NICARAGUA: FINLAND CUTS BUDGET SUPPORT

UNCLAS SECTION 01 OF 02 MANAGUA 001427

SENSITIVE
SIPDIS

STATE PASS OPIC AND IAF

E.O. 12958: N/A
TAGS: EAID EFIN ECON PGOV PREL NU
SUBJECT: NICARAGUA: FINLAND CUTS BUDGET SUPPORT

SUMMARY
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1. (U) On October 22, the Embassy of Finland announced an end to its
$2.5 million annual assistance to the national budget of Nicaragua.
Finland is now the fourth country to withdraw direct budget
assistance, after Germany, Sweden, and Great Britain. The Budget
Support Group (BSG),a group of five countries including Finland,
plus the European Union, the World Bank, and the Inter-American
Development Bank, provides direct contributions to the general
budget of Nicaragua. To date, the BSG has withdrawn a total of $21
million from the national budget. In 2007 The IMF, under its three
year Poverty Reduction and Growth Facility Program (PRGF) approved a
$120.4 million arrangement in support of the government's economic
programs; so far about $47 million has been disbursed. End Summary.


FINLAND TO END BUDGET SUPPORT ASSISTANCE
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2. (U) The Embassy of Finland announced in a letter sent on October
22 its decision to discontinue the disbursement of $2.5 million to
the general budget of Nicaragua. A member of the Nicaraguan Budget
Support Group since 2005, Finland has donated approximately $85
million to Nicaragua during the last five years. So far in 2008,
Finnish assistance to Nicaragua has totaled $16.5 million, including
$2.5 million destined for the national budget which now will not be
disbursed. According to the letter, the reason for the decision was
dissatisfaction with the fact that the GON has not published the
final version of its 2008-2012 Human Development National Plan.
Other reasons for Finnish discontent include the failure to account
for Venezuelan funds flowing into Nicaragua, the decision of the
Supreme Electoral Council to prohibit two political parties from
competing in 2008 municipal elections, and government harassment of
local NGOs. The Embassy of Finland indicated that it would find
another way to channel these funds. For now, Finland's 2009 budget
still includes $19 million for foreign assistance to Nicaragua.

GET IN LINE
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3. (U) Finland is not the first country to withdraw budget support
from Nicaragua since Daniel Ortega became President. In August 2007,
Sweden announced it would end its foreign assistance to Nicaragua,
as a result of its decision to shift focus on countries in Africa
and Eastern Europe. Observers in Nicaragua speculated that the true
reason behind the Swedish decision was Ortega's prohibition of
therapeutic abortion, an assertion denied by the Swedish Ambassador.
Germany announced in April of 2008 its suspension of budget support
in Nicaragua. The United Kingdom's Department for International
Development (DFID) announced that it plans to close its
representational offices in Nicaragua in April of 2009, and withdraw
$4 million destined for the 2009 national budget. According to
DFID, London took the decision to invest in more economically
vulnerable regions such as Africa, Asia, and the Middle East. DFID
will continue its cooperation with Nicaragua through indirect
assistance projects. The IMF supports the Nicaraguan budget through
its three year $120 million Poverty Reduction and Growth Facility
Program (PRGF) arrangement in support of the government's economic
programs. To date, about $47 million has been disbursed. Future
disbursements are contingent on satisfactory IMF reviews, the last
of which was canceled for safety concerns following street protests
and disturbances in Nicaragua in the wake of municipal election
fraud allegations.

THE BUDGET SUPPORT GROUP
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4. (U) The Budget Support Group is composed of Germany, Norway, the
Netherlands, the United Kingdom, Sweden, Switzerland, the European
Commission, the World Bank, and the Inter-American Development Bank.
This group entered into a "Joint Financing Agreement" with the GON
in May 2005 to support the efforts of the GON to attain sustainable
economic growth and a reduction of poverty in the long run. Budget
support is a direct contribution to the general budget using the
accounting and procurement systems of the GON. These funds, which
are not destined to a particular use, but to the total budget
itself, allow the GON to allocate its resources according to its
priorities. The Budget Support Group created a Performance
Assessment Matrix (PAM),which includes a number of indicators that
are used for monitoring performance. The matrix includes five
sectors: macroeconomics, public finance, the productive sector,
social sector and governance. The cooperation of the Budget Support
Group is supposedly contingent upon accomplishments demonstrated in
the PAM.

LOCAL REACTION

MANAGUA 00001427 002 OF 002


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5. (U) Opposition politicians from the Constitutional Liberal Party
(PLC) said the Finnish action will cause other European countries to
follow suit. In their view, the blame lies with mismanagement and a
policy of confrontation on the part of President Ortega. In a
defensive statement, FSLN Vice Minister of Foreign Affairs Manuel
Coronel Kautz argued that the Finnish decision would not greatly
impact Nicaragua's development, and expressed doubt that other
countries would follow. Kautz warned that no country should
"interfere in another country's internal policies."

COMMENT
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6. (SBU) The Finnish decision reflects negatively on Nicaragua as a
worthy partner for donor assistance, especially in light of
accusations of wholesale fraud surrounding municipal elections. Of
particular concern is that most budget support typically goes to
poverty reduction programs. Nicaragua now faces a 2009 budget (not
yet approved by the National Assembly) with $21 million less in its
coffers than what it thought it would have. The reaction so far on
the part of the FSLN to Finland's decision appears to be
indifference. Many assume that Venezuela will step up to the plate
as caretaker of the Bolivarian Alternative for the Americas (ALBA),
which Nicaragua joined immediately upon President Ortega's ascension
to office. This may not be easy for Caracas, having promised
development projects to countries around the world when oil prices
were rising to $100 per barrel.