"Kudos" to Nicaragua from IMF Officials Result in $10 Million Increase in Loan Package

Sources:

IMF Press Release, "IMF Executive Board Completes First Review Under Nicaragua's PRGF Arrangement and Approves Increase in Financial Support by US$10 million"
Bloomberg.com, "Nicaraguan Central Bank Warns of Spiraling Inflation"
El Nuevo Diario, "FMI Aprueba Primera Revisión de Programa"

On Thursday, September 11th, IMF Executive Board members conducted their first review of Nicaragua’s performance under the Poverty Reduction and Growth Facility (PRGF) arrangement it established with the IMF in October 2007. Board members expressed their satisfaction with how Nicaragua has performed in the months following the arrangement. They are particularly impressed with the fact that the country has been able to stay within the fiscal standards that the IMF established for it at the outset of the arrangement.

PRGF arrangements are special loan programs that the IMF designs for low-income countries. They typically focus on helping target countries better manage their public resources and establish more accountable governments. They carry annual interest rates of .5% and are repayable over 10 years with a 5 ½ year grace period on principal payments. Governments apply to participate in PRGF arrangements by outlining the economic targets and policy goals that they would like to meet in Poverty Reduction Strategy Papers. The IMF and the World Bank use these Strategy Papers as guides in setting standards for the arrangements, which are funded through trusts that the IMF administers.

Fortunately for Nicaraguan government officials, the IMF is not only providing positive feedback with its review. Executive Board members have also approved a $10 million increase in support provided to Nicaragua, increasing the total value of the arrangement to $120.4 million. Board members also waived two of the requirements that they had expected Nicaragua to meet by the first half of 2008; they have chosen to excuse delays in the approval of the 2008 budget and in the adoption of measures to discourage theft in electricity consumption.

IMF officials recognize that Nicaragua’s economy was particularly affected by Hurricane Felix last October, as the country was forced to import basic foods as a result of the hurricane’s effects on its vegetation. Officials also seem to be concerned with the upcoming national elections because it is likely that the government will spend significant amounts of money in the upcoming months in preparation for that process. Nevertheless, both IMF and Nicaraguan officials are optimistic that the continuing arrangement and the $10 million boost will help Nicaragua continue its progress and perhaps embark in new social and economic projects.

Discussion Questions:

1- One of the purported goals of PRGF programs is to help low-income countries establish more “transparent” governments. What is the relationship between increased external financial aid and accountability in governance? Does a country’s administration become “better” at governing when it receives more money from an organization like the IMF?

2- Given that the IMF is especially concerned with how the Nicaraguan government will respond to the upcoming elections, would IMF officials be wise to send advisors to Nicaragua to aid the government in running the elections? Should the IMF provide “educational” aid as well as financial aid?