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C O N F I D E N T I A L SECTION 01 OF 03 MANAGUA 001489 
 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/EPSC AND EEB 
DEPT FOR USOAS 
STATE PASS TO USAID FOR CARDENAS 
TREASURY FOR SARA SENICH 
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN 
 
E.O. 12958: DECL: 12/11/2018 
TAGS: EAID ECON EFIN NU PGOV
SUBJECT: NICARAGUA: EUROPEAN BUDGET DONORS IN HOLDING 
PATTERN 
 
REF: MANAGUA 1426 
 
Classified By: Ambassador Robert J. Callahan for reaons 1.4 b & d. 
 
¶1. (C) Summary:  European donors to Nicaragua's national 
budget (at both the EU and Member State level) are seriously 
examining their assistance to Nicaragua in large part as a 
result of the fraud perpetrated by the Sandinista National 
Liberation Front (FSLN) during the November 9 municipal 
elections.  The European Commission Delegation in Nicaragua 
has told us they are waiting for policy guidance from 
Brussels on a way forward but a suspension of disbursements 
is likely.  Donor support accounts for almost 15% of the 
Nicaraguan national budget.  The French Ambassador, 
representing the EU Presidency, recently reminded the GON in 
a recent press interview that EU assistance comprises about 
50% of international budget support for Nicaragua.  So far in 
2008, Nicaragua's international Budget Support Group (BSG) 
has disbursed only $15 million of a previously programmed 
$115 million because of frustration with the FSLN's lack of 
transparency, its bullying of NGOs, and the harassment of 
political opposition earlier this year.  Germany, the United 
Kingdom and Sweden had already announced plans to withdraw 
budget assistance earlier from Nicaragua as a result of a 
realignment of foreign aid priorities towards Africa and the 
Mideast.  Europe-funded sectoral assistance projects, which 
are more targeted, continue to be funded.  End Summary. 
 
Europeans Reach Impasse 
----------------------- 
 
¶2. (C) Formed in 2005, the BSG comprises the European 
Commission, the Netherlands, Norway, Switzerland, Sweden, 
Finland, Germany, the UK, the World Bank and the 
Inter-American Development Bank (IADB).  Unlike specific 
sectoral projects, budget support provides the GON with 
discretionary funds which can be utilized for a variety of 
national needs.  Our European interlocutors have recently 
made plain, both privately in and public, that the primary 
reason for dwindling budget support is the GON's antagonistic 
policies towards civil society, NGOs and an overall lack of 
fiscal transparency, to include funds from Venezuela which 
are "off budget."  The FSLN's fraudulent November 9 municipal 
election results, an election which was neither free nor fair 
and lacked international observers, has called into question 
the very survival of the BSG as a cohesive entity here. 
 
¶3. (C) On December 5 Carlo Pettinato, the European Commission 
Delegation's Chief of Institutional and Budget Support, told 
econoff that so far in 2008, the Commission has not provided 
a single euro for the Nicaraguan national budget because of 
dissatisfaction with the GON's performance on democracy and 
transparency issues.  The FSLN's actions on November 9 only 
served to raise Nicaragua,s negative profile in Europe.  In 
Brussels, the issue of disbursements to the Ortega regime has 
now reached senior, political levels within the EU, drawing 
the attention of Commissioner for External Relations Benita 
Ferrero-Waldner.  Pettinato said that 2009 looks equally 
bleak, and unless the FSLN takes dramatic steps to achieve a 
"politically legitimate" solution, budget support funds from 
the Commission will remain frozen.  He added that given the 
multi-layered nature of the EU's decisionmaking process in 
Brussels, not to mention the upcoming holiday season, it was 
easy to predict a long delay in budget support disbursements. 
 
 
¶4. (U) Representing the EU Presidency, French Ambassador 
 
MANAGUA 00001489  002 OF 003 
 
 
Thierry Fraysse adopted a sharp, highly critical tone in an 
interview with center-left daily El Nuevo Diario on December 
¶3.  Fraysse noted that EU donations comprise roughly 50% of 
international budget support for the GON (about $60 million 
out of $115 million annually, adding both Commission and 
Member State contributions).  He also opined that "many 
countries would like to have" the level of cooperation which 
Nicaragua enjoys with the EU.  He lamented the lack of a 
constructive dialogue between the BSG and the Ortega regime, 
and added that the EU's previously pledged 2008 budget 
support package of $39 million was very unlikely to arrive by 
the end of the calendar year, if at all. 
 
