,V/- f 4,A)Report No. 3524-NI 4? )y vltt

Nicaragua:The Challenge of Reconstruction FILE COPY

October 9, 1981 to * ALatin America and the Caribbean Regional Office ea O

FOR OFFICIAL USE ONLY

Document of the World Bank

This document has a restricted distribution and may be used by recipients F I F C 0 P Yonly in the performance of their official duties. Its contents may nototherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit = Cordoba (¢)US$1.00 - ¢10.00¢1.00 = US$0.10

MEASURES AND WEIGHTS

1 kilometer .62 miles1 square kilometer = 100 hectares = 247 acresI manzana 0.699 hectares = 1.727 acres1 quintal (C.A.) 45.36 kilograms = 100 pounds1 metric ton 2,204.6 pounds = 22.05 quintals

ABBREVIATIONS

AGROINRA Agro-Industry of the Agrarian Reform(Agro-industrias de la Reforma Agraria)

APP Area of People's Property(Area Propiedad del Pueblo)

ATC Rural Workers Association(Asociacion de Trabajadores Campesinos)

BND National Development Bank(Banco Nacional de Desarrollo)

CABEI Central American Bank for Economic IntegrationCAS Sandinist Agrarian Cooperative

I (Cooperativa Agraria Sandinista)CIERA Center for Research in Agrarian Reform

(Centro de Investigacion de la Reforma Agraria)COIP Peoples's Industrial Corporation

(Corporacion Industrial del Pueblo)CONIBIR Real Estate Corporation

(Corporacion Nicaraguense de Bienes Raices)CORCOP People's Commerce Corporation

(Corporacion Comercial del Pueblo)CORFIN Nicaraguan Financial Corporation

(Corporacion Financiera de Nicaragua)CORFOP People's Forestry Corporation

(Corporacion Forestal del Pueblo)ENABAS Nicaraguan Enterprise for Basic Food Products

(Empresa Nicaraguense de Alimentos Basicos)ENIPORT Nicaraguan Import Enterprise

(Empresa Nicaraguense de Importaciones)ENIPREX Nicaraguan Enterprise for Export Promotion

(Empresa Nicaraguense de Promociones de Exportaciones)ESRA Agricultural Service Enterprises

(Empresa de Servicios de la Reforma Agraria)

FOR OFFICIAL USE ONLY

ABBREVIATIONS (Continued)

FED Special Development Fund(Fondo Especial de Desarrollo)

FINAPRI Preinvestment Fund(Financiera de Preinversion)

FIR International Reconstruction Fund for Nicaragua(Fondo Internacional para la Reconstruccion de Nicaragua)

IDB Inter-American Development BankINAA Nicaraguan Water and Sewerage Institute

(Instituto Nicaraguense de Agua y Alcantarillado)INE Nicaraguan Institute for Energy

(Instituto Nicaraguense de Energia)INPESCA Nicaraguan Institute for Fisheries

(Instituto Nicaraguense de la Pesca)INRA Nicaraguan Agrarian Reform Institute

(Instituto Nicaraguense de Reforma Agraria)INSS Nicaraguan Social Security Institute

(Instituto Nicaraguense de Seguridad Social)INMINEH Nicaraguan Mines and Hydrocarbons Institute

(Instituto Nicaraguense de Minas e Hidrocarburos)INEC Nicaraguan Institute of Statistics and Census

(Instituto Nicaraguense de Estadisticas y Censos)IRENA Natural Resources and Environment Institute

(Instituto de Recursos Naturales y del Ambiente)MIDA Ministry of Agricultural Development

(Ministerio de Desarrollo Agricola)MIPLAN Ministry of Planning

(Ministerio de Planificacion)PROCAMPO Office of Rural Promotion

(Direccion de Promocion Campesina)SAMU Secretariat of Municipal Affairs

(Secretaria de Asuntos Municipales)TELCOR Telecommunications and Postal Services

(Instituto Nicaraguense de Telecomunicaciones y Correos)UNAG National Union of Farmers and Ranchers

(Union Nacional de Agricultores y Ganaderos)UPE State Production Unit

(Unidad de Produccion Estatal)USAID United States Agency for International Development

FISCAL YEAR

January 1 - December 31

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

SYNOPSIS

This Economic Memorandum assesses the impact of the revolutionarywar on the economy of Nicaragua and the institutional and economic transforma-tions that have taken place during the last two years. Short and medium-termprospects are examined, together with alternative growth paths that theeconomy can take in the near future. The behavior of the economy during therecovery period is analyzed, particularly with respect to the development ofthe major productive sectors, agriculture and industry, and to Governmentpolicies regarding money and credit, public finances, investment, and foreignborrowing. The report arrives at a number of proposals for policy action withrespect to demand management, the orientation and growth of private and publicinvestment and savings, the need to increase efficiency of state enterprises,and several important agricultural issues.

NICARAGUA: THE CHALLENGE OF RECONSTRUCTION

TABLE OF CONTENTS

Page No.

COUNTRY DATA

MAP

SUMMARY AND CONCLUSIONS . ........................... .. .......... i - vi

I. INTRODUCTION ....................................... o............. I

II. THE REVOLUTIONARY PERIOD ............................. 2

III. THE RECOVERY PERIOD .................................. 4

A. The Institutional Reorganization and Expansionof the Public Sector ................... 4

B. Short-Term Behavior of the Economy ............... 9C. The Agricultural Recovery and Transformation ..... 21D. Industry in the Post-War Period ................. . 26E. The New Social Policies .. ........................ 32

IV. POLICY ISSUES ....... ................................ 34

A. Agricultural Development Issues ............... ... 35B. Public Manufacturing Enterprises ................. 41C. Demand Management ................................ 42D. Orientation and Growth of Investment and Savings.. 44

V. NEAR- AND MEDIUM-TERM PROSPECTS OF THE ECONOMY ....... 49

A. Alternative Growth Scenarios ..................... 49B. Balance of Payments .............................. 53C. Creditworthiness Considerations .................. 55

APPENDIX I: DETAILED TRADE PROJECTIONS ....................... 58

APPENDIX II: STATISTICAL TABLES ............................... 65

This report is based on the findings of an economic mission to Nicaragua inNovember 1980. This mission was composed of: Gabriel Siri, Chief of Mission;Peter Miovic, General Economist; Marko Voljc, Industrial Economist; GloriaReyes, External Debt Specialist; Eric Shearer, Consultant for Agriculture;Michael Zuntz, Consultant for Public Finance; Mark Hagerstrom, ResearchAssistant; and Susana Amas, Secretary. A draft of the report was discussedwith the Government in August, 1981.

Page 1 of 2

COUNTRY DATA - NICARAGUA

AREA POPULATION DENSITY (mid-1979)130 Thousand km2 2.5 million (mid-1979) 19.2 per km2

Rate of Growth: 3.3 (from 1970 to 1977 ) 51.1 per km2 of Arable Land

POPULATION CHARACTERISTICS HEALTH -/

Crude Birth Rate (per 1,000) 45.0 Population per Physician 1,666.0Crude Death Rate (per 1,000) 13.0 Population per Hospital Bed 484.0Infant Mortality (per 1,000 live births)

INCOME DISTRIBUTION DISTRIBUTION OF LAND OWNERSHIP% of National Income, Highest Quintile .. % Owned by Top 10% of Owners

Lowest Quintile .. Z Owned by Smallest 10% Owners

ACCESS TO SAFE: WATER ACCESS TO ELECTRICITY(1970)% of Population - Urban .- % of Population - Urban 76.7

- Rural - Rural 7.0

NUTRITION EDUCATION (1980)Calorie Intake as % of Requirements 109.0 Adult Literacy Rate 87%Per Capita Protein Intake 70.0 gns. Primary School Enrollment %

GNP PER CAPITA IN 1980 2/ US$ 720.0

GROSS NATIONAL PRODUCT IN 1980 ANNUAL RATE OF GROWTH (g, constant prices)

US$ Mln. _ 1965-70 1970-75 1975--80

GDP at Market Prices 2,133.9 100.0 4.4 5.9 -6.1Gross Domestic Investment 431.0 20.2 1.3 9.4 -13.4Gross National Saving 17.3 0.8 3.0 -8.8 -18.4Current Account Balance -413.7 19.4 - -

Exports of Goods, NFS 507.7 23.8 2.7 8.6 - 9.3Imports of Goods, NFS 966.2 45.3 -0.1 10.2 - 4.7

OUTPUT LABOR FORCE ANDPRODUCTIVITY IN 1978

Value Added Labor Force V.A. Per WorkerUS$ Mln. % Mln. % US$ %

Agriculture 529 26.3 .338 46.4 1,565 58.3Industry 538 26.8 .117 16.0 3,040 113.3Services 944 46.9 .274 37.6 3,445 128.4Unallocated

Total/Average 2,011 100.0 .729 100.0 2,683 100.0

GOVERNMENT FINANCECentral Government

( ¢ Mln.) % of GDP1980 1980 1978-80

Current Receipts 4,001.3 18.8 13.6Current Expenditure 4,649.3 21.8 17.4Current Surplus - 648.3 - 3.0 -4.0

Capital Expenditures 1,694.4 7.9 5.1

1/ Except for the literacy estimate, the social indicators are pre-revolution values.

2/ GNP per capita at current US$, calculated by the 1981 World Atlas Methodology.

Not available

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COUNTRY DATA - NICARAGUA

MONEY, CODIT AD PRICES 1976 1977 1978 1979 1980(Million e outstanding,end period)

Money and Quasi Money 4,293.6 4,993.7 4,672.0 5,717.6 7,138.4Bank Credit to Public Sector - - - 1,802.8 3,310.7Bank Credit to Private Sector 1/ 5,770.1 7,038.8 7,268.1 8,643.4 12,008.7

(percentage or index numbers)

Money and Quasi Money as 2 of GDP 33.2 33.8 32.9 39.7 33.4General Price Index (1980 - 100) 46.8 52.9 54.2 74.2 100.0Annual percentage changes in:

General Price Index 10.6 13.0 2.5 36.9 34.RBank credit to Public Sector - - - - 83.6Bank credit to Private Sector 17.3 22.0 3.3 18.9 38.9

BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1978-80)1970 1975 1980 US$ Mln. 2

(Millions 1us$)

Exports of Goods, NFS 215.2 446.0 507.7 Cotton 102.3 17.9Imports of Goods, NFS 231.4 587.5 966.2 Coffee 172.2 30.1Resource Gap (deficit - -) -16.2 -141.5 -458.5 Beef 73.2 12.8

Sugar 19.9 3.5Factor Income (net) -28.1 -59.0 -78.2 Shrimp 21.1 3.7Net Transfers 6.2 16.7 12.3 All other goods 12.0 31.9

Balance on Current Account -38.1 -183.8 -413.7 Total 570.6 100.0

Direct Foreign Investment (net) 15.1 11.0 0 EXTERNAL DEBT, DECEMBER 31, 1980Net MLT Borrowing 27.6 139.7 270.4

Disbursement 43.7 160.0 332.6 US$ Mln.Amortization -16.1 -20.3 -62.2 Public Debt, Incl. Guaranteed 1,475

Subtotal 42.7 150.7 270.4 Non-Guaranteed Private Debt 2/ 192

Other Capital (net) 7.8 1.4 -50.8 Total Outstanding & Disbursed 1,666

Increase net in Reserves 15-.9 31.7 194.1 DEBT SERVICE RATIO FOR 1980 3/- - increase) %Gross Reserves *- 135.7 80.8

Total Outstanding & Disbursed 4/ 28.1

RATE OF EXCHANGE IBRD/IDA LENDING, MARCH 31. 1q81

Through Anril 1979 (Million US$)

USS 1.00 - 9 7.0 IBRD IDA¢ 1.00 - US$ 0.143 Outstanding & Disbursed 134.6 60.3

Sindi & 1979rUndisbursed 26.6 17.2Since April 1979 Outstanding inc. Undisbursed 161.2 77.5

us$ 1.00 - t 10.0e 1.00 - us$ 0.10

1/ For 1979-80 includes credit to APP.

2/ Estimated debt of nationalized banks and enterprises.

3/ Ratio of debt service to exports of goods and non-factor services.

4/ Includes an estimate on the repayment of the (estimated) US$ 192 million of the debt of nationalized banks and enterprises,that is still being negotiated,

August 31, 1981

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SUMMARY AND CONCLUSIONS

i. The struggle which ended with the overthrow of the Somoza regimein July 1979 was extremely costly for Nicaragua. It seriously damaged thenation's productive capacity and led to huge financial losses. The massiveflight of capital and later drops in exports led to a severe foreign exchangeshortage. The destruction of factories and inventories and the loss ofmanagerial personnel brought about a contraction of industrial activity.Agricultural output was also affected by the war and its aftermath, althoughnot to the same extent as industry. There was a sharp decline in the outputof cotton and basic grains and, moreover, the slaughter of immature beefcattle and the smuggling of herds out of the country seriously jeopardizedbeef production for the coming years. There is no doubt that the Nicaraguaneconomy suffered a severe setback; the income foregone during 1978-80 sur-passed US$2.0 billion.

ii. When the war ended, the Government immediately proceeded to establishorder and began the process of repairing urban damage. An extensive reorgani-zation of the machinery of Government was undertaken, a number of new institu-tions were created, and the administration of practically all Government andautonomous public agencies was reorganized. Commercial banks and insurancecompanies were nationalized, and new ministries were established to controlsome of the country's domestic and foreign trade. Moreover, the Governmentrapidly expanded the scope and coverage of social programs, particularly inthe areas of education and health. Schools were closed for one semester whilea massive literacy campaign was launched, with many students as teachers. Thegoal was to teach reading skills to four hundred thousand children and adults.

iii. The new regime endorses a mixed economy, in which the Governmentwill be involved in a variety of directly productive activities, and willclosely regulate the economic process. The role of the State in the ownershipof productive assets has been radically changed. Land holdings and industrialand commercial enterprises of the Somoza family and his associates wereconfiscated and placed under state control. The value added of public enter-prises now represents one-fifth of agricultural GDP, one-sixth of industry,three-quarters of construction, all of mining, and one-quarter of commerce.In sum, 37 percent of the country's Gross Domestic Product in 1980 was producedin state-controlled institutions.

iv. The decline in industrial and agricultural production, althoughpartially counterbalanced by generally high export prices, resulted in adrastic drop in export receipts in 1980. At the same time, the value of foodimports nearly quadrupled, and the rise in oil prices greatly raised theimport bill. The Government responded to the contraction of the economy withexpansionary policies, which attempted to restore real consumption levelsand reduce unemployment in the cities. Domestic credit to the public andprivate sectors expanded by nearly half in 1980; credit oriented toward publicinstitutions and the agricultural sector grew particularly fast. The CentralGovernment's expenditures exceeded a very large increase in revenues, and,consequently, a substantial fiscal deficit was accumulated. Many stateenterprises also had large deficits; the total public sector deficit estimated

- ii -

by the Mission was nearly one-sixth of GDP. The resulting inflationarypressures were dampened by a large increase in imports, made possible by agenerous inflow of external financing and a substantial loss of reserves.In particular, imports from partner countries of the Central American CommonMarket more than doubled, and in 1980 a trade deficit of US$225 million wasbuilt up with Central America. The total resource gap was about US$460million, or over one-fifth of GDP.

v. The expansionary policy did assist the recovery of agriculturalproduction during the crop year 1980/81. Area harvested of all major crops,with the exception of cotton and maize surpassed pre-war years' levels (averageof 1976/77-1978/79). However, industrial growth fell considerably short ofGovernment targets in 1980. Particularly disappointing was the performanceof manufactured exports, which reached only 62 percent of their 1978 level inreal terms.

vi. The Mission's assessment indicates that the negative economicconsequences of the war are far from over. Per capita income levels of 1977will not be attained, in the best of circumstances, until the late 1980s. Theaccumulated foreign debt is large and increasing rapidly; in spite of resched-uling and softer terms on new borrowings, its service will absorb more thanone-fifth of export receipts for the rest of the decade--fuel imports willabsorb between a quarter and one-third more. Economic growth will likelycontinue to be constrained by a scarcity of foreign exchange.

vii. Because of this constraint, the Mission's findings suggest givinghighest priority to the export sector, particularly to agriculture and toagro-industries. The proposed strategy would reinforce the emphasis that boththe public and private sectors have already given to agriculture during therecovery period. The mining sector also offers high potential for foreignexchange generation. However, the manufacturing sector has both supply anddemand constraints. Domestic demand has not fully recovered, and the demandfor manufactured goods from other Central American countries is down becauseof the contraction of some of these economies, the loss of markets to compe-titors, and obstacles to trade caused by political disturbances throughoutthe region. On the supply side, difficulties stem from the remaining physicaland financial damage wrought by the war and from the private sector's hesitancyto increase production.

viii. The Mission analyzed several problems related to agricultural produc-tion and productivity that have arisen in the transformed Nicaraguan economy,and concluded with a number of recommendations. These address issues such as:

(a) The relationship between farm profits and price ceilings. Policy-makers are aware of the difficulty of maximizing farm productionthrough price stimuli and at the same time improving food consump-tion levels for urban and landless populations. Depending on thelevel of commercialization, structure of production and marketingsystem, both efficiency and welfare goals could be satisfied ifprices of many crops were allowed to rise to levels approaching theinternational price level in order to encourage a stronger foodproduction response, and at the same time food and income-relatedsubsidies were provided for specific target groups. A recentincrease in the price of rice has been successful in eliciting asubstantial supply response.

- iii -

(b) The economic efficiency of state farms. Following the revolution,about one-fifth of Nicaragua's farm land was expropriated. Inorder to maintain the high level of productivity on these farms,the Government retained or combined the production units andmanaged them as state enterprises. The Bank's Mission endorses theGovernment's stated policy of managing state farms as efficientrevenue-producing units. If this goal proves difficult, alternativeorganizational structures that could assure the maximum degree ofeconomic efficiency should be considered.

(c) The future role of the private entrepreneur. The initial agrarianpolicy of the Government produced uncertainty over land tenurerelationships, both because it was accompanied by spontaneousland invasions and because the steps taken were perceivedonly as an initial phase. The agrarian reform, announced onJuly 19, represents a major step forward in the definitionof comprehensive land tenure policy. If administered in asystematic manner, it may lead to a major reduction in privatesector uncertainty.

Longer term issues, such as natural resource utilization and the outlook forcotton, beef and milk production have also been dealt with. The Government'sdirect and indirect control over forest resources will allow rational, long-term planning for the uses of the underutilized lands in the Atlantic water-shed. One of Nicaragua's more pressing problems arises from the sharplypeaked seasonal demand for labor that occurs during the harvest time of themajor agricultural commodities. The situation has been recently aggravated bythe decrease in the supply of labor for harvesting which has been the resultof both the increase in alternative incomes available to the campesino and theinterruption of migratory labor from El Salvador and Honduras. Mechanizationof cotton and irrigated rice harvesting will undoubtedly be required. In thelong run, Nicaragua's agricultural production may need to be modified toconform to a more even use of its labor force.

ix. The post-war emergency stage of striving simply to reestablishproduction of newly-nationalized enterprises has concluded, and the emphasisshould now shift to efficiency and surplus generation. This entails theupgrading of management and the establishment of better accounting controls.It is essential to develop a medium-term strategy with respect to productionpriorities, the capital accumulation process the role of the public andprivate sectors and the specific areas where each will exert primary respon-sibility. While the public sector responds to directives (and the Governmentis in the process of making these directives clearer), the private sectorresponds best--particularly when considering longer-term decisions--to acoherent, stable system of policies and incentives. A great advantage ofsuch a system is that it would decrease the degree of uncertainty perceivedby the private sector, lower the level of profits required to undertake new

investments, and therefore effectively encourage private investment. Manyincentives--factor and product prices--are clearly unsustainable and thusrevision could be considered. A process of economic decision making whichfollows established rules and allows for a meaningful participation of theprivate sector, could go a long way in restoring private entrepreneurs'confidence.

- iv -

x. In order to analyze the feasibility of different economic alter-natives for the country, a model has been constructed wherein projectionsof internal and external conditions, government policies, and likely outcomesare made compatible. Using this tool of analysis, some of the different pathsthat the economy can take in the coming decade have been examined. Thealternative routes that the economy will follow depend on the level of demandrestraint that the Government is capable of achieving, on the productionand productivity targets that the country is able to reach, and on the abilityof the Government to obtain foreign financing. The report arrives at thefollowing proposals for policy action for the attainment of a high and stablerecovery path:

(a) Checking as soon as possible the expansionary policies adoptedby the Government during the recovery period. The bindingforeign exchange constraint precludes the possibility of4ttempting to restore past levels of consumption throughmonetary and fiscal expansion. If recurrent financial crisesare to be avoided, internal discipline needs to be stressed,rather than reliance on unpredictable inflows of emergencyexternal aid. This situation calls for austere controls onprivate and public consumption--which totalled more than GDPin 1980--and on many imports, particularly during the firsthalf of the decade. In sum, what is required is a coherentand precisely targeted demand management policy, with wellthought-out priorities.

(b) Strongly orienting government and private investment duringthe next few years towards projects that generate or saveforeign exchange and have high and early rates of return. Thiswill require drastically reducing the growth of administrativeexpenditures, carefully choosing the more urgent social programsto expand, and may imply deferring some worthwhile projects.

(c) Encouraging the increase of private investment to levels of10 percent of GDP or more. Without a strong recovery ofprivate investment, particularly in the productive sectors,the Government's plan of a mixed, rapidly-growing economywill not be attained.

(d) Designing and implementing an export promotion strategy.A policy oriented towards increasing exports will requirenot only direct promotional measures, but the adoption ofpolicies aimed at reducing anti-export biases.

(e) Finally, acquiring large amounts of external financing, muchof it at concessional terms. The possibility that Nicaraguacan surmount its current balance of payments crisis is contingenton this. The Government has already eased the immediate burdenof the debt through successful rescheduling negotiations withprivate foreign banks of the prior public debt and that of thenewly nationalized banks, as well as debts with some bilateral

donors. Analysis of alternative growth scenarios with respect totheir creditworthiness implications, suggests a two-phased approach.In the initial phase, while Nicaragua is highly vulnerable tovarious shocks and susceptible to serious debt servicing problems,it would be most desirable for the country to obtain externalassistance at concessional terms. If policies of internal stabil-ization are successful in checking imports, exports grow rapidlyand normal levels of productivity of capital stock are restored,Nicaragua could attain the rapid growth rates it has reached in thepast and fully reestablish its traditional creditworthiness.

xi. The Government of Nicaragua is aware of the difficulties thatthe reconstruction of the economy will entail and is preparing a number ofreforms and policy measures which are beginning to be put into effect duringthe second half of 1981.

(a) A comprehensive fiscal reform--conceived within a mixed economyframework--is being prepared. The law would substantially modifytax collection programs, impede tax evasion and establish a systemof incentives for production and exports. With respect to fiscalexpenditures, the Government plans to limit the expansion of the1981 budget to 10 percent, in nominal terms. There is also underconsideration an ambitious auditing control system that willcover both the Central Government and public enterprises.

(b) Legislation to encourage foreign investment is being prepared.The Government has also commenced a significant dialogue withNicaragua's principal entrepreneurs and hopes this reapproach-ment can be continued so that private investor confidencecan be restored.

(c) The financial system is to be strengthened by recapitalizingthe nationalized commercial banks that were virtuallybankrupted during the revolution, and by raising interestrates closer to positive real levels. Monetary policy willalso be tightened through direct credit allocation controls,particularly to the public sector.

(d) An agrarian reform, announced on July 19, aimed at regulatingthe expropriation of unutilized land in large farms and distri-buting it, in part, to the campesinos. The scope of thisreform is expected to be defined by the rules and regulationsof the law, which have yet to be defined. The Government hasstated unequivocally its determination to halt land invasions.

The above set of reforms is expected to define a framework wherein privatesector business can satisfactorily operate. On September 10, the Governmentaddressed the issue of demand management announcing a number of emergencymeasures which include major increases (30 to 100 percent) of some consumptiontaxes and the reduction of current fiscal expenditures as well as a cut of10 percent of total fiscal subsidies. Furthermore, the Government will also

- vi -

regulate and control the freely-floating parallel foreign exchange market.The right to strike was temporarily suspended, and the authorities imposedpenalties for invasion of private lands and enterprises.

xii. During the discussion of this economic memorandum in draft, theGovernment expressed a general agreement with the conclusions of the Mission.The authorities stressed the importance they gave consumption austerity andsavings generation, acceleration of private investment, improving efficiencyof state enterprises and institutions, enhancing public finance controls,and encouraging exports. These intentions are encouraging. If the Governmentis successful in implementing these measures, as well as improving the manage-ment of the greatly enlarged public sector, Nicaragua will indeed be able toreconstruct its economy as well as continue to enhance the social situation ofits citizens.

CHAPTER I. INTRODUCTION

1. Nicaragua is now recovering from a war. At the same time it isundergoing a revolutionary transformation that has had a major impact onasset ownership and economic management. In November 1980, a World Bankeconomic mission visited Nicaragua to review these changes and analyze theirimplications for the economy's prospects. This is its report.

2. The Mission came at a moment of transition. The Government ofNicaragua was in the process of establishing its role in the management ofthe economy. Moreover, many of the new institutions were often staffed byofficials equally new to public management. Because of the destruction ofthe war, the departure of many high and intermediate level technicians, andunprecedented inflation, much data on the economy remains of uncertainaccuracy. 1/ This report, therefore, concentrates on Nicaragua's revisedeconomic organization and the country's attempts to accelerate agriculturaland industrial production. It also places major emphasis on the Government'sdemand management policies, with particular stress on their balance of paymentsimplications. Another important issue is investment, since the quality andrecovery of capital formation--both fixed and human--will ultimately determineNicaragua's longer-term economic future. Although longer-term issues underliemany of the problems addressed in this memorandum, given the immediacy ofNicaragua's problems, its time horizon is in the short to medium term.

1/ The Ministry of Planning is in the process of revising the 1979 and 1980National Accounts.

- 2 -

CHAPTER II. THE REVOLUTIONARY PERIOD

3. While a guerrilla war had been conducted intermittently against theSomoza regime since the 1960s, during the late 1970s it escalated into aseries of major incidents. By 1978, attacks on urban centers--often joined byresidents--had severe economic effects. In early 1979, the fighting becamea full-scale war. This armed struggle, which ended with the establishmentof the Government of National Reconstruction in July 1979, was extremelycostly for Nicaragua. More than 30,000 people lost their lives, and manymore left the country. 1/ In addition, the war seriously damaged the nation'sindustrial productive capacity and had disastrous effects on the external andinternal finances of the country. The direct damage to physical structures,equipment, and inventories was about a quarter of a billion dollars. Theflight of capital prior to and during the conflict exceeded half a billiondollars; many banks, and industrial and commercial enterprises became insolvent.

4. During the first half of 1979, private investment shrank to aminimum, and construction nearly came to a standstill. Urban unemploymentand underemployment reached alarming levels (the combined rate was morethan 30 percent). Real GDP dropped by 25 percent in 1979--in addition tothe decline of 7 percent it had suffered in 1978. The income foregone duringthe years 1978 through 1980 surpassed two billion dollars, compared to a trendline based on past GDP growth. This loss--over a three-year period--was aboutequal to the 1980 GDP.

5. The war caused significant damage to many urban centers. Partic-ularly hard hit were Esteli, Leon, Masaya and the capital city, Managua.Intensive fighting in these city centers heavily damaged most municipalbuildings as well as many commercial and residential establishments. Thehostilities brought about a severe contraction of industrial activity, asa result of the destruction of factories and inventories and the loss ofmanagerial personnel. For almost two months, in June and July, industrialproduction virtually ceased, and manufacturing output declined by 31 percentin real terms for 1979.

6. Damage to factories was most severe in the industrial area alongthe northern highway in Managua, where a number of factories were completelydestroyed and many others suffered major damage. While the urban centersof Esteli, Matagalpa and Masaya all were heavily damaged, the industrialplants in those and other cities suffered less than those in Managua. Officebuildings, warehouses and related facilities suffered most of the losses.

1/ The social and human implications of the war were analyzed thoroughlyby ECLA's Mexico office; the Bank mission concentrated on the economicimplication. See "Nicaragua: El Impacto de la Mutacion Politica,"United Nations, 1981.

- 3 -

7. Serious losses were also sustained as a result of the lootingof inventories of raw materials and finished products. Many plants whichsuffered no damage to production installations experienced major lossesof stocks. A study by the Central Bank of 160 enterprises, representingabout 60 percent of the total gross value of manufacturing output, foundthat they experienced losses equivalent to some 28 percent of the valueof their inventories. While 16 percent of the firms had damages in excessof 25 percent of the value of fixed assets, 44 percent experienced losses inexcess of 25 percent of the value of their inventories. For the entiresector, the value of inventory losses was estimated at US$60 million.

8. Shops and markets were particularly hard hit by widespread looting.While these were not a total loss to the economy, since the looted goods werelargely utilized, they led to many financial insolvencies and a later need formany firms to rebuild inventories from scratch. The large drawdown of inven-tories and the very limited fixed investment led to an uncommon occurrence:in 1979 Nicaragua's gross investment was negative.

9. Agricultural output was also seriously affected by the war and itsaftermath--although not as much as industry. There was a relatively sharpdecline in the output of some seasonal crops, especially cotton and basicgrains; milk and egg production was also curtailed. The slaughter of immaturebeef cattle and the smuggling of herds out of the country severely compromisedbeef production for a number of years. Transportation, input supplies, marketsand labor mobility were greatly affected by the fighting, and, of course,security problems prevented many producers, large and small, from planting,tending, and harvesting their crops.

10. A very significant loss for the country was the later, drasticdrop in export proceeds; exports represent one-third of GDP, and providea major source of employment. The 1979/1980 agricultural season was disruptedby the war and the 1980 exports greatly affected. High international pricesof coffee, sugar and cotton offset some of the volume losses, but total exportreceipts from goods and services still decreased by US$219 million between1978 and 1980, a drop of 30 percent. In real terms, the drop was more than47 percent.

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CHAPTER III. THE RECOVERY PERIOD

11. The new Government immediately embarked simultaneously on the tasksof both economic recovery and social transformation. An atmosphere of law andorder and financial probity was achieved amidst profound social and economicchanges, and institutional reforms. The reorganized Government bureaucracy,although largely inexperienced, is attempting to improve the living conditionsof the population and increase production at the same time. The new regimehas indicated that it will maintain a mixed economy, in which a greatlyexpanded public sector will be directly involved in the regulation of theeconomic process, and will exert a sizeable degree of control over the orien-tation of investment. It has made an effort to strengthen the planningprocess, adopting an emergency program as soon as the war ended. It sub-sequently drafted a formal program of economic reactivation for 1980, andlater prepared a 1981 plan, which calls for a period of "efficiency andausterity." An understanding of both the very basic changes that took placewithin the new Government and the economy's behavior since the war is vitalto any analysis of the economy's future prospects.

