assistance Strategy                                                                       13

(FY03) task, which seek to develop private sector mechanisms for insuring agricultural
producers and, possibly, public infrastructure against natural and market-based risks; and an
Agricultural ESW (FY02) on promoting competitiveness and stimulating broad-based growth in
agriculture.

28.      The main new lending operation being considered by IDA over the next three years, other
than the PSAC and series of PRSCs, is a Second Competitiveness Enhancement (FY04) credit
that would incorporate the findings of FIAS' work on the investment climate and competition to
improve the investment environment, help Nicaragua's private sector prepare for possible entry
into a regional free trade area, and eventually support an expansion of the number of business
clusters. This project, combined with TA support from MIGA and IFC/FIAS, is envisioned as
the core source of technical assistance services for measures to improve the hbsiness climate and
accelerate growth. In addition, two or three small investment projects are being considered.
These projects are all of an innovative character and have in common a strong rural development
and poverty reduction focus. An Off-Grid Rural Electrification Project (FY03) would support
the sustainable provision of electricity services and associated social and economic benefits in
selected rural sites; a Rural Micro-FinanceDevelopment Project (FY03) seeks to improve the
efficiency and soundness of financial intermediation in rural areas; and possibly a Rural
Telecommunications Development Project (FY05) would extend access to rural telecom
services. The PCF Umbrella Project (FY02) will purchase carbon credits generated by a small
portfolio of primarily renewable energy projects, addition to energy sources diversity and
benefiting both the local and global environment.         Future Clean Development Mechanism
potential in the forestry/land management sectors (for carbon sequestration) could have similar
positive spin-offs for rural sector productivity and sustainability. The main new non-lending
operations envisioned over the next three years in support of this pillar include a Land Sector
Study (FY03) that reviews the progress and challenges remaining in the area of land rights, an
Investment Climate and Competition Environment Assessment (FY04) (by FIAS) which will
be carried out in coordination with a Rural Sector Competitiveness Assessment (FY04), both of
which seek to provide analytic underpinnings for future operations to improve competitiveness;
an Infrastructure Assessment (FY05) to identify the most pressing infrastructure needs that need
to be addressed in the future;" l and a FinancialSector Assessment Program (FSAP) (FY04) to
strengthen our understanding of potential vulnerabilities in the financial system and design
corrective measures. Two studies with a regional focus are proposed that are of relevance to
Nicaragua: Central America Trade ESW (FY03) that will center on strategic issues related to a
US-Central America FTA, and a study on Drivers of Sustainable Rural Growth in Central
America (FY03). At the govenmuent's request, IDA is also planning a diagnostic mission,
possibly with IMF participation, to review the sustainability of Nicaragua's domestic debt and
help identify strategies to address it.

29.     In conjunction with the Bank's programs, IFC has been focusing on facilitating private-
sector development since it resumed its activity in Nicaragua in FY98. It is supporting the
private sector with existing investments (of about $16 million commitment) in productive
Nicaraguan finns in agribusiness, retail, pharmaceuticals, and the financial sector. Through each
investment, IFC provides scarce long-term capital and transfers expertise on environmental,


  An assessment of the regulatory policies and institutional framework to identify and address adverse impacts
   related to environmental issues, land acquisition and physical relocation that could result from significant
   increases in infrastructure investments may be considered for certain sectors (e.g., roads) as part of the
   infrastructure assessment.
 Nicaragua- Country Assistance Strategy                                                            14

social, managerial and financial practices. IFC's support for the Nicaraguan private sector also is
provided through regional projects (of about $70 million commritment) in Central America, that
include investments in a private equity fund (Central America Growth Fund), a regional power
development company (EGO, a regional information and communications provider
(Convergence), a regional financial group (Cuscatlan), and a credit bureau company (Trans
Union Central America - TUCA). In support of the IFC's focus, a number of trust funds were
utilized for regional market assessment initiatives covering Nicaragua, with respect to
development of the SME, insurance, private health and education, and hydroelectric generation
projects.


30.      FIAS has been supporting Nicaragua in its promotion of investment, particularly FDI, via
its advisory services. In FY98-99, FIAS completed three assignments with respect to (i)
implementing new FDI laws, (ii) establishing an investment promotion agency, and (iii)
examining the country's legal framework for FDI. FIAS is also launching two new initiatives as
part of IDA's Competitiveness Learning and Innovation Credit: (a) assisting in developing the
Nicaragua FDI and (market) competition policy framework and (b)assisting the Government in
establishing a reform strategy for the removal of administrative barriers to investment.


31.      MIGA has been active in Nicaragua through its activities in insurance as well as technical
assistance for investment promotion. Taken together, the WBG's activity in this area is focused
on improving investor confidence and removing barriers to private sector-led growth.


Second Pillar - Greater and Better Investment in Human Capital

32.      The PRSP's second pillar-Greater and Better Investment in Human Capital--aims to
increase the human capital of the poor through investments in basic education and technical
training, preventive health care at the primary level, child nutrition and a stronger population
policy, in order to enhance their productivity, income and welfare. Structural reforms in the
social sectors are vital to the success of these efforts in view of very tight budget constraints that
force the Govemment to limit its social budget and look instead for institutional strengthening
and operational efficiency gains. Two key ongoing decentralization efforts that the Government
seeks to enhance in the education and health sectors involve a balance between the power of
local autonomy and the need to provide an adequate framework of incentives for quality and
equity at the national level.


33.      The education strategy focuses on the delivery of quality educational services that would
depend upon an adequate mechanism of incentives to provide those services. Central to the
strategy is an initiative to provide financial and administrative autonomy to schools that would
be more responsive to the local community that they serve, backed up by a strong, centrally
managed system that would ensure an adherence to minimum quality standards, to capture
spillover benefits between decentralized units, and to ensure that equity objectives are not
undermined due to decentralization. In addition to efforts to provide greater autonomy to
schools, the government also plans to expand the coverage of preschool and make selective
investments in providing access to school for children unable to attend early grades because of
their distance to the school site. Additional investments to improve schools and schooling would
Nicaragua- Country Assistance Strategy                                                          15

guarantee a minimum quality standard of schooling inputs, conditions, and services for all
schools, as well as a program of incentives to parent/school councils to steadily increase the
quality of their schools and achieve higher outcomes for their students. The curricula of the
teacher traiiing institutes are to be improved and expanded to make them more relevant for local
needs.


34.      For the Atlantic Coast, the PRSP emphasizes the continued use of instruction in the
mother tongue in the initial grades while strengthening the attainment of Spanish language
proficiency.     A series of studies are planned to assess the effectiveness and relevance of
technical and tertiary education with a view toward possible reforms. (Such reforms could
become an important engine for increasing productivity growth and for widening the skills and
adaptivity of the workforce; both of which would enhance private sector growth and encourage
FDI.) Finally, the PRSP proposes a family subsidy program to encourage very poor children to
attend primary school on a regular basis.

35.      The Government submitted a proposal for funding to the Secretariat of the Education for
All - Fast Track Initiative (EFA-FTI), an initiative of international donor countries to provide
grant financing for deserving countries towards the goal of assuring that by 2015 all children will
obtain at least a complete primary school education. Nicaragua's proposed EFA-FTI is built
around a two-pronged strategy. First, it would provide school councils of all of the nation's
schools with resources, guidelines and technical assistance to enable them to raise the quality of
education services their schools deliver, step-by-step, to guarantee adequate learning for all of
the children in their community, while at the same time holding these councils accountable for
results. Second, the proposed plan would provide demand-side subsidies through a scholarship
incentive fund, integrating the Red de Protecci6n Social with the Ministry of Education's Beca
program, to help children from the poorest families overcome hardships to enroll in school and
attend class daily. The proposed program would also promote the engagement of parents and
civil society in the education process, provide adequate educational material, and measure
results. The educational administration at all levels would be strengthened on the basis of
experiences from successful interventions and would be able to assist areas where results have
been lacking.     Representatives of the donor community have recently formally agreed to support
Nicaragua's EFA-FTI program. Work is now proceeding to build the required capacity and close
the financing gap, which is estimated to cost approximately US$20 million per year until 2015.

36.       The PRSP's health sector strategy focuses on improved implementation of the
institutional modernization process, increasing the coverage and quality of health services and on
promoting behavioral changes at the household level. The modenization process focuses on
improved management practices, innovative ways of providing services in remote areas,
alternative systems for procurement and distribution of medicines, the creation of special
'matemal houses' to improve access to prenatal and care and institutionalized births for women
with obstetric risks, and a demand-driven process to target health services. The expansion of
coverage focuses particularly on primary health care and on women of reproductive age, children
and adolescents, and will involve the creation, rehabilitation and equipping of health centers in
rural areas, together with the development of a cost effective package of basic services, which is
to include reproductive health care services. Improving the patient referral system and expanding
provision of vaccines at the primary level is also expected to contribute to a more efficient
delivery of services. To achieve behavioral changes, the PRSP contemplates education programs
to improve hygiene and nutrition practices at the community and household levels, in addition to
Nicaragua- Country Assistance Strategy                                                          16

their inclusion in the primary education curricula. Recogrizing the importance of access to safe
water and sanitation for improving health and nutrition outcomes, the PRSP also contemplates
major investments to expand the national coverage of water and sanitation.

37.      In nutrition, the strategy focuses on preventive measures directed at the chronic
malnutrition problems of children under two years of age. It particularly stresses family and
community actions and programs to encourage healthy diets, hygiene, preventive health, and
child/maternal care. Specific activities will concentrate on monitoring the physical development
of children, negotiating constructive feeding and food preparation practices at the household
level, and distributing vitamin supplements to nursing and expectant mothers and to children


38.      In population, the strategy aims to integrate reproductive health care into primary health
care services, to improve family planning, reduce mortality rates and strengthen the basic social
fabric.    In addition, it also contemplates formal and informal education programs, with the
participation of NGOs, community leaders and municipalities to encourage self-esteem,
responsible maternity and paternity, and family unity.        These are considered important for
influencing behavioral patterns within families and among vulnerable groups to reduce domestic
violence and family disintegration.


 39.     Complementing its sectoral policies in education and health, the Govemment is
 developing a social protection strategy to enhance human capital development of the poor and
vulnerable.    A comprehensive review of selected poverty programs in Nicaragua's PRSP
portfolio revealed that there is considerable program duplication and fragmentation. About a
quarter of the programs do not address the needs of the poor. In many, targeting and evaluation
systems are weak. In sectors where policies are not well defined and explicit, inconsistencies
appear among different programs and projects.          Furthermore, despite the great number of
programs and projects, the review detected areas where resource allocation appears insufficient,
including attention to the health, nutrition and educational development of children 0-3 years of
age, access to clear title for housing and property, and attention to personal risks, especially
domestic violence. These, as well as results from other studies and program evaluations would
inform the Government in its effort to develop a coherent social protection strategy conducive to
reaching the goals of the country's poverty reduction strategy. The strategy is expected to
include policies and measures for improving access to basic social services for the poor, for
confronting socio-economic crises, as well as for addressing the specific needs of vulnerable
groups.


40.      Bank Group Assistance. The proposed PSAC and PRSCs aim to support this pillar of
the PRSP by focusing on measures to improve the coverage and quality of primary education,
improving the coverage and quality of basic health services, especially in rural areas, and
improving child nutition indicators. The measures highlighted by the PSAC are being supported
by several ongoing lending operations, consisting entirely of second-generation projects, which
reflects the Bank's close involvement with Nicaragua's social sectors since the early 1990s. The
Second Basic Education Project (Credit 3281-NI) approved in FY00 is expanding education
coverage and quality by promoting a more equitable and effective basic education system with
community involvement in school govemance. The Agricultural Technology and Technical
Education & Training APL Project (Credit 3371-NI) approved in FY00 addresses training
Nicaragua- Country Assistance Strategy                                                           17

and rural technical education as part of pluralistic, knowledge and information system. The
Second Health Sector Modernization Project (Credit 3084-NI) approved in FY98 is
contributing to expanding service coverage and quality by improving the efficiency,
effectiveness and equity of the Nicaraguan health system by scaling up the Integrated Model of
Maternal and Child Care. The Third Social Investment Fund Project (Credit 3142-NI)
approved in FY99 as well as the Poverty Reduction and Local Development Project (Credit
3504-NI) approved in FY01, both carried out by FISE, are expanding the coverage and quality of
social services by providing essential small-scale social infrastructure (mainly education, health
and water & sanitation) in poor communities, while strengthening the municipal management of
this inifastructure to help sustain it longer. Increasingly, these projects are also turning to
support the expansion of economic infrastructure in poor communities. These projects are also
supporting the Living Standard Measurement Surveys that are periodically carried out in
Nicaragua, together with the preparation of poverty maps used by FISE to target interventions.
Recent non-lending IDA operations that support this pillar include an Ex-Post Evaluation of the
Emergency Social Investment Fund (FY02) and a Review of Selected Poverty Programs in
Nicaragua's PRSP Portfolio (FY02), which identify strengths and weaknesses in existing
operations with the aim of helping the authorities restructure them to improve their effectiveness.


41.      New lending operations being considered by IDA to support this pillar, in addition to the
PSAC and later PRSCs, include a Third Basic Education Project (FY04) that would consolidate
the innovations and successes of earlier projects. Given that Nicaragua has been selected to
participate in the EFA Fast Track Facility, this project would also serve as an "EFA Support
Project," a technical assistance operation to help the Government and other stakeholders achieve
the benchmarks for the Education for All Initiative. A Third Health and Nutrition Project
(FY05) is proposed to deepen the health sector modernization process and extend the nutrition
pilot project initiated under the earlier project. An Education Sector Policy Note (FY03) will
address the coordination of the PSAC with the existing and new education sector projects and the
Education for All Initiative.

Third Pillar - Better Protection for Vulnerable Groups

42.     The third PRSP pillar-Better Protection for Vulnerable Groups--seeks to guarantee
access to basic social services for Nicaragua's extreme poor and protect them from natural and
economic disasters that perpetuate poverty. The governnent is still in the process of developing
a social protection strategy, so immediate efforts in this area have focused on a pilot program
that assists young children in extremely poor households by encouraging their attendance in
school and regular medical visits for checkups and vaccinations through incentives to their
parents. This pilot was recently evaluated and found to be well targeted and effective in building
human capital as well as alleviating income shocks experienced during the recent coffee crisis.
As a result of the evaluation, the program is being expanded. As part of its longer term strategy,
the government is strengthening the public institutions responsible for social safety nets, such as
the Ministry of the Family, and rationalizing the institutional roles of multiple entities involved
in providing services to vulnerable groups. The design and monitoring of assistance programs is
being improved, with clearer targeting and exit mechanisms to avoid dependency.              Further
proposed actions include efforts to improve early warning of natural disasters and ameliorate
their impact more effectively, as well as measures to strengthen the institutional capabilities of
local governments and communities to deal with disasters and reduce vulnerability.
Nicaragua- Country Assistance Strategy                                                                                 18


43.      Bank Group Assistance. This represents the least developed of the four pillars that
underlie the PRSP. Accordingly, the main action emphasized in the PSAC at this stage to
support this pillar is the design and adoption of a social protection strategy, with special attention
to children aged up to three years, which have been identified as among the most vulnerable
members of Nicaraguan society. Other than the PSAC/PRSC, no other IDA operations are
planned to support this pillar during this CAS period, in part because the ongoing operations are
relatively new and expected to continue executing over this planning period. The main ongoing
lending operation to support this action is the Poverty Reduction and Local Development
(FISE IV) Project (Credit 3504-NI) approved in FY01, which goes beyond earlier FISE
operations by supporting the development of safety nets within a strengthened social protection
strategy. In addition, the project includes a Social Assistance Innovations Fund to identify new
measures to reach vulnerable groups which are not easily reached through supply side
interventions. Furthermore, special attention is being given to develop fast response safety net
mechanisms that can be used to cushion the detenoration of human and social capital during
economic crises and natural disasters once they occur. The Natural Disaster Vulnerability
Reduction Project (Credit 3487-NI) approved in FY01 also is supporting this pillar by
improving Nicaragua's disaster management capacity at national and local levels. An ongoing
non-lending operation that supports this pillar is the Informal Safety Nets Study (FY02), which
analyses the coping mechanisms of those affected by economic and natural shocks, including the
current crisis in the coffee sector, and seeks to formulate effective assistance strategies in
response. This findings of this study are being further refined in the regionally-focused Social
Impact of the Coffee Crisis (FY03) study that will analyze poor household's coping mechanisms
and the Government's response in order to identify the scope for public action as well as specific
Governnent interventions to address the poverty and social impacts of the coffee crisis and other
economic shocks that affect the poor, particularly in rural areas.

Fourth Pillar - Good Governance and Institutional Development

44.     Nicaragua ranked 8lIt among 102 countries in the Transparency International's
Corruption Perceptions Index 2002, which constitutes an important negative signal for potential
investors interested in expanding their operations in the country. Despite ongoing efforts to
strengthen public sector financial management, the system is still weak and is considered an
obstacle to growth and poverty reduction, since it reduces the impact of public spending and
encourages donors to bypass the Government's budgeting and expenditure processes, resulting in
a fragmented investment programs. Also, the constitutional reforms of 2000 caused a setback to
governance-improving efforts by appearing to undermine the independence and legitimacy of the
other Powers of the State, notably the Supreme Court and Comptroller General's office. 12 To
improve Nicaragua's governance and institutions, the PRSP focuses on consolidating the rule of
law, major institutional strengthening, greater transparency and efficiency in public expenditures,
and institutionalizng a culture of integrity. The PRSP also seeks to promote democracy through
an expanding decentralization, participation of civil society and respect for human rights. To

12   The constitutional reforms changed the structures of the Comptroller General's office, the Supreme Court and the
       Supreme Electoral Council, among other, by expanding their governing boards. Although these structural
      changes may have been technically justified, the appointment of the new magistrates and members of these
      appeared to be heavily influenced by political, rather than professional, considerations. This has potentially far-
      reaching implications for investor confidence, which depends on the enforcement of property rights and
      adherence to the rule of law.
Nicaragua- Country Assistance Strategy                                                           19

achieve these ends, the PRSP contemplates various reforms to modernize the commercial and
civil laws, strengthen the Comptroller General's office and the Judiciary through training and
equipment (especially in the resolution of property claims), accelerate land titling and modernize
the cadastre and registry, and establish special public defenders to give the poor greater access to
the legal system. To ensure transparency in public management, the strategy emphasizes the
establishment of an improved public procurement system and the operation of a reliable
integrated financial management system in the central government.           To fight corruption and
strengthen ethical values, the PRSP envisages a comprehensive revision of the legal framework
on integrity and other actions to increase the effectiveness and independence of the National
Assembly, the Judicial System and the Comptroller General's Office. The IDB is providing
financial and technical assistance to the Government in these three areas. Transparency and fair
enforcement in legal, judicial and bidding framework are keys to growth and private sector
development in Nicaragua, especially where foreign private sector participation in such sectors
as infrastructure may be sought.         Particularly important will be the laws and actions to
professionalize the civil service, clarifying the accountability and functions of public servants.
The participation of civil society in public affairs, promoted through CONPES, is to be further
strengthened through legislation to codify the participation of citizens in government processes.
Offices for the defense of human rights and the public defenders of children, women and
indigenous populations are to be reinforced.


45.     Bank Group Assistance. The PSAC and PRSCs aim to support this pillar by focusing
attention on measures to improve public sector financial and expenditure management, tax
administration, civil service reform and donor coordination.         The institutional strengthening
objectives to be supported by the PSAC are already being supported at the sector levels through
IDA's ongoing lending operations, all of which have some institutional strengthening
components. In addition, IDA is supporting a comprehensive institutional reform effort through
the Economic Management TA Project (Credit 3314-NI) approved in FY00. This project has
supported the extension of the Integrated Financial and Administrative Management System
(SIGFA) across the public sector, the initiation of the civil service reform process, improvements
in economic management, reorganizations to streamline the public sector, and other governance
improving measures initiated under the National Integrity Program. The main IDA noni-lending
operation supporting this pillar has been the Public Expenditure Review (FY02),               which
provided recommendations for improving public expenditure management to strengthen the
poverty focus of public spending and for establishing a tracking mechanism to channel and
account for the public savings accruing from HIPC debt relief.


46.     The main iew lending operation proposed to support this pillar is the Second Economic
Management TA Project (FY04). This operation is envisaged as a key provider and coordinator
of technical assistance services in all governance and institutional strengthening areas
emphasized by the PSAC. This includes completing the implementation of the SIGFA, passage
and implementation of the civil service reform law, strengthening the government's fiscal policy
formulating capacity, and implementing public sector financial and expenditure management
reforms. The latter should improve transparency and create the basis for a multi-year budgeting
framework and for improving donor coordination mechanisms. Also, this project should be
designed with sufficient flexibility to support other related governance improving initiatives that
may require support, such as judicial reform. (Although judicial reform is a high priority for
Nicaragua, the political climate for supporting such reform is still evolving and the donor
Nicaragua- Country Assistance Strategy                                                                  20

funding available for ongoing activities appears to be adequate.)   Key non-lending services
envisaged under this pillar are the preparation of a Country Financial Accountability
Assessment (FY03) and a Country Procurement Assessment (FY03). The main findings from
these assessments will guide the institutional strengthening and reform measures supported
through the PSAC and other operations, including the IDB-financed procurement reform
program, and will set the basis of measures to be taken before IDA moves towards a providing
financial assistance under a PRSC framework.


Cross-cutting Themes

47.     The PRSP's three cross-cutting themes refer to environmental vulnerability, social equity
and decentralization. The plans to reduce ecological vulnerability are laid out in Nicaragua's
Environment Policy and Action Plan 2000-2005 (PANic) that was approved on February 23,.
2001. It lays out 16 areas where the Government will take environmental actions, including the
promotion of a sustainable development model, harmonizing legislation that affects the
environment, developing a national environmental information system, promoting environmental
education, developing ways to charge for pollution costs and ensuring the use of environmental
parameters in public projects to measures cost and benefits. Specific action priorities encompass
six areas: water, forestry , soils, solid and liquid waste, environmental education and institutional
coordination. 3 Although most regions require environmental attention, highest priority is give
to areas of Jinotega, Nueva Segovia, The North Atlantic region (RAAN), Chinandega, Esteli and
Matagalpa.


48.     The PRSP is especially concerned that future growth be broad-based, rather than
contributing to an already high level of inequality. Recognizing that the rural-based growth
experienced in Nicaragua during the 1990s has largely favored the poor, the PRSP continues to
focus attention on the importance of a rapidly growing rural economy.                  Other actions
contemplated in the PRSP to promote social equity include reviewing legislation affecting
indigenous groups, the children and adolescents' code, and the adoption law. These reviews are
expected to lead to important draft legislation to improve the rights of these vulnerable groups.
Also, the strategy contemplates the development of action plans to improve opportunities for
men and women, assist rural women and reduce domestic violence. In this last context, the
National Women's Institute and centers for adolescents at risk are to be strengthened.

49.      The PRSP considers decentralization an integral part of Nicaragua's modernization and
reform process. In this context, it encompasses plans to strengthen the municipalities through
development of better financing systems, improving their planning capabilities and strengthening
their capacity to monitor and evaluate their performance.                 This will require better trained
personmel, fiscal support systems and improved local tax collection. In addition to the efforts
taking place in education and health, decentalization initiatives are also expected to yield a
major impact in the transportation sector, where the regulation and management of public
transportation, including lake and river ports, is to be transferred to local control.



3   Of these six priority areas, the one area where Nicaragua's environmental indicators stand out most in
     international comparisons is in the extremely rapid rate of deforestation; Annex Table BI 1.
Nicaragua- Country Assistance Strategy                                                         21

50.      Bank Group Assistance. The first and third cross-cutting themes identified in the PRSP
are currently being supported directly by the Second Rural Municipalities Project (Credit
3480-NI) approved in FY01, which seeks to improve the performance of rural municipalities by
building their capacity to provide local public infrastructure, protect the environment and
manage natural resources in a sustainable manner, and promoting local economic development.
In addition the Poverty Reduction and Local Development Project (Credit 3504-NI)
approved in FY01 works with communities (including indigenous) to empower them to
participate in local decision making and project execution so that investments best address their
development needs. The project also supports a Youth in Action program by co-financing
recreational activities for poor urban youth in collaboration with municipalities and the private
sector. A GEF-funded Atlantic Biodiversity Corridor Project (Credit 28361-NI) approved in
FY97 also is contributing to these objectives by seeking to ensure envirornentally sustainable
land use in the Atlantic Coast region through better land use and biodiversity planning,
monitoring and evaluation, and financial mechanisms to sustain the corridor. With regard to the
second cross-cutting theme, the Bank has recently been carrying out analytical work on Youth at
Risk in Nicaragua, which shows the tremendous challenges involved in the formation and
integration of adolescents into society and offers recommendations on what government, donors,
and civil society can do b create better opportunities for youths, especially young women. IDA
will continue this work with a focus on improving employment opportunities for adolescents.

