Nicaragua is one of the poorest countries in Latin America and highly dependent on foreign aid. Despite recent steady progress in poverty reduction, at the launch of the program in 2004, some 46 percent of Nicaragua’s population lived in poverty, and 15 percent in extreme poverty. A Poverty Reduction Strategy, prepared through a broad participatory process, identified main focus areas for the country’s developmentÑincluding better governance, broad-based growth, and improved health and education status of Nicaraguans.
The goal of the First Poverty Reduction Support Credit (PRSC), one of a series of budget-support operations, was to support the implementation of this national strategy. It provided financial support for public institution reforms, better governance, competitiveness, and social improvements. Specific reforms included passage of the Civil Service Law, approval of a decree creating the rural telecommunications fund, approval of minimum poverty spending targets in the national budget (at least 11 percent of GDP in 2003, 11.4 percent in 2004 and 11.6 percent in 2005), implementation of the School Autonomy Law and other key policy actions. Subsequently, the government updated its strategy with greater emphasis on growth, which the World Bank supported through a Second PRSC.
Improved public resource management, growth in pro-poor spending (from 10 percent of GDP in 2002 to 13.6 percent in 2006) and investments in infrastructure and human capital, along with better governance in order to sustain poverty reduction.
Highlights:
- Economic growth has surged from under 1 percent in 2002 to 5.1 percent in 2004, and has remained at around 4 percent ever since. Nicaragua now ranks among the fastest growing countries in Latin America.
- Value of foreign private investment has increased from US$75 million in 1995 to US$230 million in 2005.
- One indigenous territory and almost 6,000 indigenous people were able to have their land rights titled and registered. The time it takes to title a property dropped from 65 days in 2003 to 10 days in 2005
- Maternal mortality rate dropped from 230 per 100,000 live births in 2000 to 87 in 2005
- National access to clean water increased from 72.8 percent in 2002 to 75.8 percent in 2005.
- Modifications to the General Education Law created fiscal savings equivalent to 7 percent of GDP per annum.
- As a result of the new civil service law supported by the operation, 4,300 government employees are for the first time included within a standard professional classification system, generating efficiency gains and cost savings.
- Through HIPC debt relief, two poverty reduction credits and an earlier budget support operation (PSAC), IDA provided the largest amount of budget support to Nicaragua between 2004 and 2006.
- IDA was pivotal to donor coordination by focusing donors around key, measurable results, improving the transparency and impact of public expenditures, and reducing pressures on national resources by harnessing existing in-country program management capacity.
- IDA played a decisive role in leading other agencies to disburse budget support in the face of political uncertainties, thus contributing to macroeconomic stability. Furthermore, IDA helped establish routine program reviews and facilitated dialogue between international donors and government ministries, using the country’s own monitoring framework to guide donor assistance.
- IDA helped enhance Nicaragua’s public financial management systems and modernize the legal framework for the financial sector, which lead to greater fiscal transparency. This assistance, coupled with policy support through the PRSCs, has improved the operation of internal controls and external scrutiny and analysis of fiscal performance, thus improving government accountability and the efficiency of public expenditure.
- Total project cost was US$68.3 million for PRSC 1 and US$25 million for PRSC 2.
KfW, the German development agency, provided 6 million euros in parallel financing to the first Poverty Reduction Support Credit and is parallel-financing the second credit with 4 million euros.
Nicaragua is still facing a long road to sustainable poverty reduction and broad-based growth in a complex environment of strong political divisions and high levels of income inequality. IDA continues to support Nicaragua in this work. The Second PRSC has already been approved. In addition to focusing on poverty reduction, it includes measures in the areas of trade, education, land titling, civil service reform and road maintenance. This work will be complemented by other specific investments and by analytical work.
RSS