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Cablegate: Nicaraguan Government Ignoring Budget Support

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

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