51.      The PRSP's cross-cutting themes are being mainstreamed in IDA operations: all new
projects are routinely subjected to prior environmental impact evaluations, as well as to gender
assessments in an effort to guarantee a more equitable project impact. Activities with a possible
incidence on the Atlantic coast of Nicaragua also are being reviewed b ensure conformance with
the governnent's indigenous policy framework.            Finally, it is important to note that
decentralization features prominently in ongoing IDA-financed operations, most of which
include specific institutional strengthening components. All social sector projects, for example,
involve some form of decentralization to improve service delivery and accountability. Two new
tasks are being proposed to help reduce enviromnental vulnerability: a second GEF-funded
Atlantic Biological Corridor Project (FY04) and a Renewable Energy Resources Policy Paper
(FY03). The last activities should also help position Nicaragua to participate in the global
market for carbon sequestration.

Economic Outlook

52.     External Environment.               In many ways, Nicaragua's extemal environment today is
more difficult that at the time of the last CAS:
   *   terms of trade have deteriorated significantly since the late 1990s;
   *   economic growth among the main trading partners, notably of the United States, has
       slowed down in the aftermath of September 11, 2001;
   *   domestic credit growth is projected to be slow, as the surviving commercial banks behave
       with greater caution and are subject to tighter prudential oversight;
   *   the domestic debt burden is significantly higher than in the mid- 1990s;
   *   the international reserves position is weaker; and
   *   the Government does not command a clear majority in the Legislature.
Nicaragua- Country Assistance Strategy                                                                               22


53.    There are also some positive developments that the new Administration can build on,
however, and new opportunities to exploit. In particular:
    * The new Administration's visible commitment to combat corruption is being recognized
       as a positive force for development by private investors, and, also by donors who appear
       to be revising their aid commitments favorably. Although it is unlikely that the recently
       high levels of aid recent years can be sustained in the long run, this positive attention may
       postpone the projected aid decline for some years.
    * Prospects of greater market access for Nicaragua and other Central American countries to
       the more developed NAFTA partners have improved with recent integration initiatives
       associated with the Free Trade Area of the Americas (FTAA) and a possible Central
       America Free Trade Area (CAFTA).
    * The completion of a broadly participative PRSP in 2001 should facilitate the coordination
       of assistance efforts around better focused development policies.
    * Many difficult political decisions identified as Completion Point conditions under the
       HIPC initiative-e.g., the privatization of power and telecommunications, and the reform
       of the pensions system-have already been taken and started to be implemented. This
       should simplify the task of complying with the Completion Point conditions.
    * A budding Manufacturing Free Trade Zone exists, that has grown to encornpass 44 firms,
       generating some 37,000 (direct and indirect) jobs.

54.       Short and Medium Term Macroeconomic Prospects. Due to the more difficult external
environment described above, the macroeconomic outlook for 2002 is very weak (Table 4).
GDP growth is projected to slow to 1 percent, after having grown by an annual average of 6
percent in 1999-2000 and 3.3 percent in 2001. Inflation is projected to remain near 6 percent,
close to the rate of exchange rate crawl that is being implemented. The value of exports is
expected to resume modest growth in 2002, after a spell of negative growth in 2001 on account
of the depressed coffee market and lower demand from the United States. Import growth is
expected remain negative in view of the slow income growth. Both trends together should
gradually strengthen the balance of trade.

55.      In the medium term, Nicaragua's GDP is projected to grow by 3 percent in 2003 and 4.5
percent in 2004, while inflation should remain steady within single digit figures. This stronger
growth is driven by a projected economic recovery in the US and Europe that should increase
demand for Nicaraguan exports, a partial improvement of the terms of trade and greater investor
confidence as the impasse with the National Assembly becomes resolved. These projections also
are premised on the adoption of a disciplined fiscal policy under an agreed PRGF program
supported by the IMF and other donors. The fiscal adjustment in 2002 is projected to be large in
comparison to the 2001 fiscal deficit, but modest compared to the Budget that had been approved
in 2001.14 Even so, a major cumulative adjustment on the order of 6 percent of GDP (after
grants and HIPC debt relief) will be needed over four years to move toward a sustainable
macroeconomic situation. This adjustment places a significant constraint on the public sector's
ability to maneuver in years to come. The government is committed to protect poverty related
spending when undertaking this adjustment, as the PRSP Progress Report (Table 4) projects a
continued increase in the GDP share of poverty-related spending in spite of the significant

4   The entire fiscal adjustment between 2001 and 2005 amounts to about 11% of GDP, of which almost half (5.2%)
      is expected to emerge from lower interest payments in the wake of HIPC debt relief Of the remaining
      adjustment, it is envisaged that 40 percent would be generated through the tax reform and 60 percent through
      expenditure cuts.
Nicaragua- CountryAssistance Strategy                                                                                23

decline in GDP-share of total public expenditures. It is expected that the growth retarding effects
of reduced public expenditures will be largely offset by the growth inducing effects of more
private investments facilitated ("crowded in") by the reduced government presence in the
economy, together with the adoption of market-oriented reforms contemplated in the PRSP.

56.      Debt and Creditworthiness. Nicaragua is not creditworthy for borrowing from IBRD
(and has a per capita income below the IDA eligibility threshold), so it is considered an IDA-
only country. As of December 1999, extemal debt stood at $5.5 billion in Net Present Value
terms, which amounts to a little over two times the official GDP in 2001. Once it reaches the
HIPC Completion Point, Nicaragua can expect to receive debt relief on the order of $4.3 billion
(including through traditional mechanisms), which would reduce its extemal debt in NPV terms
to 150 percent of exports or roughly 50 percent of 2001 GDP. Nicaragua also has one of the
largest domestic debts among HIPC countries, reaching about $1.4 billion equivalent, or slightly
more than 50 percent of 2001 GDP. The need to service these public debts constitutes a
significant burden on public finances, but should be manageable under the proposed PRGF
program.
             Table 4: Nicaragua - Projected Macroeconomic Indicators (2002-2005)
                                                                 2002           2003       2004             2005
                                                                               percentages
  Real GDP growth                                                  1.0            3.0       4.5               5.0
  Inflation Rate CPI; (e.o.p)                                      6.0            6.0       4.0               4.0

  Exports f.o.b.                                                  .1.0           10.8          11.5          12.6
    Export Volume                                                  1.1            5.5           6.1           6.2
  Imports f.o.b.                                                  -4.2           -2.4           3.6           6.2
    Import Volume                                                 -4.7            1.0           3.4           6.1
  Terms of Trade (deterioration-)                                 -0.6            3.0           5.2           5.9
                                                                                % of GDP
  Trade Balance                                                  -37.4          -35.1         -32.6         -31.0
  Current Account Balance                                        -28.2          -24.0         -19.3         -18.3
  Current Account Balance (excluding interests)                  -26.0          -21.2         -16.0         -15.2
  Combined Public Sector Balance (before grants)                 -16.5          -13.2          -9.4          -7.5
  Grants                                                           7.3            6.9           4.1           4.2
  Combined Public Sector Balance (after grants)                   -9.2           -6.3          -5.3          -3.3
  Public Sector Primary Balance (after grants)                     2.0            4.1           0.9           1.9
  Gross Domestic Investment                                       27.3          27.8          29.1           30.6
   Public                                                         12.2          12.2          12.9           13.0
   Private                                                        15.1          15.6          16.2           17.6
 National Savings                                                 -1.2            3.0          9.0           11.6
  Public                                                          -4.2           -1.0          3.8            5.6
  Private                                                          3.0            4.0          5.3            6.1
 External Savings                                                28.5           24.8          20.0           19.0
 Gross International Reserves (in months of imports)               2.3            2.5            2.6           2.9
Source: IMF and Bank Staff estimates. (Note: The public sector primary balance in 1999-2000 averaged -4.0% of GDP.
Nicaragua- Country Assistance Strategy                                                            24


                   III.    THE BANK GROUP'S ASSISTANCE STRATEGY


Progress since the Last CAS

57.      The Previous CAS. At the time of the last CAS in March 1998, Nicaragua was in the
midst of completing a dual transition from a centrally planned to a market economy, and from
war and instability to peaceful democracy. Growth had resumed, prices remained stable and the
possibilities of renewed hyperinflation, civil war or the abandonment of market economic
principles were no longer considered major threats. (This represented a significant evolution
from the early 1990s, when such concerns were still at the forefront.) IDA's assistance strategy
was aimed at (i) consolidating growth through private sector development, (ii) developing the
rural sector, and (iii) developing human capital and protecting the poor.


58.     Progress was to be evaluated according to the following criteria (i) establishment of a
track record of macroeconomic reforms that will enable I{1PC eligibility, (ii) progress
benchmarks for each of the three priority areas of assistance described above, and (iii)
maintaining the current quality of portfolio implementation. Three major risks to the Bank
strategy were foreseen: (i) increased political polarization that could plunge Nicaragua into a
governability crisis, (ii) interest group and social pressures that could push the Government to
increase fiscal expenditures and/or halt privatization efforts, and (iii) weak implementation
capacity that could delay reformns and project implementationr


59.     What worked well. In broad terns, most of the priorities identified in the 1998 CAS
were pursued.     Indeed, actions that depended mainly on decisions by the Executive were
achieved. Nicaragua succeeded in accelerating growth during the second half of the 1990s and
became eligible for HIPC debt relief by reaching the Decision Point. Most of the progress
indicators presented in the previous CAS were achieved, and Nicaragua continued to make
progress in addressing poverty. (The matrix in Annex D describes the advances made in
reaching the progress benchmarks incorporated in the previous CAS.) Significant progress was
made in the privatization of public utilities and banks, but the quality of privatization was not up
to par. The telecom utility (ENITEL) was privatized, despite several failed attempts. Also, the
Government succeeded in maintaining an excellent record of portfolio implementation. In fact,
as all ongoing projects are classified 'Satisfactory' or better, and none is currently classified as
being 'at risk'.


60.      What did not work well. Nicaragua was less successful in establishing a solid
macroeconomic track record. Although the Government has now assigned priority in this areas,
the 1998 PRGF program went off-track toward the end of the last CAS period, despite a strong
effort to maintain stability in the aftermath of hurricane Mitch (Box 2).          Progress towards
structural reformns was also mixed.       BANIC, a public commercial bank, was eventually
privatized, but the transparency of its privatization was widely questioned and ultimately the
bank failed. Similarly, efforts to strengthen public sector institutions, through initiatives such as
the introduction of the SIGFA and the strengthening of several line ministries, generally have
been successful but suffered an imnportant setback when the staffing process for the Comptroller
Nicaragua- CountryAssistance Strategy                                                                     25


General's Office and the Supreme Court in the wake of the 2000 constitutional reforms resulted
in public distrust in these institutions' independence, thereby affecting their effectiveness.


            Box 2: The World Bank's Response to Hurricane Mitch in Nicaragua
Hurricane Mitch struck Nicaragua in late October 1998, causing major human and physical damage.
The World Bank's response to this catastrophe included increasing Nicaragua's IDA allocation to
finance a Hurricane Emergency Assistance Credit ($50 million) and a Supplementary Basic Education
Credit ($13.2 million), accelerating the preparation of the Sustainable Forestry Investment project ($9
million), reprogramming $62 million in ongoing IDA-financed projects to assist in emergency
reconstruction activities, and the establishment of a Central American Emergency Trust Fund to
channel donor resources in providing debt service relief. Nicaragua recovered fairly quickly from the
damages caused by the hurricane, but encountered fiscal problems when aid-financed reconstruction
activities were phased down.

61.     Immediately upon assuming office, the Bolafios administration has begun to address
these issues, and began discussions with the IMF on a PRGF arrangement. A new three year
PRGF arrangement was approved by the IMF Board in early December 2002, and the first PRSP
Progress Report and Joint Staff Assessment were reviewed by the IDA and 1MF Boards. The
program envisages a substantial fiscal adjustment and reduction in the exchange-rate indexed
stock of domestic central bank debt, which are expected to take place through a comprehensive
tax reformn, and amended budget for 2002 and a program to recover assets of previously
intervened commercial banks. These measures are designed to put Nicaragua's fiscal balances
on a sustainable path.        The Bolafios government has also given priorities to rooting out
corruption and increasing transparency in the use of public funds.

Portfolio Performance and Management
62.      As of September 30, 2002, IIDA's active portfolio consisted of 15 credits totaling $461.1
million, of which $258.1 million were undisbursed, plus one $7.1 million GEF grant for the
Atlantic Biodiversity Corridor Project.

   * The last adjustment operation, a Financial Sector Adjustment Credit, was approved in
     FY98 and was fully disbursed in FY00.
   * Nicaragua has the largest active portfolio in Central America, with a good performance
     record over the years. All active projects are rated Satisfactory, with one (Sustainable
     Forestry) rated Highly Satisfactory, both in terms of achieving development objectives
     and implementation progress. Furthermore, none of the active projects are currently rated
     'problem projects' or 'projects at risk'.
   * Disbursement performance has been generally strong, except for a slowdown in several
     projects at the beginning of 2002, following the change in govenmment and the adoption
     of fiscal austerity measures that reduced the available counterpart funds. Although the
     disbursement ratio has declined since 1999, it is mainly because several large projects
     became effective over the last two years, and are just beginning to execute in eamest.
   * The average age of the IDA portfolio has also declined over the last 3 years, from 2.5
     years in 1999 to 1.8 years in 2001, reflecting an increase in the number of active projects.
   * Compliance with financial and auditing requirements has been good, and the quality of
     audit and procurement reports is satisfactory. There are no overdue audit reports from
     FY02. Two areas in need of attention are the monitoring of project expenditures and
Nicaragua- Country Assistance Strategy                                                                 26

         activities carried out via decentralized schemes, and the capacity of local firms to
         undertake project audits m compliance with International Standards of Auditing and
         World Bank requirements.
    *    The last Country Portfolio Performance Review took place in Febniary 2002.

The Process of CAS Formulation

63.     CAS consultations were carried out with the Government, civil society and other dorors
on August 12-14, 2002 to seek views on IDA's role in Nicaragua and to identify its comparative
advantage vis-a-vis other donors in supporting specific programs. The consultations did not
focus on eliciting views on Nicaragua's development challenges, or on the Government's
strategy for addressing them, since these had been the focus of extensive consultations
throughout the PRSP process. The main findings of the CAS consultations are described in
Annex E.


The Proposed Assistance Strategy

 64.     This CAS describes a new assistance framework for Nicaragua in which World Bank
 Group assistance is designed around the implementation of the country's Poverty Reduction
 Strategy Paper (PRSP). For IDA, this approach entails a program of lending and non-lending
assistance structured around the PRSP's four pillars.       Initially, a Programmatic Stiuctural
Adjustment Credit (PSAC), supported by investment and technical assistance operations, is
proposed as a vehicle for supporting the implementation of key reforms and delivermg the
financial assistance required to implement the country's PRSP.         Complementing the PRGF
arrangement with the IMF, this assistance will be conditioned on progress made in implementing
specific measures contemplated in the PRSP.15       Over time, IDA expects to move towards a
framework of programmatic assistance through which the major share of financial support would
be provided through larger Poverty Reduction Support Credits (PRSCs) that would provide
broad program support for PRSP implementation. The volume of lending provided under PRSCs
is expected to be larger than under the PSAC, so the amount of financial support provided
through investment lending would decline significantly with the move toward PRSC-based
lending. Stand-alone operations under a PRSC framework, would be mainly limited to small,
innovative projects of an experimental nature or for which the institutional infiastructure is still
underdeveloped, and to technical assistance operations to help implement specific measures
contemplated in the PRSP.         The transition towards a PRSC approach requires that the
Government's public expenditure program is appropriate and adequately supports the
accomplishment of PRSP goals, and also that adequate public financial management and
procurement systems are in place to ensure the transparent, economic and efficient use of public
resources consistent with the agreed public expenditure program. To some extent, the focus on
fast-disbursing credits is motivated by the need for Balance of Payments support during the
initial period as the Government implements its governance improving refon-us and other
adjustment measures.       More importantly, however, the focus on programmatic lending is
motivated by the desire to improve the impact of public programs through better coordination
and stronger country ownership.



15 These measures also coincide with the key actions identified in the HIPC Completion Point matrix.
Nicaragua- Country Assistance Strategy                                                         27

65.      Working closely with IDA, IFC will support the implementation of Nicaragua's PRSP,
particularly on the first strategic pillar - broad-based economic growth. IFC's approach in
Nicaragua and in other countries in Central America is to support private sector development
through activities at both the individual country and the regional levels.


66.      In support of Nicaragua's PRSP agenda, IFC will continue supporting Nicaragua's
pnvate sector in priority areas such as (i) strengthening the financial sector and capital market,
(ii) promoting foreign private investment in Nicaragua, (iii) broadening private participation in
infrastructure, and (iv) reactivating growth in agriculture and industry. IEFC is currently in the
preliminary stages of looking into possible investment opportunities in tourism in the Central
American region.       IFC is further interested in investment opportunities in housing finance,
micro-finance, agribusiness, manufacturing and SMEs (through intermediaries) in Nicaragua or
at the regional level. On the nor-investment side, IFC is considering to cany out a housing
finance market assessment in Nicaragua, supported by a trust fund. IFC's future investments
will depend on the improvement in removing the structural obstacles identified in the 2001
PRSP, such as the fragile banking system and weak property rights, and progress in addressing
the fourth pillar - good governance and institutional development - which will be critical for
improving investor confidence and doing business in Nicaragua.


67.      The renewed emphasis on foreign direct investment by President Bolanos has created
significant momentum within the country in support of the use of such investment as a
development tool. Working in dose cooperation with the rest of the World Bank Group, MIGA
is assisting the govemment to improve Nicaragua's ability to attract and host investment, and to
realize fully the potential development benefits of those investments.


 68.     Since FY01, MIGA has been working in conjunction with the World Bank's
Competitiveness Learning and Innovation Credit to improve the ability of the country to attract
foreign investment. Already completed components of this capacity-building program include:
organizing the national system for investment promotion; creating effective promotion strategies
for targeted sectors; and fostering cooperation between government ministries and agencies
involved in the investment promotion and installation process.

69.      For FY03, MIGA plans to assist the national investment promotion agency by: analyzing
key sectors and identifying companies in those sectors that are potential investors; helping the
agency to effectively target those companies through structured investment promotion
campaigns; developing an investor facilitation function to assist in the installation of FDI; and,
the creation of an aftercare function to improve investor retention and reinvestment.


70.      Currently, Nicaragua is the largest host country for MIGA-guaranteed investments in
Central America, with $161.9 million in gross exposure for five guarantees in the country. These
guarantees relate to two projects, both in the power sector. One is a geothermal power plant
(Momotombo), which MIGA insured in FY00 and the other, signed in June 2002, is for a power
distribution project that covers all of Nicaragua except the Atlantic coastal areas. Currently,
MIGA is not in the process of underwriting any projects in Nicaragua that are likely to be signed
in FY03.
Nicaragua- Country Assistance Strategy                                                        28

71.       MIGA will continue to promote Nicaragua as a foreign investment destination, and
emphasize the value of guarantees to facilitate that investment.       However, the actual FDI
facilitated by and large will depend on continued progress in the areas of economic reform and
privatization.


Core Diagnostic Requirements for Moving Towards a PRSC Framework

72.      Two ex-ante analyses are expected to underpin the development of a PRSC program: (i) a
cross-cutting assessment of the country's social, structural, and key sectoral development
policies, which covers the policy reform and institutional development priorities for sustainable
growth and poverty reduction, and (i) an assessment of the country's public financial
accountability anrangements, which covers its public expenditure, procurement and financial
management systems. Both of these constitute core diagnostic sector work, drawing as needed
on poverty assessments, public expenditure reviews, country procurement and financial
accountability reviews, and other analyses.


73.      IDA is wel advanced in completing the core diagnostic sector work for Nicaragua, but
additional work is needed to move towards a PRSC framework. A detailed Poverty Assessment
(PA) (FY02), based on the 1998 LSMS supported the preparation of the PRSP, while the Public
Expenditure Review (PER) (FY02) presented recommendations for improving the poverty
focus of public spending, strengthening public expenditure management and establishing a HIPC
tracking mechanism. An update to the PA is underway to incorporate the results of the 2001
LSMS. A Country Financial Accountability Assessment (CFAA) (FY03) and a Country
Procurement Assessment Report (FY03) also are currently under preparation. Once these are
completed and their findings discussed with the Govenmment the resulting recommendations will
be integrated into a Country Economic Memorandum/Development Policy Review (FY04),
which will sunmmanze actions needed and the Govemment's program for moving towards a
PRSC framework. In the meantime, the initial PSAC will support already identified reforms that
aim to bring the Govenmment's program and policies in line with public expenditure and
fiduciary pre-requisites for the PRSC framework. This is the case of the Country Financial
Accountability Assessment (Box 3), for example, where initial mission recommendations have
already been incorporated as reforms to be supported under the PSAC.
Nicaragua- Country Assistance Strategy                                                                              29


Box 3: The CFAA: An Example of Ongoing Fiduciary Work to Ensure a Successful PRSC
Framework
The interim guidelines for PRSCs require an ex-ante fiduciary assessment of the country's financial management
systems, including the adequacy and transparency of systems for monitoring, reporting on, and auditing public
financial flows. The main field work for the Nicaragua Country Financial Accountability Assessment (CFAA),
conducted jointly with the IDB, was carried out in November 2002. The CFAA is scheduled to be completed and
discussed with the Government by February 2003.

In moving towards a PRSC approach, IDA would seek assurances that the Government is prepared to address
significant weaknesses identified in the CFAA. At this stage, it is envisaged that broad actions would include, that:

*   A strong and realistic public financial management improvement program, built around an agreed CFAA action
    plan, is under implementation under the coordination of an inter-institutional working group and that financing
    sources for the action plan are identified;
*   Significant progress is made towards consolidating and updating current laws and regulations in a draft Public
    Financial Management Law, with significant gaps filled by Executive Decrees;
*   The Government continues use of its integrated financial management system (SIGFA), enhanced through
    implementation of the treasury module and advanced design of the procurement, human resources and physical
    assets modules, as the core tool for public financial management processes and information;
*   The budget document to be presented to Congress includes all extra-budgetary public funds and the
    Government initiates a program to include specific outputs related to budgeted costs in sectoral development
    plans, to serve as a basis for ex-ante feasibility and ex-post execution evaluation;
*   Detailed cash flow schedules are prepared such that discretion in expense and payment prioritization at the
    central level is substantially reduced;
*   A plan for strengthening internal controls (with a focus on legality and efficiency of expenditures), and
    upgrading of human and technological resources for accounting and internal audit departments of executing
    agencies is prepared, and includes specifics of internal control for decentralized/deconcentrated budget
    execution;
*   The statement of budgetary execution is complemented with a cash balance reconciliation, and all budget
    transfers are subject to proper accountability reports on use of funds. Procedures for preparing Government
    financial statements, as part of a gradual plan for adopting international practice, are prepared. Public access to
    Government financial information and quality of information available to the public are enhanced;
*   The program for modernization of the Comptroller's General Office (CGR) is underway. The CGR endorses a
    realistic plan for, and is committed to, produce a compliance/financial audit report of Government accounts;
*   An inventory of Donor-financed programs (under execution and in preparation) per sector and institution is
    completed and possible duplications and inefficiencies are identified. External aid channeled through the
    Treasury accounts is incremented significantly, and all domestic Central Government revenues and
    expenditures   are   channeled through      the   Treasury   accounts.   Cash    flow   information    for public
    decentralized/deconcentrated/state-owned entities is available on a timely basis;
*   Capacity for public debt management in the Ministry of Finance is increased. Procedures for extension of loans
    to decentralized and state-owned entities, and for issuance of government guarantees are established;
*   The tax administration reform program -including upgrading of human resource capacity- continues under
    implementation. Customs and tax administration procedures are enhanced, documented and consolidated.

74.       The Country Procurement Assessment Report (CPAR), also currently in progress, is
being prepared in close coordination with the IDB.            Given the IDB's support to the
implementation of an ongoing procurement reform effort, close coordination between both donor
institutions is critical.   A September 2002 CPAR mission found that Nicaragua's overall
procurement framework is reasonably acceptable. Although there are some provisions that do
not follow acceptable international practices, they are not an impediment to procurement under
IDA-funded projects since IDA guidelines prevail over local legislation. A December 1999
Procurement Law has substantially improved the public procurement system, but there is still
room for improvement in efficiency and tansparency, and for making the law more compatible
with intemational practices. To address this, the Govemment has just started implementing an
ambitious procurement reform program with IDB and other donor assistance to strengthen the
Nicaragua- CountryAssistance Strategy                                                      30

legal, regulatory and    independent oversight aspects of public procurement The findings and
recommendations of        the CPAR, expected to be completed in mid-2003, will provide
recommendations for     actions needed to complement the Government's efforts under the IDB-
financed program, and   for reforms, if any, to be supported by subsequent PSACs or PRSCs.


