VZCZCXYZ0001
PP RUEHWEB

DE RUEHMU #0020/01 0052109
ZNY CCCCC ZZH
P 052109Z JAN 06
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC PRIORITY 4826
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE PRIORITY

C O N F I D E N T I A L MANAGUA 000020 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR AID - A. OLSON 
 
E.O. 12958: DECL: 10/29/2015 
TAGS: EAID ECIN ETRD PGOV NU
SUBJECT: STATE AND USAID POLICY PLANNING DIRECTORS VISIT 
NICARAGUA TO ASSESS U.S. ASSISTANCE PROGRAMS 
 
 
Classified By: AMBASSADOR PAUL TRIVELLI, REASONS 1.4 (B,D) 
 
¶1. (SBU) SUMMARY: In their joint visit to Nicaragua, State 
Director of Policy Planning Stephen Krasner  and USAID 
Assistant Administrator for Policy and Program Coordination 
Douglas Menarchik made clear that State, USAID and the White 
House are considering ways to reduce the complexity of U.S. 
foreign assistance delivery while increasing its 
effectiveness, especially as it relates to U.S. national 
security interests.  GON representatives, business leaders 
and foreign donors expressed a preference for untied U.S. 
assistance, such as budget support.  Several requests were 
made to expand coordination to participate directly with 
other donors in a sector-wide approach program (SWAP) 
involving pooled funding, instead of discrete USG/GON 
bilateral projects.  Embassy staff highlighted efforts to 
overcome manipulation of the election process and judicial 
corruption, as well as the stark consequences of a Sandinista 
(FSLN) victory in the November 2006 Presidential elections. 
They also emphasized the vital work that USAID and the rest 
of the Mission are providing in the areas of health, 
education and trade-capacity building.  Representatives of 
the GON noted that they consider the benefits of Millennium 
Challenge Corporation (MCC) eligibility to be on par with the 
IMF program, CAFTA and the Highly Indebted Poor Countries 
(HIPC) initiative.  The delegation visited two USAID-funded 
projects in which 12,000 micro-farmers are graduating from 
being food aid recipients and subsistence farmers to pooling 
their production to meet the high volume and quality demands 
of major supermarket suppliers in the United States and 
Central America.  Paragraphs Thirteen and Fourteen provide a 
primer on international foreign assistance in Nicaragua.  A 
list of non-Mission participants in the meetings is found at 
the end of this message.  END SUMMARY 
 
Working for Democracy and Rule of Law 
- - - - - - - - - - - - - - - - - - - 
 
¶2. (U) Mission and civil society participants outlined the 
threats of FSLN and Liberal Constitutional Party (PLC) 
electoral shenanigans, including efforts by allies of the two 
parties on the Nicaraguan Supreme Electoral Council (CSE) to 
undermine democratic candidates.  USAID is supporting the 
Consortium for Elections and Political Party Support (CEPPS) 
and is awaiting a proposal from the OAS to field a long-term 
election observation mission.  The Mission is also working 
with a broad coalition of Nicaraguan civil society to 
pressure authorities to prevent manipulation of the electoral 
process and educate voters about their rights.  Participants 
mentioned that this is an area where relatively modest 
financial resources can be crucial to protecting Nicaraguan 
democracy.  (NOTE: Already budgeted but undelivered FY06 ESF 
funding for these activities is urgently needed to prepare 
for regional elections on the Atlantic Coast in March 2006.) 
 
¶3. (C) While corruption remains a problem in various sectors 
of Nicaraguan society, anticorruption experts described the 
especially pernicious effects of judicial corruption and the 
strong efforts - led by USAID - to address this situation. 
Former Supreme Court Magistrate Guilermo Vargas described how 
the "sinister" pact ("El Pacto") between the PLC and FSLN 
have packed Nicaraguan courts with judges who take their 
marching orders from the political strongmen who lead the two 
parties.  Presidential Legal Advisor Fernando Zelaya 
1KQQC[uotrafficking, the proceeds of which some allege is being 
used to fund the FSLN political campaign.  Adela Torrente 
from the American Nicaraguan Chamber of Commerce explained 
how the lack of rule of law negatively impacts Nicaragua,s 
business climate.  Mignone Vega, an anticorruption advisor in 
the Office of the Presidency, noted the political price that 
President Bolanos has paid for leading a campaign against 
corruption, with party strongmen Daniel Ortega and Arnoldo 
Aleman keeping the country in a constant crisis to avoid 
accountability for their corrupt acts.  Several participants 
hailed the effectiveness of USAID efforts to combat 
corruption and said that this is the moment to strengthen 
that support. 
 
