NICARAGUAN GOVERNMENT IGNORING BUDGET SUPPORT

C O N F I D E N T I A L SECTION 01 OF 02 MANAGUA 002255 SIPDIS SIPDIS STATE FOR WHA/CEN, WHA/EPSC, AND EEB/OMA TREASURY FOR SARA GRAY USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR E.O. 12958: DECL: 10/04/2017 TAGS: EFIN EAID ECON PREL PGOV NU SUBJECT: NICARAGUAN GOVERNMENT IGNORING BUDGET SUPPORT DONORS Classified By: Amb. Paul Trivelli for reasons 1.4 b&d ¶1. (C) Summary: At an October 2 meeting donors providing direct budget support to Nicaragua expressed frustration over repeated brush-offs from the government since the Budget Support Group's (BSG) annual performance review in July. BSG members believe the government is assuming that donors will fall into place once the IMF Poverty Reduction and Growth Facility (PRGF) is approved in October. IMF Resident Representative Humberto Arbulu Neira is concerned "because without direct budget support, Nicaragua's PRGF is blown." On October 3, Arbulu will request an appointment with Central Bank President Antenor Rosales to impress upon him that the success of the PRGF is directly linked to donor budget support. The BSG intends to send a letter to the Minister of Finance "firmly" stating that GON unwillingness to meet with the BSG is imperiling 2008 budget support. We suspect that the relationship between the donors and the IFIs will become clearer to the government after Arbulu and the BSG deliver strong messages to the economic leadership. End Summary. Budget Support Donors Are Being Ignored -------------- ¶2. (C) At an October 2 meeting donors providing direct budget support to Nicaragua(See para 7, for background) expressed frustration over repeated brush-offs from the government since the BSG's annual performance review in July. BSG President and World Bank Resident Representative Joe Owen stated that while there is goodwill on the part of BSG, the government's indifference toward the group could change that feeling. BSG members are concerned because the USD 1.47 billion National Budget that Ortega plans to present to the National Assembly on October 15 assumes USD 100 million in direct budget support that they have yet to commit. ¶3. (C) BSG members believe the government is simply assuming that donors will fall into place conditionality issues once the IMF Poverty Reduction and Growth Facility (PRGF) is approved in October. Comments from BSG members at the meeting indicate how wrong this assumption may be. Representatives from the Finnish and German Embassies and the U.K.'s Department for International Development (DFID) stated that there are growing reservations within their governments about continuing direct budget support for Nicaragua. By October 4 the BSG intends to send a letter to the Minister of Finance "firmly" stating that GON unwillingness to meet with the BSG is imperiling 2008 budget support. But Their Support Affects The PRGF -------------- ¶4. (C) IMF Resident Representative Humberto Arbulu Neira is concerned by this news "because without direct budget support, Nicaragua's PRGF is blown." As a HIPC country, Nicaragua has few options for filling the USD 100 million gap that would be left by the withdrawal of donor budget support. The loss of almost 10% of GON operating budget would require the complete revision of the budget and fiscal terms of the PRGF, explained Arbulu. ¶5. (C) On October 3, Arbulu will request an appointment with Central Bank President Antenor Rosales to impress upon him that the success of the PRGF is directly linked to donor budget support. Arbulu will insist that the GON reach out to the BSG as soon as possible. Arbulu will then call IMF Headquarters in Washington to inform staff of developments. Arbulu does not believe that the impasse with the donors will stop the IMF Board's consideration of Nicaragua's PRGF, but does believe that it will raise serious concerns for many members. What Needs To Be Done -------------- ¶6. (C) BSG members cannot confirm their intention to provide direct budget support until the BSG and GON agree to a matrix of performance indicators (PAM). At the annual Performance Review Meetings in July, the GON asked that the list of indicators be shortened and revised. BSG members were open to the idea and requested that the GON propose changes as a first step in negotiations. To date, the GON has not presented its proposed modifications. BSG members recognize that the failure of the government to respond may be partly explained by the involvement by key staff in being reassigned to work on Hurricane Felix relief and resolution of the ongoing electricity crisis. They are concerned, however, that the GON may well plan to present the BSG with a final PAM without negotiating its contents. These concerns are not allayed by the increasingly rude and dismissive tone of e-mails from Ministry of Finance staffers to the BSG secretariat, currently managed by the Netherlands Embassy. Time is of the essence, as negotiating the PAM normally takes about two months. Background On Budget Support -------------- ¶7. (SBU) Nicaragua and some of its donors created the Budget Support Group in 2006 in response to the 2005 Paris Declaration on Aid Harmonization and Alignment. Donor countries agreed to provide direct support to Nicaragua's annual budget as long as Nicaragua adhered to or strived to achieve eight guiding principles: support for human rights, transparency in government, democracy, judicial independence, gender equality, macroeconomic stability, fighting corruption, and poverty reduction. The yearly review of GON performance is based upon one coordinated matrix of indicators organized under the broad topics of macroeconomy, public finance, social issues, governance, and productivity. After each annual review, the BSG and GON determine if any indicators and/or targets need to be adjusted before donors commit budget support in the coming year. The BSG is composed of the Inter-American Development Bank, the World Bank, the European Union, the U.K., Norway, the Netherlands, Germany, Switzerland, and Finland. BSG observers are the IMF, UNDP, Canada, and the United States. Comment -------------- ¶8. (C) While disconcerting to members of the BSG, this latest episode with the government is unlikely to bring the budget support program to a screeching halt. Clearly, the GON has not grasped the fact that donor agencies must defend and account for their programs to their governments back home. The fact that these donors also participate in the IMF and other IFI consideration of Nicaraguan issues seems lost on the government. The relationship between the donors and the IFIs should become much clearer to the government after Arbulu and the BSG deliver their strong messages to the economic leadership. How quickly the GON will be able to respond, with the many distractions created by the FSLN in other areas of Nicaraguan economic and political life, as well as hurricane relief, is unclear. TRIVELLI