Institutional Arrangements

75.     The move towards PRSCs will require an adequate institutional capacity on the part of
Government, as well as of the Bank and other donors. On the part of Government, fiduciary and
public expenditure planning capacities need to be sufficiently well developed to persuade the
Bank and other donors to move toward programmatic support, or at least to channel all project
aid through a common treasury accounting framework (Caja Unica). On the Bank's side, the
new assistance framework will lead to several important institutional adjustments:

    *Enhanced Task Coordination. The tasks of preparing and monitoring the PSACs under
      this new framework will require greater coordination between the PSAC team (and later
      the PRSC team) with teams supporting other IDA operations in the country portfolio and
      this approach will undoubtedly require a stronger country team environment.
   * Enhanced PSAC Supervision Budget. Because of their cross-sectoral nature, the PSACs
     and then PRSCs, especially, will require a correspondingly larger supervision budget than
      straight investment projects. Additional resources beyond that may be needed since
     activities supported under PSACs and especially PRSCs will not be coordinated by
     individual project coordinating units which are generally set up for conventional
     investment- projects. lmproved financial management on the part of government should
     help in the task of tracking the use of resources, but the tasks of quality control and
     monitoring of project outcomes will entail a stronger internal effort.
   * Enhanced AAA Services. As support for investments is channeled increasingly through
     vehicles other than straight investment operations and the number of different project
     teams and coordinating units is reduced, IDA's analytic and advisory services need to
     expand as the main vehicle for channeling expertise toward different sectors. This trend
     is consistent with the Bank's evolution towards being a 'knowledge institution'.)
     Particular attention will needed in the form of workshops and training activities to help
     government institutions learn to operate under the new CAS framework, and WBI can
     assume an increasing role in this transforrnation.
   * Enhanced Field Presence. Given the size of its program and cross-country experience,
     IDA is well positioned in Nicaragua to play a lead role in several sectors To exercise
     that lead effectively, however, IDA will need to strengthen its Country Office with
     experienced staff that can provide the necessary day-to-day, in-country coordination
     support. (Some donors have indicated that they would consider financing the incremental
     costs associated with an expanded Bank presence in certain sectors.)

The IDA Assistance

76.     The Resource Envelope. The overall IDA resource envelope for Nicaragua during this
CAS period (FY03-FY05) amounts to SDR90 million (or approximnately $120 million
equivalent). This amount represents a 40 percent reduction with respect to the 1998 CAS base
Nicaragua- Country Assistance Strategy                                                                       31

case of $205 million.1 6 However, this decline in Nicaragua's IDA allocation should not result in
a decline in net disbursements to Nicaragua over the new CAS period.              In fact, gross
disbursements from IDA are projected to increase from an average level of $67 million in 2001-
02 to an average of $90 million over 2003-05, since under the new CAS frarnework a larger
proportion of aid is front-loaded on account of the PSAC/PSAC credits.


77.     The reduced IDA allocation over this CAS period is due mainly to Nicaragua's previous
poor performance on governance. To a lesser extent the young age of the portfolio also affected
the allocation.  Unfortunately, the perceived lack of progress on governance mainly reflects the
previous administration's shortcomings, since the new Government is placing improved
governance at the top of its policy agenda and already has taken some bold steps in this area. It
is expected that with the Governnent's strong focus on governance IDA allocations to
Nicaragua should increase in future years.


IDA Alternative Lending Scenarios

78.     Base Case program.           The IDA base case program is developed around a series of
adjustment credits, beginning with a one-tranche Programmatic Structural Adjustmnent Credit
(PSAC) and continuing with a one- or two-tranche Poverty Reduction Support Credit (PRSC-I),
that would provide financial support for implementation of the policy and institutional reforms
needed to support implementation of Nicaragua's PRSP, together with an IMF PRGF
arrangement. The proposed PSAC and PRSC-I would support the implementation of the PRSP
under extremely fiscally-constrained conditions that threaten to undermine the Government's
capacity to meet its poverty spending targets, and, at the same time, support reforns aimed at
establishing conditions needed for moving towards a PRSC framework. The PSAC and PRSC-I
are envisaged as separate credits conditioned on measures identified in the PRSP over the course
of this Government administration and highlighted in the HIPC Completion Point matrix. 17
Assuming that the institutional and fiduciary framework needed to move towards a
programmatic approach are in place by fiscal year 2004, IDA would begin to provide an
increasing share of its financial support through PRSCs and reduce the amount of investment
finance provided under individual investment projects. In the event that the setting up of this
framework is delayed, a base case follow-up PSAC-II could be considered, but smaller in size
than the envisioned PRSC-I. (The CAS program matrix in Annex B1 lists the main areas to be
supported with IDA assistance.)




 It also represents an even greater decline with respect to the actual lending since IDA allocations for FY99-01
16
 were increased through a supplemental allocation in response to hurricane Mitch.
7 Seven floating completion point conditions are listed in the Nicaragua HIPC Decision Point Document
    (IDA/R2000-237 dated December 7, D100, Box 6). They refer to the preparation and implementation of a
    PRSP, implementation of a tracking mechanism for HIPC funds, maintenance of a stable macroeconomic
    framework supported by a PRGF arrangement, implementation of reforms to promote human capital
    development and social protection, implementation of governance strengthening measures, introduction of a
    satisfactory reformed pension system, and divestment of the public telecom (ENITEL) and energy generating
    units (ENEL).
Nicaragua- Country Assistance Strategy                                                                             32

79.     Since the Government's tenure extends beyond this CAS period,' 8 only two of the three
adjustment credits are contemplated in the base case program, while the third credit is envisaged
to fall into the next CAS period. The PSAC is proposed to be relatively small ($15 million),
while the first PRSC would be for a larger amount ($35 million), for a total of $50 million over
the 3-year IDA period.

80.      The PSAC and PRSCs are designed to support the implementation of the PRSP in three
key areas: (i) improving the business climate to promote faster, private sector-driven growth,
particularly agriculture and forestry (Pillar I of the PRSP), (ii) social sector reforms to improve
the development impact of social programs and developing a social protection mechanism
(Pillars II & E), and (iii) improving governance and strengthening institutions (Pillar IV). In
this context, and responding to the new Administration's particular focus on the first (economic
growth) and fourth (governance and institutional strengthening) pillars, it is envisioned that the
first PSAC will place particular emphasis on strengthening public sector institutions and
improving private investor confidence, moving in tandem with private sector support to be
provided by IFC, FIAS and MIGA. Four technical assistance-intensive investment projects are
contemplated in the base case program to help implement the activities focused on in the PSAC
and PRSCs, including: 19

     * a Second Competitiveness Enhancement Project (FY04, $8 million) that will provide
       technical assistance to support the measures under the first pillar of the PRSP;
     * two social sector projects (Third Basic Education Project (FY04, $15 million) and the
       Health and Nutrition Project (FY05, $11 million)) that will help miplement measures
       contemplated under the second and third pillars of the PRSP; and
     * a Second Economic Management TA Project (FY04, $17.5 million) that will provide
       technical assistance to support implementation of the fourth pillar of the PRSP, including
       possible support for the judicial and electoral reforms contemplated by the Government
       (if it requires additional assistance in these areas), in addition to the financial and
       institutional strengthening activities initiated under the first project

These four technical assistance-intensive investment operations, together with the PSAC and
PRSC-I, constitute the core of the FY03-05 CAS Program (Table 5). Although they contain a
high component of technical assistance, these four projects are also expected to finance some
investments.




18 The government's tenure ends in January 2007, while this CAS period extends until June 2005.
19 The most important feature of each of these projects is that it will serve as a vehicle for providing comprehensive
    technical assistance in the area covered by its respective PRSP pillar. The titles have been drawn from the
    ongoing projects which appear to be best positioned for providing such comprehensive TA support through
    follow-up projects. A further project that may be considered in this context is the second phase of the
    Agricultural Technology and Technical Education APL project, which has been serving as a focal point for
    various rural sector initiatives co-financed by several donors. The ongoing Agricultural Technology project was
    approved as an APL project with the understanding that the next phase would receive financing if
    implementation proceeded satisfactorily. It is assumed here that this next phase would be financed under the
    next CAS period, either through a follow-up second Agricultural Technology credit or indirectly through a
    PRSC.
Nicaragua- CountryAssistance Strategy                                                                                33

                            Table 5: The IDA Base Case Program (FY03-05)


            PSAC/PRSC                                   PSAC/PRSC Support Projects
                                         Ptinar 1                       Pillars 2 & 3         |         Pillar 4
                                                  Lending Program
    FY03       PSAC I        - Rural Microfinance ($7m)
                 ($15m)      - Rural Electrific. ($12m)
    FY04       PRSC I        - Competitiveness II ($8m)       - Basic Education III          -Econ. Mgmt TA
                 ($35m)                                       ($1lIm)                        ($17.5m)



(
    FY05                                                       Health & Nutrition
                                                               (15m)
    High       PRSC II       - Ag. Tech. APL 11 ($7m)
    Case        ($25m)       - Rural Telecom Dev ($7m)

                                               Non-Lending Services
    FY02    - PER
            - Joint Staff Assessment of the PRSP
                                - Comp. and Broad-based        - Informal Safety Nets
                                 Growth in Agric. ESW          - Ex-Post Eval. Of Emerg.
                              - Improved Cook.                 Social Investment Fund
                             (ESMAP)                           - Review of Selected
                              - Nicaragua PCF Umbrella         Poverty Pgms. Nic. PRSP
    FY03    - Poverty Assessment Update
            - Joint Staff Assessment of the PRSP Progress Report
                               - Land Sector ESW               - Education Sctr Policy        - CFAA
                               - Atlantic Bio Corr 11             Note                        - CPAR
                             (GEF)                             - Youth at Risk Study
                               - Off-Grid Rural Elec
                             (GEF)
                              - Renew. Energy (ESMAP)
    Regional Studies          - CA Trade Study                 - Soc. Impact Coffee Crisis
                              - Drivers of Rural Growth
    FY04   - CEM              -FSAP
           - PSIA
                              - Inv. Climate   Assessment                                     - Audit FirnCapac. Ass.
                              - Rural Sector   Competitiv.
    FY05
                              - Infrastructure   Assessment                                  - Improving Govemance



81.    Finally, the base case program also includes two small, innovative investment projects
with a strong rural, poverty-reducing focus. These are the Off-Grid Rural Electrification
Project (FY03, $12 million) and the Rural Micro-finance Development Project (FY03, $7
million), and represent about 15 percent of the base case lending program of $120 million. The
Govemment considers both of these projects to be high priority, and preparation activities are
fairly advanced. These projects support the first pillar of the PRSP and maintain the strong rural
development focus exhibited by the ongoing IDA portfolio. (The projects being considered here
in addition to the PSAC and PRSC are not exclusively TA projects, but will also be expected to
involve some investment components, given that they are being implemented during a period of
transition toward a PRSC-centered program.)
Nicaragua- Country Assistance Strategy                                                         34

82.      High Case Program. The high case program would provide an additional allocation of
$40 million compared to the base case. The most significant change is that PRSC II (FY06, $25
million) would be advanced to FY05. For this to happen, the measures spelled out in the PRSP
and supported by the preceding PSAC and PRSC must be implemented rapidly and the IDA
portfolio needs to be perforning smoothly, reflecting adequate institutional capacity to execute
projects.   Under these conditions, execution of the ongoing Agricultural Technology and
Technical Education & Training Project (Loan 3371-NI), an APL, will likely be well
advanced and a second phase of the Agricultural Technology APL Project (FY05, $7 million)
would be proposed. This project would complement the assistance to the PRSP's first pillar
being proposed under the Second Competitiveness Project by emphasizing improved agricultunal
sector competitiveness. Also, complementing the two other new rural programs identified in the
base case program, a Rural Telecommunications Development Project (FY05, $7 million)
would be included in the high case reflecting the Government's capacity to implement new,
innovative projects.


83.     Low Case Program. The low case would be a response to the Government's inability to
maintain adequate macroeconomic control, to make progress in the implementation of the PRSP,
or to its encountenng portfolio performance problems that prevent it from absorbing the
resources available under the base case IDA allocation. By the time this scenario materializes, it
is likely that the first PSAC would already have been approved (and disbursed), as well as the
two innovative rural projects contemplated in the base case. Under this scenario, IDA would not
provide further fast disbursing assistance. (This scenario is distinct from the base case program,
where some delays in program implementation have been factored in, with the result that only
two fast disbursing operations become effective within the 3-year CAS period.) Similarly, FY04
and FY05 projects seeking to support the first PRSP pillar would lose their rationale because the
intended growth-promoting impact would be affected adversely by macroeconomic instability.
Consequently, the FY04-05 low case would include only the two social sector projects
supporting the PRSP's third pillar, Third Basic Education Project (FY04, $15 million) and the
Health and Nutrition Project (FY05, $11 million), the Second Economic Management TA
Project (FY04, $17.5 million) that will provide technical assistance to support the measures
under the first pillar of the PRSP, and the Off-Grid Rural Electrification Project (FY03, $12
million) and the Rural Micro-finance Development Project (FY03, $7 million) that will already
have been approved.
Nicaragua- Country Assistance Strategy                                                                                           35




                         Table 6: IDA Assistance Scenarios for Nicaragua (FY03-05)
                                Low Case                                Base Case                            High Case
Triggers
   Fiscal   Unsatisfactory macroeconomic framework, Evolution of public sector deficit as share o same as base case
PerformancE with public sector defick (after grants) GDP broadly in line with the Govemment's
            remaining above 8 percent of GDP in 2003 macroeconomic program (9.2% in 2002,
                                                     6.3% in 2003 and 5.3% in 2004) that is
                                                     being supported by the PRGF


             Share of central govemment budget devoted Share of public expenditures in CG budget same as base case
             to PRSP programs declines to 40% or lower devoted to poverty programs consistent
                                                       with PRSP targets (43% in 2002,47% in
                                                       2003, 50% in 2004)


 Reform      Inability to implement economic and social   Satisfactory progress in implementation of Significant progress in at least
 Program     reform program contemplated in the PRSP      economic and social reforms contemplated one of the following areas
             and supported by PRSC-I                      inPRSP and supported by PRSC-1             requiring legislative approval:
                                                                                                     (1) completion of the ENEL and
                                                                                                     ENITEL privatization programs;
                                                                                                     and (2) strengthening of
                                                                                                     property rights through
                                                                                                     approval of "Land Registry
                                                                                                     Law" and "Indigenous Lands
                                                                                                     Demarcation Law".

                                                          HIPC Tracking Mechanism operating          Same as base case
                                                          adequately

                                                                                                     Significant progress in at least
Governance                                                                                           two of the following areas: (1)
                                                                                                     passage of the "Civil Service
                                                                                                     Reform Law"; (2) improved
                                                                                                     public financial management
                                                                                                     through approval of 'Public
                                                                                                     Financial Management Law";
                                                                                                     and (3) improved budgetary
                                                                                                     process through approval of
                                                                                                     "Budget Framework Law".

  Portfolio 3 or more IDA projects rated unsatisfactory At most 2 projects rated unsatisfactory      At most one project rated
Perfornancc                                                                                          unsatisfactory

             Difference between expected and actual       Total portfolio disbursements broadly in line Difference between expected
             portfolio disbursements increases above      with projections at appraisal                 and actual portfolio
             15% of undisbursed balance                                                                 disbursements remains
              _____________________________________        ____________________________________         consistently negative
Lending Program
  Lending    No follow-up fast-disbursing operations after Lending program contemplates two fast- Same as base case, plus one
  Strategy   PSAC; only core investment lending in         disbursing operations (PSAC, PRSC-1) and additional fast-disbursing
             social and rural sectors                      6 investmentfTA operations               operation (PRSC-II) and two
                                                                                                    additional investment
                                                                                                    operations currently
                                                                                                    contemplated for next CAS
                                                                                                    period.

 Lending                         $80 million                             $120 million                          $160 million
 amounts


84.    Key Lending Triggers. Triggers to move into the high or low case are presented in
Table 6, and are centered on the Government's ability to maintain macroeconomic stability,
implement key measures contemplated in the PRSP, improve governance and maintain
Nicaragua- CountryAssistance Strategy                                                                           36

satisfactory portfolio implementation. The main trigger for moving to a low case scenario would
be a deteriorated macroeconomic framework as demonstrated by the new PRGF program going
off track.      Another important trigger is related to the overall public spending on priority
programs identified in the PRSP, as reflected in the annual budget presentation and execution
figures. A failure to maintain such spending stable as a share of GDP would undermine the
rationale of the CAS. A third important trigger is the failure to implement a transparent tracking
mechanism for HIPC funds and, more generally, a lack of progress in the implementation of
institutional reforms required to support a program lending approach. The absence of progress
on this front would trigger a hold on further PSACs/PRSCs, but would leave open the possibility
of reverting to a more conventional, project-based aid so long as the performance of other IDA
projects remains satisfactory. Accordingly, a fourth trigger is the perceptible decline in the IDA
portfolio performance indicators. A high case scenario would be triggered by an unexpectedly
rapid progress in the implementation of the PRSP, both in terms of overall spending on programs
in the PRSP portfolio, as well as of the passage of important refonns. Particularly noteworthy in
this regard would be the approval and implementation of the Civil Service Reform law, the
approval of the indigenous lands demarcation law , and the completion of the power and telecom
privatization programs. These measures had encountered significant political resistance in the
past. Their passage would signal the existence of a national political consensus around the
government program, and that the Assembly is fully on board and prepared to move forward at
an accelerated pace. The additional IDA support provided in the high case program would be
warranted under those circumstances.


Bank Analytical and Advisory Services.

85.     In tandem with the objective of moving towards a programmatic approach, analytical and
advisory services will become an ever more important component of IDA's assistance. Recently
IDA has completed a Public Expenditure Review (FY02), which includes a fiscal sustainability
analysis and aims to support the PRSP process and its implementation. Other ESW includes:
Nicaragua: Promoting Competitiveness and Stimulating Broad-based Growth in
Agriculture (FY02), a Review of Selected Poverty Programs in Nicaragua's PRSP Portfolio
(FY02), a Joint IDA-IMF Staff Assessment (FY02) of the Poverty Reduction Strategy Paper
(PRSP) prepared by the Government in July 2001 and a second Joint IDA-IMF Staff
Assessment (FY03) of the PRSP Progress Report prepared in November 2002, a second Poverty
Assessment: Challenges and Opportunities for Poverty Reduction (FY01), 20 an Ex-Post
Evaluation of the Emergency Social Investment Fund (FY01) and a report on the Nicaragua
Pension Reform Proposal (FY00), which provides the background for the recent pension
reforms adopted by the Government. Nicaragua has been carrying out LSMS since 1993, and
these have provided the basis for high quality poverty analyses that have supported the design
and implementation of the PRSP.


86.     As previously mentioned, a large share of IDA's ongoing and future ESW program
relates to core diagnostic products needed to provide the underpinnings for moving towards
lending though PRSCs: a Country Financial Accountability Assessment (FY03), a Country

20 This assessment was based on the second Living StandardsMeasurement Survey (LSMS) carried out in 1998, and
    also includes the results of the Qualitative Poverty and Exclusion Study, which included consultations with 22
    poor communities in three regions of the country. A follow-up report is being prepared in 2002 with figures
    from the 2001 LSMS.
Nicaragua- CountryAssistance Strategy                                                            37

Procurement Assessment (FY03), a Country Economic Memorandum/Development Policy
Review (FY04), and a Poverty and Social Impact Analysis (FY04). Other ESW and advisory
services tasks currently planned include the following:


    * A review of Rural Sector Competitiveness and Land Sector (FY03) will identify thi
         main obstacles to growth in the rural business environment and in the consolidation of
         land tenure rights.
    *    A study on Improving Governance (FY05) will update the knowledge base on
         governance in light of the Government's recent strong measures and identify, from a
         poverty reduction perspective, which types of corruption have the greatest impact on the
         poor and, thus, deserve priority attention.
    *    An Infrastructure Assessment (FY05) will assess existing infrastructure deficits in a
         comprehensive manner to help identify the areas with the biggest gaps for purposes of
         prioritizing investments.
    *    An Investment Climate Assessment (FY04), will provide a diagnostic of the business
         climate in Nicaragua, assess competitiveness and analyze the competition policy
         framework. It is expected that, with support from other Bank units, this assessment will
         include special attention to the environment for rural investments.
    *    The ongoing regional Social Impact of the Coffee Crisis (FY03) is synthesizing existing
         work on the nature and extent of the coffee crisis in Central America and its impact on
         the poor, with a view to developing quick surveys to complete the diagnostic for
         designing a social protection mechanism that would be consistent with country level
         growth promotion
    *    An Education Sector Policy Note (FY03) will address the coordination of the PSAC
         /PRSC with ongoing and proposed IDA projects in the education sector and the
         Education for All Initiative.
    *   Ongoing Energy Sector Assistance (FY02) supported by ESMAP includes an ongoing
        program for Pilot Commercialization of Improved Cooking Stoves to reduce household
        demand for wood fuels and lower pressures on peri-urban woodlands, and the recently
        initiated preparation of a Policy and Strategy for the Promotion of Renewable Energy
        Resources to overcome policy and market barriers to the introduction of clean energy
         sources.
    *   A joint IMF-IDA Financial Sector Assessment Paper (FY04) will analyze financial
        sector vulnerabilities and provide recommendations for improvement of the legal and
        regulatory framework applicable to all financial institutions, including the anti-money
        laundering and combating the finacing of terrorism (AMIJCFT) regime. As a follow-
        up, IDA would support Nicaragua's initiatives towards strengthening its existing
        AML/CFT regime and bringing it in compliance with the international standards by
        providing the necessary technical assistance and training, or directing technical assistance
        requests to other donors.
   *    Since it relies exclusively on private audit finms in Nicaragua, IDA is planning an Audit
        Firm Capacity Assessment (FY04) to review institutional capacity, audit capacity, and
        engagement terms on the basis of International Standards of Auditing.

87.       Within IDA's program of non-lending services, WBI has assumed an increasing role in
knowledge dissemination and the provision of advisory services. Based on the previous CAS
priorities, WBI learning/training events in Nicaragua have included programs on Attacking
 Nicaragua- CountryAssistance Strategy                                                                    38

 Poverty, Decentralization, Urban and Local Government and Social Protection.             Nicaraguan
 civil servants and private sector individuals have also participated in a number of other programs
 run at the regional level. The new Global Development Learning Network (GDLN) center-
 established and operating in the Bank's Managua Country Office will continue to assist in
 disseminating further many of WBI's learning programs.             In line with its new objective of
 integrating knowledge more closely with WBG operations, over the CAS period, WBI will help
 assess in more depth the institutional capacity building needs of the country and run or help run
 learning programs in the areas of rural development and productivity growth, rural poverty
 alleviation and human capital development.

                                Table 7: Status of Core Diagnostic Work
           Core Diagnostic Report                      Last Completed               Next Scheduled
Country Economic Memorandum                                   1994                         FY04
 Public Expenditure Review                             December 7, 2001
Poverty Assessment                                     February 21, 2001              FY03 (Update)
Country Financial Accountability Assessment                                          FY03 (underway)
Country Procurement Assessment Report                                                FY03 (underway)


Coordination with other Donors

88.     hi view of Nicaragua's aid dependent status, donor activities are very visible and play an
important role. Although strong donor coordination has facilitated the exchange of information
among donors, more needs to be done to improve coordination of the donor funded activities
themselves. The Govenmment has taken an important step in June 2002 by proposing a new
mechanism for future donor-government relations, characterized by greater government
involvement in aid coordination, better identification and articulation of the type of aid
demanded (as opposed to letting aid be supply-driven), and improvements in public financial
accounting and oversight mechanisms to facilitate the eventual adoption of sector wide
approaches by donors. 2'

 89.     Even though Nicaragua has been one of the most aid-favored countries in the world, the
impact of this aid has been generally below expectations. To improve program impact, many
donors and the government are increasingly arguing in favor of a sector wide approach that relies
on an understanding between donors and the Govemment with general agreements in three areas:
(i) on the entire public expenditure program at the sector level, (ii) to finance the sector program
through budget support, and phase out isolated project financing, and (iii) on the division of
labor among donors, including agreement by some donors to take the lead in coordinating the
sector dialogue in some areas and to participate as co-financiers in others. While the country
would find this approach advantageous in terns of increased flexibility to allocate resources in a
consistent manner (thereby overcoming the main drawback of inadequate donor coordination),
and donors would be able to economize on administrative resources without sacrificing
development impact, it will require some time to implement given the necessary preconditions
that must be in place for success. IDA's shift towards programmatic lending, supported by
critical analytical and fiduciary work, will help support donors' plans to begin to provide
assistance in the context of a sector-wide approach.