A. The Institutional Reorganization and Expansion of the Public Sector

12. The Government is headed by a Junta of National Reconstructionbacked by the Directorate of the Sandinista National Liberation Front, thepolitical leadership. There is also a Council of State, in which a varietyof groups are represented. The machinery of government was quickly andextensively reorganized after the revolution. A number of new ministries werecreated; new institutions were developed; and practically all Government andautonomous public agencies underwent administrative reorganization. Thefinancial system was nationalized and totally restructured, and institutionsestablished to handle other nationalized sectors of production. The NationalGuard was disbanded and a new revolutionary army formed from the Sandinistaforces. A complementary militia has also been formed.

13. In addition to the already-established ministries and agencieswhich underwent some organizational changes, a number of new governmententities were created in the months after the Sandinista administration cameinto power, reflecting profound changes in the new Governmen*t's perceptionof the role that the State should play in Nicaraguan society. Among others,Ministries of Planning, Social Welfare, Culture, Justice, Housing and HumanSettlements, Industry, Internal Trade, Foreign Trade, and Transportation werecreated (for details see Figure I).

14. Although Nicaraguan cities have had a tradition of semi-autonomy inlocal government, the newly established municipal Juntas, particularly that inManagua, have demonstrated far greater scope in action and responsibility thanbefore.

15. Equally important was the radical change in the State's role inthe ownership of productive assets and the control of the economy. The newGovernment immediately confiscated all property belonging to the Somozafamily, as well as that of other individuals who had abandoned the country

FIGURE I

NICARAGUA(MAJOR PUBLIC INSTITUTIONS)

CENTRAL GOVERNMENT [ LOCAL OVE.RNMENT FI- 0OS'R C T EVC NEPI] ~ AFC-FCAIAINPB CF INANCIAL SYSTIEMORGANIZATIONS STATE SERVICE ENTERPRISES ENTERPRISES PENTERRISES

-Juntade Goberno de Rconstrucon -ManaguaReconstructionBoard (JRM) -NcEraganSocialSecurity InstituteNSS -NicarauanInstituteforEnergy(INEI -NcaragunEntrprse for Basic Food Industrial Corporation (CO P) -Fancia Corporation (CORFINacionl -Municipal BEards (JMi -Superinenden-v of an3ks Nicarguan Institute for Aqn!duct- and Products IENABAS) Commercial Corp-tat-on (CDIPDP) Central Back (BCN)-Ministry of Planning -National Commission fur Renoyation of Sewerage (INAA) -Nicar-guac Enterprise for Sea Prod-ucl - "Forest Corporation (CORFOP -) Nicaraguan -stitun for Insurance--Ministry of Interior Coffen Plantations (CONARCA) -Tleon.n -uncitions and Post (TELCOR) (ENMAR) -Real state Corporation (CONIBIR) and Raesurtnce (INISER)I

-Ministry of Etywrior -Pre--nFes-mentFnd (FINAPRI National Lottery NicaraguanEnerprise for Agricuitral -Ming Coreraton- CONDEMINA) ProcampoMinistry of Construc-ion National Au.onnmous nunrir-y Inputs IENIAI Transport Corporation (COTRAP) National Development Eank (BND)-Minitery ef Sncrl WNltare of Ni,tatgoa (UNAN) Nicaraguan Cotton Enterprise (ENAL) Nicaraguan Ineti.ute for Fisheries Banco Immobiliar-oMiert r ofHealth -NicaraguanCoffeeEnterpri-e (ENC IFE) (INPESCA) Banco deAmerica

-Mi-istrv M Labor Nicaraguan Meat Enterpris (ENCAR) -Agritultur- l Se.-ce Enterprises Banco NicaraguensaMinistry of Culture -Nicraguan Sugar Enterprise (ENARUCAR) (ESRA) Special Dvelopment Fund (FED)

-Ministry of Edu-atien -Ncaraguan Enterprise tnt Epnrr Eanco de Credito PopslarM isery of Defense Promotion (ENIPREX)

-Minimnry of Fnance Nicuraguan Import Enterprise (ENIMPORT)Ministry of Ho.sing end Human Settlements (MINVAH) N,Nicaraguan Banane Enrerprite (BANANIC)

-Ministy Me Transport -Ncaraguan Leather Enterpri- (ENICUR)Mi"istry of Foreign Trede -Nicaraguan Salt E Enterprie (ENASAL)

--Ministry of Internul Trodn Nicaraguan Enterprise tot Cultural-Mini"try tf Ind-sty Recordings (ENIGRAC)-Mi nistry of Agricol(tu ral Duevoeipmen t-Miistry ef Justice

Miistry ef Alantic Coast Deuslopenen

-International Reconstruction Fund (FIR)

Secretariat of Munmipal Affairs (SAMUINicaraguan nstitutnfor Natural Resources=and En-irunmnt (IRENA)

-Nicaraguan Institute for Tourism (INTURISMO)

Contrnller General- Nic-ragaan Institute tot Statistics and Centus (INECI

Judiciary Power-Special Tribunals

WrIld Bank 22349

Dc-tber 198O

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after December 1977. Most of the expropriated wealth was in the agriculturaland manufacturing sectors. In the second half of 1979, insurance companies,mines, forests, fisheries and some aspects of domestic and foreign commercewere also nationalized. The Government also greatly expanded its participationin the construction and transportation sectors.

16. During the first five months following the revolution many of thenationalized enterprises were run and managed by the National ReconstructionTrust Fund. By December 1979, most of the state productive enterprises hadcommenced operation. Apart from the traditional public enterprises thatfunctioned in the service sector prior to the revolution, 1/ a number ofnew entities were formed in that sector as well as in the agriculture andmanufacturing sectors. These all now form part of the Area of People'sProperty (APP).

17. In foreign trade a number of specialized enterprises commencedoperations in early 1980. The Ministry of Foreign Trade currently managessix exporting and two importing enterprises. The export firms deal withcotton, coffee, meat, sugar, and bananas. There is also an Export PromotionEnterprise, more general in scope. On the import side, one enterprise spe-cializes in imports of basic agricultural inputs; the Nicaraguan ImportEnterprise covers some of the other imports. While the export firms have amonopoly control of their products, the import firms do not. The People'sCommerce Corporation and the Nicaraguan Enterprise for Basic Food Products(ENABAS) are administered by the Ministry of Internal Trade and specializein domestic commerce and marketing of basic food products respectively; theNicaraguan Institute for Fisheries specializes in the catching and marketingof fish products.

18. Public transport enterprises are integrated in the People's TransportCorporation; construction enterprises operate under the Ministry of Construction.In agriculture, the Ministry of Agricultural Development (MIDA) directlyadministers the nationalized farms and public agroindustrial enterprises.The rest of the state-owned manufacturing sector is managed by the People'sIndustrial Corporation (COIP) under the Ministry of Industry. Wood extractionand processing is handled through the People's Forestry Corporation, a spe-cialized agency under the Nicaraguan Natural Resources and EnvironmentInstitute. 2/ Finally, the nationalized mining sector is organized into threecorporations (mining development, non-metallic minerals and petroleum) allincorporated in the Nicaraguan Mines and Hydrocarbons Institute.

19. The nationalized financial sector comprises the Central Bank, theInsurance and Reinsurance Institute, the Agricultural Financing Fund (PROCAMPO),and the Nicaraguan Financial Corporation (which includes a Special DevelopmentFund, the National Development Bank, the Housing Bank, and former commercialbanks--the Banco de America, Banco Nicaraguense, and Banco de Credito Popular).

1/ Nicaraguan Energy Institute, Nicaraguan Water and Sewerage Institute,Telecommunications and Post Office, and National Lottery.

2/ The director of this institute, as well as those of the fisheries andmining institutes, has ministerial rank.

- 7 -

20. Prior to the revolution, the public sector played only a marginalrole in the production, distribution and capital formation processes. Theeight public enterprises that operated in pre-war Nicaragua were mostlyutilities and specialized development banks; the total state sector (includinggeneral government and autonomous agencies) accounted for only 15 percentof the country's GDP. According to preliminary data for 1980, the picturehas changed substantially: the value added of public enterprises represents17 percent of the agricultural GDP, 38 percent of the value added in services(excluding general government), three-quarters of construction; all of themining sector, and one-fifth of manufacturing GDP. In all, approximately37 percent of the country's Gross Domestic Product in 1980 was generated instate entities. However, if only agriculture, forestry, fisheries, mining andmanufacturing (i.e., the goods-producing sectors) are considered, the Area ofPeople's Property controls less than one quarter of production. The role ofthe State is relatively small in such important economic areas as the produc-tion of coffee and cotton (12 percent and 15 percent of total value added,respectively), meat (8 percent of total) and chemicals (9 percent of totalvalue added) as well as domestic trade. I/

Table 1: ESTIMATED PUBLIC SECTOR SHARE IN 1980 GROSS DOMESTIC PRODUCT

GDP Public Sector Public Sector(Million GDP Share

Sector Cordobas) (Million Cordobas) (Percent)

Farming 3,226.9 613.7 19Livestock 1,503.0 120.2 8Forestry 38.3 23.7 62Hunting and Fishing 135.8 86.9 64

Sub-Total Primary Sectors 4,904.0 844.5 17

Manufacturing 5,243.3 1,048.7 a/ 20Construction 475.9 356.9 75Mining 281.0 281.0 100

Sub-Total Secondary Sectors 6,000.2 1,686.6 28

Commerce 3,859.8 964.9 25Transport and Communications 1,170.1 702.1 60Ownership of Dwellings 1,205.5 22.9 2Utilities 532.9 532.9 100Financial Services 706.2 706.2 100General Government 2,406.7 2,406.7 100Other Services 553.9 99.5 18Sub-Total Tertiary Sectors 10,435.1 5,435.2 52

Total Gross Domestic Product 21,339.3 7,966.3 37

a/ Majority-owned enterprises.

Source: Ministry of Planning and Mission Estimates

1/ The state domestic trade corporation, CORCOP, accounted for approximatelyone-quarter of manufactured product sales in 1980; ENABAS handled some18 percent of the total trade in basic grains.

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21. Little pre-war financial data are presently available on the manu-facturing and commercial enterprises which are now under State control; thus,it is difficult to ascertain in detail the changes that have taken place inthese key sectors. Some of these enterprises suffered the greatest physicaldamage, and their records were often destroyed. Many of these businesseswere owned--and often directed personally--by President Somoza and theiroperation was not wholly guided by market principles. Preliminary data for1980 indicate that the 84 public manufacturing enterprises that are eithercompletely owned by the State, or where the State is a majority shareholder,accounted for 40 percent of exports and employed 25 percent of the work forcein the manufacturing sector.

22. In the agricultural sector, more information was available to theMission and a description of the increased participation of the State in thissector can be made. In 1976, fewer than 1,500 estates with over 350 hectareseach controlled 38 percent of the land in farms and ranches, excluding thevirtually unpopulated Atlantic Plain. In the most densely settled Pacificregion, the relative concentration was even greater; fewer than 750 farms hadmore than two-thirds of the farm land. In contrast, 100,000 farms, represent-ing nearly two-thirds of the total number, had less than seven hectares each;they comprised less than 4 percent of the total farm land, and many of themwere partially or totally rented or sharecropped. Finally, as of 1971, 31,000rural families were completely landless. If these are added to the 11,000"farms" with less than 0.7 hectares each (1976 estimate), and allowances aremade for population growth, the total number of rural families that werevirtually landless can be estimated at about 50,000 before the revolution,equivalent to about one-fourth of the total number of rural families.

23. The Somoza family, its associates and friends owned an importantshare of the best crop and pasture land in the western part of the country,particularly in the Pacific region. About 1,500 to 2,000 farms coveringan estimated 800,000 to one million hectares were confiscated--or, in afew cases, purchased--by the new Government, along with large numbers ofprocessing and agroindustrial plants and equipment, such as sugar and ricemills, cotton gins, coffee hulling plants, slaughterhouses and farm supplydistribution facilities.

24. The organization of the APP in agriculture has been graduallyevolving. By the end of 1980, each confiscated farm was being turned into aState Production Unit (UPE); an average of about six contiguous or neighboringUPEs was to be coordinated by a "complex." The 160 complexes are beinggrouped into 27 enterprises, which were, until recently, directly responsibleto a central government agency, INRA. The 45 agroindustrial complexes reportedto another agricultural agency, AGROINRA. Both agencies were abolished inlate 1980 in favor of a new General Directorate of Production in the Ministryof Agricultural Development (MIDA). The managers of the complexes and publicenterprises became responsible to one of MIDA's 18 regional offices withrespect to both administration and policy.

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B. Short-Term Behavior of the Economy

25. Many of the problems that the Nicaraguan economy is currently facinghad their origin in production drops resulting from the war, a large externaldebt and the rise in the price of oil--conditions inherited or externallycaused. The flow chart presented in Figure II attempts to summarize thesalient economic problems that Nicaragua faced during the past year and ahalf. The percentages in parentheses show 1980 figures in comparison withthose of a base year, 1978. The decline in industrial and agriculturalproduction, although partially counter-balanced by a rise in export commodityprices, resulted in decreasing exports. At the same time, as a consequenceof the decline in production of basic grains and increase in prices, importsof food tripled. In addition to the balance of trade deficits that have theirorigin in production drops, the rise in oil prices contributed nearly 20 percentof the rise in imports.

26. Efforts were made to increase the greatly curtailed production, butin practice, losses in domestic supply were largely compensated for throughincreased imports. Demand was sustained through expansionary policies.Domestic credit, compared to that of 1978 more than doubled. Much of thiscredit was oriented toward the public sector, and a substantial part of itwent to a few state organizations, particularly in the area of agriculture.The Central Government expanded rapidly. Its current expenditures exceeded anextraordinary increase in current revenues, and an unprecedented fiscaldeficit of US$220 million--10 percent of GDP--was accumulated.

27. Aggregate consumption rose by 80 percent in nominal terms--50 percentfaster than the growth of GDP--although in real terms, 1980 consumption wasstill more than 10 percent below pre-war levels. Inflation was relativelyrestrained through a large increase in imports, made possible by a generousinflow of external financing, a drawdown in reserves, and price controls.Consumer prices rose by nearly 30 percent during 1980 (December to December),a high rate, but much lower than the 70 percent increase reached during 1979.During the first year and one half following the war, a number of countriesand international organizations provided Nicaragua with substantial amounts ofgrants and medium- and long-term loans and credits--total loan disbursementsamounted to about US$650 million. Imports from the Common Market partnercountries more than doubled, and a deficit with Central America of US$225million was built up in 1980. The resource gap was US$459 million, or 90percent of total exports of goods and services, and 21.5 percent of GDP.

28. Imports rose 87 percent in real terms, almost to the 1978 level.Moreover, the rise in import prices was twice as large as that of exportprices. Much of the increased import bill came from the price rise in oilimports and the need to build up depleted inventories. Demand of consumergoods was satisfied largely through increases in imports from Central America.

29. The policy pursued during the first year and a half following thewar focused on satisfying the basic needs of the population, restockinginventories, trying to restore real consumption levels which had droppedsharply in 1979, and providing employment, or at least marginal work, for the

FIGURE Il:NICARAGUA

SALIENT ECONOMIC PROBLEMS ARISING IN THE POST REVOLUTIONARY PERIOD,POLICIES ADOPTED AND RESULTING IMBALANCES

(Percentage Changes from 1978 to 1980)11

WORLD PRICE INDUSTRIAL AGRICULTURAL EXTERNALOF OIL PRODUCTION PRODUCTION DEBT

I+ 137%) (-18% real) (-24% real) (+53%)

PROBLEMS t T t t v

IMPORTS EXPORTS TO EXPORTS IMPORTS DEBTOF FUEL CENTRAL AMERICA OF COTTON OF FOOD2- SERVICE

(+195%) (-49%) (-8)(+190%1 (1980: 28%)

l ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ \ ~~~~~~~~~~~~~~ ~~~(DISBURSEMENTSPOLICIES 1979/60m

ADOPTED IN 6 .illio/PRACTICE \/

GOVTl AND GOT URENT ||GOVT. CURRENT| \\/ f

PRIV. CREDIT _ EXPENDtTURES || REVENUES O

(+1 11) (+C. 2770 million) 4 (+C. 2397 million)|\\/

i I XI ~~~~~~TOTAL FISCAL DEFICIT /

(+80%) ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~

RESULTS |l\

AGRO PRODUCT. " MORTS | RESOURCE GAINTI| EERNATIONET)LCROP 1980-81 CENTRAL AMERIC Ifb (1980: -$459 millio so REERE ( Ih ngeTin )

R (-9% of pre-war)6-I (+116%) 90%ofexports) (Changein

-$194 million)

1/ Except when otherwise indicated, percentages in parentheses refer to changes of 1980 current values with respect tothose of 1978. It is perinent to note that inflation was very strong during this period. (consumer prices went up by 1 00%)

2/ Approximately one-third of food imports come from Central America.3/ Debt service during the first half of the decade averaged only 12% of exports.4/ Data refers to the total disbursements of loans, credit lines and donations for the period from July 1979 to December 1980.5/ Most of the credit expansion went to government institutions and state enterprises. Percentage growth refers to the

domestic assets of the banking system: Net credit to the public sector, net credit to the private sector and other'.6/ Percentage compares 1980/81 crop Year production with 1976/77-1978/79 crop year average (in real terms).

World Bank -22859

- 11 -

urban unemployed through the rapid expansion of both service activitiesand public employment. An expansive credit policy has been conducive toa significant recovery of the agricultural sector. There has, however,been some cost to permitting a less painful transition: the fostering ofan untenable trade deficit.

30. Several of the principal economic issues highlighted in this summaryoverview are analyzed in greater detail: monetary policy, public finances,balance of payments and external debt management.

i. Money and Credit

31. Traditionally in Nicaragua, monetary policy has played a conserva-tive role. However, after the 1979 conflict, the Central Bank adopted anexpansive monetary policy, and credit grew rapidly. Reserve requirements fordeposit banks were practically abolished and the money multiplier increasedsharply. Although the ultimate causes of the external imbalance lie outsidethe monetary field, there is little doubt that the credit expansion wasconducive to the decline in the international reserves, which dropped byabout US$200 million in 1980.

32. By the middle of 1980, it became clear to the monetary authoritiesthat there was excess liquidity in the economy, and an official policy ofcredit containment was adopted. Brakes were applied in the last quarter ofthe year to the credit allotted to some rapidly expanding official institutions.

33. Part of the net credit expansion stemmed from the low repaymentlevel of short-term credit. This is not surprising, given the insolventnature of many enterprises. Significant arrears appeared in industrial andrural credit, and above all, in state enterprises. The largest increasein credit during 1980 was to Government and official institutions. In fact,perhaps as much as 90 percent of the credit expansion during the firstsemester of 1980 may have gone to the "non-private sectors." Although thispercentage dropped during the second semester, for the entire year the publicsector share was probably close to two-thirds. A large amount of this creditto the public sector went to agricultural institutions.

34. While credit to the private sector in 1980 did not increase in realterms, this apparently did not imply a credit "crunch," but rather a limiteddemand for credit--in spite of the subsidized level of interest rates. Thereare several reasons for this: (i) as a result of the war, capital overcapacitystill exisLs and the slack is only gradually being taken up (real GDP wentdown by about a quarter in 1979 while roughly 5 percent of the capital stockmay have been lost; at the end of 1980 less than half of the GDP losses hadbeen recovered); (ii) the climate of uncertainty that prevails among privateentrepreneurs, particularly with regard to longer term investment; and (iii)some entrepreneurs prefer to finance investments internally--there appears tohave been some reluctance to open up books to the nationalized banking system.

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35. The large reduction in production and the uncertainty caused bythe war, coupled with an expansive monetary policy, brought about a situationwhere the stock of money rose and the velocity of circulation was very low.During the last half of 1980, as monetary expansion slowed, the velocity ofcirculation gradually returned to more normal levels. And the money overhangthat had been built up in 1979 was absorbed through the public's dishoardingof liquid assets. About 01.3 billion was added to the nation's liquidity, asthe velocity rose. Domestic credit expansion was largely financed by foreignborrowing.

Table 2: MONETARY RATIOS(millions of Cordobas and coefficients)

Dec. 1979 Dec. 1980

1. Monetary Ratio (M/GDP) 0.397 0.3342. Reduction of monetary ratio during 1980 0.0633. Liquidity financing (reduction times GDP) + 1,344

Source: Tables 2.3 and 6.1.

ii. Public Finances

36. Although improving in quality, public finance data are particularlyweak. The new Government replaced many officials; files and data were lostduring the war; and the insolvency and changed ownership of many firms lefttheir tax status ambiguous. For these reasons, there was no effective budget-ing for the second half of 1979; new cabinet members were expected to followonly general guidelines. The final 1980 budget was only for the last 9 months;an earlier quarterly budget was a tentative series of guidelines. Data arestill not complete for many new public enterprises, and consolidated figuresof the public sector by the Finance and Planning Ministries were not available.

37. The data constructed by the Mission reveal that the public sectordeficit was about one-sixth of GDP. 1/ In spite of a large amount of externalfinancing, net domestic lending to the sector was substantial.

1/ The estimate was arrived at by adding the total increase in publicexternal and internal debt and subtracting the increase in foreignliabilities of the financial system.

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Table 3: SELECTED PUBLIC FINANCE INDICATORS(percent of GDP)

1973-76 1980Average

Central GovernmentCurrent Revenues 12.0 18.7Current Outlays 8.9 21.8Savings 3.1 -3.0

Capital Outlays 6.9 7.9Deficit a! -3.7 -10.3

Public SectorDeficit -4.7 -17.3Internal Financing, net -0.7 4.6External Financing, net 5.4 12.7

a/ Includes effect of minor capital revenues.

38. Given the lack of data with respect to the decentralized agencies,the discussion of public finances focuses on the role of the Central Government.In any event, the Central Government itself was responsible for approximately60 percent of the public sector deficit and the two utilities, INAA and INE,for another 10 percent.

Central Government Receipts

39. The war made for highly unstable conditions until July of 1979,resulting in particularly low government revenues during the first halfof that year. Tax collection recovered substantially during the last threemonths of the year, as the new Government started to improve tax administra-tion and introduced its first economic and financial program. By 1980, theeffects of the 1979 reform made themselves strongly felt. When measuredin constant terms, current revenues rose by almost 50 percent over those in1978, the last relatively normal pre-war year. The 1980 ratio of currentrevenues to GDP of 18.7 percent constitutes a 50 percent improvement over theperformance of the mid-1970s; the rate was higher than that of other CentralAmerican countries.

40. Part of the revenue increase came from new taxes. A direct progres-sive ad valorem coffee export tax 1/ went into effect in October 1979, repla-cing all prior coffee levies. Similar taxes were also introduced late in

1/ While sometimes considered indirect taxes, and shown accordingly inthe statistical tables, their burden cannot be shifted in a "pricetaking" country like Nicaragua, and therefore export levies are indeeddirect taxes.

- 14 -

1979 on beef, sugar, bananas and sesame seed. In each case an ad valorem taxrate applies at a price assumed to represent the 1979 cost to marginal producers.In 1980, the direct taxes on coffee yielded over 0200 million and those onother exports 080 million. Their yield was 12.6 percent of coffee exportsand 6 to 7 percent of other agricultural exports; combined they made up nearly8 percent of total current revenues in 1980.

41. Business enterprises which formerly paid income tax in accordancewith the low and only mildly progressive schedules applicable to individuals,now pay a flat 40 percent rate. Nevertheless, these revenues fell, in realterms, to about 70 percent of the pre-revolution level, due to the drasticdecline in profits. The formerly applicable 1 percent per annum propertytax has been replaced by a temporary 2 percent capital levy to be collectedduring each of the next three years. Property tax receipts thus have greatlyincreased, amounting in 1980 (in real terms) to 170 percent of the pre-warlevel.

42. Turnover taxes, formerly amounting to 6 percent of the value ofselected transactions, were replaced by a uniform 8 percent sales tax ongoods and services, from which only essential foodstuffs are exempt. Excisesand other levies on most alcoholic beverages also were simplified and raised.Thus, production and consumption taxes increased in real terms just as stronglyas property taxes, and in 1980 came to produce 01 billion, or more than one-third of all current revenues.

43. The strong 1980 rise in revenues is not exclusively the result ofnew or higher taxes. A partial tax amnesty applied to anyone declaring aformerly unreported liability and payitfg half of it. Government officialsestimate that this strategy produced an additional 0150 million. Taxes arenow assessed and collected more diligently than under the previous Government.The credibility of the tax administration has been enhanced. As a result, thenumber of persons presenting income tax declarations and real property unitson the tax rolls has increased substantially. Further improvements areanticipated in 1981, when a unified register of all taxpayers, to be introducedaround mid-year, will make evasion much more difficult.

44. There has been no significant change in the relevant dependence ofthe Government on indirect and direct taxes. The measures mentioned probablyhave most markedly increased the tax burden borne by middle class wage earners,who are more likely to be affected by higher consumption taxes than those inthe lowest income brackets, because many basic food items are tax exempt.Middle class wage earners are also likely to have been affected by the moreeffective collection of income taxes; the real burden of these taxes has beenfurther augmented by the effect of inflation that pushes contributors intohigher brackets. In view of the new export taxes on agricultural staples,it may be assumed that ranchers and coffee growers--both large and small--represent a second group affected by the higher overall tax burden.

45. Current revenues during 1981 are projected to increase in real termsby nearly 12 percent. Most of the increase is expected from an unspecifiedrise of 0478 million of "non-tax and other revenues"; tax revenues are expectedto rise only 4 percent in real terms. (See Table 5.2) Revenues from indirecttaxes are expected to remain constant in real terms, while revenues from incomeand export taxes in real terms are to increase substantially.

- 15 -

Central Government Expenditures

46. Between 1974 and 1978 Central Government current expenditures roseby more than two-thirds in real terms (see Table 5.3). The normal expansionof current Government spending related to population and economic growth wasreinforced by that related to reconstruction after the earthquake. Paymentsfor goods and services increased steeply, and as external borrowing also grewrapidly, interest payments rose from 2.4 percent to 12.4 percent of totalcurrent expenditures.

47. Between 1978 and 1980 total current expenditures grew in realterms by 38 percent. Payments for goods and services and transfers to thepublic sector rose much more rapidly, by 73 and 55 percent respectively.Since GDP has dropped quite substantially over the period, total CentralGovernment outlays rose from 18.7 percent of 1978 GDP to almost 30 percent in1980. It was this rapid expansion of fiscal outlays that contributed most tothe domestically-generated financial disequilibrium. The rise is explained bythe requirements of the numerous post-war reconstruction tasks, and by theexpansion of current expenditures in the social area. Only interest paymentsdeclined greatly, since part of the public debt was renegotiated and manypayments were postponed.

48. Much of the expansion reflects new priorities. Between 1977-78 and1980 the share of social expenditures and general government administrativeexpenditures has risen greatly, while that of infrastructure and financial/commercial outlays has dropped markedly. The most important features of the1981 budget are the renewed emphasis on social areas and infrastructureactivities and the relative decline in the importance of expenses by theministries engaged in productive areas and in general government activities.Public debt payments are also to rise significantly.

Table 4: SUMMARY DISTRIBUTION OF CENTRAL GOVERNMENT EXPENDITURES(percent)

Average Estimated Budget1977-78 1980 1981

Social Sectors 17.7 26.0 28.9Production Sectors 8.8 9.2 4.6Infrastructure 21.4 14.0 18.8Commercial, Financial and Economy Ministries 10.4 6.4 6.7Public Enterprise Loans -- 5.5 --

Other Government 22.5 28.8 22.2Public Debt Service 18.6 10.1 16.0Contingency -- -- 2.8

Total 100.0 100.0 100.0

Source: Table 5.5

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49. The 1981 budget envisages a 44 percent expansion of Central Govern-ment current expenditures. Assuming a 25 percent inflation rate, this impliesa real growth rate of about 15 percent. The strongest increase is expected ingoods and services. Interest payments are also anticipated to rise steeply(to nearly 14 percent of all current expenditures). Transfers are the onlyheading showing a significant decline in real terms.

50. Capital expenditures prior to the revolution accounted for approx-imately one-fourth of total Central Government expenditures; usually less than6 percent of GDP. They consisted overwhelmingly of infrastructure investmentsand transfers to organizations outside the Central Government (see Table 5.4).During the war, capital expenditures declined precipitously. But in 1980 theyreached an all-time high, as the Central Government took on a much more impor-tant role in maintaining overall capital formation and also furnished financingto other public sector areas. Central Government fixed investments reached4.6 percent of GDP, nearly twice the pre-war record, and the total capitalexpenditures (i.e., including capital transfers) of the Central Governmentcame to one-fourth of its total budget and 8 percent of GDP, a level notreached even during the period of earthquake reconstruction.

51. While the 1981 Central Government budget envisages a very substantialreal decline in overall capital expenditures as capital transfers decline, itsfixed investments are programmed to exceed the 1980 level. The burden offinancing the development program will shift to other public sector entities,as a larger part of it is to be financed through their own resources and loansthat they themselves must service.

52. In 1980 the Government succeeded in greatly increasing currentrevenues but current expenditures grew parallel due to the great expansion ofGovernment functions and to high inflation. The current account deficit waslower than in 1979, but the greatly expanded capital budget obliged theauthorities to expand domestic as well as foreign borrowing to record levels.For 1981 a significant rise in current expenditures is projected, while alesser expansion of current receipts is anticipated. Consequently, a muchlarger current account deficit is expected. And though capital expendituresare projected to be smaller, the overall Central Government deficit may benearly 02.3 billion. To cover this, the authorities project foreign, aswell as domestic, borrowing of larger sums than in 1980. Disbursements offoreign financing are to rise to more than ¢1.2 billion (US$120 million)and internal borrowing to about ¢1.5 billion.

Public Investment

53. The private sector traditionally had undertaken the bulk of fixedinvestment. In 1975-1977 this had been equal to 13.5 percent of GDP oralmost two-thirds of the total. In contrast, the estimated private fixedinvestment in 1980 represented no more than 3.2 percent of GDP, or less thanone-sixth of total investment.