Changing European Priorities 
---------------------------- 
 
¶5. (C) Hans Wessels, Head of Cooperation for the Embassy of 
the Netherlands, told econoff on December 3 that he had 
recommended to The Hague that the Netherlands freeze 2009 
budget support for the GON pending a satisfactory, 
politically legitimate resolution of the November 9 crisis 
surrounding municipal elections.  Already in 2008, the 
Netherlands had cut its donor support by 50%, disbursing only 
$8 million instead of the previously planned $16 million as a 
result of earlier anti-democratic moves by the FSLN.  Wessels 
stated, however, that the Netherlands would leave the window 
open for continued budget support to get back on track, 
though he discounted this possibility in the near future. 
While Switzerland, Norway, the Netherlands and the European 
Commission have made "pledges" for 2009 budget support, these 
are for planning purposes only and very tentative. 
 
¶6. (C) Nicaragua's budget woes have coincided with a shift in 
European assistance priorities towards Africa and the 
Mideast.  Sweden announced its departure in August 2007. 
Germany decided not to provide direct budget support in 2008. 
 In December 2007, the United Kingdom's Department for 
International Development (DFID) announced its decision to 
discontinue direct budget support, closing its DFID offices 
in 2010, shifting assistance to Nicaraguan NGOs. 
 
The IFIs 
-------- 
 
¶7. (C) So far, international lending institutions active in 
Nicaragua continue to maintain an independent, apolitical 
posture.  The World Bank's (WB) Resident Representative in 
Nicaragua has stated on numerous occasions that the WB's 
mandate is to implement development programs, not to comment 
on democracy and governance issues related to the particular 
government in power.  However, the IADB's representative in 
Nicaragua recently met privately with the Ambassador to 
express deep frustration with the GON.  She also told the 
Ambassador that she was due to provide the IADB's Board of 
Directors in Washington with a status report in December on 
the political climate in Nicaragua (Reftel).  The WB and the 
IADB both approved budget support contributions in 2008, but 
both loans require legislative approval by the Nicaraguan 
National Assembly, which to date has failed to act. 
Meanwhile, the International Monetary Fund's (IMF) 
representative in Nicaragua told the Ambassador on December 
10 that the Fund is not prepared to disburse its next tranche 
of approximately $25 million to the Central Bank until the 
GON demonstrates its ability to secure financing for the 2009 
budget (Septel). 
 
Comment 
 
MANAGUA 00001489  003 OF 003 
 
 
------- 
 
¶8. (C) The BSG's survival as an influential and united entity 
in Nicaragua is uncertain.  Among the European donors, only 
Norway and Switzerland (non-EU members) have made firm 
commitments to continue budget support unabated, but their 
contributions amount to just $9 million per year.  If the 
European Commission, the BSG's largest donor at almost $40 
million per year, signals an unwillingness to disburse funds, 
it could have serious repercussions in 2009 because overall 
BSG assistance accounts for approximately 15% of the national 
budget.  The GON could be faced with a budget deficit of 
approximately $100 million, by Nicaraguan standards a large 
sum.  No doubt, President Ortega is banking on his ALBA 
patron Hugo Chavez to come through for him in the toughest of 
times. 
 
Budget Support to the GON 
------------------------- 
 
¶9. (U) The table below shows 2008 pledged and actually 
disbursed direct budget support to Nicaragua by country 
and/or organization, in millions of USD: 
 
Donor                     Pledged      Disbursed 
--------------------------------------------- ----- 
European Commission         39.5          0.0 
Netherlands                 17.2          7.7 
United Kingdom              5.0           0.0 
Finland                     2.7           0.0 
Switzerland                 4.0           4.0 
Norway                      5.2           3.3 
World Bank                  20.0          0.0 
IADB                        20.0          0.0 
--------------------------------------------- ------ 
Total                       115.00        15.0 
CALLAHAN