NICARAGUAN FISCAL PROCESS TRANSPARENT, BUT

UNCLAS SECTION 01 OF 02 MANAGUA 000359 SENSITIVE SIPDIS TREASURY PLEASE PASS TO SARA SENICH E.O. 12958: N/A TAGS: EAID ECON PREL NU SUBJECT: NICARAGUAN FISCAL PROCESS TRANSPARENT, BUT VENEZUELAN FUNDS REMAIN OFF-BUDGET REF: STATE 28885 ¶1. (SBU) Summary: Per Ref A, Embassy Managua reports that Nicaragua is in compliance with Section 7088 (c) of the Department of State, Foreign Operations, and Related Programs Appropriation Act (SFOAA). The Nicaraguan budget is publicly available on the Ministry of Finance,s website, and is reviewed and approved by the National Assembly. The budget does not, however, accurately or completely reflect funds originating from Venezuela, which remains a controversial issue with the National Assembly. As part of its Poverty Reduction and Growth Facility agreement (PGRF),the IMF is trying to establish an accurate accounting of these funds. Nicaragua's current IMF program also includes work on improving transparency regarding capital expenditures. USAID and other international donors continue to work with the GON to improve fiscal transparency. End Summary. Nicaraguan Budget is Available on Website... -------------- ¶2. (U) Per Ref A request, Post reports that Nicaragua's budget process meets acceptable standards for transparency as outlined in Section 7088 (c) of the SFOAA. The official budget is made public, both in its proposed and National Assembly approved versions, on the Ministry of Finance's website (www.hacienda.gob.ni). The website details overall revenues and expenditures and breaks out the budget by ministry and agency. Each ministerial budget details salaries, current expenditures, donor projects, and capital expenditures. Nicaragua's budget development and administration is governed by Law 550, the Public Administration and Budgetary Regime Law, which requires that the national and municipal budgets meet World Bank and IMF standards. ...But Venezuelan Assistance Difficult to Assess -------------- --- ¶3. (SBU) Since President Ortega took office in January 2007, Venezuela has provided significant sums of off-budget assistance to the Nicaraguan Government. A September 2008 Central Bank Report (published largely at the IMF,s behest) listed $88.6 million in government-to-government assistance in 2007. That assistance included $69.3 million in &petroleum cooperation,8 provided through ALBA Nicaragua, S.A. (ALBANISA),a joint venture between Petronic, a Nicaraguan state-owned oil company owning a 45% share, and �0A;PDVSA, a Venezuelan state-owned oil company owning a 55% share. According to an agreement signed by Ortega and Venezuelan President Hugo Chavez, ALBANISA buys oil from Venezuela's PDVSA and pays 50% of the bill within 90 days. From the balance, ALBANISA loans 25% to a local development fund and 25% to an ALBA Fund, both of which undertake development projects in Nicaragua. ALBANISA is supposed to repay these funds at an interest rate of 2% over 23 years, following a 2-year grace period. ¶4. (SBU) President Ortega,s 2008 Annual Report states that total funding through ALBANISA was $375 million from its launch in 2007 through 2008, but this may not include off-budget assistance to the ruling FSLN (Sandinista National Liberation Front) party. The FSLN appears to have used this part of this assistance to invest in party building, pay for party projects and political propaganda, and fund the campaigns of pro-government candidates in the November 2008 municipal elections. The GON has not explained how it has disbursed Venezuelan assistance or the mechanisms by which such assistance was processed, making a full assessment of the impact of such assistance difficult. ¶5. (SBU) Questions have arisen in the National Assembly regarding Petronic,s 45% stake in ALBANISA, which would seem to assign it a 45% share of ALBANISA debt. Walmaro Gutierrez, the FSLN Chairman of the Economic Commission in the National Assembly, counters that although PETRONIC is state-owned, the company is not subject to legislative authorization requirements that would otherwise apply to government entities. Gutierrez points out that the 1979 law that established Petronic allows the company to acquire foreign debt without approval of the National Assembly. Opposition leaders argue that the 2003 Debt Law makes it clear that any debt acquired by state-owned companies )- MANAGUA 00000359 002 OF 002 especially long-term financing beyond that required for operating a business -- must be included in the government budget and is subject to approval by the National Assembly. ¶6. (SBU) There is little transparency about how ALBANISA funds are used. ALABANISA manages some funds directly, while others are administered by a FSLN-linked financial cooperative, ALBA-CARUNA. In implementing social programs and infrastructure construction, they may even be mixed with funds provided through the national budget. For example, government officials have provided contradictory information regarding funding for the &Zero Hunger8 program, at times claiming that it is supported with ALBANISA proceeds and at other times claiming that resources from the national budget are used. Similar questions have been raised about funding for &Houses for the People,8 a government program that officials claim was supported by ALBANISA but now appears to have been financed by the Nicaraguan Social Security Institute (INSS). USG Efforts to Improve Fiscal Transparency -------------- ¶7. (U) USAID funds a project aimed at institutional strengthening of management systems which includes restructuring the budgets of the Ministries of the Family and Health towards results based budgeting. This process increases the transparency and accountability of the use of public funds. International Donors, Work on Fiscal Transparency -------------- -------------- ¶8. (U) Other donor programs include: - World Bank: Project to increase efficiency, productivity and transparency in the public sector. Total: $23.5 million. Initiated: March 2004. Ended: June 2008. - Inter American Development Bank: National Budget Audit. Project helps the Controller General's Office in preparing a reference framework and action plan to prepare financial audits and comply with budget execution as required by international donors who contribute to Nicaragua,s budget. Total: $407,000. ¶9. (SBU) The GON is currently in its second year of a three-year Poverty Reduction Growth Facility (PRGF) agreement with the IMF. Two structural components of the agreement are capital spending controls and tax administration, both of which programs are focused on improving quality and transparency. In addition, under the PRGF the GON agreed to monitor and report on Venezuelan aid both to the public and private sectors. In accordance with this requirement, the GON,s Central Bank published a report in September 2008 which detailed Venezuelan assistance to Nicaragua in 2007 (however, many observers complained that the figures provided by the Central Bank were grossly underestimated). CALLAHAN