NICARAGUA: IMF REPRESENTATIVE ON BUDGET SUPPORT,

C O N F I D E N T I A L SECTION 01 OF 02 MANAGUA 000571

SIPDIS

STATE FOR WHA/CEN, WHA/EPSC AND EEB
TREASURY FOR SARA SENICH
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN

E.O. 12958: DECL: 06/08/2019
TAGS: EAID ECON EFIN PGOV NU
SUBJECT: NICARAGUA: IMF REPRESENTATIVE ON BUDGET SUPPORT,
VENEZUELAN ASSISTANCE

Classified By: Classified by Ambassador Robert J. Callahan for reasons
1.4 b & d.

Summary
--------------


1. (C) The International Monetary Fund's (IMF) Resident
Representative in Nicaragua told the Ambassador on June 4
that the IMF is negotiating with the Nicaraguan Government
(GON) and other international financial institutions to
provide $85 million in direct budget support for the Ortega
Administration, which would all but close the country's $120
million budget gap. He also told the Ambassador that
Venezuela provided well over $400 million to Nicaragua in
2008 (including foreign direct investment) and that
assistance in 2009 will likely total as much. Arbulu
referred the Ambassador to a Nicaragua Central Bank report,
summarized in paragraph 7, for additional details on 2008
Venezuelan assistance. End summary.

2009 Budget: IMF to the Rescue
--------------


2. (C) The IMF's Resident Representative in Nicaragua,
Humberto Arbulu-Neira, met with the Ambassador on June 4 to
discuss important modifications to Nicaragua's Poverty
Reduction and Growth Facility (PRGF). To date, the IMF has
provided funds under the PRGF solely to the Central Bank to
strengthen its international reserves. However, according to
Arbulu, a worldwide IMF policy shift in the wake of the
global financial crisis means that these same funds are now
available for direct budget support to national governments.
For Nicaragua, this is particularly significant because
European countries withdrew budget support after fraudulent
2008 municipal elections, leaving a budget shortfall of $120
million for 2009.


3. (C) Arbulu told the Ambassador that the IMF, World Bank,
and Inter-American Development Bank are currently negotiating
with the Central Bank and the Ministry of Finance to provide
$85 million in budget support for 2009. That would leave a
balance of $35 million -- a sum that according to Arbulu the
GON could easily make up by cutting spending and issuing $15
million in short-term debt. Arbulu said that an IMF
technical team had just completed a two-week visit to
Nicaragua on June 3, and that Arbulu himself, along with
Central Bank President Antenor Rosales, would travel to
Washington soon to wrap up an agreement at IMF headquarters.
Arbulu warned that negotiations may be contentious, because
the agreement would include additional requirements for
fiscal oversight that the IMF would demand in exchange for
providing direct budget support.


4. (C) Looking ahead to an upcoming IMF macroeconomic review
of Nicaraguan progress under the PRGF, Arbulu said that he
expected the GON to make the grade, though various European
governments could "create problems" over the November 2008
electoral fraud. However, Arbulu suggested that the budget
situation for 2010 could be complicated. He said that the
GON may need to move forward with tax increases that Ortega
postponed this year given the economic situation. Note:
These are issues Arbulu's successor will have to deal with.
Arbulu has served as the IMF's Resident Representative for
over four years and is transferring to Washington in July.
His replacement is expected in August. End note.

IMF Views on Venezuelan Assistance to Nicaragua
-------------- --


5. (C) Arbulu told the Ambassador that Venezuela provided
more than $400 million in assistance to Nicaragua in 2008.
He reported that the IMF had verified the figure and that it
was accurate. Arbulu stressed that this is a large sum of
money for a small economy such as Nicaragua's. For
additional information on Venezuelan assistance in 2008,
Arbulu referred the Ambassador to a Nicaraguan Central Bank
report published on June 4 called "External Cooperation,"
which contains a two-page section on Venezuelan financial
assistance (see paragraph 7).


MANAGUA 00000571 002 OF 002



6. Arbulu said Venezuelan assistance in 2009 would likely
top $400 million, including foreign direct investment and
additional funds derived from the sale of Venezuelan
petroleum through the Bolivarian Alternative for the Americas
(ALBA),so-called "Petroleum Cooperation." He told the
Ambassador that in 2009 Venezuela,s PDVSA (Petroleos de
Venezuela) would install state-of-the-art South Korean
generators valued at $180 million. PDVSA will also build a
plastics factory and move forward with feasibility studies
for an oil refinery called "Bolivar's Supreme Dream." Arbulu
said "Petroleum Cooperation" would be used to bolster the
balance sheet of FSLN-linked financial cooperative
ALBA-CARUNA, making it one of the largest financial
institutions in Nicaraguan by the end of 2009.

Central Bank Report Identifies $457 in Cooperation
-------------- --------------


7. (C) The Central Bank's 2008 "External Cooperation" report
states that Nicaragua benefited from $457 million in support
from Venezuela during the previous year, summarized as
follows:



A. ALBA Petroleum Cooperation (in millions)
--------------
Proceeds:
Donations through ALBA Development Fund: $147
Loans through ALBA-CARUNA: $146
--------------
Total: $293


Expenditures:

Subsidies for Public Transportation: $50
Streets and Houses for the People: $23
Food Security: $6
Agricultural Microfinance: $69
Health/Education: $8
Urban Transportation: $3
Institution Building: $23
Financing for Electricity Generation: $111
--------------
Total: $293


B. Bilateral Cooperation
--------------
Donations to Water Utlility: $2
Donations to Private Sector: $22
Loans from Venezuelan Development Bank: $9
---
Total: $33


C. Foreign Direct Investment
--------------
Electricity Generation (120 MW): $98
Two Petroleum Storage Tanks: $25
Construction Equipment: $8
--------------
Total: $131

Comment
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8. (C) Arbulu's explanation of the IMF,s current policy
perspective toward Nicaragua is a significant departure from
its previous position, which was to provide funds exclusively
for strengthening the Central Bank's international reserves.
Undoubtedly, the GON will be thrilled to learn that the IMF
can provide direct budget support. That would resolve the
fiscal crisis created by the withdrawal of European donors in
the wake of fraudulent 2008 municipal elections. On the
positive side, direct IMF budget support and oversight may
improve fiscal transparency. IMF budget support would also
spare Nicaragua a fiscal crisis that Ortega may have resolved
by tapping foreign reserves and undermining the country,s
stable monetary policy in the process.
CALLAHAN