GON SLOWLY REACHING OUT TO BUDGET SUPPORT DONORS

C O N F I D E N T I A L SECTION 01 OF 02 MANAGUA 002479

SIPDIS

SIPDIS

STATE FOR WHA, WHA/CEN, WHA/EPSC, AND EEB
TREASURY FOR SARA GRAY
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR

E.O. 12958: DECL: 11/09/2012
TAGS: EFIN EAID ECON PREL PGOV NU
SUBJECT: GON SLOWLY REACHING OUT TO BUDGET SUPPORT DONORS

REF: A. MANAGUA 2393 (NOTAL)


B. MANAGUA 2255

C. MANAGUA 1933 (NOTAL)

Classified By: Amb. Paul Trivelli for reasons 1.4 b&d.


1. (C) Summary: The Budget Support Group (BSG),a group of
donor countries providing direct budget support (i.e. cash
transfers for development purposes) to Nicaragua, told the
Ministry of Finance (MHCP) on October 4 that it could not
confirm funds to support the 2008 National Budget without
better information as to how these funds would be used (Ref
B). As a result, the GON has slowly begun to engage the
budget support donors, starting with an October 11 preview of
the 2008 Budget by Ministry of Finance (MHCP) staff. BSG
members have been concerned that MHCP included unconfirmed
donations in the budget for "projection purposes," but MHCP
staff claim that the amounts will not be incorporated into
the final budget by the National Assembly until confirmed by
donors. On October 16, the MHCP tried to pass 10 Millennium
Development Goals (social indicators) as the revised
indicators for the Performance Assessment Matrix (PAM) which
the BSG use to asses the GON's performance. The BSG
president returned the list with suggestions for improvement,
some of which MHCP included in its second draft of the PAM,
delivered October 29. BSG donors still view the GON as a
reluctant participant in the budget support process. If this
view persists, donors may decide to phase out their direct
budget support over the next few years. End Summary.

The GON Finally Reaches Out
--------------


2. (C) The Budget Support Group (BSG),a group of donors
providing direct budget support to Nicaragua, sent a letter
to the Ministry of Finance (MHCP) on October 4 stating its
unwillingness to confirm donor funds to support the 2008
National Budget without better information as to how these
funds would be used (Ref B). As a result, the GON has
engaged with the BSG, but has not yet addressed donor issues
on the matrix of indicators for 2008 and the required
semi-annual meetings. BSG donors are prepared to provide USD
80 million of Nicaragua's USD 1.53 billion 2008 budget. The
BSG is composed of the Inter-American Development Bank (new
in 2008),the World Bank, the European Union, U.K., Norway,
the Netherlands, Germany, Switzerland, and Finland. BSG
observers are the IMF, UNDP, Canada, and the United States.


3. (SBU) On October 11, the GON provided a preview of the
2008 National Budget to the BSG (four days before the budget
was delivered to the National Assembly),which included a
discussion of when and how to include BSG funds. The GON
highlighted:
-- The fiscal deficit will be close to 1.8% of GDP, the PRGF
target;
-- Poverty reduction expenditures will be 16.7% of GDP;
-- Teachers and health service workers will receive a 12%
salary increase;
-- The GON will prioritize resources to help the Atlantic
Coast region recover from Hurricane Felix, finance municipal
elections in November 2008, and transfer capital to the new
National Development Bank (Ref A); and,
-- MHCP will reduce the number and size of its capital
expenditures in 2008 so that spending targets can be met.


4. (C) In this meeting, BSG donors focused on how the MHCP
accounts for donor funds within the budget. MHCP
traditionally creates a draft budget in May, to allow donors
to report Nicaragua's needs in time for donor governments to
determine financing amounts before the end of the year. When
the MHCP submits the budget to the National Assembly in
October, it should only include confirmed funds from donors.
The MHCP adds any funds confirmed by donors after October via
a budget reform law. This year, MHCP decided to include
unconfirmed funds from donors for "projection purposes,"
i.e., to meet the budget deficit targets for the Poverty
Reduction and Growth Facility (PRGF),the IMF's low interest
lending facility for low-income countries. MHCP assured BSG
donors that the Economic Commission at the National Assembly
will not include any unconfirmed funds in the budget sent to
the floor.



5. (SBU) BSG donors also raised concerns regarding inflation
and the slow execution of the 2007 capital budget. MHCP
staff told donors that the increase in the world price of oil
will drive Nicaragua's inflation, minimizing the effect of
GON policy in other areas, such as reducing banks' reserve
requirements by 3%. Consistent with the FSLN's criticism of
donor assistance projects, MHCP staff blamed the slow
execution of the 2007 capital budget on "administrative
problems and high execution costs." (Comment: In reality,
slow execution is the result of the presidency meddling in
ministry affairs and the lack of technically experienced
staff after the wholesale turnover in government personnel
orchestrated by the Ortega administration (Ref C). End
Comment.)

The GON Tries for an Easy Score
--------------


6. (C) On October 16, the MHCP sent the BSG a proposed
Performance Assessment Matrix (PAM) which contained 10
indicators, copied from the IMF Poverty Reduction Growth
Facility (PRGF) and based on the United Nations' Millennium
Development Goals, focused primarily on social issues. The
BSG's yearly review of GON performance is based upon this one
coordinated matrix of indicators organized under the broad
topics of macroeconomy, public finance, social issues,
governance, and productivity. In comparison with the 54
indicators in the 2006 PAM, these ten indicators lacked the
quality and breadth essential for an effective PAM (Ref B).
BSG President Joseph Owen recommended that the GON broaden
and improve the quality of the list.


7. (C) On October 30, the GON forwarded a new matrix with 24
indicators covering macroeconomic, social, and production
issues and eliminating good governance and public finance.
The BSG technical committees will comment on these
indicators, and propose additions and modifications at the
semi-annual review meeting, which must take place before
December 31. This meeting was finally scheduled for November
19, on two working-days' notice.

Background: IMF role in the BSG process
--------------


8. (C) While having a PRGF is not a requirement for BSG
donors, the goal of achieving and maintaining macroeconomic
stability is. Most BSG donors believe that an active PRGF
encourages the government to pursue policies that support a
stable macroeconomic environment. A good PRGF and a quality
PAM help donors to justify their programs at home. As an
observer to the BSG, the IMF ResRep was unaware of the BSG's
growing frustration with the GON until a few days before the
IMF Board meeting in October where the PRGF was approved (Ref
B).

Comment
--------------


9. (C) Despite its recent effort to engage the BSG, the GON
continues to frustrate donors who feel the government is a
reluctant participant in the budget support process. Every
request for a meeting must be repeated, and meetings are
often delayed or postponed. The BSG's work calendar is
continually slipping, increasing frustration among local
donor agencies and their capitals. If GON truculence
continues, donors may reduce their direct budget support over
the next few years, as they conclude that they cannot justify
the funds. Should donors pull out of multi-year commitments,
the GON could lose the majority of its budget support by 2010.
TRIVELLI