November 2007

Issue: 2007 - 9

Business News and Economy

• INVESTMENT COMENTARY: OCTOBER 2007
• IMF Executive Board Approves US$111.3 Million PRGF Arrangement for Nicaragua
• Taiwan, Nicaragua Start Free Trade On Jan. 1
• Nicaragua, US discuss swapping arms, medical tech

 

Business News and Economy

INVESTMENT COMENTARY: OCTOBER 2007

By Javier Morales1
Macroeconomic indicators for Nicaragua for September are encouraging despite international financial turbulence derived from the sub-prime lending issue, a weak dollar, and a drastic increase in oil prices.

First of all, the IMF has approved a loan worth about $111.3 million under the Poverty Reduction and Growth Facility (PRGF) to support Nicaragua´s economic program. It will result in an immediate disbursement of approximately $18.5 million. PRGF loans carry an annual interest rate of 0.5% percent and are repayable over 10 years with a five and a half year grace period on principal payments. “Nicaragua has made important strides over the last years. Macroeconomic stability has been strengthened, vulnerabilities reduced, and poverty-reduction spending expanded, while important progress has been made with structural reforms,” says IMF deputy MD Murilo Portugal.

The government has sent to the National Assembly for approval the National Budget for 2008, which takes into account a successful 10% increase in tax collections in 2007 and a reduction in governmental expenses due to poor execution of the 2007 budget in almost all of the government agencies. The new budget estimates $1.5 billion for 2008.

International reserves at the Central Bank were $1.036 billion, as of September 30th, an increase of 12% with respect to last December. Deposits in the financial systems are at the highest levels after the last election, a peak of US$2.316 as of October 6, 2007; a significant increase is expected after the Central Bank decision to reduce the monetary reserves by 3% of deposits in the financial systems, which means additional deposits of $70 million dollars into the financial system.

The exchange rate spread is at its minimum level reflecting a lower demand of dollars in the economy. Inflation during the month of September increased by 1.14% and cumulative inflation for the year 2007 reached 8.48 % which is 2% higher than last year for the same period. Inflation is affecting food prices, especially of staples such as rice and beans, a consequence of food aid provided to the population affected by hurricane Felix.

Exports are growing as a result of higher commodity prices, and imports reflect an increase in the trade deficit of $1.155 billion propelled by the oil shock. Export growth for the first eight months of 2007 is about 17.6%, due to higher commodity prices and n increase in export volumes of coffee, sugar, beef and gold.

IMF Executive Board Approves US$111.3 Million PRGF Arrangement for Nicaragua

Press Release No. 07/224
October 5, 2007

The Executive Board of the International Monetary Fund (IMF) today approved a three-year, US$111.3 million arrangement under the Poverty Reduction and Growth Facility (PRGF) for Nicaragua in support of the government's economic program. The decision allows an immediate disbursement to Nicaragua of an amount equivalent to about US$18.5 million.

The PRGF is the IMF's concessional facility for low-income countries. It is intended that PRGF-supported programs are based on country-owned poverty and reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy paper (PRSP). This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5½-year grace period on principal payments.

Following the Executive Board discussion, Mr. Murilo Portugal, Deputy Managing Director and Acting Chairman, said:

"Nicaragua has made important strides over the last years. Macroeconomic stability has been strengthened, vulnerabilities reduced, and poverty-reduction spending expanded, while important progress has been made with structural reforms. With support from the IMF and the international community, including debt relief, past policies have facilitated growth and some improvement in social indicators.

"The new government's program aims to consolidate these gains, to move forward to reduce poverty in a more decisive way and achieve the Millennium Development Goals. It creates additional fiscal space to increase social spending and investment in key sectors such as energy, water, education, and health. At the same time, public debt levels are expected to fall over the medium term, while key structural challenges will be addressed, most notably in the power sector, strengthening the transparency and governance of public sector institutions, as well as developing future options for social security reform.

"The authorities' program appropriately prioritizes a multi-pronged strategy for addressing these challenges. In the case of the electricity sector this includes increasing investment in the sector and reducing distribution losses, as well as improving the regulatory framework. While poverty spending is set to increase, the authorities also recognize the importance of, and have committed to, further improving the efficiency of government expenditure. The authorities are committed to better targeting of poverty-related spending, strengthened systems of budget control and investment planning, and accounting transparently for all development assistance. Social security reform that reestablishes the balance between contributions and benefits also remains a central challenge.

"The authorities recognize the importance of steadfast implementation of the program in the face of a more difficult external environment. This will fortify the program's anchoring role in supporting confidence. They are also committed to increasing private investment and intend to continue working on strengthening the business climate," Mr. Portugal said.