Working for Economic Growth and Stability 
- - - - - - - - - - - - - - - - - - - - - 
 
Acting Foreign Minister Pitches Budget Support 
- - - - - - - - - - - - - - - - - - - - - - - 
 
¶4. (SBU) Acting Foreign Minister and Development Coordinator 
Mauricio Gomez provided his detailed analysis of various 
assistance programs for Nicaragua.  He described 
international support as consisting of 580 official 
development projects with 40 partners and 300 missions, 
accounting for 14% of Nicaragua's GDP.  The need to 
coordinate with all of those entities "develops a lot of 
bureaucracy on the part of the Government and hurts the 
capacity to govern," he argued.  He claimed that reliance on 
programs run by foreign governments, international 
organizations and NGOs in place of government ministries 
creates inefficient and duplicative "parallel structures" 
that hinder the GON's ability to efficiently serve the needs 
of the people.  He believes that Nicaragua needs to generate 
its own resources to make GON social spending sustainable. 
 
¶5. (SBU) Gomez opined that the reason for the unwillingness 
of some donors to provide budget support is "perception" that 
the GON lacks transparency.  Gomez asserted that, while the 
former Aleman Government "had to spend a lot of time 
defending its actions, we're better now," adding that the 
present government is "built on efficiency and transparency." 
 In his view, Nicaragua does not need more money, but rather 
more flexibility to use existing levels of support so that 
less is spent on outside entities 
-especially contractors- that use up a good deal of the funds 
on overhead.  (NOTE: Gomez directed some of this criticism 
directly at USAID - probably because the USG has declined to 
participate in budget support, which he champions, or to 
commit to much of the Harmonization and Alignment process, 
which he coordinates.  See Paragraph Fourteen for details.) 
 
International Donors Call for More Coordination - And Budget 
Support 
- - - - - - - - - - - - - - - - - - - - - - - 


¶6. (SBU) Representatives of several donor countries and 
international organizations repeated many of the themes from 
the Gomez meeting.  International donors called for more 
direct USG involvement in the coordination of foreign 
assistance in Nicaragua.  Swedish Ambassador Eva Zetterberg 
lamented the lack of USG involvement in multilateral 
development cooperation efforts (known as the Sector Wide 
Approach - see Paragraph Fourteen for details), and suggested 
that U.S. representatives at least participate as observers 
in the Budget Support Group, which includes representatives 
of entities that provide budget support to the GON.  IDB 
official Eduardo Balcarcel acknowledged the time-consuming 
nature of some donor coordination initiatives but called for 
ad hoc "coordination in the field" to ensure that efforts are 
complementary.  Jurg Benz, Swiss Development Agency (COSUDE) 
Country Director and chair of the Budget Support Group, 
lamented that there are too many donors working on too many 
priorities, and not enough donor specialization.   (Note: 
USAID chairs the Trade-Capacity Building Donor Group ("mesa") 
and the Mission is active in the Election, Health and 
Education Mesas.  Also, federal law prohibits the pooling of 
donations with foreign governments, other than via 
international institutions of which the U.S. is a member.) 
 
¶7. (SBU) IDB Representative Balcarcel offered examples of how 
budget support lets ministries manage multiple projects - 
some of them very small - for themselves to avoid duplication 
of efforts.  "Budget support avoids transaction costs, 
particularly for small donors," he noted.  Colleen Littlejohn 
of the World Bank commented that donors place a burden on the 
GON.  For example, an officer in the Education Ministry spent 
his first three weeks on the job doing nothing but attending 
coordination meetings. 
She used the same term as Acting Foreign Minister Gomez in 
decrying "parallel structures."  Dr. Menarchik reasoned that 
results are difficult to measure with budget support and 
underlined the reality of having to be accountable to 
taxpayers for results. 
 
Donors Address Concerns About "Turning Off the Tap" 
- - - - - - - - - - - - - - - - - - - - - - - - - - 
 
 
¶8. (SBU) International donors also addressed Dr. Krasner's 
concerns about budget support limiting leverage should 
democracy be threatened.  He noted that the history of 
conditionality is that too often recipients make commitments 
and do not keep them, but nonetheless, donors keep on paying. 
 Their response was that donors flag corrupt or 
anti-democratic actions, in which case some would likely 
continue funding while others would pull out.  Responding to 
a comment by Dr. Krasner about the difficulty of "turning off 
the tap", Ambassador Zetterberg recalled that the Budget 
Support Group had to some extent turned off the tap in 2005. 
They had promised $120 million, but when Nicaragua,s 
macroeconomic program went off track, intense discussions 
arose over whether disbursements should continue.  In the 
end, most donors disbursed, but very late, and only $89 
million. 
 
