VZCZCXRO0241
RR RUEHLMC
DE RUEHMU #2479/01 3231729
ZNY CCCCC ZZH
R 191729Z NOV 07
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 1683
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHRL/AMEMBASSY BERLIN 0133
RUEHHE/AMEMBASSY HELSINKI 0056
RUEHLO/AMEMBASSY LONDON 0088
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNSC/NSC WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 MANAGUA 002479 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR WHA, 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: DECL: 11/09/2012 
TAGS: EFIN EAID ECON PREL PGOV NU
SUBJECT: GON SLOWLY REACHING OUT TO BUDGET SUPPORT DONORS 
 
REF: A. MANAGUA 2393 (NOTAL) 
 
     ¶B. MANAGUA 2255 
     ¶C. MANAGUA 1933 (NOTAL) 
 
Classified By: Amb. Paul Trivelli for reasons 1.4 b&d. 
 
¶1. (C) Summary: The Budget Support Group (BSG), a group of 
donor countries providing direct budget support (i.e. cash 
transfers for development purposes) to Nicaragua, told the 
Ministry of Finance (MHCP) on October 4 that it could not 
confirm funds to support the 2008 National Budget without 
better information as to how these funds would be used (Ref 
B).  As a result, the GON has slowly begun to engage the 
budget support donors, starting with an October 11 preview of 
the 2008 Budget by Ministry of Finance (MHCP) staff.  BSG 
members have been concerned that MHCP included unconfirmed 
donations in the budget for "projection purposes," but MHCP 
staff claim that the amounts will not be incorporated into 
the final budget by the National Assembly until confirmed by 
donors.  On October 16, the MHCP tried to pass 10 Millennium 
Development Goals (social indicators) as the revised 
indicators for the Performance Assessment Matrix (PAM) which 
the BSG use to asses the GON's performance.  The BSG 
president returned the list with suggestions for improvement, 
some of which MHCP included in its second draft of the PAM, 
delivered October 29.  BSG donors still view the GON as a 
reluctant participant in the budget support process.  If this 
view persists, donors may decide to phase out their direct 
budget support over the next few years.  End Summary. 
 
The GON Finally Reaches Out 
--------------------------- 

¶2. (C) The Budget Support Group (BSG), a group of donors 
providing direct budget support to Nicaragua, sent a letter 
to the Ministry of Finance (MHCP) on October 4 stating its 
unwillingness to confirm donor funds to support the 2008 
National Budget without better information as to how these 
funds would be used (Ref B).  As a result, the GON has 
engaged with the BSG, but has not yet addressed donor issues 
on the matrix of indicators for 2008 and the required 
semi-annual meetings.  BSG donors are prepared to provide USD 
80 million of Nicaragua's USD 1.53 billion 2008 budget.  The 
BSG is composed of the Inter-American Development Bank (new 
in 2008), the World Bank, the European Union, U.K., Norway, 
the Netherlands, Germany, Switzerland, and Finland.  BSG 
observers are the IMF, UNDP, Canada, and the United States. 
 
¶3. (SBU) On October 11, the GON provided a preview of the 
2008 National Budget to the BSG (four days before the budget 
was delivered to the National Assembly), which included a 
discussion of when and how to include BSG funds.  The GON 
highlighted: 
-- The fiscal deficit will be close to 1.8% of GDP, the PRGF 
target; 
-- Poverty reduction expenditures will be 16.7% of GDP; 
-- Teachers and health service workers will receive a 12% 
salary increase; 
-- The GON will prioritize resources to help the Atlantic 
Coast region recover from Hurricane Felix, finance municipal 
elections in November 2008, and transfer capital to the new 
National Development Bank (Ref A); and, 
-- MHCP will reduce the number and size of its capital 
expenditures in 2008 so that spending targets can be met. 
 
¶4. (C) In this meeting, BSG donors focused on how the MHCP 
accounts for donor funds within the budget.  MHCP 
traditionally creates a draft budget in May, to allow donors 
to report Nicaragua's needs in time for donor governments to 
determine financing amounts before the end of the year.  When 
the MHCP submits the budget to the National Assembly in 
October, it should only include confirmed funds from donors. 
The MHCP adds any funds confirmed by donors after October via 
a budget reform law.  This year, MHCP decided to include 
unconfirmed funds from donors for "projection purposes," 
i.e., to meet the budget deficit targets for the Poverty 
Reduction and Growth Facility (PRGF), the IMF's low interest 
lending facility for low-income countries.  MHCP assured BSG 
donors that the Economic Commission at the National Assembly 
will not include any unconfirmed funds in the budget sent to 
the floor. 
 
 
¶5. (SBU) BSG donors also raised concerns regarding inflation 
and the slow execution of the 2007 capital budget.  MHCP 
staff told donors that the increase in the world price of oil 
will drive Nicaragua's inflation, minimizing the effect of 
GON policy in other areas, such as reducing banks' reserve 
requirements by 3%.  Consistent with the FSLN's criticism of 
donor assistance projects, MHCP staff blamed the slow 
execution of the 2007 capital budget on "administrative 
problems and high execution costs."  (Comment: In reality, 
slow execution is the result of the presidency meddling in 
ministry affairs and the lack of technically experienced 
staff after the wholesale turnover in government personnel 
orchestrated by the Ortega administration (Ref C). End 
Comment.) 
 
The GON Tries for an Easy Score 
------------------------------- 

¶6. (C) On October 16, the MHCP sent the BSG a proposed 
Performance Assessment Matrix (PAM) which contained 10 
indicators, copied from the IMF Poverty Reduction Growth 
Facility (PRGF) and based on the United Nations' Millennium 
Development Goals, focused primarily on social issues.  The 
BSG's yearly review of GON performance is based upon this one 
coordinated matrix of indicators organized under the broad 
topics of macroeconomy, public finance, social issues, 
governance, and productivity.  In comparison with the 54 
indicators in the 2006 PAM, these ten indicators lacked the 
quality and breadth essential for an effective PAM (Ref B). 
BSG President Joseph Owen recommended that the GON broaden 
and improve the quality of the list. 
 
¶7. (C) On October 30, the GON forwarded a new matrix with 24 
indicators covering macroeconomic, social, and production 
issues and eliminating good governance and public finance. 
The BSG technical committees will comment on these 
indicators, and propose additions and modifications at the 
semi-annual review meeting, which must take place before 
December 31.  This meeting was finally scheduled for November 
19, on two working-days' notice. 
 
Background: IMF role in the BSG process 
--------------------------------------- 

¶8. (C) While having a PRGF is not a requirement for BSG 
donors, the goal of achieving and maintaining macroeconomic 
stability is.  Most BSG donors believe that an active PRGF 
encourages the government to pursue policies that support a 
stable macroeconomic environment.  A good PRGF and a quality 
PAM help donors to justify their programs at home.  As an 
observer to the BSG, the IMF ResRep was unaware of the BSG's 
growing frustration with the GON until a few days before the 
IMF Board meeting in October where the PRGF was approved (Ref 
B). 
 
Comment 
------- 

¶9. (C) Despite its recent effort to engage the BSG, the GON 
continues to frustrate donors who feel the government is a 
reluctant participant in the budget support process.  Every 
request for a meeting must be repeated, and meetings are 
often delayed or postponed.  The BSG's work calendar is 
continually slipping, increasing frustration among local 
donor agencies and their capitals.  If GON truculence 
continues, donors may reduce their direct budget support over 
the next few years, as they conclude that they cannot justify 
the funds.  Should donors pull out of multi-year commitments, 
the GON could lose the majority of its budget support by 2010. 
TRIVELLI