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Table 5: GROSS INVESTMENT, 1975-1981(percent of GDP)

Actual Estimated Projected1975 1976 1977 1980 1981

Fixed Public Investment 1/ 6.9 7.6 11.5 12.2 12.7Fixed Private Investment 15.5 12.5 12.7 3.2 3.5Change in Inventories -0.1 -2.8 2.9 4.8 -

Total Investment 21.4 17.3 27.1 20.2 16.2

1/ Includes Central Government and Official Institutions.

Sources: 1975-1977; IBRD Report No. 2061-NI1980-1981; Ministry of Planning and Mission Estimates

54. The value of 1980 public investments (02,604 million) represented12.2 percent of GDP, exceeding that planned (¢2,230 million) but well belowthe total net borrowing of the public sector (¢3,660 million). The excessinvestment took place entirely in the productive sectors; investments insocial and economic infrastructure fell short of what had been planned. Itproved less difficult to execute that part of the program which consistedlargely of imports of capital goods than to execute construction activitiescarried out with domestic resources.

55. The composition of Government investment differed considerablyfrom the past (see Table 5.7). In 1980 economic infrastructure (energy,transportation and telecommunications) represented slightly more than one-third, an equal share went into productive investments, while about 30 percentof total investment was allocated to social infrastructure (education, healthand housing). Prior to 1979 economic infrastructure had accounted for thelion's share.

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Table 6: ESTIMATE OF INVESTMENTS IN 1980-1981(percent of GDP)

1980 1981

I. PUBLIC FIXED INVESTMENT 12.2 12.7

A. Social Infrastructure (education,health and housing) (3.6) (3.1)

B. Productive Sector (4.3) (4.6)C. Economic Infrastructure (energy,

transportation and telecommunications) (4.3) (5.0)

II. PRIVATE FIXED INVESTMENT 3.2 3.5

III. TOTAL FIXED INVESTMENT (I and II) 15.4 16.2

IV. CHANGE IN STOCKS 4.8 0.0

V. TOTAL GROSS DOMESTIC INVESTMENT 20.2 16.2

Sources: Public Investment - Table 5.7Private Investment, 1980, Mission; 1981, MIPLAN

56. In order to forestall delays in execution, the 1981 Plan reliesheavily on the continuation of 16 projects carried over from the precedingyear. On the basis of potential financial and construction constraints, theMinistry of Planning decided that total public investments to be implementedin 1981 should total 04,056 million, a significant real increase over the 1980level. Government authorities believe the public sector must play an importantrole in supplementing the low levels of private investment.

57. To implement Government objectives, the relative importance ofvarious types of public investments has been altered. Economic infrastruc-ture investments are scheduled to rise in 1981 by 40 percent in real terms;productive investments also will be increased by 27 percent in real terms,while social infrastructure investments are to be retained at the same reallevel.

58. Productive investments under the responsibility of the Ministryof Agricultural Development (70 percent of all productive sector investmentsand nearly 25 percent of total public investment) consist mostly of short-terminvestments required to increase rapidly the agricultural output, both of cropand livestock (Table 5.8).

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59. The level of investment of the People's Industrial Corporation,COIP, represents 3 percent of total investment. Its purpose is primarily torepair or replace equipment of the public enterprises it controls, and to helpthe enterprises expand their capacity to meet rising demand for goods. Thethird ranking productive investment, only slightly smaller than that of COIP,will enable the National Fishery Institute to repair and expand its fleet andpurchase other equipment.

60. Nearly half of the economic infrastructure component consists ofenergy investments by the National Energy Institute. The larger part of itsinvestment (¢420 million) represents investments in geothermal energy projects,with the remainder going mostly to hydroelectric projects. The second mostimportant part of the economic infrastructure component--about one quarter--isthat of the Transport Ministry. Half of this consists of the purchase ofbuses with the remainder being accounted for by relatively small investmentsrelated to urban transport and airport maintenance. Construction Ministryinvestments consist mainly of highway and highway bridge projects; theremainder of economic infrastructure investments is for expansion of thetelecommunications network.

61. About one quarter of social sector investment is for housingactivities; another quarter is for Ministry of Health investments. The latterconsists almost entirely of improvements of existing hospitals and healthcenters. The Education Ministry will invest 18 percent of the sector'sinvestment, the bulk consisting of primary and secondary education andtraining projects. The remainder is for drinking water and sewer construc-tion, urban reconstruction, and a plethora of relatively small projects.

iii. External Capital

62. During the first two years following the war (until June 30, 1981),international organizations and bilateral agencies provided Nicaragua withsubstantial amounts of external assistance. Total commitments of loans andtrade credits amounted to about US$1,120 million; total disbursements fromthese and prior loans were US$716 million. Among the major multilaterallenders, the IDB committed US$193 million (including US$45 million from theVenezuelan Trust Fund), the World Bank Group US$91 million (of which US$37million was IDA), and CABEI US$36 million. Bilateral loan commitments andlines of credit were received from USAID US$73 million, Latin America US$258million, Western Europe US$97 million, socialist countries US$132 million, andLibya and OPEC US$120 million. Donations granted in cash and goods duringthis period amounted to an additional US$306 million (US$223 disbursed), andthis estimate excludes considerable direct technical assistance.

63. Estimated public sector long- and medium-term external debt at theend of 1980 was almost US$1.5 billion.

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Table 7: MEDIUM AND LONG-TERM PUBLIC, EXTERNAL DEBT OUTSTANDING, END 1980(US$ millions)

Disbursed IncludingOnly Undisbursed

Suppliers credits 13 13Financial institutions 567 570Bilateral loans 477 650Mlultilateral loans 418 6b4

Total 1,475 1,897

Source: Table 4.2

Not included in this total is the external debt of the now-nationalizedcommercial banks and public enterprises which equals about US$200 million.

64. Immediately on taking power the new Government announced it fullyaccepted its obligation to repay all legitimate external debt. It quicklybegan to compile information on this debt and began a systematic series ofnegotiations with its creditors. The refinancing negotiations of Nicaragua'sexternal debt can be broken down into five categories:

(i) Debt of the public sector to multilateral development banks.Debt outstanding (disbursed only) was about US$350 million by the end of1979. The Government made rapid arrangements with IDB, CABEI, and the IBRDto end the arrears in debt service begun under the prior regime. By April1980, its debt service to all three entities was current.

(ii) Debt of the public sector to private foreign banks. Thecontractual debt owed to private financial institutions, plus the interestoverdue, was US$582.0 million as of December 1979. After a series of detailednegotiations, both partners agreed in late 1980 to refinance the outstandingdebt on the following terms: 12 years maturity, including a five year graceperiod. The interest rate will rise gradually from LIBOR + 1 percent duringthe first 3 years to LIBOR + 1-3/4 percent during the last 2 years. Duringthe grace period the interest rate paid will be only 7 percent; the differencebetween this and the commercial rate agreed upon will be refinanced and paidbetween the sixth and tenth year of the loan.

(iii) Public debt to bilateral, official organizations. As ofJuly 1979, this debt amounted to US$266 million. Three countries are theprincipal creditors: the United States, Spain, and the Federal Republic ofGermany. A Paris Club meeting convened in October 1980 to settle this debtdid not reach an agreement. The Nicaraguan authorities settled their debtwith Spain bilaterally and are now negotiating with Germany.

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(iv) Debt of the nationalized commercial banks to the privateforeign banks. Until July 1979, these businesses were part of the privatesector. Total debt owed (including interest arrears) is approximately US$180million. Negotiations relative to this debt have recently come to a satis-factory conclusion under the following terms: 10 years maturity which includesa 5-year grace period. The interest rate that applies until December 15, 1981is 9-7/8 percent. Future interest rates will rise gradually from LIBOR + 3/4during the first 3 years to LIBOR + 1-1/4 over the last 4 years. During thegrace period, the interest paid will be 6 percent: the difference between thisand the rates specified above will be refinanced and paid between the sixthand the tenth year of the loan.

(v) Agreement with respect to the debt to private foreign banks ofthe enterprises that have been nationalized (approximately US$30 million) isstill pending.

(vi) Debt of the private sector to private foreign banks. Totaldebt is estimated to be approximately US$47 million. Solution to this problemis linked to foreign exchange availability. The Nicaraguan Government hasindicated that it is not responsible for this debt, although it has expressedits interest in gradually solving the problem.

C. The Agricultural Recovery and Transformation

i. The Recovery

65. Measured against the average output for the three crop years pre-ceding the outbreak of serious unrest--1976/77 to 1978/79--the index of agri-cultural production in the disrupted 1979/80 crop year was down by 23 percent(Table 7.2). On the other hand, output of some products actually rose in1979/80; sesame seed went up by 80 percent and tobacco and sorghum were upby 15 percent. Cattle slaughter in both 1978 and 1979 increased by one-fourthover the 1975-77 average, but at the expense of herd inventories and thus, offuture years' production.

66. For 1980/81, recovery in virtually all lines of production exceptcotton, beef and milk had been expected to be rather rapid; overall agri-cultural output was projected to be not too far below the 1977-79 average.However, these early expectations have not been realized, due to a lower thananticipated increase in total acreage planted and acute shortages of labor atharvest time. In addition, expected high yields for some basic grains havenot materialized. It now appears that overall agricultural output will beabout 10 percent below the pre-war average.

67. The Mission's projections of production and trade are, of course,based on certain policy assumptions. Some of these are discussed in thepresent section; others are dealt with briefly in a later section on policyissues. The 1980/81 coffee crop was about 10 percent below the record crop of1978/79 because of labor shortages during the harvest. Under the officiallysponsored and funded coffee renovation program, about 13,000 hectares hadbeen replanted by the end of 1980. The drop in world prices of coffee shouldreduce export earnings in 1981 substantially below the 1980 total.

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68. Cotton became the country's No. 1 export earner in the 1960s.The combined value of exports of lint cotton, cottonseed meal and cake, andcottonseed oil in 1976-78 reached US$162 million. According to officialstatistics, harvested area had reached peaks of 216,000 and 237,000 hectaresin 1976/77 and 1977/78, respectively. 1/ Following the precipitous dropin the cotton area in 1979/80 to a mere 38,000 hectares, ample Governmentencouragement and credit and the adequate availability of supplies and laborbrought the planted area back to 94,000 hectares for 1980-81. Official policyis to discourage farmers from growing cotton on marginal land; thus the cottonarea is likely to return to no more than 150,000 hectares by the middle of thedecade. Lower acreage--less than half of that of the peak year prior to thewar--and labor shortages at harvest time, have been partially offset by higheryields, but cotton output is still expected to be about one-third below thepre-war average.

69. Sesame seed production had been declining steadily during the1970s, at an annual rate of nearly 4 percent. Since this crop represents aless labor and technology-demanding alternative for owners or renters of landthat could not plant cotton during the emergency period, sesame acreage in1979/80 more than doubled the pre-war average. The planted area rose bytwo-thirds in 1980/81, to 23,000 hectares, or about one-quarter of the areaplanted with cotton. Production is expected to be at an all-time record, andexports in 1981 may well be worth nearly US$20 million, equivalent to morethan 15 percent of the export forecast for cotton. Sesame is exported in theform of shelled seed for bakery and other direct food use. At present exportprices (and being exempt from export taxes as a "non-traditional" product),sesame seems to be an attractive alternative for farmers.

70. Sugar has been the third largest export earner among cultivatedproducts. Cane production in 1979/80 had dropped 15 percent below the pre-war average and will remain 10 percent below that average in 1980/81. Boththe Government-owned sugar estates and the remaining private company have beenplanting a substantial additional area with sugarcane, as much as 5,000 to6,000 hectares combined. Given average weather conditions, this will resultin increasing the sugar supplies above pre-war levels in the near future.

71. Tobacco production was hardly affected by the war, probably becauseit is grown on relatively small plots in isolated areas. Total acreage isalso quite small (about 2,500 hectares in 1980/81). Acreage and yield of bothbright (mostly for domestic use) and black tobacco (for export) in 1980/81 issubstantially above that of pre-war averages, and production is expected to be55 percent above the 1976/77-1978/79 average.

1/ It is possible that acreage figures are somewhat exaggerated becausegrowers may have claimed more area than they intend to plant in orderto obtain more concessionary credit from the banks. That average yieldsin both of those crop years were below the average that prevailed in theearlier 1970s could serve to support the point, although this could alsohave reflected expansion of cotton on increasingly marginal land.

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72. With the exception of paddy rice and most feed sorghum, basic grainsare typically grown by small producers. The relative decline of total acreagein basic grains (maize, beans, rice and sorghum) in 1979/80 was about 20 per-cent. As a result of a sharp drop in the area cultivated with maize totalbasic grain acreage in 1980/81 was still about 7 percent below that of thepre-war period. Production is expected to be slightly higher than that ofpre-war years largely reflecting a sorghum yield more than two-thirds largerthan pre-revolutionary yields. 1/

73. The slaughter of beef cattle in 1980 was off 17 percent fromthe record highs of 1978 and 1979, but 3 percent above the pre-war average.An export tax that had been in effect through late 1980 encouraged producersto sell to slaughterhouses that supply the domestic market. Thus, beefexports in 1980 were more than one-third less than the 1979 record and20 percent below the 1975-77 average. However, prices have nearly doubled andtherefore the dollar value of 1980 exports is expected to be two-thirds higherthan 1975-77 values.

74. There are no reliable estimates of the noncommercial slaughter ofcattle, casualties, or clandestine export of cattle on the hoof during thewar. Hence, until a reliable census is taken, it is impossible to determineto what extent the numbers of cattle have been reduced. One recent estimateis that at the beginning of 1980, cattle numbered 2.4 million--down 19 percentfrom the previous year--but private sector sources claim that the herds mayhave been as low as 2.2 million. In any event, it will take several yearsof restraint in domestic beef consumption as well as incentives, credit andintensified technical assistance to rebuild cattle herds to the point wheredomestic consumption and export goals will no longer be in conflict.

75. The supply of milk appears to have suffered a great deal more thanthat of beef, although complete data are not available and it is not knownhow badly the dairy herd has been reduced. Deliveries of milk to plantsand to the powdered milk plant in the first half of 1980 were down 46 percentfrom the same period in 1978. According to official statistics, Nicaraguaexported an average of US$7 million in milk products in 1976-78, and even in1979 exports were US$4.7 million, while imports amounted to US$4 million. Inview of the new Government's program for improving nutrition among the pooreststrata of the population, it does not seem likely that the country will beexporting milk in the foreseeable future. Indeed, a good deal of powderedmilk may have to be imported for a number of years.

76. Commercial production of chickens and eggs--largely in the handsof one recently confiscated company--suffered seriously during the fighting.Nevertheless, as a result of concerted Government efforts, chicken slaughterat the end of 1980 was already above pre-war levels. However, egg productionwas reportedly still considerably low. The short- and medium-run plans arefor a sharply increased production of both in order to keep down domesticdemand for beef while at the same time upgrading diets.

1/ This phenomenon needs to be further investigated; there may be an errorin the area or the production estimate.

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ii. The Structural Transformation

77. During the war and in its immediate aftermath, an undeterminednumber of peasant occupations of privately-owned farms took place. Where theconfiscation decrees applied, the situation was legalized by incorporatingthe farm into the public sector as a "State Production Unit" (Unidad deProduccion Estatal--UPE). "Sandinist Agrarian Cooperatives" (CooperativaAgraria Sandinista--CAS), emerged among peasants who owned or rented land,under the aegis of the newly formed Rural Workers Association. Various avail-able estimates put the number of such collective production groups in mid-1980at 450 to 650, of which only about 10 owned their land; they comprise between10 and 120 members each. Furthermore, about 1,200 to 1,500 Credit and ServiceCooperatives have been created since the war, composed of smallholders and/orrenters who work their land individually. Lastly, between 500 and 1,000"informal groups" of campesinos are thought to exist at any given time. Thesearise specifically as collective credit recipients and are often dissolvedas soon as a particular short-term crop loan has been repaid. These jointarrangements overlap to some extent--but by no means totally include--anestimated 30,000 farmers with small- and medium-sized plots.

78. According to the responsible agency, PROCAMPO, the small farmerclientele for official technical assistance and organization support serviceshas risen from a few thousand before the war to about 110,000, of whom 77,000are said to be associated together in one form or another. There has also beena tangible structural change in farm credit. In June 1978, only 11 percentof the agricultural portfolio was owed by small producers; practically allof the rest was owed by entrepreneurial farmers and ranchers. In June 1980,16 percent was owed by small producers, under the National Development Bank(BND) rural credit program, 20 percent by the APP, and 64 percent by privateentrepreneurial producers. Moreover, this estimate excludes the large lendingof the Central Bank to INRA in support of its agricultural activities. Offi-cial credit under the BND's various programs was being dispensed to 29,000farmers in mid-1980, compared with fewer than 2,000 clients in 1979.

79. One example of the agricultural credit expansion is PROCAMPO'slending. The total nominal amount of loans made under this small farmerrural credit program in 1980/81 was over six times the nominal amount lentin 1977/78, covering 3-1/2 times the area of crops earlier financed. Further-more, according to PROCAMPO, the average land cultivated by its clients isabout 1.75 hectares, or twice the average under a pre-revolution program.This increased access to land is thought to reflect principally the growinginclusion of renters and the greater availability of credit to poorer farmers.

80. Estimates of the total number of rural workers benefitted by orinvolved in the new structures that arose from the revolution--i.e., the Statefarms and the collectives and cooperatives--vary widely, partly because thesenumbers are in continuous flux, as associations are formed or dissolved, andas the state enterprises adjust their payrolls to meet both long-term andseasonal requirements. The most reliable guess would seem to be about 70,000,almost 20 percent of the active agricultural labor force. At least 35,000--or10 percent of the labor force--are employed in the public sector. The remainderare members of newly formed groups, most receiving credit.

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81. An important agrarian measure of a general nature enacted by therevolutionary Government is the imposition of a ceiling on land rents amount-ing to ¢100 to ¢300 per manzana (about US$14 to US$43 per hectare). In thecase of cotton land the new ceiling is drastically lower than the rent thatwas charged prior to the revolution. The measure benefits entrepreneurialfarmers who prefer to rent rather than own. About one-half of the cottonacreage has been on rented land in recent years.

82. A substantial redistribution of surpluses from agricultural produc-tion and marketing, from the private to the public sector, is also takingplace, due to Government monopolization of the export trade and heavy, price-progressive taxation of these exports. Export taxes are collected on all"traditional" agricultural exports: sugar and molasses, coffee, beef andbananas. The export tax on each of these products is designed to siphon offa steeply growing share of the surplus, as export prices rise above a floorthat presumably represents a fair profit above production cost for producers.Bananas exported entirely by the U.S.-owned Standard Fruit Company, are anexception; they pay a flat 52 cents per box of 40 lbs., the same as exporterspay in Honduras and Costa Rica.

83. Price controls and subsidies were only partially successful inpreventing substantial price increases in basic foodstuffs for consumers.The consumer price index of principal agricultural commodities rose 47 percentfrom 1978 to 1979 (annual average basis), and another 23 percent from 1979to 1980. 1/ Controls and subsidies were apparently most successful at theconsumer level in the case of rice, beans and sugar. Consumer prices formaize may have reflected insufficient domestic supply more than those of otherproducts--in both years they rose much more than producer prices.

84. Wisely, there have been no price ceilings or subsidies for beef,or for meat of any kind. Thus, once the discriminatory nature of the beefexport tax in favor of domestic consumption had been offset by a tax ondomestically consumed cattle, Nicaraguan consumers were again paying thefull price determined by demand and supply for beef in international markets(at the official exchange rate). However, as previously stated, the Governmentis rapidly increasing the availability of chickens, and at relatively lowerprices than those of beef.

1/ A preliminary estimate comparing the average for the first ten monthsof 1980 with the annual average for 1979. The partial index of agri-cultural products is weighted excessively towards beef, milk and eggs,which together account for an improbable 62.5 percent of the "basket."In fact, the food, drink and tobacco price index for low-income consumersrose much less (31 percent) than that of the higher income groups (41percent) during the 12 months ending October 1980 (the overall averagewas 35 percent).

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85. Food and other basic products are being made more accessible--eco-nomically as well as logistically--by an expansion of the state marketingagency, ENABAS. In the cities, 60 retail outlets were established where basicgoods are readily available at low markups. In rural areas, ENABAS has beencollaborating with PROCAMPO and the ATC in setting up 700 village commissariesunder local management. The cost of these services, however, has been heavy.

86. The national literacy campaign during the first half of 1980represents a major investment in the nation's rural work force. While manycampesinos are perhaps barely functional in their newly acquired skill, thecampaign has apparently touched every town and hamlet in the country. Spotinquiries indicate that in the rural areas it has had tangible functionaland psychological effects in organization and self-awareness, as increasingnumbers of campesinos are able for the first time to sign their own names tosuch documents as organization by-laws, credit applications and bills of sale.Many are now able to read simple leaflets and brochures dealing with organi-zational and technical subjects.

D. Industry in the Post-War Period

87. The new Government established three immediate objectives for theindustrial sector: (i) to restore production, particularly of foodstuffs;(ii) to generate employment; and (iii) to promote exports. Given the gradualrestoration of the transportation, communications and construction sectors,improved administration and the availability of international financialassistance, it was hoped that the industrial output in 1980 would reach about85 percent of the 1978 level. The actual 1980 data shows that about 78percent of that level was achieved. Particularly disappointing was theperformance of manufactured exports, which in 1980 reached only 62 percent oftheir 1978 level, whereas the volume of manufactured imports (a proxy for thedemand of these products) was almost the same as that of the last pre-waryear. The Ministry of Planning estimates that the total industrial outputincreased by only 7.3 percent in 1980, compared with a 10 percent rise intotal GDP. The sectors with the least growth were machinery, chemicals,wood-processing, paper and textiles; on the other hand, beverage and tobaccofirms substantially surpassed their 1980 targets.

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Table 8: MANUFACTURING INDICES

1980 (%)1978 1980 1978

Employment 1/ 30,659 29,221 95.3

Average monthly wage rate(1978 prices) 1,329 1,096 82.4

Electrical energy consumption(thousand KWs) 307,812 239,121 77.7

Gross value of production(millions of 1978 Cordobas) 7,567 5,900 78.0

Total manufactured exports(US$ 1978 million) 274 169 61.6- To Central America 139 60 43.0- To rest of the world 135 109 80.8

Total manufactured imports(US$ 1978 million) 504 495 98.2- To Central America 131 205 156.5- To rest of the world 373 290 77.9

Credit outstanding to industrialsector (millions of 1978 Cordobas) 1,428 1,627 113.9

Tax collections from manufactures(millions of 1978 Cordobas) 384 612 159.3

1/ Persons employed that were registered with the Social Security Institute(INSS).

Source: Ministry of Industry and Ministry of Planning.

88. In the face of the drop in 1979 output, unemployment in industryrose sharply. Although many workers were being used in emergency repair ormaintenance activities, by the end of the year it was estimated that onequarter of the economically active population in manufacturing was withoutwork. However, during 1980 employment rose as many firms taken over by theState attempted to keep their workers on the payroll by working short shiftsor alternating days. The level of employment, therefore, recovered fasterthan that of output. This sector also experienced serious losses of mana-gerial and technical personnel. During the height of the war, a relatively

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large proportion of trained professionals and technicians left the country.While some have returned, many top managers have not. Although Nicaraguastill has a fairly sizeable pool of executives, personnel losses have ledto problems in restoring output in key areas.

89. The moderate pace of the industrial reactivation process in 1980 wasaccompanied by a significant fall in labor productivity. This was chiefly dueto frequent work stoppages, low capacity utilization (in 1980, State manufac-turing enterprises, for example, operated only at an average, estimated 65 per-cent capacity), occasional shortages of imported inputs, sluggish reactivationof the construction sector and low investment activity.

90. The attitude of the private sector has been, as a whole, extremelycautious about proceeding with a full rehabilitation effort. Many factorieswhich had remained in private hands, and which were able to undertake someproduction, did not do so due to the uncertain economic climate and thereduced purchasing power prevailing after the war. Little data are availablefor the 1980 performance of public manufacturing enterprises that could bemeasured against the sector as a whole: a comparison of the People's Indus-trial Corporation 1/ 1980 actual gross value of production figures withits annual target shows, however, that some 90 percent of the target wasfulfilled. Thus, it would appear that the quantitative performance of theState-controlled part of the manufacturing sector is roughly similar to thatof the sector as a whole (total manufacturing output in 1980 was 92 percentof that initially planned).

91. The new Government has not yet determined which will be the strategicsectors that require direct public intervention. Some attempts have neverthe-less been made to define the objectives of public enterprises in the mixedeconomy Nicaragua is trying to develop, as well as to determine the sectorsthat will enjoy the Government's special attention. According to the 1980-81program, the public manufacturing enterprises' principal tasks are to:(i) improve income distribution, (ii) increase the supply of basic consumptiongoods, (iii) generate employment, (iv) regulate prices on the national market,(v) generate surpluses to allow for self-financing, (vi) increase the role ofplanning, and (vii) introduce direct worker participation. The 1980-81programs also list the industrial branches of priority in which the publicmanufacturing enterprises should play an important role. These are: (i) foodproduction, (ii) textiles, garments and footwear, (iii) drugs and veterinaryproducts, (iv) construction materials, (v) articles for education (paper andprinting), (vi) machinery and transport equipment, and (vii) basic manufactur-ing inputs (chemical, rubber, petroleum products). The above seven sub-sectorsrepresent some 75 percent of the total manufacturing sector's gross value of

1/ Which includes three quarters of all Public Manufacturing Enterprises;47 percent of public manufacturing employment, and 56 percent of theenterprises' production.

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production; public manufacturing enterprises participate with an average of41 percent in these activities. 1/

92. In 1980, the Government faced a major problem in having to simul-taneously establish policy and organize the management of a large number ofenterprises. This task included the establishment of sectoral and subsectoralobjectives and priorities, coordination both between and within subsectors andmanagement of individual enterprises. It has been further complicated by thefact that many of these enterprises were the ones most affected by the war,not only by physical damage and looting, but also by decapitalization anddestruction of records (particularly financial information). Consequently,the Government focused first on establishing an emergency structure to manageand administer State enterprises. More effort was devoted in the second halfof 1980 to operational matters and restoring the productive capacity ofindividual enterprises.

iii. Public Manufacturing Enterprises' Operating Experience: the Caseof COIP

93. The People's Industrial Corporation (COIP), the largest Government-controlled entity that manages manufacturing enterprises, has, during thepast year of its operations, gained experience in management, planning,control and workers' participation. As of the end of 1980, COIP included82 enterprises, 63 of which were majority State-owned (in 42 of them the Stateowns 100 percent of the shares, in the remaining 21 its participation isbetween 50 percent and 99.9 percent), and 19 of which had a minority ownership(i.e., with less than half of total shares). COIP's enterprises employed over14,400 workers (one-third of them in minority-owned firms) and in 1980 theyproduced some 22 percent of manufacturing output (almost half of it in minority-owned enterprises). The corporation is part of the Ministry of Industry andis considered the latter's central tool of direct policy intervention. Itis headed by a vice-minister/director and has five departments: planningand management control, finance, administration, industrial relations andmanagement of enterprises. In accordance with the nature of their products,the 82 enterprises are divided into eight groups called industrial complexes.The eight complexes are: textiles, food, metal-mechanic, wood processing, con-struction materials, paper and printing, plastics and chemicals-pharmaceuticals.The purpose of the grouping is to achieve a greater rationalization in theparticular industrial branch through improved coordination, integration andplanning.

1/ In (i) to (iv) the State has a majority share in production (54 percentof total food production, 53 percent of textile, garment and footwear,68 percent in medication and 88 percent in construction materials), in(v) to (vii), however, its role is much smaller (18 percent in paper andprinting, 40 percent in machinery, 5 percent in basic inputs). All dataare 1980 targets and not actual figures.

Table 9: SELECTED DATA ON 1'UBLIC MANUFACTURING ENTERPRISES - 1980

GrossProduction Exports

No. of No. of (million (millionEnterprises Percent Employed Percent Cordobas) Percent Cordobas) Percent

1. People's IndustrialCorporation (COIP) /1 63 75.0 10,353 47.2 1,318.4 56.5 97.0 12.4

2. Agroindustries (AGROINRA) 12 14.3 8,933 40.7 656.9 28.1 358.2 45.9

3. Nicaraguan FisheriesInstitute (INPESCA) 8 9.5 1,896 8.6 301.6 12.9 300.1 38.4

4. People's ForestryCorporation (CORFOP) 1 1.2 761 3.5 57.0 2.5 25.5 3.3

5. Sub-Total Public Sector 84 100.0 21.943 100.0 2.333.9 100.0 780.8 100.0

/26. Total Manufacturing Sector n.a. 88,500- 11,766 1,939.2

7. Public Sector's Share inTotal Manufacturing (%) - 24.8 19.8 40.3

/1 Includes majority-owned enterprises only.

/2 Estimate: the number of employed registered with the Social Security Institutewas 32,539 in December 1980.

Source: Ministry of Planning, Ministry of Industry and Mission Estimates.

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94. COIP's principal task during the first year of operation was tofind the best way to operate these enterprises, coordinate work among themand begin to make them efficient. In majority-owned enterprises COIP nominatesplant managers, but its representatives also participated actively in minority-owned plants as board directors. COIP's control is obviously much stronger inmajority-owned enterprises, where decisions regarding coordination and ratio-nalization of production and planning of operations are transmitted directly.The role of the plant manager is, for the time being, confined to day-to-daydecision-making. In the case of minority-owned enterprises COIP's position isreportedly like that of any other shareholder. COIP has an executive boardcomprised of director, vice-director, heads of the five departments and eightcomplex coordinators. The board's principal functions are those of settingthe main strategic goals and targets for the corporation, deciding on invest-ment, pricing and labor policies, and hiring and firing plant managers. Insome operational aspects it appears, however, that the distinction between theboard's role and that of complex coordinators is not clear. The latterhave decision-making functions in their respective industrial complexes, andcoordinate work among plant managers as well as corporations.

95. COIP enterprises are now required to prepare annual operation andinvestment plans, but the main parameters for both types of enterprises(majority and minority-owned) have been output, employment, exports, importsand financing. The goals for minority-owned enterprises are indicative andnot obligatory in nature. However, COIP holds frequent meetings with themanagers of these enterprises, inquiring and analyzing their situation if itturns out that they are well below their stated targets. As shareholders theysuggest to managers what they think should be done to improve performance.

96. Majority-owned enterprises, of course, have much more explicitobligations with respect to their plans. Complex coordinators, togetherwith their subordinate plant managers, set planning targets that seem feasiblefrom their point of view (intra-complex coordination). These are presentedto the Ministry of Industry, and are ultimately analized by the Ministry ofPlanning, together with some indicative targets for the private part of theindustrial sector. Through a joint inter-ministerial coordination, theadjusted targets are channeled back to COIP, where the process of revisionof targets is done first within the eight complexes and, finally, at theenterprise level.