¶9. (SBU) Dr. Krasner stressed the advantage of the MCC 
approach, where conditionality is up front.  The MCC Resident 
Country Director pointed to the recent enactment of 
legislation to fund the highway trust fund (FOMAV) as a 
successful example of donors coordinating to pressure 
Nicaragua to pass politically sensitive legislation 
establishing a gas tax for FOMAV that would let donors fund 
road construction with an assurance that the roads would be 
maintained thereafter.  Dr. Krasner indicated that focused, 
results-oriented interactions between donors on specific 
issues rather than holding "countless meetings debating 
slides" is a preferable form of cooperation.  The 
international donors also remarked that USAID is a leader in 
health programs in Nicaragua. 
 
Some Business and Civic Leaders Join the Call for Budget 
Support 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶10. (SBU) A group of Nicaragua's "best and brightest" private 
and public sector leaders called for a "pragmatic" approach 
to development assistance aimed at trade-capacity building 
(TCB).  Treasury Minister Mario Arana repeated the now 
familiar call for budget support and "flexibility," and 
decried the onerous burden of "parallel structures" on GON 
ministries.  Some other participants questioned the ability 
of the GON to properly manage large grants to the national 
treasury.  The types of TCB assistance called for were 
infrastructure development, assistance in developing "niche 
market" crops for export, workforce training and 
macroeconomic stability.  While they did acknowledge that 
many USAID and MCC programs are already directed at these 
specific items, one participant rejoined that current 
programs have given Nicaragua enough high-dollar consultants' 
reports to wallpaper the country - a comment very similar to 
one made by Acting Foreign Minister Gomez.  Several applauded 
the MCC approach of focusing on private sector development 
and allowing beneficiaries to participate in the process. 
The economic leaders also registered their fears that an FSLN 
presidential win in November 2006 would devastate Nicaragua's 
economy.  (Comment: As in the past, some Nicaraguan business 
leaders are reportedly prepared to financially support FSLN 
leader Ortega,s campaign to ensure that if Ortega wins, he 
will not exclude them from their part of the economic pie. 
End Comment.) 
 
 
Mission Staff Emphasize Priorities 
- - - - - - - - - - - - - - - - - 
 
¶11. (C) Throughout the visit, Mission staff provided input 
and observations about U.S. assistance in Nicaragua. 
Ambassador Trivelli stated that the Mission's core objectives 
in Nicaragua for the next year are 1) survival of the Bolanos 
government (which now seems likely), 2) ratification and 
implementation of DR-CAFTA (which is pending passage of 
legislation on IPR and other issues), 3) final implementation 
of the MCC compact (which is also on track), and 4) free and 
fair elections.  He remarked that as bad as the level of 
poverty in Nicaragua remains, the country has made remarkable 
progress in the 15 years since the end of the Civil War. 
USAID Mission Director stressed that USAID plays a critical 
role in maintaining regional stability and credited USAID 
efforts with much of that improvement through democracy 
enhancement, economic development and quality health and 
education programs.  He explained that USAID resources are 
currently focused on free and fair elections in November 2006 
as a bi-lateral priority interest.  USAID is focusing its 
economic program on TCB by promoting public and private 
sector cooperation.  USAID staff said that in order to fully 
take advantage of CAFTA, Nicaragua needs to strengthen its 
public institutions, invigorate its private sector and 
integrate its economy within the region.  USAID's emphasis on 
TCB programs helped generate 24,000 new jobs last year. 
 
¶12. (C) USAID staff also stressed the importance of the 
Mission's health and education programs, stating that they 
are essential for national and regional economic progress and 
social stability.  The MCC Resident Country Director said his 
agency and USAID maintain a collaborative and close 
relationship in Nicaragua and are working to avoid 
duplication of effort.  Mission personnel were very clear 
about the dangers of an FSLN victory in the 2006 Presidential 
elections.  A Sandinista win would likely result in  capital 
flight, a setback in open markets, an anti-U.S. foreign 
policy and an immigration crisis, as many Nicaraguans would 
likely seek sanctuary in the United States and neighboring 
countries.  For these reasons, timing is crucial for the 
receipt of election and other financial assistance to bolster 
chances for a reform-minded, democratic candidate to win the 
elections. 
 