21   The thrust of the proposed new mechanism is consistent with the recommendations made in the Bank's 2001
      Nicaragua Public Expenditure Review.
Nicaragua- Country Assistance Strategy                                                             39


90.      CAS preparation has been coordinated closely with the Inter-American Development
Bank (I1DB), which also is preparing an assistance strategy aligned with Nicaragua's PRSP,
emphasizing poverty alleviation, institutional strengthening and human development The IDB
is the largest multilateral lender to Nicaragua, with annual disbursements that averaged $88
million in 1997-2001, and also plays an important role in organizing and chairing donors'
meetings through a Consultative Group process. The last CG meeting was held in May 2000 and
the next CG meeting is scheduled to be held in Managua in February 2003. In terms of 1997-
2001 lending volumes to Nicaragua, IDA provided slightly less, $85 million. The largest
bilateral lender is Taiwan, China, with annual disbursements averaging $26 million. The IDB
has taken the lead in the energy, housing, water and sanitation, social protection and higher
education sectors, while the World Bank has taken the lead in the telecommunications, basic
education, disaster and risk management, agricultural technology, municipal development and
land management sectors. IDA and IDB coordinate closely through either formal cofinancing of
specific operations or informal arrangements (with informal agreements, for example, to
coordinate assistance on either a sectoral, subsectoral or regional basis) in the areas of pension
reform, financial development, health sector modernization, FISE, transport, institutional
development and environment. (Annex C lists the areas of IDB and IDA activity with reference
to Nicaragua's PRSP.)


91.      The IDB's lending program has projected comniitnments averaging $105 million per year
over the next 4 years, which includes a high proportion of fast-disbursing assistance in the areas
of (i) competitiveness enhancement and tax reform, accompanied by project lending to the
private sector through financial intermediaries, and (ii) social sector adjustment.              New
investment projects contemplated in the IDB program include support for the education sector
(including technical education), the social protection net, productive activities in the rural sector,
housing, urban poverty reduction, general pre-investment activities, environmental clean-up of
the Masaya lake basin, improved citizens' security, development of the Atlantic Coast, and
improving ethics among civil servants.           The IDB is providing assistance in the area of
governance and institutional strengthening, in particular for procurement reform and for
strengthening the Office of the Controller General.


92.      Of the bilateral donors, Japan and the United States provide the largest volume of grants,
with annual disbursements averaging close to $50 million each during 1997-2001, followed by
Sweden and Denmark ($21 million). Germany, the Netherlands, Spain, Norway, Switzerland,
Finland and Taiwan, China, have aid programs exceeding $5 million in annual disbursements.
Aid granted by the UN Agencies as a whole has averaged $30 million per annum, while the
European Union's assistance has averaged $27 nillion. The European Union, which is also in
the process of preparing a new assistance strategy, is contemplating a program with annual
commitments averaging Euros 50 million over the next five years. About one-half of this total
assistance is expected to support rural development and agricultural policy, while another 20
percent aims to support the education sector. The Netherlands is currently co-financing two
IDA-supported projects (Agricultural Technology and Technical Education & Training APL and
Economic Management TA), Norway and the Nordic Development Fund are co-financing the
ongoing IDA-financed Health Sector Modernization project, and Switzerland and IFAD also are
co-financing the Agricultural Technology and Technical Education & Training APL Project
 Nicaragua- Country Assistance Strategy                                                                                                   40

 Program Monitoring

 93.      The achievement of CAS objectives will be monitored according to three sets of criteria:
 program implementation indicators, sector outcome indicators and portfolio performance
 indicators. These performance benchmarks to be used in each case are outlined in Table 7. All
 of these benchmarks have been derived from the Nicaragua PRSP, and several of them vil also
 be picked up in the PSAC/PRSCs, which support PRSP implementation. The performance
 indicators pertaining to the social sectors and incidence of poverty are consistent with the
 Millennium Development Goals (MDGs), and most of these indicators are reflected in the HIPC
 Completion point conditions.

                                      Table 8: CAS Performance Targets and Indicators
                          Area                                                         Indicator,2                            PRSP
                                                                             ____ _____________ __ __
                                                                                __ _ _ _            ___                     Targets
 Program Implementation Indicators
      Macroeconomic Program                                    Maintenance of an adequate macroeconomic                   same
                                                               framework
      Poverty Spending                                         Increased GDP-share of poverty-reduction spending
                                                           _   to 50% of total public expenditurcs by 2005                same
      Institutional Strengthening                              Adequately operating HIPC Tracking Mechanism by            no target
                                                               end-2003
      Education                                                Increased percent of all primary schools receiving         no target
                                                               direct financial transfers under autonomy program
                                                               from 50% in 2002 to 70% in 2005.
      Health                                                   Consolidated PHC models used across all SILAIS;            same
      Social Protection                                        Adoption of fiscally sustainable social protection         same
                                                               strategy
      Private Sector Development                               Completion of pension reform program                       same
 Sector Outcome Indicators_
      Reducing poverty level                                   Reduction in national extreme poverty rate from 15.1       15.3% in 2005
                                                           _   % in   2001 to 14% in   2005
      Improving the business climate                           Substantial reduction in red tape for starting new         no target
                                                               businesses and concluding export transactions (with
                                                               baseline to be developed under a proposed
                                                               Administrative Barriers Assessment)
      Improving accountability/transparency                    Substantial increase in donor funding channeled            no target
                                                               through single treasury account (with baseline to be
                                                               determined by CFAA)
      Improving Education                                      Increase in primary school completion rate from 41%        same
                                                               in 2002 to 44% in 2005;
                                                               Increase in primary net enrollment rate from 81% in        83.4% in 2005
                                                               2002 to 85% in 2005
      Improving Health                                         Reduced incidence of diarrhea among children under
                                                               5 from 25% in 2001 to 18% in 2004;                         16% in 2004
                                                               Reduced incidence of acute respiratory infections in
_________________________________                              children under 5 from 24% in 2001 to 21% in 2004           same
 Portfolio PerformanceIndicator                                At most two projects in portfolio are rated                no target
                             .___
                               __   __ _ __
                                     __   __   ___ __ _   __
                                                           _   unsatisfactory                                         I
                                                               Total portfolio disbursements remain broadly in line       no target
                                                               with projections at appraisal



 22In some cases CAS Performance Indicators may be different than PRSP targets. This is because the CAS
Performance Indicators reflect an updated expectation of outcomes based on experience with PRSP implementation
to date.
Nicaragua- Country Assistance Strategy                                                           41

CAS Risks


94.      The proposed CAS faces political, institutional and economic risks. Political risks relate
to the rift that emerged within the Liberal party between President Bolafios' supporters and
members of the former Administration. Although there is hope that the party may again be ieady
to work together, a persisting rift could interfere with the passage of key legislation needed for
implementation of the PRSP agenda and would make it difficult to sustain the political support
needed to complete a fiscal adjustment of the magnitude contemplated in the government
program. IDA has been working with key members of the National Assembly, facilitating
relevant information and seeking to avoid misunderstandings about the reforns that will be
supported by IDA. A local civil society specialist in the Bank's Country Office is working
closely with civil society to maintain an open dialogue on IDA assistance.    Institutional risks to
program implementation are posed by weaknesses in the judicial system and the Controller
General's Office, especially, and also in specific implementing agencies. The absence of sound
and effective institutions in either of these areas could undermine private sector confidence and
limit the impact of efforts to reduce poverty through faster growth. Conscious of this risk, the
Government has put governance and the fight against corruption at the top of its agenda, and has
taken important actions in these areas. The Government either already has in place or, is
expected to rely on donor financial and technical assistance-including from IDA--for
strengthening both the judicial system and the Controller General's Office. Finally, to mitigate
the risk of weak institutional capacity for PRSP implementation, IDA's CAS contemplates a
particularly strong component of institution-building technical assistance either in specific
investment operations or through stand-alone technical assistance projects in all lending
scenarios.


 95.     Finally, there are potential economic risks to program implementation, both external and
internal    Externally, Nicaragua remains vulnerable to natural disasters (el Nino, hurricanes,
earthquakes) and to terms of trade shocks further coffee price declines, oil price increases),
either of which could produce important setbacks in the Government's macroeconomic program.
On the intemal side, fiagjlity of the financial system makes Nicaragua vulnerable to financial
crises triggered by extemal shocks or corporate govemance deficiencies. Also, the related risk of
rapidly expanding domestic debt could undermine fiscal adjustment. The weak status of land
tenure security represents the other important source of domestic debt expansion, while
constituting a source of political risk in its own right. To the extent possible, the Government
has been working to reduce some of these risks posed by external shocks. An ongoing IDA-
financed Disaster Mitigation Project (Loan 3487-NI) is assisting the Government in the
design of disaster preparedness and damage mitigation programs, while on the commodity
side, the Government is designing commodity price management and rainfall insurance systems
to handle better commodity price shocks. To mitigate risks from the financial system, the
Govemment is implementing measures, with IDA assistance under the ongoing Pension and
Financial Sector Reform Project (Credit No. 3344-NI), to strengthen prudential norms and
Banking Superintendency. These are expected to reduce the risk of financial crises and, thereby,
the prospects of further domestic debt accumulation. Weak land title security is also being
addressed with IDA assistance in the context of the recently approved Land Administration
Project (Credit No. 3665-NI). Specific measures being supported will require setting limits on
the compensation offered to former property owners for past expropriations.
Nicaragua- Country Assistance Strategy                                                       42



96.     Finally, the move towards a programmatic assistance approach is not without risk, but
IDA is carrying out carefully the requisite fiduciary work and the move towards a PRSC
framework will only be implemented after there are adequate assurances that Nicaragua's public
expenditure program focuses correctly on the appropriate mix of investments and expenditures to
address PRSP priorities, and that the Government has put in place adequate financial
management and other control policies to ensure that resources are utilized effectively,
efficiently and transparently.




                                         James D. Wolfensohn
                                               President




By:

Shengman Zhang                                                           Peter L. Woicke




Washington, DC
December 18, 2002
                                                              Nicaragua                                                                  Annex Al
                               Key Economic & Program Indicators - Change from Last CAS


                                         Forecast in Last CAS                   Actual                      Current CAS Forecast

Economy (CY                      1999     2000        2001      2002    1999             2000    20018   2002      2003        2004      2005
Growth rates (%)
   GDP                            5.3     5.7         6.0        6.2     7.4              5.5    3.1      1.0       3.0            4.5   5.0
   Gross domestic income          5.5     4.6         6.2        6.4     3.0              2.7    -0.5     3.1       2.4            4.0   4.5
Inflation, average (%)            7.3     5.8         5.2        4.8    11.2             11.6     7.4    4.4        6.0            4.8   4.0
GDP deflator (%)                  7.5     5.8         5.2        4.8    11.2             11.9     7.4    4.4        6.0            4.8   4.0
National accounts (%GDP)
   Gross domestic investment     27.8     27.8        27.8      28.0    43.3             34.9    30.4    27.3       27.8       29.1      30.6
       Government                12.7     12.0        11.6      11.4    21.1             19.0    16.2    12.2       12.2       12.9      13.0
Balance of payments (%GDP)
    Resource balance             -22.4    -22.1       -21.1     -20.4   -54.2            -42.6   -39.5   -40.8     -40.5       -40.2     -37.3
   Current account balance       -19.3    -17.8       -16.0     -14.8   -47.9            -38.0   -37.7   -28.2     -24.0       -19.3     -18.3
Public finance (%GDP)
   NFPS fiscal balance            -3.8    -3.1        -2.7      -2.3    -14.1            -13.9   -19.0   -13.5     -10.0       -5.9      -4.2
   Foreign financing              8.1     8.3         8.1        5.8     19.5             13.8    12.7   13.8       10.3        6.7      6.3


Program (Bank's Flo              FY99     FY00        FY01      FY02    FY01             FY02    FY03    FY04      FY05        FY06      FY07
In millions of US$
Lending                          80.0     50.0        75.0      45.0    182.2            32.6    34.0    72.0       40.0       40.0      40.0
Gross disbursements                ..      ..           ..        ..    65.6             78.1    79.0    86.0       86.0       90.0      95.0

a. Estimated year.
                                                                                                                                                        Annex A2
                                                                                                                                                       Page 1 of 2


                                       Nicaragua at a glance                                                                                     11120/02

                                                                              Latin
POVERTY and SOCIAL                                                          America       Low-
                                                               Nicaragua    &Carib.    Income         Development diamond*
2001
Population, mid-year (millions)                                      5.1        517      2,460                      Life expectancy
GNI per capita (Atlas method, US$)"                                  420      3,560        430
GNI (Atlas method, US$ billions)                                      2.2     1,862      1,069
Average annual growth, 1995-01
Population (%)                                                       2.7        1.5        1.9
Labor force (96)                                                     3.8        2.2        2.3        GNI                                           Gross
                                                                                                      per                   '-primary
Most recent estimate (latest year available, 1995-01)                                                 capita                                        ienrlment
             of
Poverty (% population below national poverty line)                    48          .,         ,,m.mas
Urban population (% total population)
                      of                                              65         76         31
Life expectancy at birth (years)                                      68         70         59
Infant mortality (per 1,000 live births)                              40         29         76
Child malnutrition (56of children under 5)                            11          9          ..            Access to improved water source
Access to an improved water source (I%of population)                  84         85         76
Illiteracy (%ofpopulation age 15+)                                    19         11         37
Gross primary enrollment (9Aof school-age populatlion)               102        130         96                 -     l-icaragua
     Male                                                            100        131        103                       Low-income group
   Female                                                            103        128         88    1

KEY ECONOMIC RATIOS and LONG-TERM TRENDS
                                                    1981            1991       2000       2001
                                                                                                       Economic ratios*
GDP (US$ billions)                                   2.5              15         2.4        2.6
Gross domestic investment/GDP                       23.6            20.8        34.9       30.4
Exports of goods and services/GDP                   22 3            21.8        35.9       32.5                           Trade
Gross domestic savings/GDP                           4.2             -9.9      -11.1      -15.2
Gross national savingslGDP                          -3.1           -31.2        -6.4     -11.6
Current account balance/GDP                         -26.7          -57.2       -38.0      -38.1             .               /n\tmn
Interest payments/GDP                                 3.7           13.1         3.3        2.6       somestc                                Investment
Total debt/GDP                                       99.8          736.1      281.8      250.8
Total debt service/exports                           37.9          141.2       22.1        34.6
Present value of debt/GDP                                ..            ,.     228.2
Present value of debt/exports                             ..           .      399.7
                                                                                                                     Indebtedness
                                      1981-91    1991-01           2000        2001    2001-05
(average annual growth)
GDP                                      -2.5           4.1          5.5        3.0        3.9                        Nicaragua
GDP per capita                           -5.0           1.3          2.8        0.5        1.7                 -      Low-income group
Exports of goods and services            -3.3           8.9         13.9        6.8        7.0



STRUCTURE of the ECONOMY
                                                    1981            1991       2000       2001        Growth of Investment and GDP (%)
   of
(%6 GDP)
Agrculture                                          20.2            29.1       32.7       32.3        60
Industry                                            32.9            22.0       22.3       22.3        40
  Manufacturing                                     26.7            17.9       14.3       14.2        20
Services                                            46.9            48.9       44.9       45.4         o
 Private consumption                                73.9            89.4       92.5       95.1    -20          96    97         9a      99     00      01
General government consumption                      21.9            20 6       18.6       20.2
Imports of goods and services                       41.8            52.5       81.9       78.1                            GOI            O    GOP

                                                 1981-1          1991-01       2000       2001        Growth of exports and Imports (%)
(average annual growth)
Agriculture                                         -2.9             6.5       11.4        3.1    40
Industry                                            -2.9             4.7        3.1        3.2    30
  Manufacturing                                     -3.8             2.1        2.8        2.6    20
Services                                            -2.0             2.3        3.1        2.9     1           O
Private consumption                                 -1.1             5.1       -2.7        0.3    -10          9S   97          8       99             0s1
General government consumption                      -1.3             1.4        2.0        94     -20
Gross domestic investment                           -7.1            11.9       -9 7       -1.1                       Eoff               O    Imports
Imports of goods and services                       -2.0            11.0       -8 0        1.8                                                 P

Note: 2001 data are preliminary estimates.
 The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will
  be incomplete.
  Currently the official National Accounts are significantly underestimated.
                                                                                                                                                   Annex A2
                                                                                                                                              Page 2 of 2




                                                                                                                                   Nicaragua
PRICES and GOVERNMENT FINANCE
Domestic prices                           1981        1991        2000     2001        Inflation (%)
(% change)                                                                             15.
Consumer prices                           23.9      2,945.0        11.6      7.4   1    O
Implicit GDP deflator                     11.7      4,523.7        11.9      7.4
Government finance
   of
(% GDP, includes current grants)                                                        o
Current revenue                              ..              .     24.5     22.4                 96        97       98        99         00        01
Current budget balance                       ..          ..         2.3      4.7                          DP deflator              *PI
Overall surplus/deficit                      ..          ..       -14.2    -19.4

TRADE

(US$ millions)                           1981         1991        2000     2001         Export and import levels (USS mill.)
Total exports (fob)                       514          272         645      592        2,600
 Coffee                                   137           36         171      105
 Shrimp and Lobster                        20           13         112       76        1.500
  Manufactures                             79           61         232      252
Total imports (cifl                       828          751        1,800    1,789       100
  Food and energy
  Fuel
                                           166
                                           176
                                                       179
                                                       115
                                                                   418
                                                                   291
                                                                            474
                                                                            269
                                                                                                 i11
  Capital goods                            138         191         444      414              o
                                                                                                  9596          7    9        99         OD   01
Export price index (1995=100)               78          86          84       76
Import price index (1995=100)               61          91         117      115                           Exports
                                                                                                         Jl                  *Imports
Terms of trade (1995=100)                  129          94          71       66

BALANCE of PAYMENTS

(US$ millions)                            1981       1991          2000     2001       Current account balance to GDP (%)
Exports of goods and services              561        350           956      919
Imports of goods and services            1,044        843         1,991    1983        .10
Resource balance                           483        492        -1,035   -1,064
Net income                               -178         -375        -287     -311
Net current transfers                       0           15         400      402        -30
Current account balance                  -661         -852        -922     -972        -40
Financing items (net)                     714         868          893      801        -so
Changes in net reserves                   -53         -16           29      171        -60-
Memo:
Reserves including gold (US$ millions)    118          169         497      383
Conversion rate (DEC, locallUSS)                .      4.9         12.7     13.4

EXTERNAL DEBT and RESOURCE FLOWS
                                         1981        1991         2000     2001
(US$ millions)                                                                         Composition of 2001 debt (USS mill.)
Total debt outstanding and disbursed     2,471      10,959       6,851    6,385
  IBRO                                     118         124           5        0
  IDA                                       53         113         654      691                        G 831             B:61 43
Total debt service                        223         530          300      457
  IBRD                                     17         248            6        5               F 344
  IDA                                       0           6            6        7
Composition of net resource flows                                                                                                        D 1,490
  Official grants                           25        795          255      241
  Official credilors                      324          -7          147      147
  Private creditors                        -17         -3          141      141
  Foreign direct investment                  0          0          254      289
  Portfolio equity                           0          0            0        0                  E 297
World Bank proqram
 Commitments                                0         114           53      182        A-15RD                                   E-Bilateral
 Disbursements                             43           54          87       63        B-IDA          D-Other multilaleral      F -Pnvate
 Principal repayments                       7         114            7        6        C- IMF                                   G -Short-temi
 Net flows                                 36          -60          81       56                                                                         l
 Interest payments                         10         141            5        5
 Net transfers                             26        -201           76       51

Development Economics                                                                                                                     10/30/02
                                                        ANNEX BI: NICARAGUA CAS - Country Program Matrix (FY03-05)

 Development Objectives                            Diagnosis                     Strategy/Actions                   Progress Indicators                      Bank Group                      Others
                                                                                                                                                       Lending/       N LS
                                                                                                                                                     Investments
Overarching Objective: Cut                                                 Implement PRSP;increase share of Reduced extreme poverty rate to
extreme poverty rate in half by                                            PRSP programs in total public    13.7% by 2005, from 15.1% in
2015, relative to 1995 rate.                                               spending to 62% by 2005          2001.
PILLAR I: BROAD-BASED ECONOMIC GROWTH AND STRUCTURAL REFORM
Macroeconomic Stabilitl
Maintain stable macroeconomic High public expenditures in wake of Reduce fiscal deficit to sustainable          PRGF program on track               IDA ongoing:     PER, PRSP        IMF (PRGF),
environment                   hurricane Mitch and declines in tax level and implement actions to                                                    EMTAC            Progress report, IDB, bilateral
                              collection led to huge fiscal deficits restore growth                                                                                  PSIA support     donors
                              and reserve losses that leave the
                              economy very vulnerable;
                              slowdown in economic growth                                                       Restored annual GDP growth to       IDA planned:     Poverty Update
                              threatens to reverse gains in                                                     average 4.2% of GDP over 2000-       PRSC (03-05),   (03), CEM (04),
                              poverty reduction                                                                 05:                                 EMTAC 11  (04)


Nicaragua's huge extemal debt           Recent Bank interventions (2000-   Bring public debt to sustainable     Reached HIPC Completion point
represents a major obstacle to          01) financed by domestic debt      level
investment and growth                   undermine the HIPC process to
                                        reduce Nicaragua's public debt.


Structural Reforms
Continue transformation to market       Incomplete privatization process   Complete the telecom privatization   Sold remaining shares of ENITEL     IDA ongoing:
economy by completing the               creates investor uncertainty       program                              to private sector.                  Telecom
privatization program and social                                                                                                                    Reform TA,                         IDB
security reform process, improving                                         Complete power privatizatlon         Sold remaining public electricity   Power Proj.
the financial situation of public                                          program                              generating plants                    guarantee
utilities, strengthening the domestic                                                                                                                (MIGA)
financial system and capital
market, and modemizing business         ENACAL losses undermine fiscal     Improve performance of water utility Water/sewerage tariffs adjusted to IDA planned:                        IDB, KfW
legislation.                            control and service expansion                                           cover marginal costs               Rural Telecoms
                                                                                                                                                    (04); IFC:
                                                                                                                                                    Potential
                                                                                                                                                    infrastructure
                                                                                                                                                    proP.




                                                                                                                                                                                       Page 1 of 10
                                                    ANNEX BI: NICARAGUA CAS -- Country Program Matrix (FY03-05)

 Development Objectives                        Diagnosis                      Strategy/Actions                Progress Indicators                        Bank Group           Others
                                                                                                                                                    Lending/      NLS
                                                                                                                                                  Investments
                                   Banking failures in 2000-01        Implement program to strengthen     Completed full cycle of on-site       IDA ongoing:            IMF, IDB
                                   exposed weaknesses of              the financial system                inspections of commercial banks       Pensions &
                                   Nicaraguan financial system and in                                     with adequately trained SBIF-staff.   Financial TA.
                                   prudential supervision, leaving                                                                              IFC: Potential
                                   system vulnerable to crises.                                                                                 financial sector
                                   Intervened assets need to be sold                                                                            projects (incl.
                                   to reduce the domestic debt and                                                                              regional proj.)
                                   contribute to improved govemance.                                      Brought prudential norms into
                                                                                                          compliance with Basel core
                                                                                                          principles

                                                                                                          Completed sale of assets from                                 IMF, IDB,
                                                                                                          intervened banks at market prices                             USAID


                                   Social security reform needs to be Complete social security system     Awarded contracts to private          IDA ongoing:            IDB
                                   completed to avoid accumulating        reform program                  pension fund managers                 Pensions &
                                   fiscal losses (through the traditional                                                                       Financial TA,
                                   system which is broke) and to
                                   contribute to Nicaragua's capital                                      Introduced system of individual
                                   market development.                                                    funded accounts

                                                                                                          Completed pending reforms of the
                                                                                                          traditional pension system and
                                                                                                          completed restructuring of INSS


                                                                       Develop domestic capital markets   Introduced modem capital markets                              IDB
                                                                                                          law and insurance framework law


                                   Current commercial code dates       Modemize commercial code           Modemized the commercial code                                 UNDP, Spain
                                   from the 1930s

Develop a professional civil service Low productivity in provision of   Approve and implement the civil   Established independent rector     IDA ongoing:
                                     public services due to inadequate service reform law                 agency for mediating civil service Econ.Mgmt TA
                                     skill composition of public                                          disputes and completed training of
                                     employess. Lack of proper                                            HR units to manage new system.
                                     framework inhibits developmenl of
                                     professional, adquately paid civil                                                                         iDA planned:
                                     service                                                              A substantial proportion of central   Econ. Mgmt. II,
                                                                                                          govemment staff employed under        PRSC
                                                                                                          revised system




                                                                                                                                                                         Page 2 of 10
                                                    ANNEX BI: NICARAGUA CAS                    -   Country Program Matrix (FY03-05)

 Development Objectives                       Diagnosis                        StrategylActions                 Progress Indicators                          Bank Group                     Others
                                                                                                                                                       Lending/       N LS
                                                                                                                                                     Investments
Productive Sector DeveloDment

Improve land markets and           Uncertain property rights ranks      Modemize catastre system and        completed cadastre/registry             IDA ongoing:      Agricultural     EU
strengthen property rights         among Nicaragua's greatest           property registry, and regularize    modemization program and titling       Land Mgmt         Policy Note
                                   obstacles to private investment and property titles                      in 3 departments.
                                   growth, especially in rural areas.
                                   Uncertain land rights encourage                                          Approved law to modemize real           IDA planned:      Land Sector      UNDP
                                   overexploitation of lands; integrity                                     estate registries and law to                              Work (03),
                                   of land title registries/ cadastre                                       strengthen national and municipal                         Rural Dev. &
                                   severely eroded.                                                         cadastres                                                 Prod. Advisory
                                                                                                                                                                      (03)

                                   Indigenous groups face very          Establish appropriate legal         Approved law for demarcating and
                                   insecure land tenure rights          framework to demarcate              titling of indigenous' communities
                                                                        indigenous lands                     lands in Atlantic region


                                                                                                            Completed demarcation and tiiling                                          GTZ, USAID,
                                                                                                            of at least 12 indigenous                                                  Finland
                                                                                                            comunities in At7antic Coast and
                                                                                                            Bosawas

Improve rural financial services   Limited access to rural finance;     Improve incentives for developing   Implemented regulatory framework IDA planned:             IDA ongoing:   IDB, USAID,
                                   sector development inhibited by      sustainable rural financial         for micro-finance institutions   Rural                    Comm. Price    Germany,
                                   culture-of non-payment and           intermediation.                                                      Microfinance             Risk Mgmt,     Sweden, NGOs
                                   distorted terms in donorlNGO                                                                              (03). IFC:               Rainfall
                                   projects.                                                                                                 Potential                Insurance Dev.
                                                                                                                                             microfinance
                                                                                                                                             proj (ind.
                                                                                                                                             regional proj.)

