NICARAGUA Budget Support Group (BSG) 2005 – 2007 More Effective Cooperation?

1. NICARAGUA Budget Support Group (BSG) 2005 – 2007 More Effective Cooperation? 1 4TH LAC PRS-Donor Meeting, June 14 2007, Washington, D.C.

2. CONTENTS • Background • Alignment • Conditionality • Relationship with the IMF • Dialogue • Challenges 2 2

3. BSG Background • 2-year on-going dialogue to join partners and prepare arrangement for budget support • In May 2005, 9 donors signed a Joint-Financing Arrangement (JFA) with the Republic of Nicaragua, to support the Government’s efforts to achieve long term sustainable economic growth and poverty reduction as defined in its PND (PRSP) 3 3

4. Members • Bilateral Germany, Finland, Norway, Sweden, The Netherlands, Switzerland, United Kingdom (DFID) • Multilateral European Commission, The World Bank • In 2005: • Bilateral BSG member funds totaled 34% of all bilateral assistance • Multilateral BSG member funds accounted for 36% of all multilateral assistance 4 4

5. BSG Deliveries 2005-2007

6. BSG assistance at the macro level 6 6

7. Need for alignment? 2005 raw data • 43 donors present in Nicaragua 397 project implementation units, of which 138 were parallel to the line ministries • Total disbursed ODA = U$542 million, of which only U$305 were registered in the Budget • Approximately 400 missions visited the country, averaging 1.3 missions per day! 7

8. The Alignment story Before 2005 • Non-transparent national budget planning • Line ministries received donor funds outside control of the Ministry of Finance In 2005 • The Government took responsibility approving the Financial Administration Law (LAF)

9. LAF implementation • Greater discipline required for line ministries and donors to get support on time and on budget • Difficult transition in 2006: apprx. US$36 million of donor support left outside the budget • Proposed Budget for 2007could not be approved • In 2007, the US$36 million have been included in approved National Budget, according to the LAF • Now, there are better conditions for alignment

10. How does BSG operate in practice? • Key issues for Dialogue include • Fundamental Principles • Macro-economic stability and growth • Progress on the implementation of the PRS • Public sector reform and political governance • Alignment and harmonization practices • Annual Meeting (May-June) • Decision on preliminary financial commitments • Mid-Year Meeting (Sep-Oct) • Confirmation of financial commitments • Presentation of National Budget to the National Assembly (Oct-Nov)

11. Conditionality • Conditionality defined as “the specific set of conditions attached to the disbursement of budget support …ranging from explicit agreements to implicit understandings and from traditional ex ante conditions based on promises to ex post conditions based on actual completed measures” /1 • JFA Fundamental Principles • Performance Assessment Matrix (PAM) / 1 WB 2005, Conditionality Revisited 11

12. Fundamental Principles for the provision of Budget Support • Nicaragua has agreed to adhere to the following principles: • Commitment to international law and conflict prevention • Respect for human rights • Democratic principles, including free and fair elections • Rule of Law • Independence of the judiciary • Transparent and democratic processes • Accountability and the fight against corruption • Sound macro-economic policies • Commitment to Poverty Reduction • The breach of any of the these principles may result in the stop of disbursements. 12

13. Performance Assessment Matrix (PAM) Set of actions and targets with measurable indicators derived from the National Development Plan (PRSP) Used during MYM for planning of n+1 and during AM for assessment of n-1 13

14. PAM Evolution • During 2005, targets were based on existing bilateral/multilateral agreements • Complexity of matrix evidenced the need for simplification

15. Character of BSG conditionality • All conditions are agreed jointly • Mainly ex-post: • Respect to fundamental principles • Performance PAM n-1 • Progress in the year-to-date until MYM • Overall satisfactory performance of PAM and Fundamental Principles is needed • Partially ex-ante: • Appraisal of budget and planned actions and targets to be accomplished in n+1 • Planned actions and targets should meet satisfactory level of ambition and realism • Individual member decision with high influence from group discussion following dialogue with the authorities

16. Commitments and Disbursements • Decision Process • AM: Preliminary financial commitment based on assessment of accomplishment of actions and targets in n-1 • MYM: confirmation of financial commitment based on progress in the year-to-date and appraisal of planned actions and targets to be met in n+1 • Disbursements are made according to an agreed calendar with the Ministry of Finance • Disbursements in n of commitments made in n-1 can only be cancelled (or withheld) in case of breach of Fundamental Principles.

