NICARAGUA: 2009 BUDGET REMAINS ELUSIVE

C O N F I D E N T I A L SECTION 01 OF 02 MANAGUA 000054 SIPDIS STATE PASS OPIC AND IAF E.O. 12958: DECL: 01/13/2019 TAGS: EFIN EAID ECON PGOV PREL NU SUBJECT: NICARAGUA: 2009 BUDGET REMAINS ELUSIVE REF: (A) MANAGUA 08 1505 (B) MANAGUA 08 1489 Classified By: Classified by DCM Richard M. Sanders for reasons 1.4 (b) and (d). ¶1. (U) Summary. The GON remains without an approved 2009 budget as a result of the political stalemate in the Nicaraguan National Assembly (ref A). Finance Minister Alberto Guevara presented President Ortega's budget to the National Assembly back in October, but since then it has lingered in the legislative branch, which closed its 2008 session on December 15. Ortega's proposed 2009 budget ($1.7 billion) represents a 13% increase from 2008, a modest amount given Nicaragua's estimated 2008 inflation rate of 15% (the highest in Central America). GON revenue is estimated to be about $1.4 billion per year, leaving a fiscal deficit of approximately $300 million, which the Sandinista National Liberation Front (FSLN) hopes will be covered by international donors. Because of the global financial crisis and a deterioration of political conditions within Nicaragua, most observers here now believe that Nicaragua's growth rate in 2009 will reach only 2%, which means that the GON will likely have to revise its budget downwards to reflect decreased revenues. Meanwhile, President Ortega issued a decree on December 26 modifying the 2008 national budget by adding nearly $30 million, mostly for key government ministries that implement the FSLN's political agenda. Failure to approve a fully-financed 2009 national budget will seriously jeopardize the International Monetary Fund,s continued disbursements for Nicaragua under its three year poverty Reduction and Growth Facility (PRGF). End Summary. 2009 Budget Limbo Continues -------------- ¶2. (U) President Ortega's FSLN Government entered the New Year without an approved 2009 national budget, the result of a political impasse in the Nicaraguan National Assembly, mainly due to the opposition's allegations of fraud perpetrated during the November 9 municipal elections. Finance Minister Alberto Guevara presented President Ortega's $1.7 billion budget to the National Assembly in October, but to date it has not been approved by the legislature at either the committee-level or by the full plenary body, which closed its 2008 session on December 15. ¶3. (U) The 2009 FSLN budget focuses on "social expenditures," and consequently the ministries programmed for the biggest budgetary allocations include the Ministries of Health and Education (16.3% and 16.1%, respectively), followed by the Ministry of Transportation and Infrastructure at 7.3%. By law, national universities get 6%, plus a subsidy for energy, water and telephone services. Similarly, the Supreme Court gets 4% to operate the court system, while municipalities get 9% of the budget. The 2009 budget allocates $11.4 million for energy subsidies and $7.6 million in transportation subsidies. ¶4. (U) Ortega's 2009 budget was originally (and very optimistically) based on an annual inflation rate of 9.5% and projected economic growth of 4.5% for 2009. Because of the global financial crisis and a deterioration of political conditions within Nicaragua, however, most observers here now believe that Nicaragua's growth rate in 2009 will reach only 2% at best. Nicaragua's annual rate of inflation in 2008 reached approximately 15%, the highest in Central America. The GON's annual revenue is approximately $1.4 billion per year, leaving a fiscal deficit of about $300 million. Local media have been reporting that the GON will propose a revision of its 2009 budget as a result of lower economic growth. ¶5. (C) Mario Arana, former Central Bank President and Minister of Trade, told econoff on January 12 that according to a source in the current Ministry of Finance, the FSLN will soon announce 2009 "austerity measures" to reflect forecasted decreased economic growth and revenues for the national budget. According to Arana's source, the FSLN will then exploit this opportunity to dismiss remaining non-Sandinista civil service employees under the guise of fiscal savings. Arana told us the GON is permitted to disburse funds according to its proposed 2009 budget for up to 90 days into the New Year without National Assembly approval, but that he expects both branches of government to come to an agreement in the near future. Arana believes that the FSLN will take whatever fiscal steps are necessary to satisfy the International Monetary Fund's (IMF) Poverty Reduction and Growth Facility, which provides Nicaragua with much needed international reserves in support of its strong cordoba policy. 2009 Budget Support Dries Up -------------- ¶6. (U) At the same time that Nicaragua faces an extremely challenging fiscal year, European donors (with the exception of Switzerland and Norway) suspended their budget support assistance to Nicaragua in light of recent political events, particularly the irregularities that occurred during the November 9 municipal elections (ref B). The European Commission has traditionally contributed approximately $40 million per annum to the national budget, but recently Benita Ferrero-Waldner, EU Commissioner for External Relations, sent a letter to the GON indicating a suspension of its 2009 budget support. Overall, direct foreign assistance for the 2008 Nicaraguan national budget was to have been $115 million, but only $15 million of that amount was disbursed as a result of European outrage concerning FSLN intimidation of local NGOs and electoral fraud on November 9. The World Bank (WB) and the Inter-American Development Bank (IADB) had previously approved $40 million in budget support for Nicaragua in 2008 and 2009, but these funds require pro-forma approval by the National Assembly, which has so far failed to take the necessary action. Daniel's After-Christmas Bonus -------------- ¶7. (U) Meanwhile, on December 26 President Ortega issued a presidential decree modifying Nicaragua's 2008 budget, adjusting it upwards by approximately $30 million. The principal beneficiaries of Ortega's adjusted 2008 budget-by-decree were the very ministries charged with implementing the FSLN's social agenda, such as the Ministry of Agricultures "Zero Hunger" program. Finance Minister Alberto Guevara agreed promptly to comply with the presidential decree, asserting that President Ortega is fully capable of making such decisions as long as it is "for the benefit of the people." According to the Nicaraguan constitution, however, budgetary revisions must originate in and be approved by the National Assembly. As a result, Ortega's decree has sparked criticism from across the political spectrum that he is usurping power and has raised fears regarding the Ortega Government's increasingly authoritarian tendencies. COMMENT -------------- ¶8. (C) As former Central Bank President Arana pointed out, a pressing dilemma for the GON is that continued support from the International Monetary Fund (IMF) is directly contingent on the passage and financing of a sustainable national budget. If at some point the IMF decides to discontinue or trim its three year Poverty Reduction and Growth Facility for Nicaragua, it could have a negative ripple effect on all multilateral lenders active here. In the short-to-medium term, however, we expect that President Ortega will manage to meet his 2009 fiscal deficit through budget cuts, creative accounting and direct (or indirect) monetary assistance from Venezuela. CALLAHAN