Develop rural productive           Lack of energy, telecom and road     Design and implement rural          Prepared rural electrification          IDA planned:      Rural           IDB
infrastructure                     infrastructure promotes market       electrification program             master plan; Off-grid electrification   Off-Grid Rural    Electrification
                                   segmentation, and inhibits rural                                         programs operating in 5                 Electrification   (Advisory),
                                   development.                                                             communities                             (03)              Infrastnucture
                                                                                                                                                                      Assessment (04
                                                                                                                                                                      05)




                                                                                                                                                                                       Page 3 of 10
                                                    ANNEX B1: NICARAGUA CAS -- Country Program Matrix (FY03-05)

 Development Objectives                        Diagnosis                       Strategy/Actions                 Progress Indicators                         Bank Group                    Others
                                                                                                                                                       Lendingl           NLS
                                                                                                                                                     Investments
                                                                        Expand telecom coverage in rural    Rural telecom fund operabng; set       IDA ongoing:
                                                                        areas                               up intemet-based public service        Telecom
                                                                                                            centers in all department capitals.    Reform TA, IDA
                                                                                                                                                   planned: Rural
                                                                                                                                                   Telecoms (04)


                                                                        Expand paving stone (adoquinado) Paved 300 km of rural roads during IDA ongoing:  Roads TA (IDF) IDB, Sweden
                                                                        program                          2002-04                             Road Rehab &
                                                                                                                                            Maintenance

Accelerate technological progress Low rural productivity levels persist Implement the National Program of Substantial increase in number of IDA ongoing:                               IDB, EU,
in agriculture by developing rural because most medium and small Technology and Technical                 program beneficiaries and           Agr. Tech. &                             COSUDE,
extension and technology services scale farmers have limited acess to Agricultural Education              evidence of increased productivity Rural Educat.                             Netherlands
                                   appropriate technology                                                 and product diversification infarms
                                                                                                          benefited by program


Promote faster growth through       Low levels of domestic               Establish conditions to enourage   Sustained private investment           IDA ongoing:       Business
cluster development                 infrastructure and skills call for a the development of at least 5      growth in identified clusters.         Competit. LIL,     Environment
                                    clustered development approach to clusters                                                                     IDA planned:       Assessment (03
                                    attract new private investors and                                                                              Competitive. II    04), Regional
                                    maximize their development impact                                                                              (05). IFC:         Integration
                                                                                                                                                   Potential          Study (03-04)
                                                                                                                                                   projects in
                                                                                                                                                   tourism,
                                                                                                                                                   agribusiness,
                                                                                                                                                   manufacturing
                                                                                                                                                   and SMEs
                                                                                                                                                   (through
                                                                                                                                                   intermediaries).


Social Infrastructure
Expand the provision of safe water Serious gaps in coverage of water Expand provision of water and          Increased national coverage of         IDA ongoing:                        IDB, KfW,
and sanitation in rural areas      and sanitation, with negative     sanitation infrastructure in rural     water/ sanitaton by 1.4% per year      Poverty Redu. &                     Japan, NGOs
                                   implications for health; pace of  areas.                                 during 2001-2005, with at least half   Local Dev.
                                   coverage expansion in rural areas                                        of all new investments located in      (FISE IV)
                                   is below PRSP target.                                                    extremely poor municipalities




                                                                                                                                                                                       Page 4 of 10
                                                       ANNEX B1: NICARAGUA CAS -- Country Program Matrix (FY03-05)

 Development Objectives                          Diagnosis                         Strategy/Actions                   Progress Indicators                      Bank Group                  Others
                                                                                                                                                          Lending/           NLS
                                                                                                                                                        Investments
Develop the housing market           Significant housing deficit; Role and Transform the State's role in the      Approve'appropriate sector          IFC: Potential IFC: Housing       IDB, GTZ
                                     strategy of the public sector to      sector from executor to facilitator/   legislation, and replace BAVINIC    regional         finance market
                                     address this deficit are unclear.     regulator                              with INVUR in accordance with       investment in study.
                                                                                                                  new legislation                     housing finance.

PILLAR Il: GREATER AND BETTER INVESTMENT IN.HUMAN CAPITAL                        --       -..     ..                                      -.
Education
Increase the coverage of primary      Low enrollment rates, particularly in Implement plans to increase double Increase net primary enrollment        IDA ongoing:                      IDB, EU, KfW,
education                             rural areas, perpetuate poor         shifts, expand multgrade schools rate from 75% in 1999 to 83% in           Basic Educ. II                    USAID, WFP,
                                     education indicators and high         and rehabilitate or replace         2005                                                                     Luxemburg,
                                     illiteracy rates                      classrooms                                                                                                   Spain, Sweden


                                                                             Review/assess national coverage      Prepared national inventory and
                                                                             and gaps of education                master plan for school
                                                                             infrastructure.                      Infrastructure development
Increase the quality of primary      Poor quality of education linked to     Implement the autonomous shools Substantial increase in primary and IDA planned:          EFA Fast Track
education                            severe underfunding, poor               program and modify the funding    secondary students enrolled in    Basic Edu. II/        (03)
                                     admininstration and lack of             formula for autonomous schools to autonomous schools                (04)
                                     accountability calls for a different,   improve incentives for increasing
                                     more decentralized, sector              enrollment
                                     development model                                                         Evidence of systematic
                                                                                                               improvement in promotion rates
                                                                                                                with same evaluation standards.

Health
Improve coverage and quality of      Health status indicators among the Continue implementation of                By year 2002, reductions ininfant IDA ongoing:                        IDB, PAHO,
health services for women of         worst inthe region, especially in  ongoing programs for improving            mortality rate to 32 per 1000 I.b.and Health                          Japan, Norway,
childbearing age and for children    rural areas.                       basic health infrastructure and           under-5 mortality rate to 37 per      Modemization                    Spain, Sweden,
and adolescents                                                         equipment in the 15 SILAIS and            1000 l.b.                                                             Germany
                                                                        staff training.


Modemize the sector to increase       Budgetary restrictions, together     Strengthen MINSA in its normative Issued 'reglamento for the new           IDA Planned:
capacity and efficiency of service   with allocative inefficiency and bias and regulatory role as stipulated in Health Law.                           Health &
provision                            in favor of curative versus           the new General Law for Health                                             Nutrition (05)
                                     preventive medicine, calls for major




                                                                                                                                                                                         Page 5 of 10
                                                      ANNEX BI: NICARAGUA CAS - Country Program Matrix (FY03-05)

 Development Objectives                          Diagnosis                                   Strategy/Actions                               Progress Indicators                       Bank Group               Others
                                                                                                                                                                                  Lending/        NLS
                                                                                                                                                                                Investments
                                     institutional revamping, toward a                                                                  Based on evaluation results.
                                     more decentralized, demand-driven                                                                  consolidated the number of PHC
                                      mixed (public/private) health                                                                     models under implementation in
                                      system. High administrative cost                                                                  agreement with donors
                                      and program duplication in primary
                                      health care (PHC) across different
                                      SILAIS yield low program cost-                                                                    Introduced new medical and
                                      effectiveness.                                                                                    pharmaceutical supplies
                                                                                                                                        procurement and distribution
                                                                                                                                        system

                                                                                                                                        Most hospitals operating under
                                                      ___
                                                       _    _ _ __ _ _ __ _ __ _ __ _ _ __ _ _ _ __
                                                                __   _ _       __        _ __     _   _   _   __   _   _   __   _   _   autonom y program
Nutrition
Foster preventive approaches to      Malnutritition indicators very high by Promote healthy growth and          Reduced under-5 chronic            IDA ongoing:
malnutrition by promoting            regional standards, largely            development strategies at           malnutrition from 19.9% in 1998 to Health
behavioral changes in families and   attributable to inappropriate          community level for children,       16% by 2004                        Modemization,
communities                          nutrition practices and family         monitoring weight during pregnancy                                     JDA planned:
                                     behavioral pattems                     and developing social                                                  Health &
                                                                            communication strategy to promote                                      Nutrition (05)
                                                                            breasfeeding; revise primary school
                                                                            health education curricula

Population
Increase access to reproductive     Matemal mortality rates, adolescen              Incorporate reproductive health                     Standard PHC model to be               IDA ongoing:                 UNFPA
health care services to individuals pregnancy rates and population                  care services as basic service                      adopted and implemented in all         Health
of all ages                         growth rank among the highest in                component available to all women                    SILAIS includes reproductive           Modemization
                                    the region.                                     and adolescents                                     health component.

PILLAR III: BE1TER PROT^ECTJON FOR,VULNERABLE GROUPS
Reduce vulnerability of the extreme Lack of acoherent strategic             Design and implement a tiscally                             Completed background study to          IDA ongoing     inforM31 Safety IDB. l<P,V.
poor                                framework for short term                sustainable social protection                               identify the most vulnerable goups     Poverty Red. & Nets Study,      UNDP,
                                    interventions; lack of clear priorities strategy                                                    and the most critical social risks     Local Dev.;     Regional Coffee COSUDE, WFP
                                    on target groups to be addressed;                                                                   facing them; analyzed existing         Managua         Study,
                                    weak coordination among myriad o                                                                    programs and ranked them on            Vulnerability
                                    projects; lack of work in urban                                                                     basis of cost effectiveness;           Reduction Pilot
                                    environments where poverty is                                                                       analyzed sustainability of different   (JSDF)
                                    growing fastest and is vulnerable to                                                                social protection models
                                    disasters, economic shocks and
                                    social conflicts



                                                                                                                                                                                                             Page 6 of 10
                                                  ANNEX BI: NICARAGUA CAS -- Country Program Matrix (FY03-05)

 Development Objectives                      Diagnosis                      Strategy/Actions               Progress Indicators                       Bank Group              Others
                                                                                                                                                 Lending/     NLS
                                                                                                                                               Investments
                                                                                                       Initiated implementation on national
                                                                                                       scale of a sustainable social
                                                                                                       protection program for families with
                                                                                                       children facing health, educational
                                                                                                       and nutritional risks

PILLAR IV: GOOD GOVERNANCE AND INSTITUTIONAL DEVELOPMENT
Institutional Develooment and
Transparencv
Improve public financial      Insufficient transparency in the use Complete program to establish       Completed SIGFA program                IDA ongoing: Public         Netherlands,
management                    of public resources; weak            SIGFA across entire public sector   implementation                         Econ.Mgmt TA Investment     Norway,
                              budgetary processes, weak intemal                                                                                            Sector (IDF)   Canada
                              controls and extemal audits, and
                              weak accounting systems limit        Passage of law to guarantee         SIGFA accounts publicly                IDA planned:
                              capacity to maintain fiscal control access to public information         accessible through Internet            Econ Mgmt 11
                              and track the use of public funds                                                                               (04)
                              for better accountability.
                                                       frbtracu i. Complete program to establish       All donor funds received by public                                 IMF
                                                                   Single Treasury Account.            sector channeled through single
                                                                                                       treasury account


                                                                      Create proper HIPC tracking      Periodic presentation of                                           IMF
                                                                      mechanism                        satisfactory reports on use of HIPC
                                                                                                       debt relief

                                                                       Carry out Country Financial     Implemented key CFAA
                                                                      Accountability Assessment and    recommendations
                                                                      implement key recommendations.


                                  Public procurement system is         Modemize public procurement   Implement key recommendations                                        IDB
                                  antiquated and ongoing efforts to   system, based on a thorough    of Country Procurement
                                  reform the system are disperse;     Country Procurement Assessment Assesment
                                  new procurement law passed in
                                  1999 contains limitations that
                                  reduce efficiency




                                                                                                                                                                           Page 7 of 10
                                                ANNEX BI: NICARAGUA CAS -- Country Program Matrix (FY03-05)

 Development Objectives                    Diagnosis                       Strategy/Actions                   Progress Indicators                     Bank Group                   Others
                                                                                                                                                  Lending/         NLS
                                                                                                                                                Investments
Improve public expenditure      Lack of monitoring and evaluation Develop regular monitoring and                                               IDA ongoing:   Household
planning and management         systems perpetuates the existence evaluation system of PRSP                                                                   Survey Sys.
                                of obsolete/ineffective programs; as programs and objectives                                                                  Dev. (IDF); PER
                                overall public spending is reduced,
                                public resources need to be
                                refocused on poverty reducing        To improve efftciency of public      Prepared plan to introduce Medium
                                programs and overall efficiency of expenditures, prepare plan to          Term Expenditure Framework
                                publis spending needs to increase introduce a medium term
                                                                     expenditure framework, together
                                                                     with enabling budget framework
                                                                     law

                                 Improve public expenditure          Strengthen donor coordination         Several 'mesas sectoriales'                                          Denmark,
                                management through benter donor      effort through establishment of       operating under govemment                                            Sweden,
                                coordination; donor-funded           sector coordination groups (mesas    leadership to coordinate sector                                       Netherlands,
                                programs account for two-thirds of   sectoriales) inparallel with         activities.                                                           Norway,
                                the public investment program;       improvements in public financial                                                                           Germany
                                inadequate donor coordination        management.
                                fosters duplication and reduces                                           Initiated at least one sector-wide
                                 program impact.                                                          approach on a pilot basis

 Judicial Reform
 Strengthen govemance through   The judicial system is unreliable   Implement program for institutional    Implementation of action plan to                                     IDB, UNDP,
judicial reform                 and slow. Lack of credibility       strengthening (technical and           strengthen judicial system based                                     Spain,
                                creates uncertainty for current and professional ) injudicial manters      on report prepared in 2002 by
                                potential investors.                                                       special commission to the
                                                                                                           Executive, including reforms
                                                                                                          pertaining to the election of
                                                                                                           supreme court magistrates and the
                                                                                                          judicial career system


                                                                     Modemize Penal Code and Penal Passed laws and completed
                                                                     Process Law, and implement legal training program
                                                                     training programs to implement
                                                                     new codes.




                                                                                                                                                                                 Page 8 of 10
                                                   ANNEX BI: NICARAGUA CAS -- Country Program Matrix (FY03-05)

 Development Objectives                       Diagnosis                     Strategy/Actions                Progress Indicators                     Bank Group                  Others
                                                                                                                                               Lending/          NLS
                                                                                                                                             Investments
Participatoryv rocesses
Institutionalize the PRSP process   Lack of consensus on development Consolidate and insttutionalize the Prepared an updated, broadly                                         IMF, IDB
                                    program has led to erratic program PRSP process initiated in 2000.   consulted PRSP, accompanied by
                                    implementation over time.                                            PSIA.

CROSS-CUTTING THEMES: ENVIRONMENT, SOCIAL EQUITY, DECENTRALIZATION
Environment and ecological
vulnerability
Reduce environmental degradation Absence of environmental policy    Implement and monitor the           Approved and initiated             IDA ongoing:     Atlantic Bio.
and promote the ecological       strategy and proper legal          Environmental Policy and Action     implementation of Biodiversity Law Sustainable      Corridor (GEF),
restoration and sustainable      framework have resulted in the     Plan (PANic)                                                           Forest Dev.      Pilot
management of productive areas degradation of fragile eco-systems,                                                                                          commercializato
                                 as well as unexploited development Prepare appropriate legal           Approved law on Water Resources                     n imp.
                                 opportunities.                     framework for sustainable           and law on Fisheries                                Cookstoves
                                                                    exploitation of natural resources                                                       (ESMAP)

                                                                                                        Strengthened environmental units IDA planned:       Atlantic Bio.
                                                                                                        to consolidate the National System Sustainable      Corr. 11(GEF)
                                                                                                        of Environmental Administration    Forest 11,


                                                                      Promote sustainable forestry      Aproved forestry development law
                                                                      investments
                                                                      Offer environmental services      Promote carbon emissions             IDA planned:   Policy &
                                                                                                        mitigation and participate in market                Strategy for
                                                                                                        for carbon sequestration                            Promotion of
                                                                                                                                                            Ren. Energy
                                                                                                                                                            (ESMAP);
Reduce environmental risk           Nicaragua's geography makes it     Modemize early waming systems    Completed installation of 25      IDA ongoing:      Nicaragua PCF UNDP
                                    very vulnerable to natural                                          telemetric hydrometry stations, 8 Disaster          Umbrella proj.
                                    catastrophes; the recently created                                  seismic stations and national     Prevent. (IDF)
                                    system for the prevention,                                          tsunami waming center; organized
                                    mitigation and response to                                          a Disaster Operation Center
                                    disasters needs to be made
                                    operational and strengthened.




                                                                                                                                                                              Page 9 of 10
                                                   ANNEX B1: NICARAGUA CAS -- Country Program Matrix (FY03-05)

 Development Objectives                      Diagnosis                        Strategy/Actions                      Progress Indicators                      Bank Group                 Others
                                                                                                                                                         Lending/          NLS
                                                                                                                                                       Investments
                                                                        Formulate National Emergencies          Risk assessments and mitigation      IDA ongoing:                    JICA, SIDA
                                                                        Plan; reduce hazard risks               measures carried out in 25 of the    Natural Disast.
                                                                                                                most vulnerable municipalities;      Vulnerability
                                                                                                                disaster emergency committees        Reduction
                                                                                                                organized, trained and equipped in
                                                                                                                all municipalities.


Social Equitv
Guarantee equal gender access to                                        Design and implement plan to        Designed Plan and initiated              IDA ongoing:      Promoting
economic, social, cultural and                                          promote sexual equality in salaries implementation                                             Gender Acc.
political areas                                                         inthe public and private sectors                                                               (IDF)


Decentralization
Strengthen local governments and Excessively centralized decision-      Define and implement national           Advanced implementation of           IDA ongoing:                    IDB, UNDP,
consolidate decentralization       making; unclear policy and           policy and strategy on                  decentralization strategy            Rural                           DANIDA,
policies towards local governments commitment by central government     decentralization                                                             Municipalities 11               USAID,
                                   toward decentralization; Lack of                                                                                                                  Germany,
                                   own fiscal resources limits the                                                                                                                   Finnland
                                   capacity of municipalities to
                                   develop and provide basic services   Implement program to strengthen         Completed program to strengthen
                                   for which they are responsible by    INIFOM and to develop and               43 municipalities, which exhibit
                                   law                                  strengthen the technical capabilities   significant increase in fiscal
                                                                        and fiscal capacities of municipal      revenues.
                                                                        administrations
                                                                                                                Approved law on a national
                                                                                                                comprehensive cadastre that
                                                                                                                incorporates municipal cadastres


                                                                        Prepare and implement plan to           Implemented plan
                                                                        coordinate municipal investment
                                                                        plans through SNIP
                                                                        Implement decentralization strategy Issue 'reglamento' for Autonomy
                                                                        for Atlantic Coast region           law of Atlantic Coast region




                                                                                                                                                                                     Page 10 of 10
                                                                                                             Annex B2



                                                     Nicaragua
                     Selected Indicators* of Bank Portfolio Performance and Management
                                           As of September 30, 2002


Indicator                                                    1999              2000           2001             2002
Portfolio Assessment
Number of Projects Under Implementation a                       10               14              16               16
Average Implementation Period (years) b                        2.5              2.2             1.8              2.4
Percent of Problem Projects by Number 8 c                      0.0              0.0             0.0              6.3
Percent of Problem Projects by Amount 'C                       0.0              0.0             0.0              2.9
Percent of Projects at Risk by Number d                        0.0              0.0             0.0              6.3
Percent of Projects at Risk by Amount 8 ' d                    0.0              0.0             0.0              2.9
Disbursement Ratio (%) e                                      78.5             45.1            25.3             23.8
Portfolio Management
CPPR during the year (yes/no)                                 Yes                No            No                Yes
Supervision Resources (total US$)                           483.2             800.1          750.0            1165.2
Average Supervision (US$/project)                            48.3              57.2           46.9              72.8


Memorandum Item                                   Since FY 80        Last Five FYs
Proj Eval by OED by Number                                     23                 7
Proj Eval by OED by Amt (US$ millions)                       730.8            266.0
% of OED Projects Rated U or HU by Number                     13.6             14.3
% of OED Projects Rated U or HU by Amt                        24.0              5.5


a.   As shown in the Annual Report on Portfolio Performance (except for current FY).
b.   Average age of projects in the Bank's country portfolio.
c.   Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP).
d.   As defined under the Portfolio Improvement Program.
e.   Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the
     beginning of the year: Investment projects only.
*    All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio,
     which includes all active projects as well as projects which exited during the fiscal year.
                                                                                                                         Annex B3


                                       Nicaragua: Bank Group Program Summary
                             Proposed IDA Base-Case Lending Program (FY03-05)

                                                                                            Strategic        Implementation
    FY            Project                                             $ Million          Rewards (H/MIL'0     Risks (H/M/L)0

   2003     Nicaragua PSAC                                              15.0                    H                    M
            Rural Micro Finance                                         7.0                     M                    M
            Rural Electrification                                       12.0                    M                    M
               Subtotal for 2003                                        34.0

   2004     Nicaragua PRSC                                              35.0                    H                    M
            Competitiveness                                             8.0                     H                    L
            Economic Management TA II                                   17.5                    H                    M
            Basic Education III                                         11.0                    M                    M
               Subtotal for 2004                                        71.5

   2005     Health and Nutrition III                                    15.0                    M                    M
              Subtotal for 2005                                         15.0


               TOTAL 2003- 05                                          120.5


a. This table presents the proposed program for the next three fiscal years.
b. For each project, the table indicates whether the strategic rewards and implementation risks are expected to be high (H),
moderate (M), or low (L).