97. Parallel with the process that establishes global and individualannual targets (further broken down on a quarterly basis) is the process ofcoordinating future investment projects. In the case of bigger projects, veryfrequently COIP's experts prepare the feasibility study for the enterprise orat least offer the potential investor (majority or minority-owned enterprise)their assistance. The projects are then classified by priority and maturitywithin COIP and are further discussed at the level of an inter-ministerialgroup (called the Ad-Hoc Investment Group comprised of the Ministry ofPlanning, Ministry of Industry/COIP, FIR, FED, and FINAPRI) where sectoralpriorities, domestic and foreign financing constraints, and processingcapacity are taken into account.

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98. While the Government's economic policy framework is not intendedto be significantly biased towards public manufacturing enterprises, and theGovernment has stated it will not discriminate against private enterprisesregarding access to credit, availability of foreign exchange, prices of inputsand products, and treatment of labor problems, there has been concern expressedthat some public manufacturing enterprises are in arrears in paying taxes,bills to other public entities (e.g., for water, electricity, telephone,social security, etc.), and repaying credits to the banking system. On theother hand, public enterprises have some disadvantages vis-a-vis their privatecounterparts, mainly in the areas of wages, salaries and management incentives.

99. Like many other enterprises in Nicaragua in 1980, a number of COIPenterprises were confronted with labor problems. Workers apparently desiredgreater influence at the plant level, as well as higher wages and salaries.This created a particularly serious problem for majority-owned COIP enter-prises. Because of wage controls and limited increases in workers' remunera-tions, which only applied to the state sector, an increasing number of qualifiedworkers, technicians and managers were shifting to the private sector insearch of higher salaries.

E. The New Social Policies

100. Nicaragua'a relatively rapid economic growth during the last decadeswas not accompanied by parallel social development. Life expectancy in themid-1970s was the lowest in Central America and one of the lowest in LatinAmerica. Estimates for 1976 indicate that 42 percent of all reported co muni-cable diseases and 17 percent of deaths could be attributed to unsafe waterand poor sanitary conditions. By 1978 the adult literacy rate was only 57percent, and had gained only four percentage points in eight years.l/ Moreover,nearly two-thirds of the rural population 10 years old and above were stillilliterate. A 1973 survey found three-fifths of the rural population had adeficient food intake: more than two-thirds did not consume any kind ofmeat or fish during the week covered by the survey, and one-half did notconsume any milk; 57 percent did not eat any vegetables. These indices denotean extremely skewed distribution of income for a country that boasted thehighest per capita supply of calories and proteins in Central America (particu-larly animal proteins)--substantially higher than the Latin American average.

101. The new Government has given top priority to education--particularlyin the areas of primary and adult education. In M4arch 1980 it launched amassive national literacy campaign, which brought out 60,000 volunteers toteach basic reading skills to four hundred thousand people. The campaign,which lasted five months, was conducted mostly by urban students, althoughadult and even foreign volunteers were welcomed. The schools were closed fora semester to allow the campaign to proceed. While some of the campaign'sgoals are not quantifiable (e.g., national awareness, self-reliance), theMinistry of Education, with the aid of UNESCO, is evaluating the resultsof the campaign. Preliminary Ministry estimates indicate that the adultilliteracy rate was reduced to 13 percent.

1/ A 1979 survey made by the Revolutionary Government indicates thatadult illiteracy may have been as high as 50 percent.

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102. Since the Government's educational strategy is strongly linked toits political and economic aims, there are a variety of announced educationalgoals. Nevertheless, two themes stand out: the new policy is to educateall Nicaraguans--young and old, rural and urban--and a major educational goalis to make all citizens more productive economically and more socially con-scious. With the completion of the initial phase of the literacy campaign,other activities are being emphasized. An effort is being made to establishPopular Educational Collectives in urban neighborhoods and hamlets to continueadult education activities. The number of university students has doubled anduniversity fees reduced; a shift in university curriculum to less scholastictopics is being considered. School teachers' salaries were raised substan-tially and four new normal schools are under construction. The goal is toradically increase the amount of primary teachers to permit a major expansionof the primary school network, while replacing foreign volunteer teachers.

103. The present primary curriculum is also being revised and it isexpected that a new curriculum with appropriate materials will be ready forthe 1982 school year, which begins in August. About 200 primary schools--mostlyin rural areas--are programmed for construction during 1980-81. A revision ofthe secondary curriculum is still being considered. Vocational and adulteducation programs, however, have been greatly expanded.

104. While the Government's public health goals are equally ambitious,their implementation has been hampered by administrative constraints. Com-munity committees have been used for health education, while rural programs oflatrine and well construction have proceeded. Mass vaccination and clean-upcampaigns have been conducted. Social security has expanded its coverage byabout one-third. New programs are underway to train health paraprofessionalsto replace some present foreign volunteers and to expand safe water suppliesin many urban centers. The University medical school is being expandedrapidly, and a major public hospital for Managua is being planned.

105. These programs have been costly, in spite of a high use of volunteers.The budget assigned to the social sector (education, health, and other welfareministries) increased substantially after the war, from 18 percent of the totalbudget in 1977-78 to 26 percent in 1980, to 29 percent in 1981. The healthbudget quadrupled in nominal terms in relation to 1978.

106. The new Government substantially reoriented urban developmentpolicies, putting into effect legislation and programs for municipal autonomy,urban renewal, emergency programs for squatter settlements and expansion ofbasic infrastructure and services in all urban centers. In October 1979 theSecretariat of Mlunicipal Affairs (SAMU) was created with the role of orientingmunicipal development and channeling investments to municipalities. By 1985Nicaraguan Institute for Aqueducts and Sewerage (INAA) plans to provide accessto potable water to 50 percent of the rural population (up from 11 percent in1979) and 15 percent of the urban population. Changes in housing policy havebeen substantive. The financially insolvent public housing bank was closed,rents were lowered, and mortgage banks nationalized. The Government nowexpects that a major share of new housing will be constructed, owned, andrented by the public sector.

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CHAPTER IV. POLICY ISSUES

107. Nicaragua is favored by a number of conditions conducive to a highrate of economic growth. It has a low population/land ratio and abundantrich volcanic soils, its metal mining potential is good, and the core of thetransport infrastructure network is well established.

108. At the same time, there are a number of obstacles to the establish-ment of a high growth path. The economic consequences of the war will lingerfor a number of years. The per capita income levels of 1977 will probablynot be attained until late in this decade. The accumulated foreign debt islarge and increasing rapidly; even after rescheduling its service now absorbsmore than a quarter of export receipts. The structural changes that aretaking place in the economy will require a long period to absorb. Moreover,Nicaragua, like many other countries, depends on costly, imported fossil fuelas a principal source of electrical energy. Hydroelectric power developmenthas lagged and geothermal exploitation is just beginning. Finally, althoughmore diversified than most Central American countries, Nicaragua's commodityexports are subject to major price fluctuations which make economic managementmore difficult.

109. At the present time the country still finds itself in a very diffi-cult recovery period. It is crucial for Nicaragua to develop a medium-termstrategy with respect to the priority areas of production, the role of theprivate sector, the capital accumulation process, external financing require-ments and the handling of the severe monetary, fiscal and balance of paymentsdisequilibria that currently exist.

110. Foreign exchange scarcity is perhaps the major short-term constraintto the recovery of the Nicaraguan economy. The current trend, and that anti-cipated for the middle-term, is one of unsatisfied aggregate demand, giventhe limited capacity to import. Agriculture is the principal supplier offoreign exchange and is a sector whose recovery has been substantial. Thus,there are good grounds for giving highest priority to the agricultural sectorand its attendant agroindustries (sugar refining, beef production). Further-more, an agricultural strategy seems plausible, since both the private andpublic sectors have participated actively in the recovery effort, and it ispossible to obtain high growth in the sector with limited long-term investment.

111. However, though there is considerable unrealized land resourcepotential, the continuation of the traditional commodity-export model maypresent serious problems. The model was based on a dual structure of largeand cost-efficient productive units, coupled with a pool of cheap labor.Given the low population density of Nicaragua, the reserve labor supply hasalways been thin during peak harvest demands. Migrant workers from neighbor-ing countries, however, have almost always been available for harvests. Therevolution brought about important changes. The small farmer benefittedsubstantially from rent reductions, stepped-up public services, and abundantrural credit. As the income, or at least the liquidity, of the campesinosincreased, the need to earn additional income from picking cotton or coffee orcutting cane at harvest time decreased. These considerations are discussed in

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further detail in the agricultural policy section that follows. Nevertheless,the general conclusion that can be drawn is that for the time being Nicaraguamust continue to rely on agricultural exports as a crucial element of itsshort-term strategy; the acute need for foreign exchange makes this imperative.A rural/agricultural strategy, however, will do little in the short term toaccelerate urban employment. Forcing state industries to absorb the unemployedin unproductive jobs will run contrary to efficiency goals and the economy'slonger-term growth prospects. Although the difficult situation can be amel-iorated somewhat by carefully selected social welfare programs, its solutionwill require a period of austerity and rapid economic growth.

112. Industry will grow at the same rate as total GDP, in the best ofcases. The sector has serious supply and demand constraints. Domestic demandhas not fully recovered, and demand from the Central American Common Marketpartner countries is down, both because of the contraction of several of theseeconomies, the loss of markets to competitors, and obstacles to trade causedby political disturbances throughout the region. On the supply side, difficul-ties stem from the physical and financial damage caused by the war and fromthe private sector's reluctance to fully increase production. In 1981 andpossibly 1982, some industrial growth may still be possible by increasingthe utilization of capital. In the longer-term, substantial increases ininvestment will be required.

113. To some extent these short-term issues--particularly the acuteforeign exchange constraint--stem from excess demand and can only be resolvedthrough more prudent demand management. The present policy of restoring pastlevels of real consumption through monetary and fiscal expansion and increasedforeign borrowing may need to give way to one focused on expenditure restraintand higher productivity-- within the framework of social transformation towhich the Government is committed. A mix of appropriate price signals, moreadequate public expenditure controls, and improved monetary management willbe vital for the recovery process.

114. The handling of the state enterprises will be decisive. Althoughone cannot expect that in the short term they will become a leading sector ofthe economy, they should at least be prevented from becoming a drain on thenation's resources. The emergency stage of simply reestablishing productionhas concluded, and the time has come to focus on achieving greater efficiency.

A. Agricultural Development Issues

i. Production Incentives and Rural Income Versus Consumer Welfare

115. Like many countries, Nicaragua is not finding it easy to bridgethe conflict between two basic public policy goals: on the one hand, themaximization of farm production and raising of rural income--which requirehigh and stable prices; on the other, the maintenance--and, if possible,improvement--of food consumption levels of the lowest income strata of theurban and landless rural population. A solution to the problem has been

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sought without recourse to rural wage increases that would raise costs, andthus, prices of food for urban consumption and the cost of producing exportcommodities.

116. Maintenance and improvement of low-income food consumption levelshave been attempted mainly through price ceilings, subsidies, and officialretail outlets. The most controversial of these measures, from the viewpointof conflict between farmer and consumer, have been the price ceilings. Atthe farm level, only basic food staples are subject to these ceilings. 1/Export-oriented products have not been subject to price controls, but exporttaxes effectively limit translation to the producer of increases in worldprices.

117. The producer price index for basic grains rose 46 percent from1978 to 1979 (commensurate with the devaluation of the Cordoba), but only ninepercent from 1979 to 1980, while consumer prices rose 27 percent. It is notcertain whether campesino response in terms of area planted in basic grains in1980/81 will carry through another crop year if prices are kept artificiallylow. Furthermore, it is not yet known whether the guaranteed producer pricesof the Government marketing agency, ENABAS, will be allowed to rise to worldprice levels. In 1979-80, over 0 400 million were spent to subsidize theimport prices of basic grains down to the level at which the Government haddetermined consumers should be able to buy them. The Government is aware thatcontinued pricing of basic grains and other essential commodities (oil, sugar,salt) below the levels prevailing in neighboring countries, on the other hand,could easily lead to a vicious circle of continued leakage, and thus, thecontinued need for subsidized imports. The price of rice was raised substan-tially for the 1980/81 crop and preliminary estimates indicate that theproduction response has been so positive that exports of rice may be availablein 1982.

118. The Government's income policies to date appear to have been designedto maximize employment rather than raise per capita income. This has, nodoubt, stimulated demand for basic food staples while limiting sharp risesin demand for higher quality products. A comparison of changes in consumerprice indexes and in minimum legal wages (the only available wage yardstick)indicates that between May 1979 and October 1980, real wages of the bulk ofthe employed labor force may have declined by as much as 30 percent -- althoughsome of the drop has been compensated through subsidies in education, healthand prices of basic foods.

119. If production and exports are to be encouraged, more producerprices may have to be allowed to rise. One way to do this, while continuingefforts to improve the diet of low-income consumers, is to resort increasinglyto measures aimed at specific target-groups, such as income-related subsidiesand institutional feeding. Meanwhile, serious study is needed to determinethe farm price levels necessary to ensure that the required supply responsewill be forthcoming. These considerations could include a review of the levelof export taxes, in order to assure that the capturing of the "surplus" by the

1/ Although a total of 17 commodities are subject to ceilings at theretail level.

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State will not result in lower production for export. Export taxes and basicgrain price controls tend to be regressive, i.e., there are many small, poorproducers of both basic grains and some export commodities--coffee, beef.

ii. The Social and Economic Efficiency of State Farms

120. The Government's decision to convert the large majority of the con-fiscated estates into state farms in the short term evidently responded to thehigh risk of losses in productivity of the high-technology cotton, rice,sorghum and sugar plantations that cooperative or individual parcel managementby former farm laborers would have implied. The decision to decentralizecontrol over their management for the second crop year has no doubt beenbeneficial for furthering better management in the short run. The managershave been told that for 1981 the emphasis should not only be on maximizingoutput but also on doing so efficiently in micro-economic terms.

121. Insuring that economic efficiency of state farms is maintained atlevels comparable to private sector enterprises will be a major challenge forthe Government. The efficient operation of these farms is so vital that con-tinued adjustments, and perhaps experiments, could be made in order to assurea satisfactory degree of economic efficiency. Wherever the Government'sobjectives of efficiency prove difficult to achieve, other organizationalstructures could then be tried.

iii. Organization and Management of Peasant Farming

122. The Government has rapidly expanded the role and scope of farmercooperatives. Continued attention will be needed for the design and promotionof more viable forms of land tenure and management for the vast majority ofthe rural population, who farm small plots individually and in associationwith others. The Center for Research in Agrarian Reform (CIERA) has drawncertain conclusions regarding the potential and problems of different types oforganizations into which the cases studied were classified. Important areasfor policy decision are the roles of the newly created Rural Workers Association(ATC) and the National Union of Farmers and Ranchers (UNAG). Two basic issueswill need to be clarified: the relationship between the state apparatus andorganized campesino interests; and the interests of the campesino (producers,who can also be employers) versus those of marginal subsistence producers andlandless workers.

iv. The Future Role of the Private Agricultural Entrepreneur

123. Based on 1971 census figures and on the current administrative limitof 20 manzanas (14 hectares) that defines a small farmer, 1/ it can be estimatedthat there exist approximately 30,000 entrepreneurial farmers and ranchers inthe country, i.e., producers who can be assumed to employ more hired labor

1/ This sort of yardstick appears too general, principally because of thefailure of the census tabulations to discriminate between farms andcattle ranches.

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than they and their family contribute to the farm enterprise. On the otherhand, there were, prior to the revolution, fewer than 1,500 farms or ranchesthat were reported to the census takers as comprising 500 manzanas (350hectares) or more. That their number happens to coincide roughly with thenumber of farms confiscated from the Somozas and their allies does not implythat all large entrepreneurial farm enterprises have been confiscated.Nevertheless, pending a new census or survey, it appears reasonable toconclude that concentration of land in a few hands does not present as largean equity and efficiency problem as it does in other Central American countries.

124. The Government is in a favorable position to pursue agrarian reformprograms through the utilization of its own land holdings. 1/ Furthermore, ithas recently opted to proceed with a more thorough agrarian reform as an addi-tional redistribution measure. An agrarian reform law has been enacted aimedat nationalizing unproductive land in large estates. At the time of the comple-tion of this report the manner in which this law will be administered is notknown, nor is the extent of the land to be nationalized.

v. Longer Term Issues

125. Rural Employment and Mechanization. Like other tropical dual-agriculture economies with little irrigated land and limited diversificationat the national and farm level, Nicaragua's demand for rural labor suffersfrom seasonal variations, ranging from high underemployment to harvest shortage.The four months of January, July, August and September are the only ones duringwhich rural labor is fully employed; during October-November and February-Mayunemployment is estimated to range between 20 and 40 percent.

126. Average yearly agricultural underemployment was declining in the1970s, from an already relatively low 19 percent of the labor supply to anestimated 16 percent unemployment equivalent by 1975-78, reflecting principallythe rapid expansion of cotton acreage, more labor-intensive technology incotton and coffee growing, and stepped up rural-urban migration. 2/ Althoughdata on actual rural wages are lacking, real wages probably remained relativelystable during this period. Since the war, real wages appear to have declinedsubstantially. However, managers in the private and public sectors areconvinced that the productivity of farm labor has also declined tangibly.

127. In early 1980 export agriculture--mainly coffee and cotton--encountered an acute shortage of harvest labor for the 1979/80 crops. In1980/81 the combined absence of migratory labor from El Salvador and Hondurasand the high increase in credit provided to traditional subsistence farmershave reduced the supply of seasonal harvest labor.

128. These seasonal shortages could lead to increasing pressures for bothprivate and public enterprises to bid up the price for rural labor, at least

1/ There are only 50,000 landless rural families in Nicaragua (pre-civilwar estimate) while the Government alone holds nearly one millionhectares of land.

2/ See Empleo y Salarios en Nicaragua, Programa Regional del Empleo paraAmerica Latina y El Caribe (PREALC/OIT), September 1980.

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during harvest seasons. Therefore, production of export crops and other cropsthat compete for labor during the harvest season, such as basic grains, couldbe adversely affected at a time when their production is crucial to the recoveryperiod. Mechanization of cotton and irrigated rice harvesting appears to bethe best way of avoiding this problem; in the long run the structure ofNicaragua's agricultural production may need to adjust to allow for a moreeven use of the rural labor force.

129. Outlook for Cotton. There is growing awareness that the large-scaleintroduction of cotton into Nicaragua in the 1960s, has been a mixed blessing.Although it is an increasingly important source of gross foreign exchangeearnings, cotton's net foreign exchange earnings have been estimated at only40 percent of the export price of a bale; labor and land are virtually theonly indigenous factors in its cultivation. Cotton requires a great deal ofimported fertilizer to maintain acceptable yields. Moreover, the tropicalclimate and the lack of crop rotations, have combined to expose cotton inNicaragua to extreme insect damage. Thus, pest control has required theever-increasing use of chemical insecticides--up to 20 applications per yearin some years and on some farms. This has led to constantly increasing costsof production, substantial environmental damage, and a losing battle in thechemical war, as insect populations acquire immunity.

130. Nevertheless, Bank projections indicate that world prices may con-tinue to make cotton the most profitable crop in terms of both the farmeconomy and Nicaragua's balance of payments. Perhaps the introduction ofjudiciously selected crop rotations could help reduce the dependence onincreasing quantities of fertilizer and insecticides, at the same time allow-ing a renewed expansion of the area suitable for cotton growing. A good dealof marginal cotton acreage has apparently been planted to sorghum and sesamein the last two crop years. This may be a step in the right direction. Costand returns studies should be able to point the way towards more efficient -farm management, and the inclusion of legume crops in planned rotations mightbe considered. Researchers could be concentrating on biological insectcontrol, on the one hand, and on additional export crop alternatives (castorbeans, peanuts, soybeans) to cotton, on the other.

131. Outlook for Beef and Milk. Along with several other Central Americannations, Nicaragua's comparative advantage in raising beef cattle and exportingbeef is substantial. Since most (but not all) of the land in grazing ismarginal for crops, the opportunity cost of the land is low. Furthermore, theimport component of both investments and operating expenses--mostly veterinaryproducts--is negligible. Some experts estimate Nicaragua's beef cattle poten-tial to be three times as great as the level that prevailed before the war.Considerable investment and effort, however, will be required even to returnto the pre-war level. The demand for beef, however, seems firm. While a dropin world beef prices is forecast early in the decade, it is likely to be fol-lowed by a steep climb after 1985 that may result in real prices being one-third above their 1980 level.

132. Nicaraguan supplies of beef could be increased substantially, andcosts reduced, if certain simple improvements in herd and pasture managementwere to become more widely adopted. The technologies are well known in

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Nicaragua, but their dissemination and adoption will require time and attention.Increasing the land tax rate and extending market price valuation of the landinto the cattle ranching areas could be a powerful incentive for the more inten-sive ranch management needed. Most beef cattle are on small ranches--many ofwhich have dual purpose animals--and these are, as a rule, managed leastefficiently. Improved production techniques by these ranchers will requireparticular Government attention.

133. The purebreed or mixed breed dairy herds in the Managua milkshedwere decimated during the fighting. Their rapid reconstitution would probablyrequire large imports of animals, especially heifers. However, before investingheavily in dairy reconstruction, it would be advisable to study the relativeadvantages of this type of dairying from the point of view of its competitive-ness with less capital-intensive dual-purpose husbandry in other areas, thecompetitiveness of cash crops using the same land near Managua, and the compe-titiveness of domestic milk from both traditional and "modern" managementsystems with the cost of imported nonfat dry milk.

134. Natural Resource Use and Frontier Settlement. Nicaragua is in agood position to design and plan rational, long-term natural resource use andpopulation settlement. Including the sparsely settled eastern two-thirds ofthe country as well as the urban population, Nicaragua's population density isonly about 20 per square kilometer, compared with 41, 30 and 210 respectivelyin neighboring Costa Rica, Honduras and El Salvador. Even in the rural areasof the departments of the populous West (Chinandega, Leon, Esteli), the densityof population is only about 40 per square kilometer. In the two Atlanticwatershed departments, it is only 3 per square kilometer.

135. Two important institutions were created by the new Government tocope with the renewable natural resources in a more coordinated fashion:IRENA, the Institute for Natural Resources, and CORFOP, the public forestcorporation, whose manager is responsible to the chief of IRENA. CORFOPestimates that its confiscated enterprises now make it responsible for abouttwo-thirds of the country's commercial forest production. IRENA's budgetaryresources (presently about ¢30 million) are still quite limited in view ofits potential responsibilities, but so is the available trained manpower, forwhich it competes with CORFOP.

136. The Government's direct and indirect control over forest utilizationwill allow rational long-term planning of the most desirable combination ofuses and conservation practices for the Atlantic watershed. Such planningwill probably be concerned principally with control of commercial cutting ofthe remaining native pine and other valuable trees, and appropriate afforesta-tion and reforestation. In this connection, seasonally unemployed farm labor,as well as rural and urban youth volunteers, might be used for reforestation.A feasibility study might indicate that such investments could have high returnsif the opportunity cost of labor is low. Studies could also be undertaken todetermine the long-term feasibility of electric energy and alcohol productionfrom biomass as possible alternatives or supplement to the planned furtherdevelopment of the country's geothermal energy sources. Pulp and paper pro-duction possibilities would also be worth investigating, especially in view

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of recent research findings regarding the utilization of hardwoods. Given thepresent constraint on capital, the Government might await the results of thesestudies before undertaking any ambitious developments in this area.

B. Public Manufacturing Enterprises

137. The public enterprises confront three major types of issues. Whilethese issues require further study, a number of general suggestions can nowbe made:

i. Definition of the Role of Public Manufacturing Enterprises

138. Specification of objectives is difficult in public enterprises,because the objectives are multiple and sometimes conflicting. Conflictsarise between productivity, distributional, and employment objectives. Therole of public enterprises as instruments of government planning presents anumber of complex issues. At present, the Government's avowed policy is tomake state enterprises as efficient as possible, and to pursue revenue operat-ing profit goals.

139. A major problem--and one that affects the economy as a whole--isthe lack of definition by the Government of the strategic sectors/activitiesrequiring direct State control. Although some manufacturing subsectors aregiven preference in the 1980-81 programs, the Government's present holdings ofstate enterprises has in practice been defined largely by the Somoza family'spast preferences. Not only is this a less than optimal selection, it has ledto private and state firms being placed in direct competition with each other,leading to claims by the private sector of unfair competition.

140. One way to encourage the private sector to participate more fullyin the recovery effort would be to indicate to the private sector the economicsectors where the State intends to play a dominant role and those where thereis scope for private entrepreneurs to invest and expand. It would also serveto ease the difficult managerial task facing the Government, while focusingmore clearly on the objectives of the state enterprises. The identificationand designation of strategic (i.e., state managed) subsectors would requirethe definition of a national industrial strategy, which would link public andprivate sector objectives with the Government's economic growth strategy.

ii. Accounting and Information System

141. For 1980, quantitative targets (i.e., gross value of production,employment generation, exports, imports and bank financing) were the mainstandards by which the performance of public manufacturing enterprises wasmeasured. The 1981 program stresses efficiency as one of the necessaryconditions for the existence of APP enterprises, yet no clear criteria havebeen established for its measurement. No consistent accounting standardsand budgeting procedures yet exist that would enable a comparison of thepublic manufacturing enterprises' performance with their social objectives(and also with private producers), as well as an improvement of their control

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systems. Monitoring the performance of the public manufacturing enterprisesrequires an accounting and management information system. Managers cannot begiven clear efficiency goals or standards, and their performance cannot beevaluated against these standards, until there is a system of reliable finan-cial information. Recognizing this, the Government has requested severalinternational accounting firms to propose the establishment of a coherentauditing and management system. The proposals, however, may take a long periodto implement.

iii. Management of the Surpluses of the Public Manufacturing Enterprises

142. One of the objectives of the public enterprises is to generate sur-pluses that will permit the financing of future investment. I/ This, however,poses some questions as to the manner in which surpluses will be collected andallocated. 2/ Since practically no budgetary funds are channeled to publicmanufacturing enterprises, bank credit has been the main source of financing.Once the enterprises are consolidated and begin to operate efficiently, thequestion of how to use their after-tax profits will need to be addressed. Twooptions are under consideration: (i) to form surplus funds at the COIP orministerial level and allow them to be used for investment purposes within aparticular sector or subsector, or (ii) to create a state investment fund whereall public sector profits would be pooled. The Government intentions are tochannel surpluses strictly to productive investments and to stimulate sectorsthat are revenue generators.

143. A state investment fund concentrating and centralizing all surplusesgenerated in the State sector, gives policy makers a powerful allocationinstrument. Establishing such a fund ("Fondo de Acumulacion Estatal") wouldclearly have some advantages in providing the State with financial resourcesthat could be directly channelled in priority sectors. There are, however,some disadvantages to concentrating all of the profits of public enterprisesin a centralized fund. Such a fund could become part of the Central Governmentbudget wherewith links to productive investment financing could be lost. Stateenterprises may find that they have little incentive to generate a surplus ifthey loose all of it to a centralized fund. This risk, however, may be reducedby allocating at least some of the surpluses (perhaps the depreciation allowanceplus a share of the net profit) to the enterprises who generate them.

C. Demand Management

i. Monetary Policy

144. Although many of the problems facing the Nicaraguan economy were in-herited by the present administration (the drop in agricultural and industrial

1/ The criterion requiring firms to finance part of their own investmentsshould not be confused with another criterion, that of requiring firmsto earn a reasonable return on past investments.

2/ During the reconstruction and reactivation period most of the publicmanufacturing enterprises did not generate much surplus.

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production, the rise in world prices of oil, the very large increase in theexternal debt and service payments), some of the difficulties now encountered,particularly those related to the balance of payments, have been created byexpansive Government policies. Clearly, the ultimate objectives of thesepolicies were justified: stimulating the rebuilding of capital stock andrestarting production, satisfying minimal consumption needs. However,unchecked monetary and fiscal expansion resulted in a resource gap in 1980 ofover one-fifth of GDP, a loss of almost US$200 million in reserves, andrequired a large amount of external short-term borrowing. In the coming yearsthe economy cannot sustain such balance of payments disequilibria, solvedthrough emergency increases in foreign borrowing; financial viability willrequire stricter management of the fiscal and monetary sectors. The policiesthat need to be applied in 1981 will necessarily be quite different from thoseof late 1979 and 1980.

145. In the coming years the banking system cannot be expected to provideample aid to public enterprises in financial difficulties or stimulate privateproduction through abundant credit. The policy to be adopted need not, how-ever, be one of across-the-board credit contraction, but rather one of assign-ing priorities to different economic activities. In practice, this wouldrequire the establishment of a system of leading indicators and improvedfinancial data that would allow the authorities to impose selective restrictivemeasures before financial crises develop.

146. Credit policy in Nicaragua has usually been implemented through twobasic instruments: direct control of the quantity and orientation of credit,and regulation of interest rates. During 1980 the monetary authoritiesattempted to stimulate production by subsidizing credit through low interestrates. Until recently, bank lending rates ranged from 14 to 17 percent forshort-term loans and from 8 to 15 percent for longer-term loans (see Table 6.3).Deposit rates were also low: 7 percent for savings deposits and 7.5 to 12 percentfor time deposits. Since consumer prices rose in 1980 by about 27 percent(average monthly inflation was about 35 percent), these rates were considerablynegative in real terms. In April 1, 1981, the Government raised the generallevel of interest rates. The new rates range from 8 to 19 percent for short-term loans and from 12 to 17 percent for long-term, 1/ still below the expectedinflation rate of the next few years. Savings rates have been increased to8 percent and time deposit rates to between 9 and 16 percent. The Governmenthas expressed its intention to raise the interest rates to positive levels inthe near future, but it is proceeding with caution given the impact thatincreases in the lending rates have on private investment. If Governmentdemand management policies are successful, the higher brackets of the recentlyestablished interest rates may well be an acceptable compromise, since inflationshould subside. If, however, inflation does not abate during the currentyear, the interest rate schedule should be raised accordingly.

147. Credit allocated to the private sector has contributed little to theexpansion of total credit. Thus, the main problem is not one of controlling

1/ The increases in rates have been mainly at the upper end of the structure.It is not known how much the mean level has been increased.