A Brief Primer on International Donor Activities in Nicaragua 
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 
 
¶13. (U) Total donor assistance averages about $500 million 
per year in grants and loans.  The  assistance in new grants 
and loans (obligations) for 2004 was $532 million of which 
$313 million came from bilateral donors and $219 million from 
multilateral sources.  Principal bilateral donors were Sweden 
($56.45 million), United States ($55.87 million - not 
including the $175 million 5-year MCC Compact), Denmark 
($44.76 million), Japan ($33.7 million), Finland ($22.73 
million), and Netherlands ($17.6 million).   Multilateral 
assistance and loans come primarily from the Inter-American 
Development Bank (for competitiveness, tax reform and social 
sector adjustment), the World Bank (for support of 
implementation of Nicaragua's Poverty Reduction Strategy) the 
European Commission (for rural development, agricultural 
policy and education) and various UN agencies.  In recent 
years forgiveness of about $5 billion of Nicaragua's $6 
billion plus bilateral and multilateral foreign debt has been 
approved.  However, substantial internal debt of $6.52 
billion remains. 
 
¶14. (U) The GON has been actively working to improve donor 
coordination in the country, and seeks to 
harmonize donor activities and align donor assistance to its 
national development plan.  The GON has expressed strong 
interest in budget support or Sector Wide Approaches (SWAPs). 
 This preference was expressed in the Declarations of Paris 
and Managua, and endorsed by donors in 2003.  USAID 
interprets SWAPs as the coming together of donors, the GON, 
and civil society to agree on development objectives, 
priorities in a sector and implementation.  Some donors 
equate SWAPs directly to budget support.  While USAID policy 
generally precludes budget support assistance (and federal 
law prohibits the pooling of resources), the Mission fully 
supports the concept of SWAPs for the purpose of setting a 
common vision and goals, and ensuring coordination among 
donors in implementing assistance programs. 
 
A List of Non-USG Participants in Discussions 
--------------------------------------------- 
 
¶15. (U) The following guests participated in an Electoral 
Assistance Discussion: Gilberto Valdes, representing the 
International Republican Institute; Deborah Ullmer, 
representing the National Democratic Institute; Pablo 
Garlarce and Rafael Lopez, representing the International 
Foundation for Election Systems (IFES). All of these 
organizations are part of the Consortium for Elections and 
Political Party Support (CEPPS). 
 
¶16. (U) The following guests participated in an 
Anticorruption Roundtable: Former Supreme Court Magistrate 
Guillermo Vargas, Solicitor General Fernando Zelaya, Mignone 
Vega, Presidential Anti-corruption Advisor; Adela Torrente, 
American Nicaraguan Chamber of Commerce. 
 
¶17. (U) The following guests participated in an International 
Donor Roundtable: Swedish Ambassador Eva Zetterberg, 
representing the Donor Group;  German Ambassador Gregor 
Koebel, representing the European Union; Eduardo Balcarcel, 
Inter-American Development Bank representative; Coleen 
Littlejohn, World Bank representative; Swiss Development 
Agency (COSUDE) Country Director Jurg Benz, representing the 
Budget Support Group. 
 
¶18. (U) The following guests participated in an Economic 
Growth/CAFTA Roundtable: Minister Mario Arana, Ministry of 
Treasury; Dr. Carlos Sequeira, Secretary for Coordination and 
Strategy, Office of the Presidency; Roberto Bendana, 
Presidential Competativeness Commission; Dr. Juan Sebastian 
Chamorro, presidential advisor; Adolfo Arguello, Multiple 
investments Administration; Dr. Adolfo McGregor, business and 
civic leader; Juan Carlos Pereira, Nicaraguan Investment 
Promotion Agency (ProNicaragua); Lucia Salazar (former 
Minister of Tourism and founder of ProNicaragua). 
 
¶19. (U) The following individuals participated in visits to 
the El Verbo Model Farm and Training Center and Hortifruti 
Produce Distribution Center: Robert Trolese, El Verbo Country 
Director; Jorge Sandoval, farm manager; Alberto Pereira, 
Hortifruti General Manager; Tomas Membreno, Chief of Party 
for USAID Cooperative Agreement with Michigan State 
University. 
 
Dr. krasner reviewed this cable prior to trasnmission. 
 
TRIVELLI