                                           IFC and MIGA Program, FY99-2002
                                                   (as of November 30, 2002)

                                                                           Fiscal Year
Category                                                  1999                    2000                2001                 2002

IFC Approvals ($million)                                   15.0                    5.0                 5.0                     0.0

Sector (%)
 Agriculture and Forestry                                    7                     43                    0                       0
  Food and Beverages                                        43                      0                    0                       0
 Textiles, Apparel and Leather                               8                      0                    0                       0
 Fianance and Insurance                                      0                     57                  100                       0
 Wholesale and Retail Trade                                 37                      0                    0                       0
 Tourism Services                                            6                      0                    0                       0
TOTAL                                                      100                    100                  100                       0

Investment Instrument (%)
  Loans                                                     85                     87                 100                       0
  Equity                                                    12                     13                   0                       0
  Quasi-Equity (Loan type)                                   3                      0                   0                       0
  Quasi-Equity (Equity type)                                 0                      0                   0                       0
  Guarantee                                                  0                      0                   0                       0
  Risk Management Products                                   0                      0                   0                       0
TOTAL                                                      100                    100                 100                       0

MIGA Guarantees ($million)                                 0.0                    81.4                80.8                127.6
                                                                                                                Annex B4


                                Nicaragua: Summary of Nonlending Services

          Product                              Completion FY        Amount (US$000)   Audiencea    Objective

                                                Analytical Work/ReDorts
Recent completions:
Policy Framework Paper                                FY00                  30            G,B         KG, PD
FISE Impact                                           FY00                 133           G, D,8       KG, PS
Pension Reform Proposal                               FY00                  37            G, B        KG, PS
Evaluation of Emergency Social Fund                   FY01                  -            G, D,B     KG, PD, PS
Poverty Assessment                                    FY01                 418          G,D,B,PD    KG, PD, PS
PRSP                                                 FY01 -02               -            G, D, B      KG, PS
Public Expenditure Review                             FY02                 159           G, D, B    KG, PD, PS
Agricultural Policy Note                              FY02                 41           G,D,B,PD      KG, PS

Underway:
PRSP Progress Report                                  FY02                  -           G, D, B       KG, PS
Informal Safety Nets                                  FY02                 91          G,D,B,PD       KG, PS
Coffee Study (regional)                               FY02                 65          G,D,B,PD       KG, PS
Commercialization of Improved Cookstoves              FY02                 100          G, D, B       KG, PS
Poverty Assement Update                               FY03                 41          G,D,B,PD     KG, PD, PS
Financial Accountability Assessment                   FY03                 60            G. B         KG, PS
Renewable Energy Policy                               FY03                  -           G, D,B        KG, PS
Youth at Risk                                         FY03                  -          G,D,B,PD       KG, PS
Country Procurement Assessment                        FY03                               G,B          KG. PS

Planned:
Rural Sector Competitiveness                        FY03-04                 -            G, D, B      KG, PS
Trade Study (regional)                              FY03-04                 -           G,D,B,PD      KG, PS
Drivers of Rural Growth (regional)                  FY03-04                 -           G,D,B,PD      KG, PS
Social Impact of Coffee Crisis (regional)           FY03-04                 -            G, D, B      KG, PS
Country Economic Memorandum                          FY04                   -            G,D,B       KG, PS
Land Sector Work                                     FY03                   -             G, B       KG, PS
Poverty and Social Impact Assesment                  FY04                   -           G,D,B,PD    KG, PD, PS
Financial Sector Assessment Program                  FY04                   -             G, B       KG, PS
Improving Govemance                                 FY04-05                 -           G,D,B,PD    KG, PD, PS
Infrastructure Assessment                           FY04-05                 -            G, D,B      KG, PS

                                                  Advisory Activities
Rural Electrification                                FY02                  26          G,D,B,PD     KG, PD, PS
Institutional Capacity Building                     FY03                   -           G,D,B,PD     KG, PD, PS
Rural Development and Productivity                   FY03                  -           G,D,B,PD     KG, PD, PS
Education Sector Policy Note                         FY03                  -           G,D,B,PD       KG, PS
Rural Poverty                                       FY04                   -           G,D,B,PD     KG, PD, PS
Human Capital Development                           FY04                   -           G,D,B,PD     KG, PD, PS
Inv. Climate Assessment                             FY03                   -           G,D,B,PD     KG, PD, PS

                                                      IDF Grants
Promoting Gender Accountability                      FY99                 197           G, D, PD     KG,   PS
Agricultural Political Forum                         FY01                 381           G, D, PD     KG,   PS
Roads TA                                             FY01                 186           G, D, PD     KG,   PS
Improvement of Regional Maritime Trade               FY01                 148           G, D, PD     KG,   PS
Public Investment Sector                             FY02                 236           G, D, PD     KG,   PS
Disaster Prevention                                  FY02                 250           G, D, PD     KG,   PS
Development of Household Surveys System              FY02                 467           G, D, PD     KG,   PS
                                                    Other
AUantic Biological Corridor II (GEF)                 FY03                 7,140         G, D,B       KG, PS
Off-Grid Rural Electrification (GEF)                 FY03                  100          G, D, B      KG, PS


a. Govemment, donor, Bank, public dissemination.
b. Knowledge generation, public debate, problem-solving.
                                                                                                                              Annex B5




                                          Nicaragua Social Indicators
                                                                    Latest single year                Same region/income group
                                                                                                                Latin
                                                                                                              America           Low-
                                                         1970-75          1980-85        1994-00              &Carib.        income
POPULATION
Total population, mid-year (millions)                         2.5              3.4            5.1                515.7       2,459.8
  Growth rate (%annual average for period)                    3.3              3.1            2.7                  1.6           2.0
Urban population (%of population)                            50.3             56.4           64.7                 75.4          31.9
Total fertility rate (births per woman)                       6.6              5.5            3.6                  2.6           3.6
POVERTY
(% of population)
National headcount index                                        ..              ..          47.9
  Urban headcount index                                         ..              ..          30.5
  Rural headcount index                                         ..              ..          68.5

INCOME
GNI per capita (US$)                                          640             750            410                 3,670          410
INCOMEICONSUMPTION DISTRIBUTION
Gini index                                                      ..              ..           60.3
Lowest quintile (%of income or consumption)                     ..              ..            2.3
Highest quintile (%of income or consumption)                    ..              ..           63.6                        -
SOCIAL INDICATORS
Public expenditure
   Health (%of GDP)                                             ..              ,.            5.7                   2.8          1.2
   Education (%of GDP)                                          ..              ..            6.3                   3.3          3.4
  Social security and welfare (%of GDP)                       2.9              1.4            4.9                   7.4
Net primary school enrollment rate
(%of age group)
  Total                                                        63              73             80                    97
     Male                                                       ..             71             78                    99
     Female                                                     ..             75             81                    98
Access to an improved water source
(%of population)
  Total                                                         ..              ..            84                    85           76
    Urban                                                       ..              ..            92                    93           88
    Rural                                                       ..              ..            72                    62           70
Immunization rate
(%under 12 months)
   Measles                                                      *-             49             99                    9357
   DPT                                                          ,.             35             82                    87           57
Child malnutrition (%under 5 years)                             ..             10             11                         9
Life expectancy at birth
(years)
   Total                                                       57              61             68                    70           59
      Male                                                     55              58             67                    67           58
      Female                                                   59              64             71                    74           60
Mortality
   Infant (per 1,000 live births)                             93               71             40                    29           76
   Under 5 (per 1,000 live births)                           168              143             50                    37          115
   Adult (15-59)
      Male (per 1,000 population)                            348              277            220                   208          294
      Female (per 1,000 population)                          283              189            223                   121          261
  Maternal (per 100,000 live births)                            ..              ..           148
Births attended by skilled health staff (%)                     ..              ..            70

Note: 0 or 0.0 means zero or less than half the unit shown. Net enrollment ratios exceeding 100 indicate discrepancies
between the estimates of school-age population and reported enrollment data.


2002 World Development Indicators CD-ROM, World Bank
                                                                                                                         Annex B6
                                                                                                                        Page 1 of 2


                                  Nicaragua - Key Economic Indicators


                                                         Actual              Estunate    (Projected Base CaseScenario)
                                                1998      1999      2000       2001     2002      2003    2004    2005

National accounts (as % of GDP)
Gross domestic product'                          100.0      100.0    100.0      100.0    100.0     100.0    100.0    100.0
 Agriculture                                      32.4       31.6     32.7       32.3     32.4      32.5     32.5     32.5
 Industry                                         22.1       22.9     22.3       22.3     22.5      22.7     22.7     22.7
 Services                                         45.5       45.5     44.9       45.4     45.1      44.8     44.8     44.8
Total Consumption                                106.1      110.9    106.9      109.1    113.5     112.7    111.1    106.7
Gross domestic investment                         33.8       43.3     34.9       30.4     27.3      27.8     29.1     30.6
 Government investment                            13.1       21.1     19.0       16.2     12.2      12.2     12.9     13.0
 Private investment                               20.8       22.2     15.9       14.2     15.1      15.6     16.2     17.6

Exports (GNFS)b                                   40.1       37.9     39.3       36.0     36.0      37.7     39.6     41.5
Imports (GNFS)                                    80.1       92.1     81.2       75.5     76.8      78.1     79.8     78.8
Gross domestic savings                            -6.1      -10.9     -6.9       -9.1    -13.5     -12.7    -11.1     -6.7
Gross national savingsc                            2.3        1.4      2.5       -3.1      -1.2      3.0      9.0     11.6
Memorandum items:
Gross domestic product                          2067.8   2212.5     2429.9    2537.0    2571.0    2661.0   2806.0   2989.0
(US$ million at current prices)
GNI per capita (US$, Atlas method)               370.0      390.0    410.0     420.0     450.0     460.0    480.0    500.0
Real annual growth rates (%, calculated from 1998 prices'
 Gross domestic product at market prices          4.1         7.4      5.5        3.1      1.0       3.0      4.5      5.0
 Gross Domestic Income                           16.1         3.0      2.7       -0.5      3.1       2.4      4.0      4.5
Real annual per capita growth rates (%, calculated from 1998 prices,
 Gross domestic product at market prices            1.3     4.5       2.8         0.5     -1.0       1.0      2.5      3.0
 Total consumption                                18.4      1.8      -4.4        -0.6     -5.1      -3.0     -1.1     -0.4
 Private consumption                              23.5      0.6      -5.2        -2.2     -5.5      -3.5     -2.0     -1.3

Balance of Payments (US$)
 Exports (GNFS)b                                 830.0   838.2   956.1   913.0   926.0 1002.0 1110.0 1240.0
   Merchandise FOB                               573.2   545.2   645.1   592.0   598.0   663.0   739.0   833.0
 Imports (GNFS)b                                1656.0 2037.8 1972.0 1915.0 1974.0 2079.0 2238.0 2354.0
   Merchandise FOB                              1384.0 1702.8 1629.0 1561.0 1598.0 1659.0 1758.0 1878.0
 Resource balance                               -826.0 -1199.6 -1015.9 -1002.0 -1048.0 -1077.0 -1128.0 -1114.0
 Net current transfers                           311.0   396.0   400.0   402.0   453.0   496.0   541.0   543.0
 Current account balance (before oficial gran   -768.6 -1058.6      -931.0     -956.4   -726.0    -638.0   -541.0   -548.0
 Net private foreign direct investment          125.2       300.0   265.0      132.0    201.0     256.0    250.0    239.0
 Long-term loans (net)                          237.3       106.0    49.0       40.0     75.0      33.0     34.0     10.0
 Other capital(net, incl errors&ommissions)     236.8       422.8   242.0      284.4    171.0     205.0     71.0    169.0
 Change in reservesd                              6.0       -77.2    29.0      171.0     13.0     -30.0      0.0    -50.0
Memorandum items:
Resource balance (% of GDP)                      -39.9      -54.2   -41.8       -39.5    -40.8     -40.5    -40.2    -37.3
Current Account Balance (% of GDP)               -37.2      -47.8   -38.3       -37.7    -28.2     -24.0    -19.3    -18.3
 Netcurrenttransfers(%ofGDP)                      15.0       17.9     16.5       13.0     17.6      18.6     19.3     18.2

Exports volumes                                   -2.3        9.3    15.1        7.3       1.1       5.5     6.1       6.2
Imports volumes                                    8.6       15.9    -9.7        3.1      -4.7       1.0     3.4       6.1
                                                                                                                          Annex B6
                                                                                                                         Page 2 of 2




                             Nicaragua - Key Economic Indicators (continued)


                                                         Actual             Estimate    (Projected Base Case Scenario)
                                                1998      1999     2000      2001      2002      2003    2004     2005

Public finance (as % of GDP at market prices)'
 Current revenues                            26.9           25.8     24.5       22.3      23.4    25.1     25.8     25.7
 Current expenditures                        21.6           21.8     22.2       27.0      26.2    23.7     18.1     16.1
 Capital expenditure                         10.5           17.9     16.6       14.7      10.2    10.3     11.3     11.6
 Overall Balance surplus (+) or deficit (-)  -5.1          -13.9    -14.3      -19.4     -13.0    -8.9     -3.6     -2.0
  Foreign financing (including grants)            10.8      18.2     12.4       11.0      12.4    13.1      9.8      9.6
    Grants                                         3.1       7.4      6.1        5.7       6.7     6.3      3.6      3.6

Monetary indicators
M2/GDP                                           68.6      68.3     63.3        63.5     63.5     63.5     63.5     63.8
Growth of M2 (%)                                 30.5      18.8      9.4        11.1      7.4      9.2     10.3     11.0


Price indices( 1990 =100)
 Merchandise export price index                   71.7      62.4    64.1        54.9      56.3    59.4     61.8     65.4
 Merchandise import price index                  131.4     140.6   164.4       157.7     142.6   142.6    141.8    141.8
 Merchandise terms of trade index                 54.5      44.4    39.0        34.8      39.5    41.7     43.6     46.2
 Real exchange rate (US$/LCUJ                      2.0       1.6     6.0        -0.6        ..

 Consumner price index (average, % change)       13.0       11.2     11.9        7.4      4.4      6.0      4.8      4.0
 Consumer price index (end of year, % chani      18.5        7.2      6.6        4.7      6.0      6.0      4.0      4.0
 GDP deflator (% change)                         13.0       11.2     11.9        7.4      4.4      6.0      4.8      4.0


a.    GDP at market prices
b.   "GNFS" denotes "goods and nonfactor services."
c.   IMF definition.
d.   Includes use of IMF resources.
e.    Consolidated central government
f.   "LCU" denotes "local currency units." An increase in US$/LCU denotes appreciation
                                                                                                                          Annex B7




                                  Nicaragua - Key Exposure Indicators


                                                       Actual              Estimate (ProjectedBase CaseScenario)
                                              1998      1999     2000       2001    2002    2003    2004    2005

TOTAL EXTERNAL DEBT*
In USS millions
Total debt outstanding and disbursed (TDC       6450     6909      6851       6385    5999     5838      5725     5594
Net disbursements                                194       106       49         40     -75       33        34        10
Total debt service due (TDS)                     829       483      358        465     573      453       385      339
Total debt service paid (TDS)                    255       186      300        457     564      453       385      339

Debt and debt service indicators("lo)

  TDO/XGSb                                     565.3     559.9    505.2      483.3   426.4     377.9    337.4     299.9
  TDO/GDP                                      311.9     312.2    281.8      251.7   233.3     219.4    204.0     187.2
  TDS Due/XGS"                                  72.7      39.1     26.4       35.2    40.7      29.3     22.7      18.2
  TDS Paid/XGS'                                 22.3      15.1     22.1       34.6    40.1      29.3     22.7      18.2


IBRD and IDA exposure indicators (%)
  IBRD DS/public DS                              6.3       5.2      3.3        2.0     0.0       0.0      0.0       0.0
  Preferred creditor DS/public                  38.2      29.0     27.8       29.5    29.4      29.4     29.7      29.5

  IBRD DS/XGS                                    1.0       0.6       0.4       0.4      0.0      0.0       0.0      0.0
  IDA DS/XGS                                     0.4       0.4       0.5       0.5      0.5      0.6       0.6      0.6
  IBRD TDO (US$m)y                               15         9         5         0        0        0         0        0
  IDA TDO (US$m)c                                487      598       654        691     803       882      929       994



a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short-term capital.
b. "XGS" denotes exports of goods and services, including workers' remittances.
c. Includes present value of guarantees.
                                                                                                                                 Annex B8
                                                                                                                                Page 1of 2


                                       Nicaragua - Status of Bank Group Operations
                                                As of September 30, 2002
                                                        Operations Portfolio

 Closed projects: 43                                                                                                 Difference Between
Board                                                          Last PSR                                              Expected and Actual
Date                                                      Supervision Rating         Original Amount in US$ Millions     Disbursements a/
Fiscal                                                Development lmolementatio                                             .       FrmT
Year                 Active Projects                   ObiDecives    n Proiress          IDA    GRANT       Undisb.       Orig.    Rev'd

1997   P041790    Atlantic Biological Corridor             S              S                         7.1        3.8        3.7        1.8
1998   P035753    Health Sector II                         S              S             24.0                   7.5        4.2        0.0
1998   P053705    Transport II                             S              S             47.4                   5.4        2.4        0.0
1999   P040197    FISE III                                 S              S             45.0                   3.5        5.0        0.0
1999   P052080    Forestry                                HS             HS              9.0                   2.9        2.7        0.0
2000   P050613    Basic Education II                      S               S             52.5                  19.8      -31.4        0.0
2000   P055853    Telecom. Reform                         S               S             15.9                   1.9        1.3        0.0
2000   P049296    Economic Management TAC                 S               S             20.9                   7.2      -12.6        0.0
2000   P056087    Pension and Financial Market TA         S               S              8.0                   3.4       -3.3        0.2
2000   P064915    Agr Tech & Rural Edu                    S               S             23.6                  12.2        3.9        0.0
2001   P070016    Competitiveness LIL                     S               S              5.0                   4.6        1.8        0.0
2001   P068673    Road Rehab & Maint                      S               S             75.0                  66.3      -11.1        0.0
2001   P055823    Rural Municipalities II                 S              S              28.7                  20.7        2.1        0.0
2001   P064916    Natural Disaster Vulnerability          S              U              13.5                  12.7       -1.1        0.0
2001   P064906    Poverty Red & Local Dev                 S               S             60.0                  55.4       31.3        0.0
2002   P056018    Land Administration                     S               S             32.6                  34.6        0.0        0.0

                                                                                       461.1        7.1      261.8       -1.1        2.0


                                                              All Projects
                                                         IBRD             IDA          Total
                   Total Disbursed (IBRD and IDA):       229.6           825.8        1055.4
                          of which has been repaid:      224.1            19.3         243.3
                 Total now held by IBRD and IDA /b:       0.0           779.9          779.9


a. Intended disbursements to date minus actual disbursements to date as projected at appraisal.
                                                                                              Annex B8
                                                                                             Page 2 of 2


                  Nicaragua: Statement of IFC's Committed and Disbursed Portfolio
                                    As of November 30, 2002
                                            (US$ millions)


FY                                     Committed                           Disbursed
Approval   Company             Loan   Equity    Quasi   Partic.   Loan    Equity     Quasi    Partic.

2001       BANEXPO              5.0      0.0      0.0      0.0      0.0     0.0        0.0       0.0
2000       Finarca              1.4      0.6      0.0      0.0      1.4     0.0        0.0       0.0
1998       Frutan               0.4      0.4      0.0      0.0      0.4     0.0        0.0       0.0
1998       La Colonia           3.5      0.0      0.5      0.0      1.5     0.0        0.5       0.0
1999       SEF Dicegsa          0.8      0.0      0.0      0.0      0.8     0.0        0.0       0.0

           Total Portfolio:    11.1      1.0      0.5      0.0      4.1     0.0        0.5       0.0
                                                                                                                                   Annex B9

                                                       NICARAGUA
                                            CAS Summary of Development Priorities


                                             Country           Majorissueb                     Country       Bank            Reconciliation of
Network area                                 performance'                                      priorityc     priorityC       country and Bank
                                                                                                                             priorities d

Poverty Reduction & Economic
Management
 Poverty reduction                          good              Rural Poverty                    moderate      high            ongoing dialogue
 Economic policy                            good              Fiscal                           high          high
 Public sector                              fair              Transparency                     high          high
 Gender                                     fair              Not a priority                   low           moderate        ongoing dialogue

Human Development Department
 Education                                  good              Quality                          high          high
 Health, nutrition & population             fair              Institutional reform             moderate      high            ongoing dialogue
 Social protection                          fair              Lack of strategy                 moderate      high            ongoing dialogue

Environmentally &Socially Sustainable
Development
 Rural development                    good                    Poverty/ low technol.            high          high
 Environment                          fair                    Deforest.indigenous rightsl      moderate      moderate
                                                              biodiversity
 Social development                         fair              Decentralization                 moderate      moderate

Finance, Private Sector & Infrastructure
 Financial sector                        fair                 Corp. governance/regulatory      moderate      high            Prog.
                                                              framework                                                      Conditional./TA

 Private sector                             fair              Regulatory/judicial reform       high          high
 Energy & mining                            fair              Losses of state utility/regul.   moderate      low             IDB has the lead
                                                              framework
 Infrastructure                             good              private sector participation     moderate      moderate


a. Use 'excellent,' 'good," 'fair," or 'poor."
b. Indicate principal country-specific problems (e.g., for poverty reduction, 'rural poverty;' for education, 'female secondary completion;" for
environment, 'urban air pollution").
c. To indicate priority, use 'low," 'moderate," or 'high."
d. Give explanation, if priorities do not agree; for examrple, another MDB may have the lead on the issue, or there may be ongoing dialogue.
                                                                                                            Annex B1O


                   Nicaragua: Key Evironmental Indicators

                                                                                    Latin
                                                                                 America           Low.
                                                            Nicaragua            & Carib.       Income
 Population (millions), 2000                                          5.1            516         2,460
 Urban population (%of total), 2000                                  64.7            75.4         31.9
 GDP ($billions), 2000                                                  2          2,001         1,048
 GNI per capita, Atlas method ($), 2000                              400           3,670           410

 Environmental strategy / action plan (year preparec                1994
Agrticulure
Land area (1,000 sq. km)                                              121         20,062        32,536
Agricultural land (%land area)                                       62.3           37.9          42.6
Irrigated land (%of crop land)                                         3.2          14.0          26.3
Fertilizer consumption (100 grams/ ha arable land)                    146            856           707
Food production index (1989-91=100)                                 135.6          133.5         127.9
Population density, rural (people/ sq. km arable lar                   72            252           510

Foireit-                        -
Forest area (1,000 sq. km)                                           33            9,440         8.802
Forest area (%total land area)                                      27.0            47.1          27.1
Annual deforestation (%, 1990-2000)                                  3.0              0.5           0.8

  lod!versit___
Mammal species, total known                                          200
Mammal species, threatened                                              6
Bird species, total known                                            482
Bird species, threatened                                                5
Nationally protected area (%land area)                                7.5             7.4             5.7

     [~~~~g~~~
         -_             -      _           _            .------       -j

GDP per unit of energy use (PPP$ / kg oil equiv)                     4.2              6.0          3.6
Commercial energy use per capita (kg oil equiv)                      539           1,171           567
Traditional fuel use (%total energy use)                              42               16           29
Energy imports, net (%commercial energy use)                          44              -39            -8
Electric power consumption per capita (kWh)                          268           1,470          358
Share of electricity generated by coal (%)                              ..            5.2         44.5

Emissions and pollution                                                     *-              -     -
CO. ern-ssions per un 01 GDP lk rper PPP S ofGEC                      o 3            04             05
Total C0 2 emissions, industrial (,000 kt)                            3.4        1,308.3        2,416.1
CO emissions per capita (mt)
   2                                                                  0.7            2.6            1.0
Suspended particulate in largest city (microgr/m3)
Passenger cars (per 1,000 people)                                       3            119               9

IcW &Sanitation ___ _ut
   ter                       _           - -                                                       _76__
Access to improved water source (%total populatio                     79              85            76
Access to improved water source (%rural populatio                     59              62            70
Access to improved water source (%urban populati                      95              93            88
Freshwater resources per capita (cubic meters)                    37,507          32,905         6,243
Total freshwater withdrawal (%total water resources                   0.7
Agriculture withdrawal (%total freshwater withdraw                     84             74            90
Access to sanitation in urban areas (%urban popul                      96             87            78
Access to sanitation in rural areas (%rural populati,                  68             48            30
Under-5 mortality rate (per 1,000 live births)                         41             37           115

National accounting aggregates - 2000                   _
Gross national savings (%of GNI)                                    14.1            17.0          20.7
Consumption of fixed capital (%of GNI)                               9.3            10.6           8.7
Net national savings (%of GNI)                                       4.7             6.4          11.9
Education expenditure (%of GNI)                                      2.6             4.2           2.8
Energy depletion (%of GNI)                                           0.0             5.1           7.2
Mineral depletion (%of GNI)                                          0.1             0.6           0.5
Net forest depletion (%of GNI)                                       0.3             0.0           0.9
C02 damage (%of GNI)                                                 1.1             0.4           1.5
Adjusted net savings (%of GNI)                                       5.9             4.4           4.7
                                                                                                                         ANNEX C
                                  IDA and IDB Support for Nicaragua's PRSP Objectives
Intermediate                       Sub-Goals        World Bank Activities          IDB Presence
     Goals              I
Pillar 1: Broad Based Economic Growth