17. Special Cases • European Commission: • Decides in Annual Meeting (year n) disbursement of fixed tranche in year n • Decides in Mid-Year Meeting (year n) disbursement of variable tranche in year n+1 • Amount of variable tranche depends on % of fulfilled actions/targets • The World Bank • Prior actions/triggers and benchmarks are agreed directly with Government and later included in the PAM • Funds become available after compliance with prior actions 17

18. Relationship with the IMF (1) • Macroeconomic stability is a fundamental principle of the JFA • This can be achieved with or without the Fund • IMF’s assessment and advice are important for the Government and the BSG • Nevertheless, a program with the Fund is not a condition sine qua non for BSG commitments or disbursements • Good coordination between BSG and IMF 18

19. Relationship with the IMF (2) • In the 2005 crisis, the BSG requested a Letter of Comfort from the IMF before disbursing • In 2007, the BSG has explicitly stressed the importance of an agreement with the IMF • BSG members underline its independence from the IMF

20. Results (1) • Donor Harmonization • Improved analysis of national policy in Technical Working Groups • Transparency about internal decision making process about conditions, disbursements, breaches and role of IMF. • Global consensus about respect for fundamental principles of JFA to date • Joint “like-minded” support outside BSG to jointly identified needs: • Public sector reform (PSTAC) • Anti-corruption Fund • Fund for defense of women’s rights • Protest against penalization of therapeutic abortion • Strengthening independent statistical system 20

21. Results (2) • Improved predictability of external financing • Small differences between foreseen and real BSG disbursement • Exception: Sweden awaiting for their new multi-annual strategy.

22. Progress in Dialogue2005 Conflict between parliament and government about their division of roles/responsibilities All structural reforms were put on hold Disagreement on national budgets for 2005 and 2006 Off-track PRGF BSG postponed disbursement until (November): Reestablishment of understanding between parliament and government (“Ley Marco” agreement Bolaños-Ortega) Approval of structural reforms and national budgets 2005 and 2006 Macro-economic stability and pro-poor spending 22

23. Progress in Dialogue 2006 Good discussions in technical working groups and plenary in Annual and Mid Year Meeting, in spite of deficiencies in information Satisfactory continuity in macroeconomic policy, public finance management, economic growth, and pro-poor spending. Agreement on simplification of PAM Concerns about: Free and fair elections Lack of independent judiciary Quality /effectiveness of pro-poor expenditures Penalization of therapeutic abortion Postponement of audit on budget implementation 23

24. Dialogue so far in 2007 Satisfactory elections Smooth political transition in macroeconomic stability Approval of national budget including grants, IDB-debt relief, without structural modifications. Continuity in macro-economic stability, increased pro-poor spending First reduction of public salaries. Progress in negotiation of programs with the IMF, WB and IADB 24

25. Dialogue so far in 2007 • Slow start of dialogue with BSG • Firm ownership central government • First ever audit of national budget implementation • Postponement documentation on poverty and poverty spending Some concerns: • Insignificant poverty reduction • Human rights for women (therapeutic abortion, violence, access to justice and health service) • Weak statistical system • Lack of transparency in new public debt to Venezuela

26. Challenges on the donor side • Consolidation BSG and open minded inclusion of new members • Modality mix on macro-meso and micro level • Increasing division of labor and convergence of instruments (shared appraisals, silent partnership) • Continuity in coordination with the IMF • Some differences between conditionalities of individual BSG members should not restrain the joint analysis and dialogue

27. Challenges in dialogue • Broadening dialogue with stakeholders • Mutual understanding and agreement on conditionality • Joint evaluation of past experience in PRS and economic policy • Simplifying PAM, “in-sourcing” sectorial analysis and monitoring • Increasing joint (demand driven) technical assistance and support for institutional strengthening. • Limit preaching in favor of practical support and mutual responsibility 27

28. Final remarks The Bottom-line: • High levels of investment and disappointing growth • High levels of poverty spending and disappointing poverty reduction Mission of budget support: • Long term commitment (avoiding stop and go) • Priority to improving confidence in national institutions and conditions of good governance • May result in higher effectiveness and efficiency of national investment and pro-poor expenditures

29. Thank You! For questions, you may contact me at: jan-kees.verkooijen@minbuza.nl