Recent Economic Developments

Economic conditions remain stable on the back of prudent policies. Growth has resumed, inflation has been contained and macro imbalances reduced since the 2000-01 financial crisis. The fiscal position has strengthened substantially, which in combination with debt relief granted under the enhanced Highly Indebted Poor Countries initiative and Multilateral Debt Relief Initiative, has resulted in lower debt levels and some reduction in the current account deficit. At the same time, the financial sector has strengthened and fiscal reforms have advanced.

Nevertheless, poverty levels are still high and vulnerabilities remain. Half of the population lives below the poverty-line, and the reduction in poverty has slowed in recent years following earlier successes. Public debt levels and the current account deficit are still high despite fiscal consolidation and debt relief. The economy remains highly dollarized and exposed to sudden reversals of investor sentiment and external shocks, most recently from higher oil prices and natural disasters.

Program Summary

The new government's economic program builds on earlier progress made in entrenching macroeconomic stability, while providing the fiscal space necessary to reduce poverty without compromising debt sustainability. In addition, the program seeks to boost growth by improving the returns on high rates of investment and bolstering governance through the strengthening of key fiscal and financial sector institutions.

The fiscal program envisages a gradual decline in public debt ratios over the medium term. A temporary fiscal expansion is planned for 2008 to accommodate urgent spending on priority social programs and infrastructure, particularly in the energy and water sectors. To ensure meeting the Millennium Development Goals, the authorities program aims to improve the targeting of social spending while increasing access to health, education, water and sanitation, food security, housing and training opportunities for the poorest. Progress toward meeting these objectives will be monitored under the program.

The monetary program is consistent with a gradual decline in inflation and a further accumulation of international reserves. The crawling peg regime will be maintained as the authorities view this exchange rate regime as having served the country well in anchoring expectations, while maintaining competitiveness. The conduct of monetary policy will be strengthened through measures aimed at improving the finances of the central bank, as well as its independence and accountability.

The structural reform program focuses on measures aimed at boosting growth and poverty reduction while reducing vulnerabilities. The first year of the program emphasizes energy policy measures to improve electricity service and reduce fiscal risks. The second year of the program will seek to further strengthen public financial management practices, while the final year would aim at the implementation of specific steps to address medium-term challenges, including the under-funded social security system. The reform agenda has been carefully sequenced, mindful of implementation and political constraints.

Taiwan, Nicaragua Start Free Trade On Jan. 1

October 11, 2007 10:27 p.m. EST
Windsor Genova - AHN News Writer

Taipei, Taiwan (AHN) - Taiwan and Nicaragua will start implementing a free trade agreement on Jan. 1, 2008, setting zero tariffs on more than 50 percent of Taiwan's exports to Nicaragua and more than 65 percent of Nicaragua's exports to Taiwan for 10 years.

Steve R.L. Chen, the economic affairs minister of Taiwan, and Samuel Santos Lopez, the foreign minister of Nicaragua, exchanged the instruments of rectification at the Ministry of Economic Affairs in Taiwan's capital Taipei.

Under the agreement, Nicaragua will let 3,374 Taiwanese products into the country without duties. Taiwan will also lift tariffs on 5,797 Nicaraguan products entering the country.

After 10 years, products covered by the FTA will be expanded to allow zero-tariff for 97.3 percent of Nicaraguan exports to Taiwan and 95.1 percent of Taiwanese products sold to the Central American country.

The two countries started negotiations on the FTA in August 2004. After four rounds of talks, the FTA was ratified on June 16, 2006.

Nicaragua, US discuss swapping arms, medical tech

Tue Oct 2, 2007 11:05pm EDT

MANAGUA, Oct 2 (Reuters) - Nicaraguan President Daniel Ortega began talks with U.S. government officials on Tuesday over his offer to destroy hundreds of old anti-aircraft missiles in exchange for U.S. medical equipment.

Ortega, who led Nicaragua's 1979 Sandinista revolution and was voted back to power last year on a peace platform, said the swap would be "a small contribution to peace and security in the world."

He was speaking after talks in the Nicaraguan capital with a U.S. mission led by State Department official Richard Kidd, in charge of the weapons removal office.

Washington has long been pressuring Nicaragua to destroy or hand over more than 1,000 shoulder-filed Soviet missiles which it fears could find their way into the hands of terrorists trying to shoot down airliners.

Nicaragua has already destroyed half of the 2,000 missiles supplied by the former Soviet Union in the 1980s when the young Ortega's Marxist government forces were fighting U.S.-backed Contra rebels.

In July, Ortega offered to turn over another 650 of the missiles in exchange for medical technology and keep the rest for self-defense purposes. He also said he would accept helicopters in return for the missiles.

 

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