VZCZCXRO3383
RR RUEHLMC
DE RUEHMU #1933/01 2291700
ZNR UUUUU ZZH
R 171700Z AUG 07
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 1033
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RHEHNSC/NSC WASHDC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 02 MANAGUA 001933 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/EPSC, AND EEB 
TREASURY FOR SARA GRAY 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV NU
SUBJECT: Implementation of Nicaragua's 2007 Budget 
 
REF: A) MANAGUA 1783, B) MANAGUA 1771 
 
¶1. (SBU) Summary: President Ortega's 2007 $1.5 billion national 
budget, approved by the National Assembly in March, does not differ 
markedly from the October 2006 version presented by the Bolanos 
administration.  The Sandinista budget did shift additional 
resources toward health, education and agriculture.  The Ministry of 
Finance's (MHCP) semi-annual report on budget implementation claims 
that the obvious under-spending on capital projects is due to slow 
disbursement of assistance monies.  Indeed, foreign donors have been 
reluctant to fund capital projects with the Sandinista government 
without reasonable performance guarantees and a viable government 
economic development plan.  The new IMF agreement should provide 
some assurance to donors, but will not solve implementation problems 
caused by the wholesale dismissal of technically qualified civil 
service employees by the incoming Sandinista government.  End 
Summary. 
 
NicaraguaQs 2007 Budget 
----------------------- 

¶2. (U) President OrtegaQs 2007 National Budget, approved by the 
National Assembly in March, totals USD 1.5 billion and does not 
differ markedly from the version drafted by the Bolanos 
administration in October 2006 with both staying within IMF 
parameters.  The Ortega budget increased spending by just USD 42.1 
million, funded by a USD 39.4 million increase in tax revenue in the 
first quarter (Q1) of 2007 (a 16.2% increase over Q1 2006), and USD 
28.8 million in donor assistance not confirmed until after October 
¶2006.  The Sandinista government did shift USD 75 million between 
ministries to augment social spending.  It also "saved" USD 56.7 
million through a reduction in civil service wages, including 
ministers and the president; a reduction in representational 
expenses, GON travel, cellular phone use, and the use of credit 
cards; as well as cuts in the purchase of goods and services. 
 
¶3. (U) The Sandinista government's spending prioritizes the 
Ministries of Health, Education, and Agriculture, whose budgets 
increased by 3.5%, 12% and 24.5%, respectively.  The up tick for the 
Ministry of Agriculture reflects the incorporation of the 
GovernmentQs signature poverty reduction program "Zero Hunger" (Ref 
A). 
 
¶4. (U) The following is the budget breakdown for the largest 
recipients: 
 
Ministry                    USD(millions)  % of Budget 
--------------------------------------------- --------- 
Ministry of Health             218.9           14.3 
Ministry of Education          210.3           13.6 
Ministry of Transportation     101.8            6.6 
Transfer to Universities        81.3            6.0 
Transfer to Municipalities      69.6            5.0 
Ministry of Government          65.9            4.3 
Supreme Court                   55.4            4.0 
Ministry of Agriculture         53.7            3.5 
Ministry of Defense             39.0            2.5 
Rural Development Institute     27.9            1.8 
Emergency Social Inv Fund       20.5            1.3 
National Assembly               17.9            1.1 
Road Maintenance Fund           15.6            1.0 
Ministry of Energy and Mines    14.9            1.0 
Ministry of Environment         12.7            0.8 
Presidency                      11.9            0.8 
 
A Drop in Capital Spending? 
--------------------------- 

¶5. (SBU) The Ministry of Finance's (MHCP) semi-annual report on 
budget implementation notes that the GON has been under-spending its 
capital budget, a fact which some local economists and National 
Assembly Deputies claim has caused the current contraction of the 
construction sector, thereby leading to an overall slowing of the 
economy.  While GON capital spending is below 2006 January-June 
levels (29.4% vs. 35.5% of budget allocations), the contraction of 
the construction sector is much more pronounced (-7.8% vs. 6.8% 
growth in 2006), and likely cannot be blamed completely on the slow 
pace of GON capital spending.  Also, despite the low numbers in the 
construction sector, overall economic growth, as measured by a 
monthly economic activity index, has been steady at 4.2% for 2007, 
only a slight drop from 4.3% for 2006 (for the same time period). 
 
The GON Blames the Donors 
------------------------- 

¶6. (U) The MHCP budget implementation report places most of the 
blame for capital budget under-spending on slow disbursements by 
donors, as many infrastructure investment projects depend heavily on 
foreign assistance.  As of July 25, donors have only disbursed 21.9% 
of budgeted loans and donations (USD 128.5 million of USD 586 
million).  (Note: External borrowing and foreign assistance account 
for 15% and 15.7% of the total budget, respectively. End note).  As 
a result, capital spending tied to foreign assistance enjoys only a 
22.6% implementation rate. 
 
¶7. (SBU) Indeed donors are reluctant to disburse funds to the 
Sandinista government without sufficient performance guarantees or 
an acceptable economic development plan.  They complain that the 
lack of a coherent economic roadmap and the veil of secrecy 
surrounding GON operations do not provide the necessary confidence 
that foreign assistance will be used well.  In fact, it was six 
months into the current Ortega administration before the GON 
convened the first Donors' Roundtable (the group used to meet 
bimonthly.)  Donors have also been waiting for the GON and the IMF 
to conclude a Poverty Reduction and Growth Facility (PRGF), before 
considering further disbursements.  Now that the agreement is 
negotiated, disbursements and implementation should increase (Ref 
B). 
 
¶8. (U) The MHCP report mentions in passing that "ineffective 
implementing agencies" (not defined) and the change in GON policy 
priorities may also have contributed to the lack of capital 
spending.  The latter excuse is used to explain the delays in 
implementing the capital budgets for health (20.9% implementation 
rate vs. 27.9% in 2006), education (28.8% vs. 43.5% in 2006), and 
the newly created Ministry of Energy (10.7%). 
 
Quality Spending is a Problem 
----------------------------- 

¶9. (SBU) The real issue is the quality of GON capital expenditures. 
IMF ResRep Humberto Arbulu Neira states that the GON buries many 
salaries in its capital accounts because the previous administration 
transferred them there to meet savings targets under the prior IMF 
agreement (Ref B).  Therefore, not all capital spending translates 
into infrastructure spending.  Both donors and local economists also 
point to the replacement of specialized staff with FSLN party 
loyalists who do not possess the knowledge and/or skills to execute 
infrastructure investment.  (Note: According to some reports, 2,000 
of 5,000 civil servants at the ministry level have been fired or 
pressured out since January and this figure does not include other 
government employees such as teachers or healthcare workers covered 
by separate personnel legislation. End note.)  Aggravating the 
situation, FSLN ministers are often reluctant to embark on projects 
without the approval of the Presidency, creating huge bottlenecks 
and delays in implementation. 
 
Comment 
------- 

¶10. (SBU) Budget implementation, and the quality of GON spending, is 
a key issue for the IMF and the donors providing direct budget 
support (BSG).  All have expressed concern regarding the weakening 
of the civil service as the result of so many experienced government 
employees being replaced by party loyalists, and of efforts by the 
Presidency to concentrate all decision-making power.  We understand 
some donors are considering discontinuing direct budget support. 
Despite these concerns, the new PRGF, as negotiated, allows the GON 
to increase capital spending by USD 155 million, 84% more than in 
¶2007.  The IMF has also agreed to provide technical assistance to 
the GON to purge non-capital items such as salaries from the capital 
budget. 
 
TRIVELLI