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normal banking credit but of controlling credit to a few state organizations.If these abnormal flows are controlled, bank operations could be selectivelyexpanded in response to the demands of production, without exacerbating infla-tion. Given the size of the loans to Government organizations, the obviouscorollary that follows is that the Central Bank has a large degree of directcontrol over the expansion of credit, and considerable latitude with respectto expansion or contraction of normal bank operations.

ii. Public Finance

148. The ratio of Government expenditures to GDP increased from 11.3percent in the 1970s to 29.7 percent in 1980 (see Tables 5.3 and 5.4). TheGovernment envisages a strong expansion of its expenditures in 1981 whileparallely increasing its current revenues.

149. This will be difficult to accomplish. Raising the current revenues/GDP ratio in 1980 by more than 6 percent above the 1970s average alreadyreflects an extraordinary performance for a developing country just emergingfrom a war. It appears unlikely that new major sources of revenues can againbe found. In fact, some of the taxes collected in 1980 will not be repeated,and many public enterprises may have no net income to tax. At the same time,the rise in expenditures seems to be inordinately high. The concern is thatthe projected expenditures will probably be realized, while the expectedrevenues may fall short. Under the current foreign exchange constraints, alarger dependency on domestic deficit financing could lead to a financialcrisis. The public sector deficit will need to be substantially reduced fromits 1980 level of over 17 percent of GDP.

150. The orientation of the 1981 budget has positive goals. The propor-tion of expenditures devoted to infrastructure has risen, while that of Gov-ernment administration has dropped. Loans to public enterprises have beeneliminated. Nevertheless, social areas continue to absorb an increasing partof the budget. Given the critical situation that the economy is currentlyfacing, there is little doubt that the budget should be reduced and that somecostly social programs may have to be deferred.

D. Orientation and Growth of Investment and Savings

151. The Government's stated public investment policy, which stressesproduction and productivity, is certainly wise. During the critical recoveryperiod--which will span at least the first half of the decade--the constraintswhich Nicaragua faces require public investment projects that demonstrate botha short-term maturity and high economic returns, as well as generate foreignexchange. Nicaragua can afford only a limited number of other investments.

152. These criteria have even greater justification for private invest-ments. It is highly desirable to orient new banking credits towards projectswith high economic yields, that will generate in the short term the foreignexchange that they initially use.

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153. The Government clearly should continue to carry out investments insocial and economic infrastructure that do not correspond to these prioritieswith a view to increasing the social and economic participation of the poorand thus, furthering the creation of an economy that is both more equitableand more capable of sustained growth. Basic education is a good example, buteven in this case emphasis could be given to fomenting the acquisition ofskills (e.g., agricultural) that will further production. Unlike the economic-ally productive projects with which they compete for scarce resources, theseprojects do not create, at least in the short run, the financial returnsand foreign exchange required to repay foreign lenders. This problem is notonly a conceptual one but a practical one that results in difficult trade-offs.The general policy conclusion is that, because of the present state of theeconomy, the growth of administrative expenditures should be drasticallyreduced and some worthwhile social welfare projects may need to be deferred;much more scrutiny should be placed on the evaluation of projects that strayfrom the short-term goals of raising production, productivity and foreignexchange.

154. Besides the type of investment that should be undertaken, thereare other key issues whose resolution will determine the future growth of theeconomy: the recovery of private investment and the marshalling of greaterdomestic savings.

i. Level of Investment

155. One of the more serious obstacles to Nicaragua's future economicgrowth is the prevailing and anticipated low rate of investment. During the1970s, the fixed investment/GDP ratio usually hovered around 20 percent andreached 24.5 percent in 1977; roughly two-thirds consisted of private invest-ment. In the post-war period, private investment has dropped to a level ofabout 3.2 percent of GDP, and even the large increase in the public invest-ment's share of GDP has not been sufficient to raise total investment totraditional levels. The overall fixed investment/GDP ratio in 1980-81 wasabout 16 percent--approximately 4 percent below the 1970-1978 average. Evenmore serious has been the drop in investment in goods producing enterprises.Rough estimates shown in Figure III indicate that the level of investment indirectly productive activities has decreased from about 9 percent of GDP inthe years before the war to only 5.3 percent in 1980-81.

156. A high rate of real GDP growth was possible in 1980, and may berepeated in 1981, only because production was recovering from the low level towhich it had fallen at the end of the war. In subsequent years, however, itwill be necessary to raise both the share of total investment to GDP as wellas the efficiency of that investment. In the future, it will not be possiblefor the GDP to increase at a rate of, say, 6 percent, unless the investmentshare of GDP is more than 20 percent, and the investment has high returns.

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FIGURE III: SELECTED FIXED INVESTMENT RATIOS(PERCENT OF GDP)

Private Investment Public Investment Total Investment20

15.8%

12.2% 12.5%

110

8.9% 9.0%

7.4%

3.4% 73%

1 9 8 1980-81 1970-78 1980-81 1970-78 1980-81

- Investment in Directly Productive Activites

Source: Ministry of Planning and Mission Estimates World Bank-22851

157. One key problem that needs to be resolved to achieve this goalis the low rate of private investment. Private investment may well need toreach 10 percent of GDP, or more, if satisfactory growth rates of GDP are tobe attained. Equally important, more private investment should go to directlyproductive enterprises. If the economy is to remain a mixed one, the privateowners of the means of production will need to generate sufficient savings andinvest them. In addition, the health of the privately-owned enterprisesthemselves requires that their capital stock be renewed and increased.

158. In principle, it is possible to design credit and fiscal incentivepolicies to stimulate private investment. Until now, the large expansion ofcredit in late 1979 and in 1980, which helped to raise substantially agricul-tural production, has had little effect on medium-term industrial and agri-cultural investment. The heart of the matter seems to be the hesitancy of alarge part of the private entrepreneurs to invest. The anticipated level ofprofits is not sufficiently high to offset the perceived risks. Consequently,there is a need to focus on reducing the uncertainties through a consistentand stable system of policies and incentives.

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159. A positive step in this direction is the interest that the Govern-ment has shown in fomenting foreign investment. Even a modest success inthis regard could be helpful in allaying fears that exist, both withinthe country and abroad, with respect to risking funds in the development ofNicaragua. The foreign investment legislation that the Government is currentlydrafting, could also assist in defining the "rules of the game" for domesticinvestment, since regulations for foreign investment will implicitly establishminimum conditions for domestic entrepreneurs.

ii. Marshalling More Savings

160. In 1980, Nicaragua's Gross Domestic Savings were negative; Nicaraguansconsumed a greater amount than their total production. While there is noconsolidated public sector accounts, by analyzing the net domestic and foreignborrowing of the public sector, as well as the public fixed investment levels,the Mission estimates that public savings were also negative, by about 5 per-cent of GDP. If the public sector consumed one-quarter of GDP, this meansthat its tax receipts and operating surpluses were only four-fifths of itsconsumption. The 1981 plan calls for austerity, and austerity will clearlybe needed if savings are to be accrued.

161. While the program points out the need for increased public savings,there have been few specific policy actions yet to achieve this goal. Somesuggestions have been mentioned throughout this report. State enterprisesneed a system of financial accounts, and they should then be expected toachieve operating surpluses; price controls which encourage consumption andretard production should be revised; fiscal expenditure restraint on someprograms is also needed. Many more actions will be necessary. Both the waterand electricity companies have substantial operating losses; both need tariffincreases as well as improved collection procedures (e.g., metering). Thestate-owned Managua bus company is operating at significant losses and requiresadministrative reforms.

162. It is unlikely that further tax measures will contribute signif-icantly to public savings without continued strong controls on wages andsalaries. The Government has indeed shown austerity in public sector wages.It is for these reasons that the Mission has concluded that Central Governmentsavings may only be possible through a reduction of some of the programs to beimplemented during the next few years.

163. It also appears that private domestic savings in 1980 were extremelylow. Part of this stemmed from the obvious asset and income redistributionto poorer citizens, whose consumption is, on the margin, greater than those moreaffluent. Part is likely to have stemmed from the continuing capital flight,but part may be due to the lack of economic incentives to save.

164. Interest rates offered to savers have recently been increased (seeTable 6.3), but they are still below the rate of inflation. The spread betweenthe savings and borrowing rates is very large. This provides an incentive forthe public to consume rather than to save. Savings could be augmented byraising deposit interest rates to levels approaching rates in the international

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market. Guaranteed savings accounts in Dollars could also be permitted inan effort to elicit some repatriation of capital. As long as the publicexpects inflation--and the exchange rate of Cordobas for Dollars--to continueto rise, capital outflow will be encouraged. The exchange of Cordobas forDollars in the parallel market not only results in capital flight but allowspotential savings to be converted into consumption. Economic policy action todiscourage capital flight would be most useful. While the Government hopes toexpand exports rapidly and retard import growth, the present exchange rate notonly discourages entrepreneurial activity in the export sector, but stimulatesimport-intensive agricultural and industrial production. Finally, rent controlshave discouraged investment in rental of housing and land. "Investment" inconsumer durables is clearly at a premium until private entrepreneurs feelreasonably certain that longer term industrial and agricultural investmentswill yield profitable returns in the longer term.

165. The Government faces difficult choices. If Nicaragua is to returnto financial viability, savings should be increased; on the other hand, theonly way to raise the savings is to raise surpluses, especially publicsurpluses, while discouraging wage and income raises. In essence, Nicaraguahas been consuming beyond its present possibilities. While some externalassistance will be available, the public and private productive sectors, alongwith the fiscal, need to save and invest an increasing share of the nationalincome. The Nicaraguan people as a whole may have to, temporarily, have theirexpenditure growth reduced. The necessity and the duration of such an effortbecomes clearer when an analysis is made of the medium-term prospects of theeconomy.

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CHAPTER V. NEAR- AND MEDIUIA-TERM' PROSPECTS

166. The uncertainties with respect to the current situation and economicplans for the longer-term future on the one hand, and the less favorableinternational economic environment expected for the 1980s on the other, makeit difficult to formulate projections for the Nicaraguan economy. Therefore,rather than focus on a single set of projections, two scenarios have beenconstructed to assess the effects on the economy of different sets of assump-tions. The projections provide a framework wherein internal and externalconditions, Government policies and likely outcomes are made compatible, sothat the challenges and middle-term prospects for the economy can be betterassessed. It must be emphasized that these projections are not detailedguidelines. They represent only approximate estimates of the results thatwould be expected from different policy packages. The realism and sustain-ability of the scenarios should not be thought of in year-to-year terms, butrather as longer-term trends.

A. Alternative Growth Scenarios

167. The scenarios both assume the same international environment and,hence, have identical assumptions with regard to the prices of Nicaragua'sexports and imports during the 1980s. They differ in the assumption aboutthe level of efficiency and demand restraint that the economy will be able toreach, the investment and production targets that will be met and the levelof foreign financing that can be obtained. Both cases begin with the stronglydisrupted economy, the large inherited foreign debt, and mounting socialdemands. One scenario, the High Case, assumes that the Government willadopt policies which will be successful in putting the economy on a longerrun growth path comparable to that of the three decades preceding the war.However, the policy mix, both in economic and in social terms, will be quitedifferent from the past. Another set of projections, the Low Case, assumesthat the initial demand restraint will be modest, the productive recoveryless rapid, and external financing eventually less available.

168. The High Case scenario should be thought of as a target, theachievement of which will depend not only on the ability and determinationof Nicaraguan policy makers, but on the speed with which an internal climateof common purpose is created and the turn of the international capital andcommodity markets. The Low Case is a scenario which could well occur unlessfirm action is taken. This report focuses on the High Case scenario, sinceit is the more desirable of the two; the policy actions required to achieveit are identified and examined in greater detail.

169. A path of sustained growth for GDP of 6 percent is attainable bymeans of an open economy strategy. This will require actions to ensure thatboth the traded and non-traded goods sectors will be driven by a rapidly

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growing agricultural sector and an industrial sector processing agriculturalgoods. A shift to secondary activities will occur only over time. Theseactions are explained earlier in the report and are not inconsistent withNicaragua's planned goals of providing for the basic needs of its people andreducing the external dependence of its economy. This strategy should leadto the establishment of a more efficient and flexible economy before the endof the decade, one more able to adjust to unexpected shocks of external orinternal origin.

170. In contrast, the Low Case is an outcome Nicaragua will have totry to avoid. Per capita output stagnation could result from a failure ofinternal economic policies, which would lead to the lower growth scenarioand a decreased ability to use (and repay) external financing. While therewould be an initially smaller restraint on consumption, in the later yearsconsumption would be well below the High Case, and there would be a loss offlexibility for the economy, and consequently a greater external dependence.

171. The High Case scenario specifically presupposes a departure fromthe expansionary fiscal and monetary policies of late 1979 and 1980, and theadoption of an austerity program. Without doubt, consumption must declinefrom the current level--which is higher than GDP. Restraints would need to beplaced on private and public consumption during the first half of the decade,in order to allow for the expansion of investment and the reduction of theresource gap. While the relative share between private and public consumptionwill clearly depend on Government decisions, some numbers are illustrative.Assuming that Government consumption remains at about 21 percent of GDP duringthe entire decade, the same proportion it had in 1980, private consumptionwill have to decrease by 7 percent in 1981, and thereafter grow at only 1.8percent per year during 1980-85, a rate below the population growth. Imports,except those of capital goods, will need to be especially constrained, par-ticularly during the first half of the decade. Because of the present dis-equilibrium, total imports in 1981 should drop by 16 percent in real terms.

172. Greater efficiency in production will need to be achieved. Inaccordance with Government plans, top priority should be given to increasingthe productivity of public enterprises. During the next two to three years,Government and private investment programs should be strongly oriented towardsprojects that generate or save foreign exchange and have high and early ratesof returns. Furthermore, the rate of investment will need to be raised.Gestation lags in output from new investment can be long, and if new productiveinvestments are not started during the current and the coming year, the rateof expansion of the economy could be greatly slowed down after 1982. As theeconomy regains its former levels of economic activity, additional gains willbecome harder to achieve. Since public investment is already high, it will benecessary to place emphasis on rapidly increasing private investment to levelsabove 10 percent of GDP.

173. Export acceleration will need to be pursued; a 6 percent GDP growthwill require that exports during the period 1981-85 grow by 12 percent in realterms, and by 7 percent during 1985-90. This would require, in addition todirect promotional measures, the adoption of coordinated monetary, foreign

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exchange and fiscal policies oriented toward removing the present anti-exportbias. It is very doubtful that an import substitution policy can be justifiedfor an economy with a very small internal market, such as that of Nicaragua.Furthermore, adoption of high protective barriers would counteract an exportpromotion strategy and could ultimately lead to a situation where inefficiententerprises are permanently subsidized. Finally, the High Case strategy iscontingent on the Government's ability to obtain very large amounts of externalfinancing (representing a net transfer of US$150 per capita) during the follow-ing two to three years, and much of it on concessional terms.

174. In contrast, less dynamic policies could steer the country intoa Low Case scenario. Moreover, the lack of policy action now may well beaccompanied by a later drop in external financing, since--on the margin--Nicaragua's incremental external financing is likely to be nonconcessionary.The eventual retrenchment could be rather severe. Imports would have to becut back even further, restraining output growth and dropping consumptionbelow that of the High Case in spite of a relatively higher level of consump-tion at the onset. After a few years, as the economy's imports are reducedto the size of available (and sustainable) financing, the growth cycle couldrecommence although very much constrained by a continuing dearth of financing.

175. The projections for both the High and Low Cases are laid out inTable 10. Note that both will lead to drops in real consumption. In essence,the Low Case projection assumes that while total expenditures would be initiallysimilar to those of the High Case, investment--private investment in particular--would be lower; and the difference would be consumed. Quite soon the lowerinvestment would produce not only slower overall growth, but slower exportgrowth. This would exacerbate an already severe foreign exchange constraint.

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Table 10: NICARAGUA: FUTURE GROWTH OF GDP(percentage growth per year, in real terms)

Projected1980 1981 1981-86 1985-90

(Preliminary) High Low High Low High Low

Consumption 26.1 -4.0 -3.5 2.9 1.2 5 3

Investment 332.0 -8.0 -16.5 14.7 4.5 6 4Exports -34.8 30.4 29.1 11.7 6.3 7 5Imports 86.7 -16.3 -19.8 7.4 3.0 5 3Gross Domestic Product 10.0 9.0 a/ 9.0 a/ 6.2 2.7 6 4

Memo Items:ICOR 2.3 2.3 3.2 6.8 3.8 4.3Aggregate ImportElasticity 6.9 -1.8 -2.2 1.19 1.11 0.9 0.8

GDP per capita 5.7 5.7 3.0 -0.5 3 1

a/ Because of shortfalls in agricultural production and exports, the 1981growth rate estimate (made early this year) will not be realized.

176. A serious implication of the lower growth path is its impact on therate of growth of private consumption, which, as in the High Case, declines inper capita terms during 1981-85, even after the sharp correction between 1980and 1981. However, in the Lower Case, the negative per capita growth ratewould continue during the rest of the decade and much less relief would beprovided to the poorer strata of society through increases in public consump-tion (education, health, etc.). The Government could try to compensate forthe economic contraction by increasing public investment. But the lowerproductivity of the capital stock would mean a loss of momentum and efficiency.This could lead to a total loss of creditworthiness, which in turn would meanless financing; the result could be that the economy would virtually stagnatein terms of GDP per capita.

177. The projections are not to be taken as definitive; they are not aforecast. But they do show clearly that not only must Nicaragua restrainconsumption quickly, it must do so while encouraging investment and outputacceleration; otherwise the standard of living of the Nicaraguan people willdeteriorate. During discussions of the draft of this memorandum the authori-ties indicated that their goal was to achieve the high growth scenario, andthat they were considering taking a number of measures consistent with thisoption.

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B. Balance of Payments

178. In 1981, the projected current account deficit of the balance ofpayments, while reduced from its unsustainable level of almost 20 percent ofGDP in 1980, could still represent more than 12-13 percent of GDP in 1981.The long-term trend, however, will be a reduction of this deficit to manage-able levels by 1985. Either careful economic management will reduce it to anacceptable level (the High Case) or it will be cut even further by fallingimports as a result of reductions in economic activity. In any case, theeconomy will continue to be vulnerable to major reversals, in both volumesof exports and terms of trade. Preliminary estimates indicate that exports ofgoods in real terms could recover strongly in 1981 (30 percent) from the low1980 level, while the volume of imports could be cut back as much as 16 per-cent. 1/ The High Case scenario would have exports expanding at a rate ofalmost 12 percent during 1981-85, with imports constrained to growing roughlyonly 1 percent faster than GDP. By 1985, under this scenario the currentaccount deficit would be only a sixth of its 1980 magnitude. The rate ofgrowth of exports would then decelerate, as pre-war acreage levels would bereached for many traditional commodities, and further gains would becomeincreasingly difficult. Leadership in export growth would now have to shiftto manufactured and non-traditional agriculture-based products.

179. Whether or not the projected current account deficits are sustainableover time should be viewed in relation to the country's ability to borrow thenecessary funds to finance them. Lacking any firm knowledge of the anticipatedfinancing, the Mission based its estimates on some historical parameters as tohow much a country at Nicaragua's development level can expect to receive ingrants and multilateral loans, and a notional idea of the prospects forbilateral aid: Mexico's and Venezuela's help with financing fuel imports, aidfrom the socialist countries and the Development Assistance Committee membercountries, etc. It was assumed that the extraordinary level of grants Nicaraguareceived in the first two years following the war would drop to aboutUS$10 per capita in 1982 and stay there in real terms for the rest of thedecade. New multilateral loans, over and above the funds already committed,are estimated at about double that level (i.e., US$20 per capita in net terms)..The terms are expected to be, on the average, those that the multilateralagencies have been extending to Nicaragua at nonconcessionary terms in therecent past. Bilateral loans are represented in the model simulation by theamount of aid that has been extended to Nicaragua for the financing of fuelimports. It was assumed that this help would continue through 1985, afterwhich it would be gradually cut back. Finally, to be on the conservativeside, it was assumed in the simulation that direct foreign private investmentwould be low, while new loans from private sources would be forthcoming onlyin limited quantities.

1/ Both export growth predictions and planned food import cuts made earlythis year will not be realized because of agricultural production short-falls during the 1980/81 season.

Table, II: J5111Amh ur rAXMWqTb

(In millions of current US$'s)

Projected

1980P 1981 1982 1983 1985 1990High Low High Low High Low High Low High Low

ports of Goods & NFS 507.7 668.4 661.5 823.1 779.5 1,032.4 927.6 1,516.3 1,250.5 3,048.6 2,313.13ports of Goods & NFS 966.2 888.2 851.7 1,062.2 981.4 1,246.4 1,073.9 1,672.1 1,364.0 3,032,5 2,246.4

tt Exports of Goods & NFS -458.5 -219.8 -190.2 -239.2 -202.0 -216.1 -166.3 -154.8 -113.5 16.1 66.7(Resource Gap)

.t Factor Income -78.2 -134.1 -138.7 -144.9 -145.6 -166.7 152.5 -194.4 154.8 -294.7 -206.1

,t Transfers 123.0 35.0 35.0 28.0 28.0 31.1 31.1 38.0 38.0 58.4 58.4

irrent Account Balance -413.7 -318.9 -293.9 -356.1 -319.6 -351.7 -287.7 -312.2 -230.3 -220.3 -81.0

*dium and Long Term Loans, Net 270.4 324.9 298.2 389.0 276.0 397.8 267.2 374.7 301.9 283.3 99-3

Bilateral 183.0 183.0 117.9 117.9 183.8 183.8 212.9 212.9 -54.0 -54.0Multilateral 37.5 37.5 124.5 124.5 94,3 94.3 167.5 167.5 254.7 254.7Other a/ 104.4 77.7 146.6 33.6 119.8 -10.9 -5.7 -78.5 82.7 -101.3 *

:her Capital b/ -50.8 _ 1.0 3.1 74.2 -0.9 54.0 - -26.1 -2.2 18.0Lange in Reserves c/

(- = iicrease) 194.1 -6.0 -3.3 -36.0 -30.6 45.2 -33.5 62.6 -58.0 -60.9 -36.3

'oss International Reserves(end of the period) 80.8 86.8 84.1 122.7 114.7 168.0 148.2 255.2 232.6 545.1 417.7

Memo Items:

Reserves as months of imports 0.9 1.0 1.0 1.2 1.2 1.4 1.4 1.8 1.8 2.0 2.0Resource Gap/GDP d/ -21.5 -8.7 -7.5 -8.2 -7.0 -6.4 -5.3 -3.6 -3.0 40.2 .1.1Current Account Balance GDP d/ -19.4 -12.6 -11.6 -12.1 -11.1 -10.4 -9.2 -3.2 -6.1 -2.8 -1.3Debt Service Ratio, MLT 28.1 26.1 26.4 29.8 27.9 24.3 22.0 25.7 21.1 23.9 17.2

a-.

- Preliminary.

High cost financing, publicly guaranteed.

Short-term external financing; over the 1980s, it sums to about nil.

Change in Reserves is on a net basis in 1980. In 1981 and beyond it represents the change in gross international reserves.Both variables are defined in current US$s.

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180. Any residual required financing was assumed to have to come in theform of medium-term loans on commercial terms. These represent high costfunds which may be required to finance the incremental foreign exchange needsgenerated by the relatively rapid growth built into the High Case. They alsorepresent a measure of Nicaragua's needs for additional long-term financingwhich would be forthcoming from bilateral or multilateral sources if theoutlook of the economy improved. The net volume of these medium-term fundsin the High Case would be of the order of US$100-150 million annually duringthe period 1981-84, after which they would average about half of that amountat current prices. These are not small sums. If the half billion dollars ofthe now extent short-term loans are also converted to these terms, the totalstock of such debt would reach the US$1 billion mark before 1985 and move tothe US$1.5 billion range by the end of the decade. Carrying charges for suchsums would quickly amount to the vicinity of US$100 million at 1980 prices.This debt service could only be envisioned if the economy takes a path ofrapid export and output of growth.

C. Creditworthiness Consideration

181. There is no single indicator that can answer the question of whethera country is creditworthy. If one looks at some of the 1980 indicators forNicaragua, there is cause for serious concern: the public external debtservice ratio stood at 28 percent, the total external public medium- andlong-term debt was 3.1 times the value of exports and over three quarters ofGDP (see Table 4.4). Moreover, the country still has significant arrears insome bilateral debt service. But for the help from Mexico and Venezuela, thecosts of imported petroleum would have absorbed one-fifth of all foreignexchange earnings. In addition, Nicaragua entered 1981 with gross foreginreserves sufficient to cover only about one month's worth of imports. TheGovernment itself has stressed, in its very successful debt renegotiations,its present inability to pay contractual debt service without substantialrescheduling. By every standard it is a difficult situation. This, however,is a distinctly static picture. There are two major considerations that mayreverse this present assessment; the Government's attitude towards its externalobligations, and the prospects for fully regaining creditworthiness in thefuture. Both give some hope for substantial improvement.

182. As noted in Chapter III, the new Government immediately acknowledgedits obligation to honor prior public debt obligations and made arrangementsto repay debt service to multilateral lenders that had been deferred by theprevious Government. Service on past public debt owed to commercial lendersbeen successfully and amicably negotiated (and paid promptly since), andagreement has recently been reached on the debt of the once private (nowstate-owned) banks. Some bilateral debt has also been rescheduled; but asignificant part of the remainder is in arrears. Finally, while recognizingthat unguaranteed private debt should be serviced, the Government has notprovided foreign exchange for such payments. IFC finds its Nicaraguan debtorsin this situation. On balance then, the Government's attitude towards thenation's debt, particularly the debt of the public sector, has been quiteresponsible.

- 56 -

183. Equally important are the country's balance of payments and debtprospects. The High Case scenario projects exports in current dollars to growat rates in excess of 20 percent during 1980-85 and around 15 percent for theperiod 1985-90 (see Table 4.3), while total debt will grow at about 16 percentfrom 1980 to 1985 and only 8 percent from 1985-90. Debt service repaymentswill grow at nearly 22 percent per year from 1981 to 1985, but then drop to a13 percent annual growth rate during 1985-90. These trends would cause thedebt service ratio first to peak at almost 30 percent in 1982, but thendecline gradually to 24 percent by 1990. The debt export ratio would continueto fall until the end of the decade when it would reach its pre-war levels. 1/In relation to GDP, however, debt would first rise to slightly over 80 percentin 1982, remain there until 1985, and then decline towards pre-war levels.These ratios all remain at rather high levels, but their direction and ratesof change, particularly after the first three to four years, are encouraging.

184. Finally, the projected trends have been used to examine the proba-bility that Nicaragua will encounter debt servicing problems during the periodof projection. For this, a model based on the loan rescheduling experience ofdeveloping countries in the 1970s and late 1960s was used. 2/ The indicatorsthat the model uses in computing the probabilities of debt servicing problemsinclude the debt service ratio, the rate of growth of exports and GDP, thelevel of GDP in relation to that of the industrialized countries (representedby the U.S.), the gross disbursements to debt-service ratio, the reserves toimports ratio and the trend in the terms of trade. As might be expected, theconditional probability of debt servicing problems starts out at a rather highlevel--in the range of 30-40 percent. 3/ It then moves to higher ground overthe next three years, 1982-84, in the range of 40-50 percent before recedinginto the 30's and then 20's after 1987. This mirrors the projected financingneeds of Nicaragua. A short-term squeeze in the early years, 1982-84, followedby a period of increased repayments, 1985-87, as the grace periods of theloans that were rescheduled in 1980 begin to expire. The difficult situationis expected to continue until at least 1987.

1/ Gross disbursements should, in the long run, grow more slowly thanexports, yet they must also be large enough to cover debt service payments.Nicaragua will have to continue its pace of borrowing to keep the nettransfers positive. Obviously, these loans must be oriented to highlyproductive projects that represent net gains to the economy.

2/ See paper by G. Feder, R. Just, and K. Ross, "Projected Debt ServicingCapacity of Developing Countries," World Bank, Mimeo, November 1979; andG. Feder "Economic Growth, Foreign Loans and Debt Servicing Capacity ofDeveloping Countries," World Bank Staff Working Paper No. 274, February1978.

3/ These values depend substantially on the version of model chosen and thevariables included. But the direction of change in each case is the same.Hence, attention should be paid to directions of change rather than theabsolute values of the probabilities.

- 57 -

185. The computations confirm the feeling gleaned from the analysis ofthe trade and balance of payments and creditworthiness indicator projections.The next two to three years will be difficult and the probabilities of debtservicing and financing problems high. However, if Nicaragua can implementthe measures required for a serious longer-term development effort, andobtain substantial financing in the near term, a considerable improvementin its creditworthiness three to four years hence can be foreseen.

186. The Low Case projection has a debt service ratio at about the samelevel as the High Case, but the creditworthiness of the country would remainin doubt. The much lower growth path would produce far less flexibility;any untoward event could lead to a financial trauma, since the country wouldnot be able to obtain commercial financing as a buffer. Moreover, it wouldbe very difficult indeed to restrain consumption for such a long period.

187. Analysis of the two growth scenarios, with respect to their credit-worthiness implications, suggests a two-phased approach. In the initial phase,extending into 1984, while Nicaragua is highly vulnerable to various shocksand, hence, susceptible to serious debt servicing problems, it would be highlydesirable for the country to receive external assistance at concessional termsand in excess of the foreign exchange component of individual projects. By theend of this initial phase, sound economic policy measures should have succeededin stabilizing the economy, increasing exports, restoring the productivity ofits capitaL stock and labor--and reestablishing the country's traditionalcreditworthiness.

- 58 -

APPENDIX I

DETAILED TRADE PROJECTIONS

188. In this Appendix the detailed projections for commodity tradeand prices for the High Case are discussed. The price assumptions areidentical in the two scenarios but there are some differences in theexpected volume flows. On the export side, the differences are concentratedlargely in the "other goods" category, with only limited effects on cotton,coffee and sugar. On the import side, there are important differencesduring 1981-85 with respect to the capital goods, fuels and intermediate goodcategories. After 1985, there is continued restraint in these three categories,but the differences between the two scenarios in the rates of growth ofimports are no longer as large, although the levels are by then significantlydifferent.

189. Projections on both the export and the import side have beenbuilt on the basis of detailed prospects for volume and price changes bycommodity groups. Export price projections are based on World Bank commodityprice forecasts, 1/ modified in the near term for the more recent trendsin world markets or peculiarities of Nicaraguan export arrangements. Importprices correspond to the movements in the World Bank's International PriceIndex (IPI), 2/ adjusted for observed past differentials between the IPIand price indices of imports of particular categories of goods to the CentralAmerican region.

