VZCZCXRO7018
PP RUEHLMC
DE RUEHMU #2255/01 2771820
ZNY CCCCC ZZH
P 041820Z OCT 07
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC PRIORITY 1428
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHRL/AMEMBASSY BERLIN 0131
RUEHHE/AMEMBASSY HELSINKI 0054
RUEHLO/AMEMBASSY LONDON 0085
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC
RHEHNSC/NSC WASHINGTON DC

C O N F I D E N T I A L SECTION 01 OF 02 MANAGUA 002255 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/EPSC, AND EEB/OMA 
TREASURY FOR SARA GRAY 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR 
 
E.O. 12958: DECL: 10/04/2017 
TAGS: EFIN EAID ECON PREL PGOV NU
SUBJECT: NICARAGUAN GOVERNMENT IGNORING BUDGET SUPPORT 
DONORS 
 
 
Classified By: Amb. Paul Trivelli for reasons 1.4 b&d 
 
¶1. (C) Summary: At an October 2 meeting donors providing 
direct budget support to Nicaragua expressed frustration over 
repeated brush-offs from the government since the Budget 
Support Group's (BSG) annual performance review in July.  BSG 
members believe the  government is assuming that donors will 
fall into place once the IMF Poverty Reduction and Growth 
Facility (PRGF) is approved in October.  IMF Resident 
Representative Humberto Arbulu Neira is concerned "because 
without direct budget support, Nicaragua's PRGF is blown." 
On October 3, Arbulu will request an appointment with Central 
Bank President Antenor Rosales to impress upon him that the 
success of the PRGF is directly linked to donor budget 
support.  The BSG intends to send a letter to the Minister of 
Finance "firmly" stating that GON unwillingness to meet with 
the BSG is imperiling 2008 budget support.  We suspect that 
the relationship between the donors and the IFIs will become 
clearer to the  government after Arbulu and the BSG deliver 
strong messages to the economic leadership.  End Summary. 
 
Budget Support Donors Are Being Ignored 
--------------------------------------- 

¶2. (C) At an October 2 meeting donors providing direct budget 
support to Nicaragua(See para 7,  for background) expressed 
frustration over repeated brush-offs from the government 
since the BSG's annual performance review in July.  BSG 
President and World Bank Resident Representative Joe Owen 
stated that while there is goodwill on the part of BSG, the 
government's indifference toward the group could change that 
feeling.  BSG members are concerned because the USD 1.47 
billion National Budget that Ortega plans to present to the 
National Assembly on October 15 assumes USD 100 million in 
direct budget support that they have yet to commit. 
 
¶3. (C) BSG members believe the  government is simply assuming 
that donors will fall into place conditionality issues once 
the IMF Poverty Reduction and Growth Facility (PRGF) is 
approved in October.  Comments from BSG members at the 
meeting indicate how wrong this assumption may be. 
Representatives from the Finnish and German Embassies and the 
U.K.'s Department for International Development (DFID) stated 
that there are growing reservations within their governments 
about continuing direct budget support for Nicaragua.  By 
October 4 the BSG intends to send a letter to the Minister of 
Finance "firmly" stating that GON unwillingness to meet with 
the BSG is imperiling 2008 budget support. 
 
But Their Support Affects The PRGF 
---------------------------------- 

¶4. (C) IMF Resident Representative Humberto Arbulu Neira is 
concerned by this news "because without direct budget 
support, Nicaragua's PRGF is blown."  As a HIPC country, 
Nicaragua has few options for filling the USD 100 million gap 
that would be left by the withdrawal of donor budget support. 
 The loss of almost 10% of GON operating budget would require 
the complete revision of the budget and fiscal terms of the 
PRGF, explained Arbulu. 
 
¶5. (C) On October 3, Arbulu will request an appointment with 
Central Bank President Antenor Rosales to impress upon him 
that the success of the PRGF is directly linked to donor 
budget support.  Arbulu will insist that the GON reach out to 
the BSG as soon as possible.  Arbulu will then call IMF 
Headquarters in Washington to inform staff of developments. 
Arbulu does not believe that the impasse with the donors will 
stop the IMF Board's consideration of Nicaragua's PRGF, but 
does believe that it will raise serious concerns for many 
members. 
 
What Needs To Be Done 
--------------------- 

¶6. (C) BSG members cannot confirm their intention to provide 
direct budget support until the BSG and GON agree to a matrix 
of performance indicators (PAM).  At the annual Performance 
Review Meetings in July, the GON asked that the list of 
indicators be shortened and revised.  BSG members were open 
to the idea and requested that the GON propose changes as a 
first step in negotiations.  To date, the GON has not 
presented its proposed modifications.  BSG members recognize 
that the failure of the government to respond may be partly 
explained by the involvement by key staff in being reassigned 
to work on Hurricane Felix relief and resolution of the 
ongoing electricity crisis.  They are concerned, however, 
that the GON may well plan to present the BSG with a final 
PAM without negotiating its contents.  These concerns are not 
allayed by the increasingly rude and dismissive tone of 
e-mails from Ministry of Finance staffers to the BSG 
secretariat, currently managed by the Netherlands Embassy. 
Time is of the essence, as negotiating the PAM normally takes 
about two months. 
 
Background On Budget Support 
---------------------------- 

¶7. (SBU) Nicaragua and some of its donors created the Budget 
Support Group in 2006 in response to the 2005 Paris 
Declaration on Aid Harmonization and Alignment.  Donor 
countries agreed to provide direct support to Nicaragua's 
annual budget as long as Nicaragua adhered to or strived to 
achieve eight guiding principles: support for human rights, 
transparency in government, democracy, judicial independence, 
gender equality, macroeconomic stability, fighting 
corruption, and poverty reduction.  The yearly review of GON 
performance is based upon one coordinated matrix of 
indicators organized under the broad topics of macroeconomy, 
public finance, social issues, governance, and productivity. 
After each annual review, the BSG and GON determine if any 
indicators and/or targets need to be adjusted before donors 
commit budget support in the coming year.  The BSG is 
composed of the Inter-American Development Bank, the World 
Bank, the European Union, the U.K., Norway, the Netherlands, 
Germany, Switzerland, and Finland.  BSG observers are the 
IMF, UNDP, Canada, and the United States. 
 
Comment 
------- 

¶8. (C) While disconcerting to members of the BSG, this latest 
episode with the government is unlikely to bring the budget 
support program to a screeching halt.  Clearly, the GON has 
not grasped the fact that donor agencies must defend and 
account for their programs to their governments back home. 
The fact that these donors also participate in the IMF and 
other IFI consideration of Nicaraguan issues seems lost on 
the government.  The relationship between the donors and the 
IFIs should become much clearer to the government after 
Arbulu and the BSG deliver their strong messages to the 
economic leadership. How quickly the GON will be able to 
respond, with the many distractions created by the FSLN in 
other areas of Nicaraguan economic and political life, as 
well as hurricane relief, is unclear. 
TRIVELLI