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