Macroeconomic               Strengthen fiscal policy           Econ. Mgmt TA                     Administraci6n Tributaria.
      Stability                                                Econ. Mgmt TA 11(2004)            Sectorial Modernizaci6n Tributaria
                                                                                                 (2003).
                                                        ____ ___ ____
                                                             _____M     __ ____ ___ ____ ___ _     odernizaci6n fiscal (2004-5).
                            Improve debt Mgmt.                 Econ. Mgmt TA 11(2004)
Structural                  Reform civil service               Econ. Mgmt TA
Reforms                               _                        Econ. Mgmt TA 11(2004)
                            Privatize & regulate               Telecom Reform TA
                            public utilities           _
                            Strengthen financial syst.         Pension & Fin.Sctr Ref.           Prestamo Financiero.
                            Reform social security             Pension & Fin.Sctr Ref.           Reforma sistema previsional.
          Rural             Improve incentive                                                    Reactivaci6n Productiva Rural
   Development              structure                                                            (2002).
                            Improve Land markets               Land Administration
                            Improve rural financial       Micro-Finance Dev.(2003)               Programa Global Multisectorial
                            services                      Com. Price Risk Mgmt                   (2003).
                            Strengthen                    Competitiveness LIL                    Reactivaci6n Productiva Rural
                            commercialization             Competitiveness 11 (2005)*             (2002).
                                                          Sustainable Forestry 11                Carreteras colectoras (2003).
                                                        _ (2004)
                            Develop rural productive      Roads Rehab. & Maint.                  Reactivaci6n Productiva Rural
                            infrastructure                Off-Grid Rur. Electrif.                (2002).
                                                          (2003)                                 Carreteras colectoras (2003).
                                                          Telecom Reform TA                      Infraestructura basica Plan Puebla-
                                                          Rural Telecom Dev. (2004)              Panami.
                            Develop rural extension       Ag. Technology & TE                    Innovaci6n tecnol6gica.
                            services/ technology                                                 Reactivaci6n Productiva Rural
                                                                     ___ ___ _
                                                       ____ ____ ____ ____ ___
                                                          ______(2002).
                                                          ___ __
    Non-Rural           Promote Cluster                        Competitiveness                   Prestamo de Innovaci6n de
  Development           Development                            Competitiveness 11 (2005)*        Competitividad (2003).
                        Promote private                        Competitiveness                   Desarrollo Electrico
                        investments/exports                    Competitiveness 11 (2005)*        Rehabilitaci6n Carretera Pana.
                                                               Roads Rehab & Maint.              Road rehabilitation San Lorenzo-
                                                               Telecom Reform TA                 Muhan.
                                                               Rural Telecom Dev                 SIEPAC Interconexi6n Electrica.
                                                               (2004)*                           Fortalecimineto Capacidad de
                                                                                                 Negociaciones (2003).
                                                                                                 Programa Global Multisectorial
                                                                                                 (2003).
                                                                                                 Carreteras colectoras (2003).
                                                                                                 Prestamo de Competitividad (03)
                                                                                                 Infraestructura basica Plan Puebla-
                                                                                                 Panama (2004-5).
                        Improve ports                                                            Infraestructura basica Plan Puebla-
                                                       ____________________        _             Panam a.
           Social       Increase coverage in                 FISE 111, FISE IV                   Modernizaci6n Agua Potable.
  Infrastructure        water/sanitation                 _
                        Develop housing sector                                                   Programa de Vivienda, Bajos
                    I                                  I _II                                     ingresos (2002).
                                                                                                                          ANNEX C
Intermediate [                Sub-Goals               World Bank Activities                             IDB Presence
                                                                                                        I
    Goals                                      I lI
Pillar II: Investment in Human Capital
       Improve       Expand coverage &                Basic Education 11                     Red de Protecci6n Social.
      Education      quality of basic                 Basic Education 111(2004)              Red de Protecci6n Social 11(2002).
                     education                                                               Sectorial social (2002).
                                                                                             Educaci6n secundaria (2004-5).
                                               __________ __________ _
                                                    _________________Sectorial                          Social 11(2004-5).
                     Expand vocational                Ag. Technology & TE                    Educaci6n. para J6venes y Adultos,
                     education                                                               Habilitaci6n Laboral (2004-5).
                                                                                             Modernizaci6n de la Educaci6n
                                                                                             Tecnica (2004-5).
 Improve Health      Improve                          Health Sctr. Modernization             Red de Protecci6n Social.
                     coverage/quality of              Health Sec. & Nutr. (2005)             Red de Protecci6n Social 11(2002).
                     primary health care                                                     Sectorial social (2002).
                                               _______________     _____________________   _ Sectorial Social 11(2004-5).
                     Modernize health sector          Health Sctr. Modernization             Modernizaci6n red hospitalaria.
                     overall                          Health Sec. & Nutr. (2005)             Sectorial social (2002).
                                                _______________                              Sectorial Social 11(2002).
          Improve    Improve child nutrition          Health Sctr. Modernization             Red de Protecci6n Social.
         Nutrition                                    Health Sec. & Nutr. (2005)             Red de Protecci6n Social 11(2004-
                                                                                             5).
     Strengthen      Improve reproductive             Health Sctr. Modernization             Sectorial social (2002).
 Population Pol.     health                           Health Sec. & Nutr. (2005)             Sectorial Social 11 (2004-5).
Pillar m: Protection of Vulnerable Groups
Protection of Vulnerable Groups      _ FISE IV                                             PAININ 11.
                                                                                           FISE III.
                                                                                           Fortalecimiento Ministerio de la Familia.
                                                                                           Alivio de la Pobreza y Desarrollo Local.
                                                                                           Costa Atlantica.
Pillar IV: Strengthen good governance
                     Improve transparency             Econ Mgmt TA                         Compras y adquisiciones.
                     and efficiency in pub.           Econ Mgmt TA (2004)                  Fortalecimiento CGR.
                     expend.                                                               Probidad administrativa (2004-5).
                                                                                           Apoyo al Plan Nacional Anti-
                                                                                           Corrupci6n (2004-5).
                                                                                           Pr6stamo-Cooperaci6n T6cnica e-
                                               ______________________                      gobierno (2004-5).
                     Reform judicial system                                                Modernizaci6n del Sistema Judicial

                     Strengthen property              Land Administration
                     rights
                     Strengthen public                Econ Mgmt TA                         Programa de Preinversi5n (2003).
                     institutions                     Econ Mgmt TA (2004)                  Pr6stamo -Cooperaci6n T6cnica e-
                                                                                           gobierno (2004-5).
                     Encourage broader               mainstreamed                          Barrios en extrema pobreza urbana
                     participation               _                                         (2004-5).




                                                                                                                                       2
                                                                                                               ANNEX C


Intermediate     Sub-Goals                            World Bank Activities                     IDB Presence
    Goals                                      I
Cross-Cuttin Themes
Reduce           Protect environment                 mainstreamed                   Mainstreamed.
Environmental                                                                       Ambiental Forestal.
Vulnerability                              _              ____Cuenca                        Masaya (2003)
                 Conserve bio-diversity              Atlantic Bio Corridor
                                                     (GEF)

                 Manage forests                      Sustainable Forestry           Mainstreamed.
                 sustainably                         Sustainable Forestry II        Administraci6n Forestal.
                                                   _ (2004)*
                 Manage natural risks                Disaster Prev./Mgrnt           Infraestructura basica Plan Puebla-
                                               ______________                       Panama (2004-5).
                 Improve land use                    Land Administration
                 planning                      _
Improve social   Guarantee equal gender              Mainstreamed                   Mainstreamed.
equity           access
                 Prevent abuse to
                 women/children
Decentralize     Strengthen local                    Rural Municipalities 11        FISE III.
government       government                                                         Desarrollo y fortalecimiento
                                                                                    municipal.
                                               ___________________
                                                   _________Modernizaci6n                           Municipal Managua.
                 Consolidate                         Rural Municipalities II
                 decentralization policy             mainstreamed
Implementation                                                                      Implementaci6n de la ERCERP.
of the ERCERP                              _                                _   _
Note: Programmed year of credit approval is in parentheses; Ongoing credits do not have dates. Starred
(*) credits refer to projects which may be incorporated as components of other projects.




                                                                                                                          3
                                                                                                                ANNEX D

               NICARAGUA -- STATUS OF ADVANCE IN IMPLEMENTING 1998 CAS
             Planned in 1998 CAS           I                                Implemented by June 2002
    Strategy/Actions I Progress Indicators I                          Strategy/Actions IProgress Indicators
A. CONSOLIDATING GROWTH THORUGH PRIVATE SECTOR DEVELOPMENT
Consolidating Macro-
economic Stability
 Improve efficiency of tax Achieve IMF ESAF targets,       Strategy largely implemented.   Target not achieved. Public
administration, public     including public sector savings Assembly approved tax reform    savings rose in 1998, but
expenditures, public       from 3.7% of GDP in 1997 to     in 1997, National System of     tumed negative with post-Mitch
enterprises and the Social 8.1% in 2000.                   Public Investment was           emergency spending.
Security Institute, and                                    strengthened, social security
implement a labor mobility                                 institute was reformed, labor
program                                                    mobility program was
                                 Strategy to reform the pension   completed.               Target achieved. Assembly
                                 system by end-1999; progress                              approved new pension law
                                 in reform by 2001                                         (No. 240) in March 2000 and
                                                                                           Pension Superintendency law
                                                                                           (No. 388) in March 2001.



Continue debt negotiations       Obtain Paris Club debt relief Strategy was implemented    Target achieved.
with bilateral creditors, and    1998-00 and comparable terms
maintain performance record to   from other bilaterals
achieve earliest possible HIPC
debt relief.                     HIPC decision point and                                   Target achieved wl delays.
                                 completion points by soonest                              Nicaragua reached HIPC
                                 possible dates.                                           Decision point in December
                                                                                           2000.


Reforming the State
Downsize and increase        Reduce number of ministries          Strategy implemented     Target achieved. Assembly
effiency of Government       and agencies that report to the                               passed Law No. 290, yielding a
through comprehensive public Presidency, and restructure                                   net reduction of 2 ministries
sector reforms               those that remain by end-1999                                 and 3 autonomous agencies,
                                                                                           while reducing significantly the
                                                                                           number of high ranking
                                                                                           officials.


Establishment of an integrated   Implement SIGFA-central          Strategy implemented     Target achieved widelays
financial management system      acounting system in MIFIN by                              SIGFA was implemented in
(SIGFA) in all ministries and    1998 and ministerial system in                            MIFIN in 2000 and in all
agencies.                        all agencies by 2000                                      agencies in 2002.



Establish a technical body to    Technical body instituted by     A revised strategy was   Target achieved, with the
develop a global investment      1998                             implemented.             creation of SETEC in 1998.
strategy and priorities.
Integrate investment             SNIP integrated in MIFIN by                               Target partially achieved.
responsibilities in MIFIN.       1998; and ministerial systems                             SNIP was integrated in SETEC
                                 in all agencies by2000.                                   (instead of MIFIN) with
                                                                                           counterparts in all ministerial
                                                                                           agencies by 2000.




                                                                                                                    Page 1 of 9
                                                                                                                         ANNEX D

            NICARAGUA - STATUS OF ADVANCE IN IMPLEMENTING 1998 CAS
             Planned in 1998 CAS                Implemented by June 2002
    Strategy/Actions IProgress Indicators StrategylActions   Progress Indicators
Reform the regulatory              Revise compensation system         Strategy partially implemented Target partially achieved
framework, human resource          and legaVregulatory framework                                     wldelays. A civil service refom
management structure &             for civil service by 1999.                                        law submitted to Assembly in
compensation system.                                                                                 1999 is still pending approval.
                                                                                                     Progress has been made in
                                                                                                     designing new regulatory
                                                                                                     framework and compensation
                                                                                                     system.


Decentralize environmental         Establish a transparent fiscal     Strategy partially implemented Target partially met. A pilot
responsibilities (section C),      transfer mechanism based on                                       fiscal transfer mechanism was
school administration and          equity and efficiency criteria                                    set up in 2002 under the Rural
health services (section D)                                                                          Municipalities project and is
                                                                                                     being tested.

Provide financial resources        40 municipalities with adequate Strategy substantially             Target achieved.
and technical assistance to        financial management capacity implemented
local governments

 Fosterino Private Sector
 Growth
 Institute the rule of law through Implement reform and                Strategy partially implemented Target not achieved. The
judicial reform focusing on        prefessionalization of juridical    with the adoption of new Penal judicial system remains very
 institutional strengthening,      body.                               code, administrative disputes weak.
 court reform and legal reformn                                        settlement law, and new public
                                                                       prosecutor law. Program to
                                                                      build court houses and train
                                                                      judges was completed.




Develop a strategy and            Revise priority legislabon:    Action not taken                     Target not achieved.
detailed plan for streamlining    bankruptcy and comporate
and modernization of              reorganization procedures, and
commercial legislation and        companies law.
regulations


Field work to identify        Develop a competitiveness               Task was implemented with      Target not achieved, as
impediments and opportunities enhancement strategy for                the completion of a            attention focused away from
for SMEs                      SMEs                                    consultancy study on SMEs.     SMEs to duster development
                                                                                                     concept.

Broaden access to finance         Increase banking credit and         Strategy was implemented as Target not achieved as private
through banking reform and        financing for SMEs                  private banks were encouraged commercial banks remain
limited direct financing                                              to expand with dosure of       reluctant to finance SMEs
                                                                      BANADES and FNI was
                                                                      permitted to operate only as a
                                                                      2nd tier bank.


Increase the capital base by      Raise minimum capital               Done                           Target achieved through new
raising capital requirements      requirements; raise capital                                        commerdial banking law
                                  adequacy ratio to 10 percent                                       passed in 1999.




                                                                                                                             Page 2 of 9
                                                                                                                      ANNEX D

            NICARAGUA -- STATUS OF ADVANCE IN IMPLEMENTING 1998 CAS
             Planned in 1998 CAS                 Implemented by June 2002
    Strategy/Actions I Progress Indicators Strategy/Actions   Progress Indicators
Tighten exceptions, reduce        Introduce prudential regulation Strategy implemented with       Target achieved widelays with
foreign exchange exposure         on foreign exchange exposure delays                             passage of new commercial
and improve monitoring of         and prudential limits on related                                banking law and revision of
related party exposure            party lending                                                   prudential norms in 1999.


Issue accounting standards                                         Revised accounting standards
                                                                   were issued in May 2002, but
                                                                   contain discrepancies with
                                                                   GAAP

Close and privatize largest    BANADES to cease banking            Action taken                   Target achieved. BANADES
state banks and reform/contain operations (May 98)                                                was closed and liquidated in
smaller ones
                                  Sale of majority shares of                                      Target achieved. Majority
                                  BANIC to private sector in                                      share of BANIC was sold to
                                  1999                                                            private investors in1999.

                                  Asset ceiling and reform of                                     Target achieved. BCP was
                                  BCP                                                             closed in 2000

Unify legal framework with        Initiate financial legislation   Strategy partially implemented Target achieved, with the
precise, automatic rules and      reform                                                          passage of 3 financial sector
definitions                                                                                       reform laws in 1999

                                   Pass secured transaction                                       Target not achieved.
                                  legislation

Create first generation           Minimum staffing for securities Action taken                    Target met. Some staff hired
regulatory capacity for           and insurance supervision                                       by SBIF for this purpose
securities market and
insurance
                                  Issuance of minimum                                             Target met. Minimal
                                  regulation                                                      regulations were issued

Establish basic regulations for                                    Action not taken
corporate finance, market
transactions and investment
management

Improve framework for Foreign Revise foreign investment law        Action taken                   Assembly approved new
Direct Investment                                                                                 foreign investment law inMay
                                                                                                  2000.

Improvina Basic
Infrastructure
Creation of autonomous         Enactment of sector legislation     Strategy implemented           Targets achieved. ENACAL
regulators. Separate INM into (electricity, water) and ogranic                                    separated from INAA in
operational and regulatory    laws for regulators.                                                November 1997
entities, convert ENAP into
regulatory role.




                                                                                                                         Page 3 of 9
                                                                                                                      ANNEX D

           NICARAGUA -- STATUS OF ADVANCE IN IMPLEMENTING 1998 CAS
             Planned in 1998 CAS                  Implemented by June 2002
    Strategy/Actions    Progress Indicators Strategy/Actions   Progress Indicators
Convert MCT into overseer &       Strengthen MCT's planning        Strategy implemented          Target achieved
policy-maker                      and contracting capacity

Telecoms. Privatize ENITEL; Passage of legislation;                Strategy implemented          Target achieved widelays.
establish regulatory framework successful privatization                                          40% of ENITEL (plus mgmt
                                                                                                 contract) was sold in 2001.

 Roads. Increase private sector 20% of network in good             Strategy implemented, except Target almost achieved (1 9%
 participation. Establish Road condition                           for final step in setting up in fair to good condition) in
 Maintenance Fund. Accelerate                                      Road Maintenance Fund        spite of setback from hunicane
maintenance by contract,                                                                        Mitch
including micro-enterprises


                                  40% of maintenance to be                                       Target achieved.
                                  done by private sector by 2001



Rehabilitate and improve          Completion of works on north-    Strategy implemented         Target achieved widelays.
principal export corridors        south corridor and Managua-El                                 Hurricane Mitch caused
                                  Rama road                                                     postponement of Managua-El
                                                                                                Rama road.

Develop rural and feeder        40% of rural municipalities        Strategy implemented         Target not achieved. Rural
roads. Phased transfer of rural managing rural roads by 2001                                    municipalities only managed a
road maintenance to                                                                             minor share of road
municipalities.                                                                                 maintenance in 2001

Electricity. Introduce private    Passage of electricity law       Strategy implemented         Law was passed
sector in distribution, thorugh
privatzation or concessioning              oningsale of                                         All distribution assets and all
                                  distribution and generation                                   but two generation plants were
                                  assets                                                        privatized by 2001

Complete existing program of      Completon of bid process for     Strategy implemented         Momotombo plant has been
contracting IPPs. All             thermal plant to increase                                     divested.
investment in generation to be    capacity of Momotombo
privately funded                  geothermal plant.


Water and Sanitation. Reach Implement management                   Strategy was revised.        Target not achieved.
agreement and implement      contract or concession/sale of                                     Government decided to pilot
strategy to involve private  Managua system by 2002                                             concessioning process with
sector in management of INAA                                                                    smaller systems.



Augment share of investment                                        Strategy implemented
to rural areas.

B. DEVELOPING THE RURAL SECTOR
Accelerating Aariculture
Growth




                                                                                                                         Page 4 of 9
                                                                                                                             ANNEX D

                NICARAGUA -- STATUS OF ADVANCE IN IMPLEMENTING 1998 CAS
             Planned in 1998 CAS                                               Implemented by June 2002
    Strategy/Actions I Progress Indicators                               Strategy/Actions I Progress Indicators
Remove vestiges of state          Divest BANADES and BANIC           Strategy on removing state          Target was achieved:
control in land, labor and credit                                    control in land, labor and credit   BANADES and BANIC have
markets. Invest in public                                            markets implemented                 been closed and are being
goods.                                                               successfully.                       liquidated.


                                  Privatize ENABAS                                                       Target not achieved.
                                                                                                         ENABAS is still operating, but
                                                                                                         on a very modest scale.

                                  Publicize information on                                               Target partially achieved.
                                  market and prices

Modernize and combine the        Establish a multi-purpose           Strategy partially pursued.         Targets partially achieved An
cadaster and registry of land    uniform national cadastre and       Activities on titling and           appropriate draft law to
                                 modernize registry                  cadastre under ATML project         modernize the registry was
                                                                     were pursued and                    submitted to the Assembly, but
                                                                     economically justified              is still awaiting approval. Land
                                                                                                         titling benefitted 50,000 rural
                                                                                                         households (56% of original
                                                                                                         target).


Resolve legal disputes            Enact Property Law                 Strategy partially implemented. The Property law that was
conceming land ownership                                                                             passed in 1997 proved to be
                                                                                                     deficient.

Resolve the issue of             Enact legislation and               Strategy not successful as little   An extensively consulted
indigenous land. Complete        procedures for demarcating,         was achieved in area of             Indigenous Land Demarcation
land titling                     titling and registering             indigenous rights recognition       law was submitted to the
                                 indigenous lands.                   as per Nicaraguan                   Assembly in 1998 but is still
                                                                     Constitutional rights               awaiting approval.




Improve agricultural research    Increase by 40% the number o        Strategy implemented                Target was likely achieved, but
and farmer training in           farmers assisted by                                                     cannot be confirmed due to
agronomic management and         publictprivate extension                                                absence of baseline data.
marketing technologies.          services by 2000.
Develop co-financed and
private extension and research
services


Eliminate government direct      BANADES to cease banking            Strategy partially implemented. Target was achieved with the
interventon in rural financial   operations.                         Although BANADES was            satisfactory dosure of
markets                                                              closed, public intervention in  BANADES.
                                                                     rural credit markets continues
                                                                     through FNI, IDR, and FCR.



Rationalize credit lines funded New credit lines to be subject       Strategy partially implemented: Target not achieved.
by donors. Replace subsidized to strict lending criteria: interest   Subsidized credit lines were
credit with input vouchers      rates set at market levels,          complemented by voucher
                                                                     system but not replaced.




                                                                                                                                 Page 5 of 9
                                                                                                                          ANNEX D

           NICARAGUA - STATUS OF ADVANCE IN IMPLEMENTING 1998 CAS
             Planned in 1998 CAS                 Implemented by June 2002
    Strategy/Actions I Progress Indicators Strategy/Actions   Progress Indicators
                                 Input voucher system                                                 Target was achieved as a
                                 established.                                                         voucher system was
                                                                                                      established.

Reform legal, regulatory and       Modify banking legistlation       Strategy was pursued, but        Target partially achieved.
supervisory framework to           (incl. new secured transactions   proved more difficult to         Selected legal and regulatory
remove barriers to formal         law) and supervisory practices.    implement than anticipated.      reforms were introduced.
financial intermediation in rural
areas. Reduce credit risk
byimproving rural insurance      Modenize registry for movable                                        Target partially achieved.
markets.                         asset pledges                                                        Background studies fo
                                                                                                      modernize framework for
                                                                                                      moveable asset pledges were
                                                                                                      completed, but framework was
                                                                                                      not revised.


                                 Introduce rainfall insurance                                          Not achieved. Despite cutting
                                                                                                      edge analytic preparatory work,
                                                                                                      rainfall insurance was not
                                                                                                      introduced for lack of demand.



                                 Increase by 20% the number o                                         Target not achieved.
                                 rural entreprenerus receiving
                                 credit by 2000


Natural Resource
Management
Modernize natural resources      Pass forestry, fisheries, and       Strategy continues to be valid   Target was not achieved.
legislation. Complete land       water laws by'1999.                 but implementation has been       Draft forestry and fisheries
titling and registration.                                            slower than anticipated.         legislation has been prepared,
                                                                                                      but has not been submitted to
                                                                                                      the Assembly. Water law has
                                                                                                      not been prepared. Titling
                                                                                                      target was not achieved.



                                 Provide training to key                                              Target achieved. Multiple
                                 legislators                                                          training events were carried ou
                                                                                                      for legislators under Protierra
                                                                                                      project.

Decentralizing and              Separate MARENA's                     Strategy successfully           Targets achieved. Forest
restructuring MARENA.           normative and management             implemented, with support        management was separated
Improve forestry and fishing    functions.                           from Protierra to restructure    from forest regulation and
policy and management,                                               and strengthen MARENA, and       transferred to Agriculture
particularly in the Atlantic                                         with support from Sustainable    Ministry.
region                                                                Forestry and ABC projects to
                                                                     improve natural resource
                                                                     management in Atlantic.




                                                                                                                             Page 6 of 9
                                                                                                                     ANNEX D

           NICARAGUA - STATUS OF ADVANCE IN IMPLEMENTING 1998 CAS
             Planned in 1998 CAS                 Implemented by June 2002
    Strategy/Actions I Progress Indicators Strategy/Actions   Progress Indicators
Technology transfer to poor in Access to appropriate            Strategy was implemented          Targets likely to have been
fragile areas on natural       technology to 10,000 families                                      achieved, but cannot confirm
resource mgmt.                 in fragile zones by 2000                                           for lack of baseline data.



Legal and institutional .of     Pass biodiversity law,          Strategy only partially           Target partially achieved.
environmental enforcement       protected areas regulations     implemented as protected          Managerial plans canried out in
agencies and of protected       and renewed strategy for        areas agency remains weak         all protected areas of AUantic
areas system                    protected areas.                and underfunded.                  region. Draft blo-diversity law
                                                                                                  was prepared, but has not
                                                                                                  been submitted to Assembly.



                                Training of enforcement                                           Environmental Fund to secure
                                agencies on natural resources                                     funding for enforcement
                                regulations.                                                      agencies was created, but is
                                                                                                  not operating.


Strengthening of indigenous     Pass indigenous land rights     Strategy was pursued but          Target partially achieved.
land tenure and natural         law, progress in                proved slow to implement.         Most extensive consultation of
resourre rights.                demarcating/titling in ABC      Indigenous land tenure law        any law in the history of
                                areas and titling of two        was prepared in 1998, but still   Nicaragua, but legislative
                                demaracted areas in Bosawas.    pending approval.                 approval is pending.
                                                                Demarcation Is underway in        Indigenous land administration
                                                                Atlantic protected areas, but     was strengthened, resulting in
                                                                not in indigenous ares.           reduced local conflicts.



Create a framework to           Bi-annual donor coordination    Strategy successfully pursued. Target achieved. Regular
rationalize donor aid through   meeting in Atlantic region      Coordination meetings have     donor meetings were held.
the ABC planning process.       during 1998-2001                been convened on bi-annual
                                                                basis by regional govemments.