190. Projections of export volumes of traditional export commodities,as well as prospects for exports of industrial goods to the CACM, rely onMission assessments. Import volume projections, on the other hand, are basedon econometric estimates of import elasticities (based on the 1960-77 samplefor Nicaragua), adjusted downwards in a number of cases, in line with theplanned restrictions on "unnecessary" imports for the short term. In themedium and long term, the elasticities have been kept within a range thathas been observed in a number of developing countries in the 1970s.

191. Detailed commodity export price projections for exports and importsare presented in Table 1. Compared to the projected IPI rates, as used forthe "other goods" category (basically manufactures), only cotton and sugarare expected to command better than average prices during the 1980-85 period.In the case of sugar, the explanation seems to be that while the spot sugarprices had more than tripled in the period 1978-80, making their current levellook low, Nicaraguan sugar exporters had been locked into some longer-termcontracts that kept their actual export price of sugar well below the spot

1/ "Mid-year updating of Commodity Price Forecasts", EPD, The World Bank,mimeo, November 12, 1980.

2/ The IPI is an index measuring the average price of manufactured exportsf.o.b. from developed countries to the world (i.e., globally weighted).Its latest World Bank release was November 5, 1980.

- 59 -APPENDIX I

Table 1: CHANGES IN EXPORT PRICES

(Percentage per year, US$ denominated)

Projected1980 1981 1982 1982-85 1985-90

(Preliminary)

Cotton 29.3 12.5 14.5 14.5 6.6Coffee 27.1 -24.0 -1.6 15.0 8.0Sugar 52.5 65.6 0.0 7.4 6.0Beef 8.3 -7.7 -8.3 12.1 18.3Shrimp & Lobster 38.5 6.0 5.9 6.0 6.8Metals & Minerals 1/ 258.0 0.0 11.2 11.2 9.4Other 2/ 0.0 9.0 8.4 7.5 6.0

All goods & NFS 36.2 -0.1 6.3 11.4 7.5

Memo Items:

Terms of Trade 3/ 7.0 -9.1 -3.0 2.3 0.6

1/ Largely gold.2/ Includes industrial goods as well as non-traditional agricultural

commodities.31 Ratio of the price index of exports of all goods and non-factor

service to the corresponding import index.

prices in 1980, but are likely to turn out to be considerably higher than thespot 1981 prices. By 1983, the two trends will be phased into each other andthe sugar prices will exhibit a long-term trend similar to that of the IPI.Coffee prices are widely expected to be weak during 1981 and 1982, in goodmeasure because of a recovery of Brazil's coffee crop from its post-frost levelof 4-5 years ago. This is likely to be reversed in 1983 with an increase,in real terms, of 7 percent during 1982-85, dropping to a 2 percent realprice growth in the 1985-90 period. Nicaragua's actual beef prices, contraryto world trends, have declined from their late 1980 levels and are expected tobottom out at the end of this year or early next year. The recovery afterthat will be strong, with boom conditions expected in the second half of thedecade. Lacking information, shrimp and lobster prices have been assumed togrow slightly below the IPI during 1980-85 and above it by an almost equalpercentage from 1985 to 1990. The stagnation in 1981 prices of metals andminerals reflects the recent flatness in the gold markets, but the pattern offollowing the projected price of fuels (at 3 percent above the IPI) is expectedto be resumed in 1982. The overall export price index becomes flat in 1981,lags the IPI by 2.2 percent in 1982, and then moves ahead of it by 4 percentduring 1982-85, before dropping to a positive differential of 1.5 percentduring 1985-90.

- 60 -APPENDIX I

192. At a rate of 3 percent per year above the IPI, the assumed fuelprices are the fastest growing component of the overall import price index(see Table 2). Not far behind are the prices of food and other consumergoods. Intermediate inputs and capital goods prices are assumed to beidentical to the IPI. These trends combine into an overall import priceindex that results in a sharp terms of trade loss in 1981 (-9.1 percent),followed by a smaller loss in 1982 (-3.0 percent). After 1982 the relation-ship is reversed, with terms of trade gains of 2.3 percent during 1982-85and 0.6 percent during 1985-90. Nevertheless, the terms of trade indexin 1990 is still expected to be a full 3 percent below its 1980 value.

Table 2: CHANGES IN IMPORT PRICES

(Percentage per year, US$ denominated)

1980 Projected(Preliminary) 1981 1981-85 1985-90

Food 14.6 10.4 10.4 8.0Other Consumer Goods 12.4 10.5 10.5 6.9Fuels 63.9 11.5 11.4 9.4Intermediate inputs 12.3 9.0 7.7 6.0Capital Goods 12.3 9.0 7.7 6.0All goods & NFS 21.6 9.9 9.1 7.0

193. Commodity export volumes presented in Table 3 have, in each case,been constructed from a combination of estimates of acreages and yields, basedon Mission work described in the agricultural sections of this report. Theexports of all commodities but beef (because of herd depletion) and metals andminerals (because of the decapitalization of plants during and just prior tothe civil strife), show a surge in 1981 as they recover from the abnormallylow 1980 levels. This is particularly true of cotton, the exports of whichwere minimal in 1980.

- 61 -APPENDIX I

Table 3: GROWTH IN EXPORTS BY COMMODITY

(Percentage per year in constant 1980 US$)

Projected1979-80 1980-81 1981-85 1985-90

(Preliminary) High Low High Low High Low

Cotton -82.7 245.2-/245.2-/ 13.0 7.7 2.0 2.01! 1/

Coffee -21.2 9.2-/ 9.2-/ 6.3 5.5 3.8 3.3Sugar -31.2 43.6 43.6 5.6 4.5 5.0 3.2Beef -42.4 -11.1 -11.1 10.7 9.4 6.3 5.7Shrimp & Lobster - 9.6 31.7 31.7 5.0 5.0 5.0 5.0Metals & Minerals 2/ 45.0 0.0 0.0 3.0 2.6 6.0 6.0Other goods 3/ 28.1 23.0 21.0 6.4 12.6 9.0

All goods & NFS -25.0 30.4 29.1 11.8 6.6 7.0 5.0

1/ Anticipated exports will not be achieved because of shortfalls inproduction during the 1980-81 season.

2/ Largely gold.3/ Largely industrial goods, but also includes some non-traditional

agricultural commodities.

194. During 1981-85 the expansion of exports are expected to continue tobe vigorous for a number of reasons. Cotton and coffee crops are projectedto increase strongly, primarily due to an expansion of acreage (towards the200,000 manzana limit for cotton and to somewhat above the pre-revolutionlevels for coffee) and to a recovery in yields to an average of the better2-3 years in the 1970s (the best year is excluded on the grounds of being anoutlier). The expansion of sugar exports is somewhat slower, since the acreageby 1982 will be close to the previous peaks, and further gains are likely tobe slow, since using lands further away from processing plants is unprofitable.Beef exports are expected to begin recovery in 1982 (from very low levels)and continue strongly for the rest of the decade, as the decimated herdsare rebuilt. Metal and mineral exports are expected to show a slow recoverybut pick up as the decapitalized plants are repaired. The rapid rate ofgrowth of the "other exports" category is largely a reflection of the very lowstarting levels of 1979/80, due to the extensive war-damage of the processingcapacities. In fact, the overall volumes for this category will not recoverto their 1977 levels until 1984/85, even at the rates indicated in Table 3.

- 62 -APPENDIX I

The anticipated rapid recovery of exports in 1981-82 and their almost 12percent annual growth from 1982 to 1985 will not only help reduce Nicaragua'sresource gap to more sustainable levels, but also restore its openness.Exports, as a percentage of GDP, are projected to reach 35 percent by 1985,a level which had been achieved only in 1972 and 1973.

195. As mentioned earlier, volume growth rates of exports of all tradi-tional export goods are expected to decline sharply in the 1985-90 period,ranging from a low of 2 percent for cotton to a high of 6.3 percent forbeef. Only the "other goods" sector with its projected 12 percent annualgrowth rate is expected to be above the average growth rate of 7 percent.In addition to the various manufactured and processed goods that have beenproduced and exported in the past, other goods are expected to containincreasing volumes of exportable surpluses of sorghum, sesame and perhapswood products, if Nicaragua succeeds by then in developing its promisingforestry, and wood-based sectors.

Table 4: GROWTH IN IMPORTS BY COMMODITY

(Percentage per year, in constant 1980 US$)

Projected1979-80 1980-81 1981-85 1985-90

(Preliminary) High Low High Low High Low

Food 28.9 -50. 0 -50.0- 1.4 0.5 1.0 1.0Other Consumer Goods 9.2 -50.0 -50.0 1.2 1.0 1.0 1.0Fuels 4.0 10.0 6.5 5.9 3.3 4.0 2.8Intermediate Imports 12.1 -20.0 -30.0 7.3 3.3 6.9 3.8Capital Goods 10.1 30.0 20.0 11.3 3.9 7.0 4.2

All Goods & NFS 8.7 -16.3 -22.2 7.4 3.6 5.4 3.1

1/ Anticipated food import reductions will not be achieved because ofagricultural shortfalls during the 1980-81 season.

196. After a massive increase in imports in 1980 to support both con-sumption and the restocking of inventories, sharp retrenchment is expectedin 1981. From an unprecedented 45.3 percent of GDP in 1980, imports areexpected to drop to a more normal 34.8 percent in 1981. The areas targetedfor cuts are the categories of food and other consumer goods. These twocategories were deemed to be the only candidates for serious reduction. A

- 63 -APPENDIX I

reduction of about 20 percent in volume is also projected for intermediateinputs, but this is largely due to the bulge in imports in this category in1980, necessitated by the rebuilding of stocks. Removing this restockingphenomenon would reveal a strong positive underlying trend. Fuel imports areexpected to continue to grow by 10 percent between 1980 and 1981, due to theiralmost one-to-one relationship with respect to the projected growth in GDP;they are considered a necessity in the short run. Capital goods, on the otherhand, are likely to rise substantially (30 percent) from their depressedlevels of 1979-80, if investment picks up strongly as expected in 1981-82.

Table 5: PROJECTED IMPORT ELASTICITIES a/ BY COMMODITY

(Ratios in constant 1980 US$)

Projected1960-70 1970-77 I981-85 1985-90

High Low High Low

Food 1.17 b/ 2.50 0.23 0.14 0.17 0.26Other Consumer Goods 1.20 c/ 1.07 0.19 0.28 0.28 0.26

Fuels 0.42 2.33 0.95 0.92 0.67 0.74Intermediate Imports 1.43 1.47 1.18 0.92 1.15 1.00Capital Goods 1.22 1.54 1.79 1.08 1.17 1.11

All Goods & NFS 1.23 1.53 1.11 1.00 0.90 0.80

a/ The "elasticities" presented are really ratios of rates of growth inimports to rates of growth in GDP, rather than the partial income elas-ticities (ceteris paribus) of the theory of demand.

b/ For 1960-70 the elasticity refers to non-durable consumer goods.c/ For 1960-70 the elasticity refers to durable consumer goods.

197. After the selective reductions in imports in 1981, a period ofrestrained import growth is expected during 1981-85. The constraint isassumed to bind most heavily on food and other consumer goods. On the foodside some alleviation is expected from improved grain production. Otherconsumer goods will also have to be reduced, as long as the foreign exchangeconstraint exists. Fuels are probably the next most seriously affectedcategory. The import elasticity for this category is projected to be 0.95,much lower than its value of 2.33 during 1970-77, but higher than the 0.42value of the 1960s (Table 5). It is therefore hard to predict what thisimport elasticity will be like in the 1980s. However, there is increasingevidence that countries that have undertaken serious conservation measures

- 64 -APPENDIX I

have been able to bring this "energy coefficient" well under 1--if not withrespect to overall energy use them certainly with respect to imported fuels.With Nicaragua's first geothermal-powered electrical facility initiatingoperations in the mid 1980s, and the possibility of tapping of the biomasspotential in the latter part of the decade, the projected fuel import elas-ticities are regarded within the range of feasibility.

198. The intermediate inputs import elasticity has been reduced, butallowed to remain above 1.0 (1.18 during 1981-85, followed by 1.15 during1985-90). This is deemed necessary, despite the assumed increase in importsubstitution, since imported inputs are essential in the production of manu-factured exports, which are to be strongly promoted--as well as in suchagricultural export commodities as cotton (insecticides, herbicides, fer-tilizers). A similar reason can be adduced to the greater than unitary importelasticities of capital goods. They are important both in export-promotingand import substituting activities. In addition, it is expected that produc-tive capacity will be repaired or rebuilt in the next year or two and expandedin the years beyond. For this reason the capital import elasticity of 1.79for the period 1981-85 is greater than its historical value, notwithstandingthe foreign exchange constraint.

199. In sum, the rate of growth of imports will be brought down graduallyover the decade, as various conservation and import substitution measurestake effect. The import elasticity thus will fall from the 1.2 range in1981-85 to a value of 0.9 during 1985-90. These values are lower than whathas been historically observed (1.23 in the 1960s, followed by 1.53 during1970-77). Nevertheless, it will be essential to lower these elasticitiesif trade flows are to be brought into reasonable balance.

- 65 -

STATISTICAL APPENDIX

Table Number

I. POPULATION AND EMPLOYMENT

1.1 Economically-Active Population

II. NATIONAL ACCOUNTS

2.1 Gross Domestic Product by Sector, 1965, 1970-1980, in CurrentCordobas

2.2 Gross Domestic Product by Sector, 1965, 1970-1980, in 1980Cordobas

2.3 Gross Domestic Product by Expenditure, 1965, 1970-1980, inCurrent Cordobas

2.4 Gross Domestic Product by Expenditure, 1965, 1970-1980, in 1980Cordobas

2.5 Gross Domestic Product Projections (High Case), 1980-1990

III. BALANCE OF PAYMENTS

3.1 Balance of Payments, 1975-19803.2 Principal Exports, Value and Volume, 1970-19803.3 Exports, 1970-1980 in Current and Constant Prices3.4 Imports, 1970-1980 in Current and Constant Prices3.5 Balance of Payments Projections (High Case), 1980-19903.6 Export Projections (High Case), 1980-1990 in Current and

Constant Prices3.7 Import Projections (High Case), 1980-1990, in Current and

Constant Prices

IV. EXTERNAL DEBT

4.1 External Debt Indicators, 1970, 1975-19794.2 Payments, Commitments, Disbursements, and Outstanding Amounts of

External Public Debt, 1971-19814.3 Debt, Disbursements and Debt Service4.4 Some Creditworthiness Indicators

V. PUBLIC FINANCE

5.1 Central Government Current Revenue, 1970-19815.2 Central Government Current Revenues in Current and Constant Cordobas,

1970, 1974, 1978-1981

- 66 -

5.3 Central Government Current Expenditures in Current and ConstantCordobas, 1970, 1974-1981

5.4 Central Government Capital Expenditures in Current and ConstantCordobas, 1970, 1974, 1975, 1978-1981

5.5 Functional Distribution of Central Government Expenditures5.6 Summary Operations of the Central Government, 1970-19815.7 Public Investment, 1977, 1980, 19815.8 1981 Public Investment Program

VI. MONEY AND BANKING

6.1 Summary of the Financial System Accounts, 1979-19816.2 Short and Long Term Credit of the Financial System, 1977, 19806.3 Interest Rate Structure, 1980-1981

VII. AGRICULTURE

7.1 Area, Production and Yields of Major Crops, 1969/70-1979/807.2 Agricultural Area Planted and Production: Selected Products7.3 Agricultural Production Volume Indices7.4 Estimated Public Sector (APP) Participation in Agricultural

Production, 19807.5 Changes in Producer and Consumer Price Indices of Principal

Agricultural Commodities7.6 Comparison of Minimum Wages for Agricultural Workers and Consumer

Price Indices, 1973-1980

VIII, INDUSTRY

8.1 Gross Value of Production in Manufacturing Sector, 1977-1980, inCurrent Cordobas

8.2 Gross Value of Production in Manufacturing Sector, 1977-1980,1958 Cordobas

8.3 Gross Value of Production, Exports, and Employment by Area ofOwnership, 1980

Table 1.1: NICARAGUA - ECONOMICALLY-ACTIVE POPULATION

(Thousands)

% of Total1960 1965 1970 1975 1979'-l 1960 1970 1975 1979

Agriculture, huntingand fishing 216.8 283.7 293.6 313.6 353.7 50.4 53.4 47.9 45.4

Mining 2.6 3.9 3.6 5.0 5.9 0.6 0.6 0.8 0.8

Manufacturing 42.2 56.8 61.5 62.9 82.5 9.8 11.2 9.6 10.6

Construction 17.2 16.6 19.5 27.8 33.7 4.0 3.5 4.2 4.3

Electricity, waterand sanitation 2.6 1.5 2.7 4.9 6.0 0.6 0.5 0.7 0.8

Commerce 37.4 36.2 45.4 74.9 94.8 8.7 8.3 11.4 12.2

Transportation,and Communication 13.8 13.1 16.5 22.1 27.1 3.2 3.0 3.4 3.5

Other services 86.0 75.8 100.0 131.9 158.5 20.0 18.2 20.2 20.3

Unspecified 11.6 1.6 6.4 11.5 17.5 2.7 1.2 1.8 2.2

Total economically-active 430.2 489.2 549.3 654.7 779.7 100.0 100.0 100.0 100.0

Total population 1,435.4 1,659.2 1,921.2 2,260.8 2,498.3

Activity ratio (%) 30.0 29.5 28.6 29.0 31.2

Economic dependency ratio !/ 2.3 2.4 2.5 2.4 2.2

P/ Preliminary

1/ Total Population - Economically Active

Economically Active

Source: Statistics and Census Institute.

Table 2.1: NICARAGUA: GROSS DOMESTIC PRODUCT BY SECTOR, 1965, 1970-1980

(Millions of current Cordobas)

1965 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 21 1980 el

Agriculture 996.8 1,353.2 1,432.7 1,532.5 1,891.0 2,490.6 2,917.6 2,917.6 3,593.3 3,703.5 4,107.5 4,904.0

Manufacturing 700.0 1,110.8 1,207.6 1,309.3 1,615.4 2,158.2 2,459.9 2,689.3 3,083.8 3,236.7 3,490.0 5,243.3

Construction 128.2 173.3 188.2 205.1 312.6 629.0 603.9 688.6 708.2 429.2 181.5 475.9

Mining 49.2 33.5 32.3 29.8 37.1 59.6 39.1 35.4 109.1 98.5 75.3 281.0

Utilities 61.8 84.1 87.4 121.7 85.0 96.3 174.8 241.4 310.2 302.5 343.9 532.9

Transport & Communications 210.8 293.1 309.5 343.7 436.8 602.9 606.0 705.1 798.2 658.3 721.3 1,170.1

Commerce 829.5 1,153.3 1,217.4 1,330.2 1,718.4 2,351.8 2,397.2 2,907.2 3,140.1 2,732.9 2,377.5 3,859.8

Financial Services 101.3 143.6 163.6 130.8 199.2 318,3 307.8 388.6 436.3 416.9 505.6 706.2

General Government 252.9 374.8 397.6 403.6 432.9 597.3 709.5 846.9 946.5 1,081.9 1,391.3 2,406.7

Housing 267.6 351.2 361.4 370.3 401.8 557.6 615.4 701.1 709.5 760.7 580.0 1,205.5

Other Services 367.7 365.2 383.3 388.9 524.8 702.6 728.8 813.8 930.4 655.8 624.8 553.9

GDP (market prices) 3,965.8 5,436.1 5,786.0 6,165.9 7,655.0 10,646.3 11,133.0 12,935.1 14,756.6 14,076.9 14,398.7 21,339.3

CDP Per Capita (¢) 2,459 2,961 3,063 3,154 3,799 5,102 5,149 5,764 6,347 5,842 5,763 8,402

p/ Preliminary

e/ Estimate

Sources: Ministry of Planning and Missionestimates.

Table 2.2: NICARAGUA: GROSS DOMESTIC PRODUCT BY SECTOR, 1965, 1970-1980

(Millions of 1980 Cordobas)

1965 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979PE/ 1980 e/

Agricultural 3,596.8 4,017.8 4,340.4 4,381.5 4,637.8 5,042.9 5,371.7 5,462.9 5,672.9 6,167.1 5,348.6 4,904.0

Manufacturing 2,729.9 4,101.6 4,308.4 4,535.3 4,719.6 5,318.9 5,489.4 5,736.5 6,329.0 6,484.0 4,499.6 5,243.3

Construction 561.0 736.3 764.1 836.1 965.6 1,456.0 1,421.6 1,624.7 1,600.7 959.0 259.6 475.9

Mining 540.9 402.8 386.2 328.9 366.9 458.6 323.3 224.1 598.8 371.2 203.7 281.0

Utilities 157.7 231.5 235.2 367.3 263.9 229.6 305.7 428.5 482.4 457.0 426.1 532.9

Transport & Communications 1,018.4 1,222.8 1,280.6 1,365.8 1,463.6 1,622.0 1,604.7 1,672.6 1,533.6 1,229.8 957.5 1,170.1 >

Commerce 4,263.5 5,119.5 5,359.9 5,623.9 6,126.9 6,789.9 6,716.8 6,999.5 6,179.8 5,104.4 3,153.3 3,859.8

Financial Services 397.4 486.4 549.7 422.1 542.1 710.6 682.7 797.7 883.8 842.2 694.6 706.2

General Government 871.9 984.7 998.5 1,055.5 1,000.6 1,160.1 1,344.3 1,491.4 1,623.1 1,848.6 1,804.7 2,406.7

Housing 1,139.8 1,336.1 1,347.1 1,364.0 1,097.1 1,174.0 1,254.5 1,335.3 1,234.4 1,290.6 1,159.1 1,205.5

Other Services 1,129.1 1,458.8 1,518.8 1,479.5 1,683.6 1,810.6 1,824.7 1,894.7 1,781.5 1,223.7 899.9 553.9

GDP (market prices) 16,406.4 20,098.3 21,088.9 21,759.9 22,867.7 25,773.2 26,339.4 27,667.9 27,920.0 25,977.5 19,406.7 21,339.3

GDP per capita (US$) 1,017 1,095 1,116 1,113 1,135 1,235 1,218 1,233 1,201 1,078 777 840

p/ Preliminary

e/ Estimates

Source: Ministry of Planning and Mission estimates.

Table 2.3: NICARAGUA: GROSS DOMESTIC PRODUCT BY EXPENDITURE, 1965, 1970-1980

(Millions of current Cordobas)

1965 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979k/ 1980 et

Consumption 3,259.4 4,559.0 4,890.6 5.025.5 6.553.5 8,733.7 9,738.9 10,545.5 11,584.3 11,971.7 12,740.2 21,614.3

Private 2,942.8 4,037.6 4,327.6 4,446.3 5,930.7 7,912.2 8,731.6 9,337.6 10,188.0 10,209.3 10,176.7 17,132.3

Public 316.6 521.4 563.0 579.2 622.8 821.5 1,007.3 1,207.9 1,396.3 1,762.4 2,563.6 4,482.0

Gross Domestic Investment 829.6 1,010.8 1,025.0 792.2 1,835.8 3,553.3 2,384.6 2,240.5 4,017.8 1,850.3 - 188.3 4,310.0

Fixed 745.7 891.2 897.7 930.3 1,475.8 2,497.9 2,510.3 2,612.6 3.583.0 2,131.9 1,111.7 3,280.0

Private 571.1 665.0 607.1 624.9 1,021.1 1,736.4 1,735.4 1.623.1 1,880.7 1,264.6 581.3 676.0

Public 174.6 226.2 290.6 305.4 454.3 761.5 774.9 989.5 1,702.3 867.3 530.4 2,604.0

Change in Stocks 83.9 119.6 127.3 - 138.1 360.0 855.4 - 125.7 - 372.1 434.8 - 281.6 -1,300.0 1,030.0

Gross Domestic Expenditure 4,089.0 5,569.8 5,915.6 5,817.7 8,389.3 12,087.0 12,123.5 12,786.0 15,602.1 13,822.0 12,552.0 25,924.3

Resource Balance, net - 123.2 - 133.7 - 129.6 353.2 - 734.3 -1,440.7 - 990.5 149.1 - 836.5 254.9 1,846.8 -4,585.0

Exports GNPS 1,162.0 1,453.2 1,521.7 2,175.9 2,159.5 3,095.4 3,133.0 4,267.9 5,031.6 5,088.4 5,712.5 5,077.0

Imports GNPS 1,285.2 1,586.9 1,651.3 1,822.7 2,893.8 4,536.1 4,112.5 4,118.8 5,868.1 4,833.5 3,865.7 9,662.0

GDP (market prices) 3,965.8 5,436.1 5,786.0 6,170.9 7,655.0 10,646.3 11,133.0 12,935.1 14,765.6 14,076.9 14,398.7 21,339.3

Net Factor Income - 77.0 176.4 -205.1 -244.3 -345.1 -454.8 -415.8 -491.4 -515.9 -690.9 -1,002.8 -782.0

GNP (market prices) 3,888.8 5,259.7 5,580.9 5,926.6 7,309.9 10,191.5 10,717.2 12,443.7 14,249.7 13,386.0 13,395.9 20,557.3

Gross Domestic Savings 706.4 877.1 895.4 1,145.4 1,101.5 1,912.6 1,394.1 2,389.6 3,181.3 2,105.2 1,658.5 - 275.0

Net Current Transfers 45.5 43.2 35.1 49.1 401.8 108.4 117.0 71.4 78.4 65.8 833.6 1,230.0

Gross National Savings 674.9 743.9 725.4 950.2 1,158.2 1,566.2 1,095.3 1,969.6 2,743.8 1,480.1 1,489.3 173.0

Private 508.6 665.5 653.0 837.6 843.0 971.2 660.1 1,465.9 2,158.6 1,509.6 - -

Public 166.3 78.4 72.4 112.6 315.2 595.0 435.2 503.7 585.2 - 29.5 - -

p/ Preliminary

e/ Estimate

Sources: Ministry of Planning and Mission

estimates,

Table 2.4: NICARAGUA: GROSS DOMESTIC PRODUCT BY EXPENDITURE, 1965, 1970-1980

(Millions of 1980 Cordobas)

1965 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979P/ 1980-

Consumption 14,813.3 17,346.9 17,948.9 17,859.2 20,897.1 22,719.7 21,982.2 22,940.1 24,422.0 23,172.7 17,146.6 21,614.3Private 13,255.6 15,665.0 16,217.8 15,958.7 19,129.9 20,753.4 19,649.6 20,352.3 21,845.8 20,025.6 13,719.3 17,132.3Public 1,557.7 1,681.9 1,731.1 1,900.5 1,767.2 1,966.3 2,332.6 2,587.8 2,576.2 3,147.1 3,427.3 4,482.0

Gross Domestic Investment 3,144.7 3,514.0 3,631.6 2,730.4 4,706.2 6,176.6 4,318.4 4,513.0 7,005.6 2,875.5 - 347.1 4,310.0Fixed 2,940.8 3,268.2 3,373.6 2,997.8 4,109.6 5,023.9 4,561.1 4,820.4 6,184.0 3,436.4 1,404.8 3,280.0

Private 2,267.8 2,448.6 2,295.4 1,946.8 2,822.8 3,497.0 3,041.8 2,884.7 3,138.9 1,895.9 726.7 676.0Public 673.0 819.6 1,078.2 1,051.0 1,286.8 1,526.9 1,519.3 1,935.7 3,045.1 1,540.5 678.1 2,604.0

Change in Stocks 203.9 245.8 258.0 -267.4 596.6 1,152.7 - 242.7 - 307.4 821.6 - 560.9 -1,751.9 1,030.0

Gross Domestic Expenditure 17,958.0 20,860.9 21,580.5 20,589.6 25,603.3 28,896.3 26,300.6 27,453.1 31,427.6 26,048.2 16,799.5 25,924.3

Resource Balance Net -1,551.6 - 762.6 - 491.6 1,170.3 -2,735.6 -3,123.1 38.8 214.8 -3,507.6 - 70.7 2,607.2 -4,585.0Exports GNFS 5,312.3 6,181.9 6,411.5 8,419.4 7,547.2 9,102.0 9,102.0 9,447.1 9,003.3 9,674.5 7,782.1 5,077.0Imports GNFS 6,863.9 6,944.5 6,903.1 7,249.1 10,282.8 12,225.1 9,063.2 9,232.3 12,510.9 9,745.2 5,174.9 9,662.0

GDP (market prices) 16,406.4 20,098.3 21,088.9 21,759.9 22,867.7 25,773.2 26,339.4 27,667.9 27,920.0 25,977.5 19,406.7 21,339.3

Net Factor Income -411.1 -717.7 -802.9 -926.9 -1,431.7 -1,187.9 -756.9 -1,036.2 -1,097.9 -1,393.0 -1,342.7 - 782.0

GNP (market prices) 15,995.3 19,380.6 20,286.0 20,833.0 21,436.0 24,585.3 25,582.5 26,631.7 26,822.1 24,584.5 18,064.0 20,557.3

Terms of Trade Adjustment 901.6 163.9 - 44.6 249.5 137.8 -758.6 -2,225.3 122.2 1,725.1 584.4 - 134.8 -Gross Domestic Income 17,308.0 20,262.2 21,044.3 22,009.4 23,005.5 25,014.6 24,114.1 27,790.1 29,645.1 26,561.9 19,271.9Gross National Income 16,896.9 19,544.5 20,241.4 21,082.5 21,573.8 23,826.7 23,357.2 26,753.9 28,547.2 25,168.9 17,929.2 -

Gross Domestic Savings 2,494.7 2,951.3 3,095.4 4,150.2 2,108.4 2,294.9 2,131.9 4,850.0 5,223.1 3,389.2 2,125.3 - 275.0

Net Current Transfers 243.0 226.2 187.5 238.3 1,677.7 359.2 419.4 192.2 167.0 132.5 1,114.3 1,230.0

Gross National Savings 2,326.6 2,459.8 2,480.0 3,461.6 2,354.4 1,466.2 1,794.4 4,006.0 4,292.2 2,128.7 1,896.9 173.0Private 1,753.2 2,200.2 2,232.1 3,050.7 1,713.8 909.1 1,081.0 2,982.2 3,376.4 2,086.3 - -Public 573.4 259.6 247.9 410.9 640.6 557.] 713.4 1,023.8 915.8 - 42.4 _ _

p/ Preliminary

e/ Estimate

Sources: Miristry of Planning and Missionestimates.

Table 2.5: NICARAGUA: GROSS DOMESTIC PRODUCT PROJECTIONS (HIGH CASE), 1980-1990

(Millions of 1980 US$)

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Demand Side

Consumption 2,161.4 2,076.3 2,134.8 2,177.1 2,245.2 2,327.1 2,441.8 2,569.4 2,707.3 2,852.0 3,001.0

Private 1,713.2 1,587.7 1,609.0 1,623.0 1,657.8 1.704.5 1,781.8 1,869.9 1,985.8 2,066.0 2,167.8

Public 448.2 448.5 522.7 554.1 587.3 622.6 659.9 699.5 790.5 786.0 833.2

Investment 431.0 396.5 475.8 556.7 529.1 685.7 726.8 770.4 816.4 865.6 917.6

Resource Gap -458.5 -146.9 -118.8 - 95.9 - 76.8 - 47.8 - 24.7 - 9.5 6.6 24.7 47.3

Exports GNFS 507.7 661.9 764.7 855.9 945.3 1,032.9 1,114.1 1,190.0 1,271.2 1,358.6 1,454.3

Imports GNFS 966.2 808.7 883.6 951.8 1,022.1 1,080.7 1,138.8 1,199.5 1,264.7 1,333.9 1,407.0

Gross Domestic Product 2,133.9 2,325.9 2,488.7 2,637.9 2,797.5 2,964.9 3,143.9 3,33n.3 3,530.5 3,742.3 3,965.8

Net Factor Income - 78.2 -123.0 122.5 -130.5 -132.6 -132.3 -157.4 -153.8 -150.9 -149.4 -150.0

Gross National Product 2,055.7 2,203.0 2,366.2 2,507.4 2,664.9 2,832.6 2,986.5 3,176.6 3,379.6 3,593.0 3,815.7

Supply Side

Agriculture 490.4 549.2 593.2 628.8 664.6 700.5 736.9 773.8 812.5 853.1 895.8

Industry a/ 600.0 654.2 699.7 741.5 787.4 836.9 892.9 948.3 1,009.1 1,074.6 1,143.2

Other 729.6 779.0 827.4 876.6 930.5 987,9 1,048.4 1,105.4 1,187.0 1,261.9 1,341.3

Gross Domestic Product,

Factor Cost 1,820.0 1,982.3 2,120.2 2,246.9 2,382.5 2,525.3 2,678.3 2,837.5 3,008.6 3,189.6 3,380.4

Indirect Taxes 313.9 343.7 368.5 391.0 415.0 439.6 465.7 492.8 521.9 552.8 585.3

Gross Domestic Product 2,133.9 2,325.9 2,488.7 2,637.9 2,797.5 2,964.9 3,143.9 3,330.3 3,530.5 3,742.3 3,965.8

Population (thousands) 2,539.7 2,618.4 2,69°.6 2,791.2 9 ,qAG5 9, 5 3,02nC 3,nR4*n 3,l/R.R 3,214.0 3,282.6

GNP per Capita (US$) 809 841 877 901 929 957 989 1,030 1,073 1,118 1,162

a/ Includes non-manufacturing, construction, and mining.

Source: Mission Estimates,

- 73 -

Table 3.1: NICARAGUA: BALANCE OF PAYMENTS, 1975-1980

(Millions of US$)

1975 1976 1977 1978 1979 1980

Exports of Goods and NFS 446.0 609.7 718.8 726.9 677.7 507.7Goods f.o.b. 375.2 541.9 636.8 646.0 616.6 449.2Non-factor Services 70.8 67.8 82.0 80.9 61.1 58.5

Imports of Goods and NFS 587.5 588.4 838.3 690.5 424.8 966.2Goods c.i.f. 516.9 532.1 761.9 593.9 360.2 885.0Non-factor Services a/ 70.6 56.3 76.4 96.6 64.6 81.2

Resource Gap -141.5 21.3 -119.5 36.4 252.9 -458.5

Net Factor Income - 59.0 - 70.1 - 73.0 - 98.7 -110.2 - 78.2

Net Transfers 16.7 10.2 11.2 9.4 91.6 123.0

Current Account Balance -183.8 - 38.6 -181.3 - 52.9 234.3 -413.7

MLT Loans, net bh 139.7 55.8 205.7 92.5 98.0 270.4Disbursement 160.0 90.8 256.3 142.4 112.4 332.6Amortization - 20.3 - 35.0 - 50.6 - 49.9 - 14.4 - 62.2

Other Capital c/ 1.4 9.6 - 91.0 -270.9 -307.3 - 50.8

Change in net reserves 31.7 - 39.7 56.6 224.3 - 25.0 194.1(- increase)

International reserves 135.7 158.5 164.8 81.0 148.3 80.8gross (end of period)

Reserves in months of imports d/ 2.5 2.8 2.1 1.2 3.2 0.9

a/ The non-factor services exclude the margin between imports valued on a c.i.f. vs. those- valued on the f.o.b. basis.

b/ World Bank's Debt Reporting System's data 1975-80; MLT Loans refer to all medium and long-termpublic and publicly-guaranteed loans.

c/ Other capital includes private, non-guaranteed MLT loans, all short-term capital transactions,and errors and omissions.

d/ Imports include goods and all services.

Sources: Central Bank, Ministry of Planning, and Mission estimates; the data for 1978-80are preliminary with those for 1979 and 1980 still subject to substantial change,particularly in the service and capital account categories.

Table 3.2: NICARAGUA: PRINCIPAL EXPORTS, VALUE AND VOLUME, 1970-1980

(Value in Millions of US$, volume in thousand units)

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

Cotton - value 34.2 41.3 62.9 63.2 135.9 95.6 130.6 150.6 140.9 135.7 30.3

volume CWT 1,474.0 1,687.0 2,211.0 2,164.0 2,868.0 2,881.0 2,455.0 2,531.0 2,804.0 2,470.0 426.0

unit value 23.2 24.5 28.4 29.2 47.4 33.2 53.2 59.5 50.2 55.0 71.1

Coffee - value 32.1 29.3 33.0 44.4 46.1 48.1 119.4 198.8 199.6 158.5 158.5

volume CWT 650.0 704.0 714.0 811.0 703.0 880.0 1,143.0 1,076.0 1,188.0 1,204.0 948.0

unit value 49.4 41.6 46.2 54.7 65.9 54.7 104.5 184.7 168.0 131.6 167.2

Beef - value 26.6 28.7 38.3 44.5 21.9 27.0 37.6 37.3 67.7 93.5 58.3

volume lbs. 53.7 54.7 65.2 57.4 34.6 47.7 57.4 58.1 74.9 78.3 45.1unit value .5 .5 .6 .8 .6 .6 .7 .6 .9 1.2 1.3

Sugar - value 9.8 11.6 15.2 13.5 12.3 42.6 52.8 27.8 19.6 19.6 20.5

volume CWT 1,545.0 1,694.0 2,168.0 1,790.0 1,461.0 1,964.0 3,239.0 2,157.0 2,126.0 1,974.0 1,358.0

unit value 6.3 6.8 7.0 7.5 8.4 21.7 16.3 12.9 9.2 9.9 15.1

Shrimp - value 5.9 5.8 8.7 7.2 9.7 14.9 19.7 22.0 14.7 21.7 26.8volume lbs. 7.3 6.7 8.6 8.1 8.3 9.4 10.0 12.0 9.3 8.3 7.5unit value .8 .9 1.0 .9 1.2 1.6 2.0 1.8 1.6 2.6 3.6

All Other Goods - value 70.0 70.5 91.3 105.1 155.0 147.0 181.8 200.3 203.5 187.6 154.8

Total Merchandise Value (FOB) 178.6 187.2 249.4 277.9 380.9 375.2 541.9 636.8 646.0 616.6 449.2

Non-Factor Services 29.0 30.2 61.4 30.6 61.3 70.8 67.8 82.0 80.9 61.1 58.5

Total Exports GNFS 207.6 217.4 310.8 308.5 442.2 446.0 609.7 718.8 726.9 677.7 507.7

Sources: Central Bank, Ministry of Planningand Mission estimates.

Table 3.3: NICARAGUA: EXPORTS, 1970-1980 IN CURRENT AND CONSTANT PRICES

(Millions of US$)

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

Current US$

Cotton 34.2 41.3 62.9 63.2 135.9 95.6 130.6 150.6 140.9 135.7 30.3

Coffee 32.1 29.3 33.0 44.4 46.1 48.1 119.4 198.8 199.6 158.5 158.5

Sugar 9.8 11.6 15.2 13.5 12.3 42.6 52.8 27.8 19.6 19.6 20.5

Beef 26.6 28.7 38.3 44.5 21.9 27.0 37.6 37.3 67.7 93.5 58.3

Shrimp 5.9 5.8 8.7 7.2 9.7 14.9 19.7 22.0 14.7 21.7 26.8

All Other Goods 70.0 70.5 91.3 105.1 155.0 147.0 181.8 200.3 203.5 187.6 154.8

Total Goods (FOB) 178.6 187.2 249.4 277.9 380.9 375.2 541.9 636.8 646.0 616.6 449.2

Non-Factor Services 29.0 30.2 61.4 30.6 61.3 70.8 67.8 82.0 80.9 61.1 58.5

rotal GNFS 207.6 217.4 310.8 308.5 442.2 446.0 609.7 718.8 726.9 677.7 507.7

Constant 1980 US$

Cotton 105.2 120.8 158.0 154.5 204.7 205.6 175.3 180.4 199.6 175.8 30.3

Coffee 110.7 119.1 120.4 136.6 118.5 148.0 192.3 179.6 198.4 200.9 158.5

Sugar 23.3 25.6 32.6 27.0 22.1 29.7 48.9 32.5 32.0 29.8 20.5

Beef 71.3 74.7 89.1 78.3 47.2 64.7 78.5 74.9 97.0 100.5 58.3

Shrimp 35.8 33.0 42.2 39.8 40.9 46.4 49.2 57.0 33.0 29.5 26.8

kll Other Goods 165.3 149.1 200.7 146.1 196.2 136.7 202.6 198.0 171.6 156.3 154.8

rotal Goods (FOB) 511.6 522.3 643.0 582.3 629.6 631.1 746.8 722.4 731.6 692.8 449.2

ion-Factor Services 69.9 68.5 128.2 72.7 111.1 113.5 107.1 121.3 103.9 68.7 58.5

rotal GNFS 581.5 590.8 771.2 655.0 740.7 744.6 853.9 843.7 835.5 761.5 507.7

Sources: Central Bank, Ministry of Planning and Mission estimates.

Table 3.4: NICARAGUA: IMPORTS, 1970_1980 IN CURRENT AND CONSTANT PRICES

(Millions of US$)

1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

Current US$

Food 10.3 11.6 14.4 24.7 21.4 20.6 24.3 33.3 31.2 20.5 91.5

Other Consumer Goods 47.5 52.8 54.8 66.5 104.6 101.3 118.0 144.0 116.7 76.7 165.8

Fuel 11.4 15.1 15.5 22.9 59.3 72.9 73.3 103.0 89.0 75.7 173.5

Intermediate Goods 68.9 70.1 79.7 116.4 217.4 174.8 171.9 284.7 243.4 140.9 350.0

Capital Goods 60.6 60.8 54.1 96.5 159.0 147.3 144.4 192.8 113.4 46.2 104.3

Total Goods (CIF) 198.7 210.4 218.5 327.0 561.7 516.9 532.1 761.9 593.9 360.2 885.0

Non-Factor Services 36.0 31.4 39.7 65.9 72.1 70.6 56.3 76.4 96.6 64.6 81.2

TOTAL GNFS 234.7 241.8 258.2 392.9 633.8 587.5 588.4 838.3 690.5 424.8 966.2

Constant 1980 US$

Food 18.1 25.4 31.9 48.7 35.3 38.6 41.0 51.4 41.4 23.5 91.5

Other Consumer Goods 141.8 148.3 142.0 145.2 186.8 160.0 183.5 213.0 149.8 86.2 165.8

Fuel 105.6 120.8 124.0 145.9 185.9 207.1 197.0 250.0 210.4 124.1 173.5

Intermediate Goods 174.4 166.9 174.8 215.2 313.3 234.0 227.1 338.9 312.5 158.3 350.0

Capital Goods 185.3 174.7 143.1 215.9 292.8 239.9 231.8 285.2 145.6 51.9 104.3

Total Goods (CIF) 625.2 636.1 615.8 770.9 1,014.1 879.6 880.4 1,138.5 859.7 444.0 885.0

Non-Factor Services 109.8 90.0 104.7 146.8 131.1 113.5 89.2 113.0 124.0 72.6 81.2

TOTAL GNFS 735.0 726.1 720.5 917.7 1,145.2 993.1 969.6 1,251.5 983.7 516.6 966.2

Sources: Central Bank, Ministry of Planning and Mission estimates.

Table 3.5: NICARAGUA: BALANCE OF PAYMENTS PROJECTIONS (HIGH CASE), 1980-1990

(Millions of US$)

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Exports GNFS 507.7 668.4 823.1 1,032.4 1,264.6 1,516.3 1,753.7 2,010.1 2,306.3 2,649.0 3,048.6

Goods f.o.b. 449.2 579.8 708.6 893.9 1,100.2 1,324.1 1,534.1 1,761.5 2,024.8 2,330.1 2,686.7

Non-factor Services 58.5 88.6 114.5 138.4 164.4 192.1 219.7 248.6 281.6 319.0 361.9

Imports GNFS a/ 966.2 888.2 1062.2 1,248.4 1,458.1 1,672.1 1,883.3 2,119.4 2,388.1 2,691.4 3,032.5

Goods c.i.f. 885.1 808.0 958.7 1,118.2 1,296.6 1,489.4 1,679.3 1,891.7 2,133.6 2,406.9 2,714.4

Non-factor services 81.2 80.1 103.6 130.2 161.4 182.6 204.0 227.5 254.5 284.5 318.1

Resource Balance -458.5 -219.8 -239.2 -216.1 -193.5 -155.8 -129.6 -109.3 - 81.7 - 42.4 16.1

Net Factor Income - 78.2 -134.1 -144.9 -166.7 -182.0 -194.4 -245.1 -253.7 -264.0 -276.9 294.7

Net Transfers 123.0 35.0 28.0 31.1 34.4 38.0 41.4 45.1 49.1 53.6 58.4

Current Account Balance -413.7 -318.9 346.1 -351.7 -341.1 -312.2 -333.2 -317.9 -296.6 -265.7 -220.3 _

MLT Loans, net b/ 270.4 324.9 389.0 397.8 392.9 374.7 409.4 359.1 342.1 316.5 283.3

Other Capital c/ - 50.8 - 3.1 - .9 2.7 - -.1 .9 1.8 2.8 - 2.2

Change in net reserves d/ 194.] - 6.0 36.0 -45.2 - 54.7 -62.6 - 76.0 - 42.1 - 47.3 - 53.6 -60.9

(- = increase)

International Reserves, 80.8 86.8 122.7 168.0 222.6 285,2 361.3 403.3 450.6 504.3 565.1

Gross (end of period)

Reserves as Months of 0.9 1.0 1.2 1.4 1.6 1.8 2.0 2.0 2.0 2.0 2.0

Imports e/

a/ The non-factor services exclude the margin between imports evaluated on the c.i.f. vs. those evaluated on the f.o.b. basis.

b/ MLT loans refer to all medium and long-term public and publicly guaranteed loans.

c/ Residual gap in external financing including private non-guaranteed MLT loans, and errors and omissions.

d/ In the projection period,change in reserves refers to gross reserves with appropriate adjustment applicable to other capital flows.

e/ Imports include goods and all services.

Source: Mission estimates.

Table 3.6: NICARAGUA: EXPORI PROJECTIONS (HIGH CASE), 1980-1990 IN CURRENT AND

CONSTANT PRICES

(Millions of US$)

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Current US$

Cotton 30.3 117.7 171.4 221.4 274.2 330.3 359.2 390.5 424.6 461.7 502.0Coffee 158.5 138.4 146.9 1,87.9 228.4 264.0 298.0 334.7 374.1 416.1 462.9Sugar 20.5 48.7 51.9 59.4 67.0 75.2 83.7 93.1 103.6 115.3 128.4Beef 58.3 47.8 49.3 59.8 74.0 92.6 117.8 147.8 185.5 232.8 292.2Shrimp 26.8 37.4 41.6 46.3 51.5 57.3 64.3 72.1 80.8 90.6 101.6Minerals 39.7 39.7 44.1 50.1 57.9 68.3 79.2 91.8 106.4 123.4 143.1Other Goods 115.1 150.0 203.4 269.2 347.2 436.4 532.0 631.5 749.6 889.9 1,056.4

Total Goods (f.o.b.) 449.2 579.8 708.6 893.9 1,100.2 1,324.1 1,534.1 1,761.5 2.024.8 2,330.1 2,686.7

Non-factor Services 58.5 88.6 114.5 138.4 164.4 192.1 219.7 248.6 281.6 319.0 361.9

Exports GNFS (f.o.b.) 507.7 668.4 823.1 1,032.4 1,264.6 1,516.3 1,753.7 2,010.1 2,306.3 2,649.0 3,048.6

Constant 1980 US$

Cotton 30.3 104.6 133.1 150.1 162.4 170.8 174.2 177.7 181.3 184.9 188.6Coffee 158.5 182.1 196.4 209.3 221.2 232.3 242.8 252.5 261.3 269.1 277.2Sugar 20.5 29.4 31.3 33.2 34.9 36.6 38.4 40.4 42.4 44.5 46.8Beef 58.3 51.8 58.3 64.7 71.2 77.7 83.5 88.5 93.8 99.5 105.4Shrimp 26.8 35.3 37.1 38.9 40.9 42.9 45.1 47.3 49.7 52.2 54.8Minerals 39.7 39.7 39.7 40.5 42.1 44.6 47.3 50.2 53.2 56.4 59.7Other goods 115.1 137.6 172.1 210.8 252,9 297.1 341.7 382.7 428.6 480.0 537.6

Total Goods (f.o.b.) 449.2 580.6 667.9 747.6 825.6 902.1 973.0 1,039.3 1,110.3 1,186.5 1,270.1

Non-factor Services 58.5 81.3 96.8 108.4 119.7 130.8 141.1 150.7 161.0 172.0 184.2

Exports GNFS (f.o.b.) 507.7 661.9 764.7 855.9 945.3 1,032.9 1,114.1 1,190.0 1,271.2 1,358.6 1,454.3

Source: Mission estimates.

Table 3.7: NICARAGUA: IMPORT PROJECTIONS (HIGH CASE), 1980-1990 IN CURRENT AND

CONSTANT PRICES

(Millions of US$)

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990

Current US$

Food 91.5 50.6 56.7 63.5 70.9 78.9 86.1 94.0 102.5 111.9 122.0Other Consumer Goods 165.8 91.6 102.8 115.4 128.8 143.7 155.2 167.7 181.0 195.5 211.1Fuel 173.5 212.9 253.7 299.9 354.3 414.6 471.9 536.5 610.6 694.8 790.2Intermediate Goods 350.0 305.2 361.1 416.4 478.7 547.2 620.0 701.6 794.8 900.3 1,019.3Capital Goods 104.3 147.8 184.5 223.0 263.9 304.9 346.0 392.0 444.7 504.4 571.8

Total Goods 885.1 808.0 958.7 1,118.2 1,296.6 1,489.4 1,679.3 1.891.7 2,133.6 2,406.9 2,714.4

Non-factor Services 81.2 80.1 103.6 130.2 161.4 182.6 204.0 227.7 254.5 284.5 318.1

Imports GNFS (c.i.f.) 966.2 888.2 1,062.2 1,248.4 1,458.1 1,672.1 1,883.3 2,119.4 2,388.1 2,691.4 3,032.5

Constant 1980 US$

Food 91.5 45.8 46.5 47.2 47.7 48.1 48.6 49.1 49.6 50.1 50.6Other Consumer Goods 165.8 82.9 84.1 85.4 86.3 87.1 88.0 88.9 89.8 90.7 91.6Fuel 173.5 190.9 204.3 216.5 229.6 241.1 250.8 260.7 271.1 282.0 293.2Intermediate Goods 350.0 280.0 305.2 326.1 348.7 372.5 398.2 425.2 454.4 485.6 518.7Capital Goods 104.0 135.6 155.9 174.6 192.2 207.6 2?..2 237.6 254.2 272.0 291.0

Total Goods (c.i.f.) 885.1 735.2 796.0 849.8 904.5 956.4 1,007.8 1,061.5 1,119.2 1,180.4 1,245.1

Non-factor Services 81.2 73.5 87.6 102.0 117.6 124.3 131.0 138.0 145.5 153.5 161.9

Imports GNFS (c.i.f.) 966.2 808.7 883.6 951.8 1,022.1 1,080.7 1,138.8 1,199.5 1,264.7 1,333.9 1,407.0

Source: Mission estimates.

- 80 -

Table 4.1: NICARAGUA: EXTERNAL DEBT INDICATROS, 1970, 1975-1979

(Millions of US$)

Actual1970 1975 1976 1977 1978 1979

GROSS DISBURSEMENTS

Official grants 16.7 10.0 11.2 9.4 91.6Gross disbursements of MLT loans 44.5 160.0 90.8 256.3 142.4 112.4Concessional 23.1 30.1 25.2 37.2 38.0 38.2

Bilateral 18.6 13.7 10.5 14.8 21.8 11.3IDA - 5.6 5.8 3.1 0.8 0.2Other Multilateral 4.5 10.9 8.9 19.2 15.4 26.9

Non-concessional 21.4 129.9 65.6 219.2 104.3 74.2Official export credits 2.0 2.2 22.7 78.3 50.4 21.4IBRD 5.9 13.9 13.4 13.9 7.0 7.9Other multilateral 1.6 6.5 7.4 17.4 12.8 44.9Private 11.9 107.4 22.1 109.7 34.1 -

EXTERNAL DEBT

Debt outstanding and disbursed 155.3 589.4 655.4 864.0 961.4 1,100.7Official 110.0 252.6 313.9 447.9 545.3 687.3

IBRD 26.6 52.3 63.8 75.2 80.2 84.6IDA 3.0 13.4 19.2 22.3 23.1 23.2Other 80.4 186.9 230.9 350.4 442.0 579.5

Private 45.3 345.8 341.5 416.1 416.1 413.4Undisbursed Debt 67.0 222.9 305.6 237.8 240.4 303.3

DEBT SERVICE

Public debt service payments 24.1 56.2 76.2 102.3 98.4 55.6Interest 7.2 35.9 41.2 51.7 48.4 41.2

Payments as % exports GNFS 11.6 12.6 12.5 14.2 13.5 8.2Payments as % GNP 3.2 3.7 4.3 5.0 5.1 3.7

Average interest rates on new loans (%)Official 5.5 4.9 6.1 6.9 5.3 6.6Private 8.6 9.7 8.0 8.2 10.6 -

Average maturity of new loans (years)Official 27.8 28.8 18.8 17.6 20.7 22.6Private 7.0 7.1 6.7 6.6 4.7 -

BANK GROUP EXPOSURE

IBRD DOD/total DOD 17.1 8.7 9.7 8.7 8.3 7.7IBRD disbursements/total gross disbursements 13.2 8.7 14.8 5.4 4.9 7.0IBRD debt service/total debt service 12.4 9.6 8.1 7.2 7.1 14.4IDA DOD/total DOD 1.9 2.2 2.9 2.6 2.4 2.1IDA disbursements/total gross disbursements 0 3.5 6.4 1.2 0.6 0.2IDA debt service/total debt service 0 0.2 0.3 0.2 0.1 0.2

As % of Debt Outstandingat End of most recent

Year (1979)DEBT STRUCTURE

Maturity structure of debt outstanding (%)Maturities due within 5 years 31.4Maturities due within 10 years 44.9

Interest structure of debt outstanding (%)Interest due within first year 7.4

06/12/81Table 4.2-: NICARAGUA Page 1 of 6

SERVICE PAYMENTS, COMMITMENTS, DISBURSEMENTS AND OUTSTANDING AMOUNTS OF EXTERNAL PUBLIC DEBT

PROJECTIONS BASED ON DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF DEC. 31, 1980DEBT REPAYABLE IN FOREIGN CURRENCY AND GOODS

(IN THOUSANDS OF U.S. DOLLARS)TYPE OF CREDITOR SUPPLIERS CREDIT

TOTALYEAR DEBT OUTSTANDING AT T R A N S A C T I 0 N S D U R I N G P E R I 0 D OTHER CHANGES

BEGINNING OF PERIOD

: DISBURSED INCLUDING COMMIT- DISBURSE- S E R V I C E P A Y M E N T S CANCEL- ADJUST-: ONLY UNDISBURSED MENTS MENTS ----------- :-----------:----------- LATIONS MENT *

PRINCIPAL INTEREST TOTAL: (1) (2) (3) (4) (5) (6) (7) (8) (9)

1971 7.658 10,274 346 705 1,530 555 2.085 1.600 -611972 6,772 7,429 1,576 590 1.644 410 2,054 - -711973 5,657 7,290 50 1,643 1,735 407 2,142 - 1161974 5,582 5,721 4,116 2,691 1,739 299 2,038 - 1461975 6.680 8,244 12,223 38 1,857 491 2,348 - -5951976 5,049 18,015 112 2,356 1,024 289 1,313 - 2.6231977 6,160 19,726 3,019 14,409 1,861 275 2,136 - 2951978 19,003 21,179 2,927 4,060 930 148 1,078 1,224 1,588 m

1979 23,540 23,540 - - 309 36 345 - -1980 23,231 23,231 - - 3,084 1,048 4,132 - -7,2551981 12,892 12,892

* * * i * * THE FOLLOWING FIGURES ARE PROJECTED * * * * * *

1981 12,892 12,892 - - 3,410 788 4,198 - -2,3141982 7,168 7,168 - - 1,792 538 2,330 - -1983 5,376 5,376 - - 1.792 394 2,186 - -1984 3,584 3,584 - - 1,792 251 2,043 - -1985 1,792 1,792 - - 1,792 108 1,900 - -

* THIS COLUMN SHOWS THE AMOUNT OF ARITHMETIC IMBALANCE IN THE AMOUNT OUTSTANDING INCLUDING UNDISBURSED FROM ONEYEAR TO THE NEXT. THE MOST COMMON CAUSES OF IMBALANCES ARE CHANGES IN EXCHANGE RATES AND TRANSFER OF DEBTSFROM ONE CATEGORY TO ANOTHER IN THE TABLE.

06/12/81

Table 4,2: NICARAGUA Page 2 of 6

SERVICE PAYMENTS, COMMITMENTS, DISBURSEMENTS AND OUTSTANDING AMOUNTS OF EXTERNAL PUBLIC DEBT

PROJECTIONS BASED ON DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF DEC. 31, 1980DEBT REPAYABLE IN FOREIGN CURRENCY AND GOODS

(IN THOUSANDS OF U.S. DOLLARS)TYPE OF CREDITOR FINANCIAL INSTITUTIONS

IQTALYEAR DEBT OUTSTANDING AT T R A N S A C T I O N S O U R I N G P E R I O D OTHER CHANGES

BEGINNING OF PERIOD

DISBURSED INCLUDING COMMIT- DISBURSE- S E R V I C E P A Y M E N T S CANCEL- ADJUST-ONLY UNDISBURSED MENTS MENTS ---------------------- ---- : tLATIONS MENT *

PRINCIPAL INTEREST TOTAL: () (2) (3) (4) (5) (6) (7) (B) (9)

1971 37,608 44,402 27,565 29,532 17,450 3,642 21.092 752 -11972 49,689 53,764 61.589 52,604 14,186 5,774 19.960 275 -1973 88,107 100,892 106.640 106,795 42,715 11.201 53,916 2,630 -

1974 152,187 162,187 124,510 93,405 11,812 20,158 31.970 - -1975 233,780 274,885 82,416 107,348 10,337 26,041 36,378 - -1976 330,791 346,964 55,695 19,782 24,879 29,855 54.734 1,287 -3311977 325,363 376,162 59,249 95,264 32,677 34,839 67.516 - -171978 387,913 402,717 28,510 30,070 33,769 29.766 63,535 -1979 384,215 397,459 - - 2,384 19,193 21,577 - 41980 381,834 395,079 - - 20,900 66 20,966 9,798 206,087 X

1981 567,021 570,468

* * * + * * THE FOLLOWING FIGURES ARE PROJECTED * * * * * *

1981 567,021 570,468 - 1,917 10.785 39,670 50,455 - -981982 558,055 559,585 - 1,530 10,791 39,036 49,827 - -11983 548,793 548,793 - - 10,799 38,301 49,100 - -1984 537,994 537,994 - - 22,041 37,338 59,379 - -1985 515,953 515,953 - - 31,323 35,804 67,127 - -1986 484,630 484,630 - - 35,305 75,608 110,913 - -1987 449,325 449,325 - - 48,543 69,456 117,999 - -1988 400.782 400,782 - - 60,556 61,240 121,796 - -11989 340,225 340,225 - - 75,824 50,978 126,802 - -1990 264,401 264,401 - - 91,049 38,282 129,331 - I

* THIS COLUMN SHOWS THE AMOUNT OF ARITHMETIC IMBALANCE IN THE AMOUNT OUTSTANDING INCLUDING UNDISBURSED FROM ONEYEAR TO THE NEXT. THE MOST COMMON CAUSES OF IMBALANCES ARE CHANGES IN EXCHANGE RATES AND TRANSFER OF DEBTSFROM ONE CATEGORY TO ANOTHER IN THE 7ABLE.

06/12/81Table 4.2: NICARAGUA Page 3 of 6

SERVICE PAYMENTS, COMMITMENTS, DISBURSEMENTS AND OUTSTANDING AMOUNTS OF EXTERNAL PUBLIC DEBT

PROJECTIONS BASED ON DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF DEC. 31. 1980DEBT REPAYABLE IN FOREIGN CURRENCY AND GOODS

(IN THOUSANDS OF U.S. DOLLARS)TYPE OF CREDITOR BONDS

TOTALYEAR DEBT OUTSTANDING AT T R A N S A C T I O N S D U R I N G P E R I O D OTHER CHANGES

: BEGINNING OF PERIOD

: DISBURSED INCLUDING COMMIT- DISBURSE- S E R V I C E P A Y M E N T S CANCEL- ADJUST-: ONLY UNDISBURSED MENTS MENTS ---------------------- : ---- : LATIONS MENT *

: .: : : PRINCIPAL INTEREST TOTAL: (1) (2) : (3) (4) (5) (6) (7) (8) (9)

1971 - - _ - _ - _ _1972 - - - - - _ _ _ _1973 - - 10,000 10,000 - 572 572 - _1974 10,000 10,000 - - - 908 908 - -1975 10.000 10,000 - - - 454 454 - -1976 10,000 10.000 - - - 523 523 - -1977 10,000 10,000 - - 850 908 1,758 - -1978 9,150 9,150 - - 850 831 1,681 - -1979 8,300 8,300 - - - 377 377 - -1980 8,300 8,300 - - - - - - -8.300 11981 - - X

* * * * * * THE FOLLOWING FIGURES ARE PROJECTED * * * * * *

* THIS COLUMN SHOWS THE AMOUNT OF ARITHMETIC IMBALANCE IN THE AMOUNT OUTSTANDING INCLUDING UNDISBURSED FROM ONEYEAR TO THE NEXT. THE MOST COMMON CAUSES OF IMBALANCES ARE CHANGES IN EXCHANGE RATES AND TRANSFER OF DEBTSFROM ONE CATEGORY TO ANOTHER IN THE TABLE.