C. DEVELOPING HUMAN CAPITAL AND PROTECTING THE POOR
Education
Decentralize shool              90% of primary and secondary Strategy has been pursued            Target achieved for secondary
administration to local school schools to be managed by       successfully.                       schools, but not for primary
management boards.              local school boards by 2000.                                      schools (80% of students in
Strengthen institutions at both                                                                   2002).
central MECD and local levels
and carify roles. Rain           Decrease drop-out rates from                                     Tafget achieved. Primary
teachers and improve            18% to 15% and repetition                                         repetition rate is now 8.2%
pcenrfves based on              rates from 25% to 20% for                                         and drop-out rate is 10%
textbooks and charge nominal    pnmary students by 2000                                           (2001).
rental fee to encourage
recyding.

                                Maintain 100% textbook                                            Target achieved.
                                provision to primary students
                                through 2002.




                                                                                                                         Page 7 of 9
                                                                                                                             ANNEX D

           NICARAGUA -- STATUS OF ADVANCE IN IMPLEMENTING 1998 CAS
             Planned in 1998 CAS                 Implemented by June 2002
    Strategy/Actions I Progress Indicators Strategy/Actions I Progress Indicators
                                  Expand the number of primary                                         Target was achieved. (In
                                  school teachers eligible for                                         2000, 12,500 teachers
                                  performance incentives to                                            received incentives under the
                                  11,000 by 1999.                                                      program.)



Expand and strengthen pre-                                           Strategy was being pursued.
primary education, targeting                                         However, coverage fell slightly
children in rural and marginal                                       below govemment target of
urban areas                                                          30% coverage in 2000/01.
                                                                     Target may be achieved in
                                                                     2003.

Health
Extend to the national level,      By year 2002, reductions in       Strategy partially implemented. Targets appear to have been
with emphasis on rural poor,      infant mortality rates from 58                                     met. In 2001, infant mortality
an integrated PHC model           per 1000 I.b. to 54, in maternal                                   was 31 per 1000 l.b. and
focusing on preventive care,      mortality rates from 110 per                                       chronic malnutrition rate was
family planning, nutrition         100,000 to 100, and in the                                        17.8%. The figures on
assistance, pre- and post-natal   malnutrition rate for children                                     maternal mortality are not
care. Define an inter-            under 5 from 28% to 25%.                                           accurate enough to confirm
institutional coordinated                                                                            trend.
national nutrition strategy and
develop national nutrition
education program                 Extension to 17 SILAIS of PHC                                        PHC model extension was
                                  model including instituitonal                                        partially achieved. A national
                                  delivery.                                                            standard model still needs to
                                                                                                       be defined on basis of ongoing
                                                                                                       evaluation.


                                  Implement reproductive health                                        Partially implemented
                                  education module by 2002



                                  Implement nutritional strategy                                       Pilot nutrition program is
                                  and educational program by                                           operating. Needs to be
                                  2000.                                                                expanded on basis of
                                                                                                       evaluation results.


Strengthen cost recovery,                                            Strategy partially implemented.
extend coverage of health                                            Hospital fees were suspended
insurance. Increase share of                                         due to unpopularity and admin
primary expenditures and                                             problems and share of primary
establish expenditures                                               expenditures declined
planning and evaluation                                              between 1997 and 2001. A
system                                                               planning/evaluation module
                                                                     (SIMINSA) in process of being
                                                                     established.




Consolidate decentralization    Develop and implement                Partially implemented.         In process of implementation
process: transfer functions and integrated expenditure program       Performance agreements
budgets to health districts and supported by donors.                 ('compromisos de gestion') are
municipalities; strengthen role                                      in place for all SILAIS, but




                                                                                                                               Page 8 of 9
                                                                                                                        ANNEX D

               NICARAGUA -- STATUS OF ADVANCE IN IMPLEMENTING 1998 CAS
             Planned in 1998 CAS                                              Implemented by June 2002
    Strategy/Actions    Progress Indicators                             Strategy/Actions I Progress Indicators
                                                                     compitance is tagging;
                                 30% of budget and drug              MINSA's policy and regulatory Target not achieved.
                                 categores decentralized to
                                          categdes
                                              ecentalizd to          unit was strengthened, but staffare
                                                                     turnover has weakened it
                                 health distnicts by 2002            again. A new General Health
                                                               law was passed in2002, but
                                 Successful implementation of still requires a 'reglamento'.        INSS was succesfully
                                 MINSA and INSS restructuring.                                      restructured; MINSA was not.


                                 Separate INSS health and                                           Target achieved.
                                 pension accounts by 2000

                                 Implement new hospital                                              Agreements were signed, but
                                 management agreements.                                             there are many problems of
                                                                                                    implementation and
                                                                                                    compliance.

Rehabilitate most dilapidated    Regulate private providers          Strategy under implementation Accreditation of private
health facilities through                                                                          providers has taken place.
competitive fund.                                                                                  Further follow-up is needed.

                                 Issue the Pharmaceuticals law,                                     Laws were passed, but
                                 the MINSA and INSS Organic                                         'reglamentos' have not been
                                 laws, and the Health Insurance                                     issued.
                                 law by 2001.
Safety Nets
Develop an effective and well    Adopt national poverty strategy     A Social Safety Net program     Target not achieved.
targeted social safety net       setfing priorities, streamlining    was developed and evaluated.
strategy and program             programs, reducing duplication      It is now being revised by the
                                 of efforts; establish operational   new government, which has
                                 plan to implement strategy,         expressed different priorities.
                                 with clear targeting criteria for
                                 assistance programs.



Continue to provide social                                           Strategy implemented
Infrastructure through FISE
and other programs; increase
emphasis on rural water supply
and sanitation

Develop nutrition programs     FISE to increase number of            Strategy partially implemented Target achieved.
and assistance to children and projects in rural water supply
pregnant & lactating women     and sanitation

                                 implement nutritional strategy                                     A pilot program was
                                 and education program by                                           implemented, but still needs to
                                 2000                                                               be evaluated and expanded
                                                                                                    accordingly.




                                                                                                                            Page 9 of 9
                                                                                   ANNEX E


                       CAS Consultations with Nicaraguan Stakeholders

Consultations on the World Bank's Country Assistance Strategy for Nicaragua were held in
Managua during August 13-14, 2002, with civil society (through the Economic and Social
Planning Council, CONPES), members of the Legislature, the international donor community,
media representatives and the Executive branch of Government. The Bank was represented at
these consultations by the Department Sector Leaders: Helena Ribe (HD), Manuel Sevilla
(FPSD, Martin Raine (ESSD) and Felipe Jaramillo (PREM) visiting from headquarters, and by
Florencia Castro-Leal (Sr. Economist, PREM), Violeta Granera (Civil Society Specialist,
LCCNI) and Ulrich Lachler (Resident Representative) from the Nicaragua resident mission..

Following an introductory presentation by the Resident Representative, the participants invited to
each meeting were asked 48 questions via the Options Finder survey technology, which was ably
administered by a team of consultants from El Salvador led by Ms. Claudia Monzon. After this
the meeting was opened up for general discussion, with Mr. Mario Fuentes (CONS) serving as
facilitator.

Overall, the meetings were very positive and supportive of the World Bank's role in Nicaragua.
The formal consultations focused on two types of questions: those pertaining to Nicaragua and
those pertaining to the role of the World Bank in assisting Nicaragua. The first set of questions
sought to find out what are perceived to be the most important issues requiring attention (e.g.,
development bottlenecks) among all those enumerated in the PRSP, while the second set sought
to find out in which areas the World Bank is perceived as having a comparative advantage in
providing assistance. (he statistical compilation of answers to these questions is available upon
request)     On the basis of these answers, the following trends emerged from the CAS
consultations:

The Nicaraguan Context

*       Civil society is better informed than the Government about the PRSP; 31 percent of the
government representatives indicated that they did not know the PRSP, compared to only 21
percent of the civil society representatives. Most significant is that over half of the legislators
surveyed did not know the PRSP. This suggests that a greater effort is needed to familiarize the
members of the National Assembly with the PRSP.

*       When asked how important were each of the different obstacles to development facing
Nicaragua, most participants rated 'low human capital levels' and 'low technology' as highly
important, whereas the 'fragile banking system' and 'lack of infrastructure' were rated less
important.

*        Most participants in every group surveyed chose 'low growth" as the most important
economic development problem for Nicaragua. The next largest group among civil society and
among donors chose 'adverse terms of trade shocks'. Among government representatives, the
next largest group chose 'low productivity' in answer to this question.




                                                                                                 1
                                                                                      ANNEX E

*       In response to questions about the most important social problem affecting Nicaragua's
development, most participants in all groups opted for 'low investment in human capital'. Also,
a significant number of respondents chose 'income inequality'. In cortrast, few respondents
opted for 'gender inequality', 'population growth', or 'migration' to answer this questions.

*         In response to questions about the most important institutional issues for Nicaragua's
development, most participants opted for 'better transparency and control mechanisms' and
'institutional capacity building' and 'strengthening the rule of law'. A significant number of
participants also selected 'strengthening the judicial system'.          In contrast, few participants
selected answers relating to 'democracy', 'decentralization' or 'consensus building'.

The Role of the World Bank

*       Most participants saw the World Bank's role as a financial institution as far more
important than its role as a 'provider of technical assistance', 'knowledge institution' or
'dialogue promoter'. They also saw an important role in the area of assisting the government
with donor coordination.

*       With respect to strategic objectives, most respondents saw a significant role for the World
Bank in the areas of 'promoting economic growth' and 'raising rural productivity'. Members of
the government also gave significant weight to the area of 'institutional development.'

*        With regard to sectoral involvement, most participants agreed that the Bank had a
significant role to play in helping to invest in the social sectors (health and education). Beyond
that, there was great disparity in the sectors emphasized. 'Rural development' attracted many
responses among legislators, 'decentralization' was emphasized by civil society representatives,
'physical infrastructure and modernization of the state' were emphasized by government
representatives and 'strengthening economic policy and the financial system' was emphasized by
donors.

*       With regard to criteria for targeting assistance, most respondents leaned toward 'growth
potential' as a very important criterion, while 'incidence of poverty' was perceived as more
important than 'capacity to execute projects' as a criterion for targeting assistance to
municipalities.

*        With regard to focusing additional World Bank assistance at this moment; most groups
leaned in favor of focusing this assistance more on accelerating growth (versus poverty
reduction), on rural (versus urban) development, on financial (versus TA) assistance and on
investing in human (versus physical) capital. Most groups were more or less evenly split on the
question of focusing Bank assistance on strengthening the public versus private sectors.

*       With respect to relations with the Bank, more than 50 percent of the government and
donor representatives rated their relations with the World Bank as 'good to excellent.'        This
contrasted with the responses of legislators and civil society representatives, of which less than
25 percent gave this rating. (The multiple-choice question relating to this issue did not contain
an option to reflect the case of 'no relations' with the Bank, so many participants appear to have


                                                                                                    2
                                                                                    ANNEX E

chosen the option of 'poor' relations to characterize this situation.) One aspect that stood out
from these responses is that no group indicated that they had a "high" degree of access to
information on the World Bank, and most civil society representatives obtained their information
about the World Bank from the media.

The main message suggested by these responses is that the Bank should focus its assistance on
lending activities to promote faster economic growth, with special attention on raising rural
productivity, and on investing in human capital. This message is broadly consistent with the
general strategic direction outlined in the draft CAS, as well as with the previous CAS (1998).
In view of recent developments (including approval of a fast-track negotiations process in the US
Congress), several participants suggested designing the CAS more explicitly within a regional
integration framework.

The consultations with the Government went a little deeper than those held with the other groups
in that the IDA allocation was discussed, as well as specific projects under preparation. In
general, the government believed that the reactivation of economic growth was the most
important objective in the short run. Though most government participants agreed with the
principle of targeting poverty in public spending and policies, they also emphasized that this
targeting criterion needs to be accompanied by the criterion of growth potential.

Following the consultations, several bilateral donors (representing the Nordic countries,
Germany and the Netherlands) sent a written comment to recommend the adoption of sector-
wide approaches, encouraging the Bank to move explicitly in that direction in the CAS. Such an
approach was taken to imply a clearer division of labor among the main multilateral donors
(World Bank, IDB and European Union) in terms of taking the lead responsibility in
coordinating each sector, and for the World Bank to strengthen its local office to assume
leadership in particular sectors.

Various participants emphasized the need to improve coordination within the activities supported
by each of the larger donors, citing an example of several IDA-financed operations with
overlapping components. Another message emerging from these consultations is that the World
Bank could do more in terms of developing a clearer sector perspective and generating a greater
cohesiveness among the different projects it finances in each sector. This requires, among other,
closer coordination among the team leaders managing the active projects in each of the sectors

Finally, one clear message from these consultations is that the Bank needs to make a greater
effort to communicate beyond the government and donors. Important steps were taken in this
regard with the launching of a Global Distance Learning Center at the resident mnission and, most
recently, with the hiring of a civil service specialist earlier this year. Several participants also
spoke   in favor of creating a public information center (PIC). (Some participants indicated that a
PIC should look beyond being a mere repository of World Bank documents, and aim to be an
intemet access point for development information.) The consultation with media representatives
centered on the usefulness of setting up regular meetings between the Bank's Resident
Representative and key media representatives (say, once a month) for informal, off-the-record
conversations on topics of mutual interest In response to the enthusiasm generated by the
meeting with media representatives, an interview to discuss the CAS consultations was granted
to the weekly magazine, CONFIDENTIAL, which appeared on August, 25, 2002.

                                                                                                  3
                                                                                     ANNEX F



                   A Technical Note on Nicaragua's Fiscal Sustainability


Annex B of the Nicaragua Public Expenditure Review (PER, No. 23095-NI, dated
December 7, 2001) develops a model to assess the sustainability of macroeconomic
policies. The model basically compares the expected flow of future public sector
revenues under given fiscal, monetary and exchange rate policies to the debt servicing
requirements of a country's outstanding public debt. If the present value of the future
flow of revenues exceeds the present value of the flow of debt servicing requirements,
then the government's macroeconomic policy stance and debt level are said to be
sustainable. If it falls short, then it is unsustainable.

This model has been adapted to Nicaragua's structural characteristics by using the
macroeconomic parameter values pertaining to that country in 2001, and incorporating
the assumption that the country's extemal debt is reduced in line with the debt relief
target contemplated at the Decision Point under the HIPC Initiative. This model then
calculates the present value of public sector net revenues (after servicing the external
debt) as a function of three key variables: (i) the rate of real GDP growth, (ii)the public
sector primary savings rate (after grants), and (iii) the behavior of donors in supplying
credit on concessional terms.

With respect to donor behavior, two alternative assumptions are considered: the first is
that donors will continue to give Nicaragua enough credit on concessional terms so as to
maintain the proportion of the external debt to GDP constant at the ratio reached
immediately after the HIPC debt relief. (That ratio is estimated to be about 50 percent of
GDP.) A second, less generous assumption about donor behavior is that donors will only
roll over the principal on the external debt to maintain the nominal US Dollar value of the
external debt constant. With a GDP growth of 5 percent per annum and a US Dollar
inflation rate of 2 percent, it tums out that the first assumption about donor behavior
would have yielded a gross disbursement of concessional credit of about US$410 million
in 2001. The second assumption about donor behavior yields a gross disbursement of
US$105 million in 2001 (i.e., the actual value of principal repayments in 2001). As a
point of reference, actual gross disbursements received by Nicaragua's public sector in
1997-2000 averaged US$288 million per annum, which is about half-way between the
disbursements resulting under the two alternative assumptions about donor behavior. So,
if donors continue to exhibit the same levels of generosity on average as during 1997-
2000, the donor supply function for concessional credit to Nicaragua can be modeled by
averaging the disbursement outcomes under the two behavioral functions described
earlier.

Annex B of the PER shows (in Tables B.3 and B.4) the present value of future public
revenues (after external creditors are serviced), expressed as shares of GDP, under each
of these two donor behavior functions for a given combination of GDP growth rates and
primary surplus ratio (after grants). The assumption that donors will continue to assist
                                                                                          ANNEX F

Nicaragua with the same degree of generosity as in 1997-2000 is represented by Table F 1
below, whose cells were derived as simple averages of the cells in PER Tables B.3 and
B.4 for each combination of GDP growth and the primary surplus ratio.

                 Table F. 1: Present Value of Net Public Revenues
                                (as proportion of GDP)
                                     annual GDP growth rate
                                   3%    4%    5%     6%    7%
                    -r     0%     0.12   0.24    0.38    0.56   0.79
                           1%     0.22   0.34    0.50    0.69   0.94
                     <e    2%     0.26   0.45    0.62    0.83   1.10
                     e     3%     0.40   0.55    0.73    0.96   1.25
                     i     4%     0.50   0.66    0.85    1.09   1.40
                           5%     0.59   0.76    0.97    1.22   1.55


Each entry in Table F. 1 shows the present value of future public revenues that can be
devoted toward the service of the domestic public debt. To ascertain whether
Nicaragua's fiscal and macroeconomic policies are sustainable under this model, it is
necessary to see whether the present value shown in the table for a particular combination
of GDP growth and primary savings is greater than the value of the domestic public debt.
(Unlike most of Nicaragua's external debt, the domestic debt is contracted on market
terms, so its present value and its face value are about the same.)

According to the most recent figures from the Central Bank and the IMF*, Nicaragua's
domestic debt is estimated to be around US$1.6 billion, or approximately 62 percent of
GDP in 2002. From Table F.1, all growth and primary surplus combinations that lie to
the south-east of the diagonal line represent sustainable policies. So, for example, if the
rate of GDP growth turns out to be 4 percent per annum, then the primary surplus ratio
would have to be close to 4 percent of GDP to ensure sustainability.

According to the economic program supported by the PRGF arrangement agreed in
December 2002, the primary public sector surplus averages 2 percent of GDP per annum
during 2002 and 2005; see CAS Table 4. With the domestic debt amounting to 62
percent of GDP, this primary surplus ratio would be sustainable if the GDP growth rate is
at least 5% per annum, which had been the average growth.rate during 1996-2000. To
the extent that Nicaragua's medium term growth prospects are more modest than they
were in the latter half of the previous decade, a greater fiscal adjustment effort may be
necessary to ensure fiscal sustainability.


* See appendix on "Debt Sustainability" in the IMF document titledNicaragua- Selected Issues and
Statistical Appendix, which provides background information to the staff report on the 2002 Article IV
consultation discussions with Nicaragua and Nicaragua's request for a three-year arrangemcnt under the
PRGF, approved on December 4,2002.


                                                                                                         2
                                                                                      ANNEX F


It is useful to note that the preceding calculations are not affected significantly by the
possible sub-valuation of Nicaragua's GDP. Assuming that Nicaragua's true GDP is
substantially higher than the official figures currently indicate, the ratio of the domestic
debt to GDP will turn out to be much lower than the 62 percent of GDP mentioned
earlier. By the same token, however, the ongoing fiscal adjustment effort will also turn
out to be correspondingly weaker - i.e., what appeared to be a primary surplus of 2
percent of GDP, was actually a much lower surplus. So, if the combination of a given
fiscal effort and projected growth rate yielded an unsustainable domestic debt under the
old GDP figures, the same fiscal effort would continue to yield an unsustainable outcome
under the revised figures.




                                                                                               3
                                                   1                                ANNEX G




                                   Bank-Fund Relations Note

 On December 4, 2002, the International Monetary Fund (IMF) approved in principle a three-year
 arrangement for Nicaragua under the Poverty Reduction and Growth Facility (PRGF) in the
 amount of SDR 97.50 million (about US$129 million) to support the government's 2002-05
 economic program. The decision entitles Nicaragua to the release of SDR 6.97 million (about
 US$9 million). The IMF Board's decision became effective after the World Bank Executive
 Board's review of Nicaragua's Poverty Reduction Strategy Paper (PRSP) progress report on
 December 10, 2002.

The PRGF is the IMF's concessional facility for low-income countries. It is intended that PRGF-
supported programs are based on country-owned poverty reduction strategies adopted in a
participatory process involving civil society and development partners, and articulated in a PRSP.
This is intended to ensure that PRGF-supported programs are consistent with a comprehensive
framework for macroeconomic, structural, and social policies to foster growth and reduce
poverty. PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years
with a 5 1/2-year grace period on principal payments.

Nicaragua was also granted in principle SDR 1.88 million (about US$2.5 million) in additional
interim assistance under the Heavily Indebted Poor Countries (HIPC) Initiative. The additional
interim assistance will also become effective after the World Bank Board's review of Nicaragua.
Nicaragua reached the decision point under the HIPC Initiative in December 2000 and is expected
to reach the completion point by the end of 2003.

In commenting on the Executive Board's discussion, Eduardo Aninat, Deputy Managing Director
and Acting Chairman of the Board, said: "Following a sharp deterioration of economic
performance in recent years, the new government of Nicaragua has embarked on a three-year
program, to be supported by a new PRGF arrangement, that addresses key economic
vulnerabilities and barriers to growth and poverty reduction. The authorities have already
demonstrated a strong commitment to appropriate policies through the important measures they
have put in place, and their ownership of the program augurs well for its implementation. Given
the considerable challenges that lie ahead, however, they need to work toward further broadening
program ownership across the political spectrum and be forceful and vigilant in implementing
their policy agenda.

"Key components of the program include the targeted reduction of the fiscal deficit while
protecting poverty-related outlays, stepped-up bank supervision and tight enforcement of
prudential rules, and the central bank asset recovery plan. The structural reformn agenda focuses
on removing constraints to growth, including through privatization, increasing budget
transparency, public sector restructuring, judicial system reform, and further trade liberalization
and regional integration. The government's strong anti-corruption agenda and its efforts to
enhance governance and accountability in the public and private sectors is a key overarching goal
of the strategy. Crucial priorities for the immediate future include early approval of the 2003
budget in line with the program, a second round of tax reform including substantial reduction of
zero-rated VAT items, strict enforcement of prudential rules, and full implementation of the asset
recovery plan.

"The government is to be commended for completing the PRSP Annual Progress Report, which
has been prepared in a participatory process including civil society and the donor community, and
                                                  2                                 ANNEX G


provides a sound basis for Fund concessional assistance. While progress has been made in
implementing the PRSP, the sizable deviations from the macroeconomic framework in 2001 did
not allow the government to fully implement its poverty reduction strategy. Thus, a satisfactory
track record of implementation of the PRSP still needs to be established for Nicaragua to reach
the HIPC completion point.

"The Executive Board's approval of the authorities' request for a new three-year PRGF
arrangement as well as for interim debt relief under the enhanced HIPC Initiative will become
effective following the World Bank's endorsement of the PRSP progress report, which is
expected shortly," Mr. Aninat stated.

Program Summary

Nicaragua's economic growth decelerated in the last three years from over 7 percent in 1999 to an
estimated I percent in 2002, due to a marked weakening of the fiscal policies, a banking crisis,
and a deterioration in the extemal environment.

The fiscal imbalances that emerged in 2000-01, as a consequence of increases in spending and
weakening in tax revenues, were addressed by the govemment that took office in January 2002.
Govemment spending was reined in through administrative means and a reduction in the budget.
As a result, primary spending during the first three quarters of the year was contained at 26
percent of GDP, down from 28 percent during the same period of 2001. Nicaragua's assembly
also approved the first round of a tax reform package, and, to reduce financial sector
vulnerabilities, the authorities are about to implement a recovery plan for assets of failed banks.
For 2002, real GDP growth is projected at 1 percent, followed by a gradual recovery during 2003
to 3 percent. Growth in 2003 is expected to be driven mainly by construction, agriculture and
livestock activities.

The objective of the approved PRGF-supported program for 2002-05 is to promote sustained
growth and poverty reduction, in an environment of low inflation and fiscal sustainability. The
authorities' strategy for the next three years is to combine deficit reduction with higher and more
efficient poverty-related spending.

During the first year of the program, Nicaragua will focus on making further progress in fiscal
consolidation, improving the reserve position of the central bank and strengthening the financial
sector.

As part of the fiscal effort, the authorities intend to reduce primary spending, while protecting
poverty-reducing outlays, and an increase in tax revenues. The public sector deficit is expected to
be reduced to 6.3 percent of GDP in 2003, down from 14 percent in 2001. The program also
targets govenmment revenues to rise by 1- percent of GDP in 2003, reflecting the effects of the tax
reform initiated in 2002 and the partial effects of the second stage of the tax reform to be
implemented in 2003.

The monetary policy will aim to strengthen the position of the central bank in a low-inflation
context. The authorities have noted that fiscal adjustment and satisfactory implementation of the
asset recovery plan are critical to achieving this goal, and intend to sign shortly a contract with
the selected firm to carry out the recoveries.
The extemal current account deficit is expected to be reduced from 28 percent of GDP in 2002 to
24 percent in 2003. This improvement is mainly due to higher exports as a result of an expected
                                                 3                                 ANNEX G


recovery in coffee and sugar pricds and production, as well as better prospects for seafood
exports.

Nicaragua joined the IMF on March 14, 1946; its quota is SDR 130 million (about US$172
million). Its outstanding use of lMvl financing currently totals SDR 123 million (about US$163
miilion).


IMF Contact name: Mr. Jorge Toro
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