06/12/81Table 4.2: NICARAGUA Page 4 of 6

SERVICE PAYMENTS, COMMITMENTS, DISBURSEMENTS AND OUTSTANDING AMOUNTS OF EXTERNAL PUBLIC DEE.T

PROJECTIONS BASED ON DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF DEC. 31. 1980DEBT REPAYABLE IN FOREIGN CURRENCY AND GOODS

(IN THOUSANDS OF U.S. DOLLARS)TYPE OF CREDITOR MULTILATERAL LOANS

TOTALYEAR DEBT OUTSTANDING AT T R A N S A C T I O N S D U R I N G P E R I O D OTHER CHANGES

: BEGINNING OF PERIOD

: DISBURSED INCLUDING COMMIT- DISBURSE- S E R V I C E P A Y M E N T S CANCEL- ADJUST-: CNLY UNOISBURSED MENTS MENTS ----------- :-----------:----------- LATIONS MENT *

PRINCIPAL INTEREST TOTAL(1) (2) (3) (4) (5) (6) (7) (8) (9)

1971 57.528 89.306 6.352 15,545 3,542 3,066 6,608 1,525 6951972 69,112 91.286 39,081 9,720 3,963 3,894 7,857 19 1,6111973 75,118 127,996 69,430 11,290 5,330 4,873 10,203 1,465 1,1191974 81,499 191,750 11,525 25,447 5,398 5,913 11,311 1,418 -1,6361975 101,623 194,823 48,814 36,794 5.510 6,025 11,535 2,825 -891976 132,740 235,213 48.236 35.497 5,950 8,122 14,072 732 2711977 162,812 277,038 79,977 53,597 7,101 9,713 16,814 581 8691978 209.571 350.202 40,773 36,032 6,248 10,951 17,199 628 1,9131979 239,695 386,012 114,060 79,723 8.788 12,906 21,694 1,313 39,7341980 350,372 529.705 150,460 85,993 16,306 27,630 43,936 70 139 11981 420,201 663,928 X

* * + * + * THE FOLLOWING FIGURES ARE PROJECTED * * * * * *

1981 420,201 663,928 - 49,002 31.937 25,730 57,667 - -851982 437.180 631.906 - 49,728 33,798 23,956 57,754 - 11983 453,110 598.109 - 45,866 37,433 21,905 59,338 - 51984 461,548 560.681 - 37,109 39,503 19,358 58,861 - -11985 459,153 521,177 - 26,698 25,752 16,800 42,552 - 21986 460,102 495,427 - 16,909 24,505 16,152 40,657 - 21987 452,508 470.924 - 10,769 24.385 15,249 39,634 - -71988 438,884 446,532 - 6,304 24,972 14.164 39,136 - 41989 420.219 421,564 - 1,262 24,632 12,976 37,608 - 21990 396,851 396,934 - 83 24.433 12,006 36,439 - -2

* THIS COLUMN SHOWS THE AMOUNT OF ARITHMETIC IMBALANCE IN THE AMOUNT OUTSTANDING INCLUDING UNDISBURSED FROM ONEYEAR TO THE NEXT. THE MOST COMMON CAUSES OF IMBALANCES ARE CHANGES IN EXCHANGE RATES AND TRANSFER OF DEBTSFROM ONE CATEGORY TO ANOTHER IN THE TABLE.

06/12/81Table 4.2: NICARAGUA Page 5 of 6

SERVICE PAYMENTS, COMMITMENTS, DISBURSEMENTS AND OUTSTANDING AMOUNTS OF EXTERNAL PUBLIC DEB

PROJECTIONS BASED ON DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF DEC. 31, 1980DEBT REPAYABLE IN FOREIGN CURRENCY AND GOODS

(IN THOUSANDS OF U.S. DOLLARS)TYPE OF CREDITOR BILATERAL LOANS

TOTAL

YEAR DEBT OUTSTANDING AT T R A N S A C T I 0 N S D U R I N G P E R I 0 D OTHER CHANGES: BEGINNING OF PERIOD

DISBURSED INCLUDING COMMIT- DISBURSE- S E R V I C E P A Y M E N T S CANCEL- ADJUST-ONLY UNDISBURSED MENTS MENTS ----------- ---------------------- : LATIONS MENT *

PRINCIPAL INTEREST TOTAL: (1) (2) (3) (4) (5) (6) (7) (8) (9)

1971 52,533 78,362 10,050 11,578 1,180 1.182 2,362 3 3281972 62,998 87,557 9,858 4,668 1,237 1,148 2,385 30 381973 66,443 96,186 30,769 19,396 1,293 1,531 2,824 - 1,6571974 84,947 127,319 46,479 23,554 1,810 2,402 4,212 1,692 1,8761975 107,694 172,172 43,722 15,831 2,589 2,913 S,502 397 -1,8071976 119,799 211,101 68,582 33,150 3,189 2,397 5,586 143 1.7461977 151,088 278,097 46,909 93,041 8,095 5,950 14,045 944 2,5891978 238,407 318,556 74,046 72,221 8,151 6,713 14,864 1,632 3,6711979 305,674 386,490 101,751 32,661 2,910 8,703 11,613 40,056 2.3171980 336,916 447,592 248,085 183,949 21,995 13,779 35,774 - -24,018 01981 476,976 649,664

* * * * * * THE FOLLOWING FIGURES ARE PROJECTED * * * * * *

1981 476,976 649.664 - 93,945 42,243 24,582 66,825 - -3,3061982 525,373 604,115 - 40,127 82,695 23,254 105,949 - -51983 482,799 521.415 - 27,558 37.029 20,420 57,449 - -91984 473,318 484,377 - 8.607 39,287 18,744 58,031 - -11985 442,635 445,089 - 1,458 35,560 16,577 52,137 - -21986 408,534 409,527 - 535 23,332 15,054 38,386 - 11987 385,737 386,196 - 386 23,456 13,978 37,434 - -61988 362,661 362,734 - 73 23,386 12,863 36,249 - -11989 339.347 339.347 - - 24,774 11,757 36,531 - -11990 314,572 314,572 - - 22,492 10,523 33,015 - 3

* THIS COLUMN SHOWS THE AMOUNT OF ARITHMETIC IMBALANCE IN THE AMOUNT OUTSTANDING INCLUDING UNDISBURSED FROM ONEYEAR TO THE NEXT. THE MOST COMMON CAUSES OF IMBALANCES ARE CHANGES IN EXCHANGE RATES AND TRANSFER OF DEBTSFROM ONE CATEGORY TO ANOTHER IN THE TABLE.

06/12/81Table 4.2: NICARAGUA Page 6 of 6

SERVICE PAYMENTS, COMMITMENTS. DISBURSEMENTS AND OUTSTANDING AMOUNTS OF EXTERNAL PUBLIC DEBT

PROJECTIONS BASED ON DEBT OUTSTANDING INCLUDING UNDISBURSED AS OF DEC. 31, 1980DEBT REPAYABLE IN FOREIGN CURRENCY AND GOODS

(IN THOUSANDS OF U.S. DOLLARS)TOTAL

YEAR DEBT OUTSTANDING AT T R A N S A C T I O N S D U R I N G P E R I O D OTHER CHANGES-: BEGINNING OF PERIOD

DISBURSED INCLUDING COMMIT- DISBURSE- S E R V I C E P A Y M E N T S CANCEL- ADJUST-: ONLY UNDISBURSED MENTS MENTS ----------- :-------------: LATIONS MENT *

PRINCIPAL INTEREST TOTAL: (1) (2) (3) (4) (5) (6) (7) (8) (9)

1971 155.327 222,344 44,313 57,360 23,702 8.445 32.147 3,880 9611972 188,571 240,036 112,104 67,582 21,030 11,226 32,256 324 1,5781973 235,325 332,364 216,889 149.124 51.073 18,584 69,657 4,095 2,8921974 334.215 496,977 186,630 145,097 20,759 29,680 50,439 3,110 3861975 459,777 660,124 187.175 160.011 20.293 35.924 56,217 3,222 -2,4911976 598,379 821,293 172,625 90,785 35,042 41,186 76,228 2,162 4.3091977 655,423 961,023 189,154 256,311 50.584 51,685 102,269 1,525 3,7361978 864,044 1,101,804 146,256 142,383 49,948 48,409 98,357 3,484 7,1731979 961,424 1,201,801 215,811 112,384 14,391 41,215 55,606 41,369 42,0551980 1,100,653 1,403,907 398,545 269,942 62,285 42,523 104,808 9,868 166.653 X1981 1,477,090 1.896,952 a\

* * * t * * THE FOLLOWING FIGURES ARE PROJECTED * * * * * *

1981 1,477,090 1,896,952 - 144,864 88,375 90.770 179,145 - -5,8031982 1,527,776 1,802,774 - 91.385 129,076 86,784 215.860 -- 51983 1,490,078 1.673,693 - 73.424 87,053 81,020 168.073 - -41984 1.476,444 1,586,636 - 45,716 102,623 75,691 178,314 - -21985 1,419,533 1,484,011 - 28,156 94,427 69,289 163,716 - -1986 1,353,266 1,389,584 - 17,444 83.142 106,814 189,956 - 31987 1,287,570 1,306,445 - 11,155 96,384 98,683 195,067 - -131988 1,202,327 1,210,048 - 6,377 108,914 88,267 197,181 - 21989 1,099,791 1,101,136 - 1,262 125,230 75,711 200,941 - 11990 975,824 975,907 - 83 137,974 60,811 198,785 - 2

* THIS COLUMN SHOWS THE AMOUNT OF ARITHMETIC IMBALANCE IN THE AMOUNT OUTSTANDING INCLUDING UNDISBURSED FROM ONEYEAR TO THE NEXT. THE MOST COMMON CAUSES OF IMBALANCES ARE CHANGES IN EXCHANGE RATES AND TRANSFER OF DEBTSFROM ONE CATEGORY TO ANOTHER IN THE TABLE.

Source: External Debt Division, Economic Analysis and Projections Department, IBRD

Table 4.3: NICARAGUA: DEBT, DISBURSEMENTS AND DEBT SERVICE

(Percentage growth at annual rates, in current US$)

Projected

1977-78 1978-80 1980-81 1981-85 1985-90High Low High Low High Low

Medium and Long Term Debt

Disbursements (gross) -44.4 52.9 21.7 -13.7 10.4 3.9 4.2 -8.3Debt Service - 4.0 22.9 8.5 8.5 22.0 11.5 13.3 7.2

Interest - 6.6 34.9 -5.6 - 5.6 14.6 7.7 11.0 4.5Amortization - 1.4 10.0 28.5 28.5 29.7 14.0 15.0 7.8

Debt, outstanding & disb.-/ 9.2 18.9 5.8 4.2 15.6 13.1 8.3 4.7 X

Memo Items:

Exports, GNFS 1.0 -16.1 30.3 30.3 22.6 17.2 14.9 13.1Imports, GNFS -14.1 11.7 -8.1 -11.8 16.3 12.4 12.3 10.4

International Price Index 19.6 13.3 9.0 9.0 7.7 7.7 6.0 6.0Gross Domestic Product - 4.6 3.0 18.8 18.3 14.5 10.6 12.4 10.0

a/ Including an estimate of the MLT private non-guaranteed debt, end of the year.

Sources: Central Bank, Ministry of Planning and Mission estimates.

Table 4.4: NTICARAGUA: SOME CREDITWORTHINESS INDICATORS

(All underlying series in millions of current US$)

Projected

1977 1978 1980P, 1981 1982 1985 1990High Low High Low High Low High Low

Medium and Long Term Loans

Debt Service Ratio /a 13.8 13.1 28.1 23.7 23.9 27.9 27.9 24.7 21.1 23.6 17.2Total Debt/Exports b/ 1.4 1.5 3.1 2.6 2.6 2.6 2.6 2.2 2.3 1.6 1.6Total Debt/GDP /c .50 .57 .76 .70 .69 .73 .70 .76 .76 .65 .60

Gross Disb./Debt Service 2.5 1.45 2.2 2.5 2.3 2.3 1.8 1.6 1.7 1.0 .8

OD

p/ - Preliminary.

a/ The debt service includes an estimate on the repayment of the (estimated)$50 million of private non-guaranteed debtthat is still being renegotiated.

b/ Ratio of tocal debt to exports of goods and non-factor services.

-C/ Ratio of total debt to GDP in current US$; the International Price Index is used for conversion to current prices.

Source: Table 4.3 and Mission estimates.

Table 5.1: NICARAGUA: CENTRAL GOVERNMENT CURRENT REVENUE; 1970-1981

(Millions of Cordobas)

CONCEPTS 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 !

Current Revenues 565.2 620.5 639.9 927.2 1,338.4 1,309.0 1,506.2 1,746.8 a 1,515.2 a/ 1,572.4 4,001.4 5,607.2

Tax Revenues 503.9 555.4 597.0 822.1 1,137.0 1,151.7 1,352.7 1,638.4 1,448.6 1,491.1 3,663.0 4,901.1

Direct Taxes 110.8 122.0 137.8 136.5 179.6 265.1 350.3 392.4 363.3 363.5 919.6 1,481.7

Income 55.1 63.0 71.3 72.6 103.2 175.0 245.8 274.5 270.1 190.9 300.4 598.9

Property 55.7 59.0 66.5 63.9 76.4 90.1 104.5 117.9 93.2 118.4 334.3 445.8

On Exports - - - - - - - - - 54.2 284.9 437.0

Indirect Taxes 392.7 433.4 459.9 685.6 957.4 886.6 1,002.4 1,349.3 1,173.8 1,248.8 2,853.4 3,419.4 co

Import Duties 169.4 170.4 175.6 217.2 361.9 345.2 367.3 452.7 376.4 353.5 1,005.1 1,004.4

Export Duties 4.9 4.9 4.5 131.4 121.8 6.9 6.7 41.0 7.4 6.9 0.7 0.7

Production, Consumption and 218.4 257.9 278.9 337.0 473.7 534.5 628.4 611.9 662.6 769.7 1,767.9 2,326.6other indirect taxes

Non-Tax Revenues 55.9 50.8 33.5 39.6 162.2 119.4 109.3 94.5 58.6 69.7 102.6 706.2

Other Internal Revenues 5.8 14.3 9.4 65.5 39.2 37.9 44.2 50.6 96.4 122.2 391.2 387.2

Transfers 1.0 9.4 4.3 50.1 20.1 14.9 12.5 13.9 8.0 11.6 356.2 350.0

Enmarked funds 4.8 4.9 5.1 15.4 19.1 23.0 31.7 36.7 a/ 88.4 a/ 110.6 a/ 35.0 a/ 37.2 a/

pl Preliminary

e/ Estimates

a/ Earmarked funds are not included in current revenues tota'-

Sources: Ministry of Finance and Mission estimates.

Table 5.2: NICARAGUA: CENTRAL GOVERNMENT CURRENT REVENUES IN CURRENT AND CONSTANTCORDOBAS, 1970, 1974-1975, 1978-1981

(Millions of Cordobas)

1970 1974 1975 1978 1979 1980 1981(Estimate) (Projection)

A. CURRENT VALUE

Current Revenues 565.2 1,338.4 1,309.0 1,603.6 1,682.9 4,001.4 5.607.2

Tax Revenues 503.5 1,137.0 1,151.7 1,448.6 1,491.1 3,773.0 4,901.1Direct Taxes (110.8) (179.6) (265.1) (364.4) (313.6) ( 919.6) (1,481.7)Indirect Taxes (392.7) (957.4) (886.6) (1,085.2) 1,177.5 (2,853.4) (3,419.4)Other Current Revenues 61.7 201.4 157.3 155.0 191.8 228.4 706.1 1

B. CONSTANT VALUE (1974 = 100) 0

Current Revenues 482.8 1.338.4 1,279.6 1,206.9 970.0 1,770.5 1,984.1

Tax Revenues 876.3 1,137.0 1,125.9 1,089.9 859.4 1,668.5 1,735.0Direct Taxes (192.6) (179.6) (259.1) (273.4) (180.7) (406.0) (525.0)Indirect Taxes (682.9) (957.4) (866.7) (816.5) (678.7) 1,202.6) (1,210.0)Other Current Revenues 107.6 211.4 153.8 116.6 110.6 100.0 249.0

C. CURRENT REVENUE/GDP RATIO (%)

10.4 12.6 11.8 10.7 11.2 18.8 19.3

Sources: Ministry of Finance and Mission estimates.

Table 5.3: NICARAGUA: CENTRAL GOVERNMENT CURRENT EXPENDITURES IN CURRENT ANDCONSTANT CORDOBAS, 1970, 1974, 1975, 1978-1981

(Millions of Cordobas)

Concepts 1970 1974 1975 1978 1979 1980 1981Concepts (Preliminary) (Projected)

A. CURRENT VALUE

Current Expenditures 485.6 885.o 1,085.3 1,979.4 2,574.9 4,649.3 6712.0Consumption Expenditure 360.4 600.0 688.6 1,316.9 1,935.5 3,347.8 4880.0Wages & Salaries 264.2 387.5 442.0 701.9 1,041.1 1,536.1 1958.5Goods & Services 96.2 213.5 246.6 615.0 894.4 1,811.7 2921.5

Interest on Public Debt 17.1 86.3 148.1 300.3 401.9 350.6 936.1Internal 5.4 10.1 9.7 53.5 186.3 250.0 372.9External 11.7 76.2 138.4 246.8 215.6 100.6 563.2

Current Transfers 108.1 198.5 248.6 362.2 237.1 951.1 895.8To the Private Sector 24.8 43.5 52.8 104.2 61.8 70.0 57.5To the Public Sector 74.2 149.3 187.3 243.0 173.2 875.8 832.0To the External Sector 9.1 6.7 8.5 15.0 2.1 5.3 6.3

B. CONSTANT VALUE (Cordobas of 1974)

Current Expenditures 844.2 885.0 1,060.8 1,489.4 1,484.1 2,054.1 2,376.1Consumption Expenditures 626.8 600.0 673.1 990.9 1,115.6 1,481.3 1,727.6Wages & Salaries (459.4) (387.5) (432.1) (528.1) (600.2) (679.7) (693.3)Goods & Services (167.4) (213.5) (241.0) (462.8) (515.4) (801.6) (1,034.3)

Interest on Public Debt 29.8 86.3 144.8 226.0 231.6 152.0 368.9Internal (9.4) (10.1) (9.5) (40.3) (107.3) (108.4) (146.8)External (20.4) (76.2) (135.3) (185.7) (124.3) ( 43.6) (221.8)

Current Transfers 188.0 198.5 243.0 272.4 136.7 420.8 352.7To the Private Sector (43.1) (43.5) (56.6) (78.4) (35.6) (40.0) (22.6)To the Public Sector (129.1) (149.3) (183.0) (182.8) (99.9) (387.5) (327.6)To the External Sector (15.8) (6.7) (8.4) (11.2) (1.2) (2.3) (2.5)

C. CURRENT EXPENDITURE/GDP Ratio (M)

Current Expenditures 8.9 8.3 9.7 13.2 17.2 21.8 23.1

Sources: Ministry of Finance and Mission estimates.

Table 5.4: NICARAGUA - CENTRAL GOVERNMENT CAPITAL EXPENDITURES 1/ 1970, 1974, 1978-1981

(Millions of Cordobas and percentages)

1970 1974 1978 1979 1980 1981(Estimated) (Projected)

A. CURRENT TERMS

Capital Expenditures 164.5 804.7 821.3 300.6 1694.4 1607.8Fixed Investment 110.5 209.2 402.3 129.5 971.8 1,312.9Purchase of Exist. Assets 0.6 16.9 22.3 5.4 3.4 3.0Capital Transfers 53.4 145.4 184.7 48.1 479.0 288.9Lending - 433.2 211.5 117.6 240.2 3.0

B. CONSTANT TERMS

Capital Expenditures 286.0 804.2 617.9 173.3 749.7 634.1Fixed Investment 192.1 209.2 302.9 74.7 430.0 517.6Purchase of Exist. Assets 1.0 16.0 16.8 3.1 1.5 1.2Capital Transfers 92.9 145.4 139.0 27.7 211.9 114.1Lending - 432.3 159.2 67.8 106.3 1.2

C. PERCENTAGE DISTRIBUTION

Capital Expenditures 100.0 100.0 100.0 100.0 100.0 100.0Fixed Investment 67.2 26.1 49.0 43.1 57.4 81.6Purchase of Exist. Assets 0.3 2.1 2.7 1.7 0.2 0.2Capital Transfers 32.5 18.1 22.5 16.0 28.2 18.0Lending - 53.7 25.8 39.2 14.2 0.2

D. CAPITAL EXPENDITURE RATIOS

As % of Total Expenditures 25.3% 47.5% 28.6% 10.4% 26.1% 19.3%As % of GDP 3.0% 7.5% 5.5% 2.0% 7.9% 5.5%

1/ Excludes amortizations,

Sources: Ministry of Finance and Mission estimates.

Table 5.5: NICARAGUA: FUNCTIONAL DISTRIBUTION OF CENTRAL GOVERNMENT

EXPENDITURES

(Percentages)

1980 (first three quarters) 1981 (budgeted)1977 - 1978 average Millions of Cordobas Millions of CordobasMill. 0 % Current Constant 1978 % Current Constant 1978 %

Social Area 1/ 528.5 17.7 970.8 570.4 26.0 2,655.9 1,248.5 29.2Productive Area 2/ 263.4 8.8 346.7 203.9 9.2 410.4 193.0 4.6Infrastructure 3/ 640.6 21.4 523.6 308.3 14.0 1,514.4 711.2 18.3

Commerce, Tourism a/ a/ 21.1 12.4 0.5 245.1 115.3 2.8Regional Development 4/ - - - - - 16.3 7.7 0.2Economic/Financial Area 5/ 310.3 10.4 215.3 126.7 5.9 343.8 161.7 3.9Loans to Public Enterprises - - 203.7 119.9 5.5 - - -Legislature, Judicial and

General Government 341.4 11.4 608.5 357.8 16.3 1,002.8 475.6 11.5 '

Defense Ministry 347.6 11.6 467.5 274.9 12.5 945.0 442.5 10.7Public Debt Service 557.5 18.6 379.0 222.8 10.1 1,409.3 662.9 16.0Contingency Funds - - - - - 250.0 117.6 2.8

TOTAL 2,989.3 100.0 3,735.4 2,197.1 100.0 8,793.0 4,135.9 100.0

1/ Health, Education, Cultural Affairs and Public Welfare Ministries; Subsidies for ENABAS and Sewerage Institute2/ Agriculture and Industry Ministries; Natural Resource Institute3/ Transport, Public Works and Housing Ministries; Subsidy to Railroads

4/ Secretariat for Municipal Affairs and Atlantic Coast Institute and Tourism Institute.5/ Planning, Finance, and Labor Ministries; Reconstruction Fund; Census Bureau

a/ Included with Economic/Financial Area.

Sources: 1972-1976 World Bank Report No. 2061-NI1977-1981 Unpublished Nicaraguan Government Statistics, Ministry of Finance.

Table 5.6: NICARAGUA: SUMMARY OPERATIONS OF THE CENTRAL GOVERNMENT. 1970-1981

(Millions of Cordobes)

CONCEPTS 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 / 1981-t/

Current Revenues 565.2 620.4 639.6 916.3 1,322.8 1,308.9 1,506.2 1,783.4 1,603.6 1,683.8 4,001.3 5,607.2

Current Expenditures 485.6 513.3 523.7 613.8 885.6 1,085.3 1,210.2 1,539.1 1,979.4 2,574.9 4,649.3 6,712.0

Consumption Expenditure 360.4 383.8 383.3 446.5 600.0 688.6 869.1 970.4 1,316.9 1,935.5 3,347.8 4,880.0

Wages and Salaries 264.2 278.7 279.2 312.2 387.5 442.0 546.8 580.3 701.9 1,041.1 1,536.1 1,958.5Goods and Services 96.2 105.1 104.1 134.3 213.3 246.6 322.3 382.1 615.0 394.4 1,811.7 2,921.5

Interest on Public Debt 17.1 18.3 37.7 64.2 86.3 148.1 154.7 244.3 300.3 401.9 350.6 936.1

Internal 5.4 5.9 5.8 15.7 10.1 9.7 17.3 20.6 53.5 186.3 250.0 372.9External 11.7 12.4 31.9 48.5 76.2 138.4 137.4 223.7 246.8 215.6 100.6 563.0

Current Transfers 108.1 111.2 102.7 103.1 198.5 248.6 186.4 324.4 362.2 237.1 951.1 895.8

To the Private Sector - 24.8 30.0 33.1 33.6 43.5 52.8 66.2 74.0 104.2 61.8 70.0 57.5To the Public Sector 74.2 67.8 57.4 65.4 148.3 187.3 108.2 236.1 243.0 173.2 875.8 832.0To the External Sector 9.1 13.4 12.3 4.1 6.7 8.5 12.0 14.3 15.0 2.1 5.3 6.3

Savings on Current Account 79.6 107.1 115.9 302.5 437.2 223.6 296.0 244.3 -375.8 -891.5 -648.3 -1,104.8

Capital Revenues 11.7 23.7 4.4 9.6 26.8 14.2 21.1 12.3 17.7 212.5 146.0 438.0

Capital Expenditures 164.5 278.7 340.5 461.3 804.7 897.3 813.1 1,301.0 821.3 300.6 1,694.4 1,607.8

Fixed Investment 110.5 136.8 115.2 129.0 209.2 347.1 370.2 921.1 402.3 129.5 971.8 1,312.9Purchase of Existing Assets 0.6 1.0 2.3 8.6 16.9 89.9 21.6 9.3 22.8 5.4 3.4 3.0Capital Transfers 53.4 140.9 150.7 92.7 145.4 223.9 289.3 241.9 184.7 48.1 473.0 283.0Lending - - 72.3 231.0 433.2 236.4 132.0 128.7 211.5 117.6 240.2 3.0

Deficit (-) or Surplus -73.2 -147.9 -22' .2 -149.2 -340.7 -659.5 -496.0 -1,044.4 -1,179.4 -979.6 -2,196.7 -2,274.6

Financing 73.2 147.9 220.2 149.2 340.7 659.5 496.0 1,044.4 1,179.4 979.6 2,196/7 2,274.6

Net Foreign Borrowing 62.0 91.0 206.8 382.0 498.2 376.4 369.1 978.8 64.6 202.3 n.a.

Disbursements 82.8 113.4 230.0 419.5 550.1 448.3 470.4 1,151.8 377.1 245.7 1,241.7Amortizations (-) 20.8 22.4 23.2 37.5 51.9 71.9 101.3 173.0 312.5 43.4 88.7 n.a.

Net Internal Borrowing 11.2 56.9 13.4 -232.8 -157.5 283.1 126.9 65.6 1,114.8 777.3 n.a.

Central Bank Net 22.2 39.9 40.9 - 3.5 -142.7 213.8 42. 7 16.4 649.4 1 506.0Others - 33.3 - 3.8 191.8 13.6 115.0 139.1 113,9 534.4 972.0Amortizations (-) 11.0 16.3 23.7 37.5 28.4 -45.8 54.9 64.7 69.0 100.0 n.a.

Memorandums Items:

Savings/Current Revenue (%) 14.1 17.3 18.1 33.0 33.1 17.1 19.7 13.7 -23.4 -53.0 -19.8 n.a.Savings/Capital Expenditures (%) 48.4 38.4 34.0 65.6 54.3 24.9 36.4 18.8 -45.8 -296.5 -68.7 n.a.

p/ Preliminary.e/ Projection.a/ Includes e 260 million of subsidies received by ENABAS,

Sources: Ministry of Finance and Mi-sion estimates.

Table 5.7: NICARAGUA - PUBLIC INVESTMENT,ACTUAL 1977, PRELIMINARY 1980 AND 1981 PROJECTION

(Millions of Cordobas-and percentages)

1977 1980 1981Executed In Executed In a/

Planned 1st Semester Full YearP! Planned -Mill.0 % Mill. ¢ x Mill. ¢ % Mill. 0 % Mill I. f %

Productive Sectors 60 2.2 335 15.0 504 43.0 911 35.0 1450 35.8

Economic Infrastructure 2184 80.7 1070 48.0 352 30.0 911 35.0 1600 39.4

Social Infrastructure-/ 465 17.1 825 37.0 310 27.0 782 30.0 1006 24.8

TOTAL 2709 100.0 2230 100.0 1166 100.0 2604 100.0 4056 100.0

Public Investment/GDP 10.9 11.5-/ 12.2 12.7 Ln

Private Investment/GDP 11.2 2.1 3.2 3.5

a/ Assuming that during 1981 the ratio between the value of investments completed in individual sectorsto those planned therein will be the same as that between overall investment to be implemented (accordingto the expectations of Nicaraguan authorities)and the cost of the total investment program.

b/ Includes also "others."

c/ Excludes change in stocksd/ As Percentage of 1980 GDP as projected when plan was drawn up (¢ million 19,504).D/ Preliminarv

Sources: 1977 Investment, IBRD document 2061-NI, page 49.1980 Investment, Programa de Reactivacion,for originally planned investments for entire year;

Unpublished MIPLAN figures,for first semester executionDirectivas para programa 1981, unpublished MIPLAN document for second semester projections.

Table 5.8: NICARAGUA: 1981 PUBLIC INVESTMENT PROGRAM - CARRY-OVER AND NEW PROJECTS

(Millions of Cordobas)

Machine&Sectors Total Carry-Over New Equipment Construction Other.

1. DIRECTLY PRODUCTIVE 1,450.1 288.6 1,161.5 229.2 703.5 517.4

Ministry of Agriclto-re - Agriculture Reform Institute (MIDA/INRA) 993.7 158.6 835.1 118.9 437.7 437.1

Mining and Power Authority (INMINER) 92.0 15.0 77.0 34.0 24.0 34.0

Domestic Trade Ministry (MICOIN) 48.7 - 48.7 37.0 11.7

Public Sector Indostry Corporation (COIP) 131.9 17.4 114.5 22.1 109.8

Fisbery Institute (INPESCA) 110.6 38.5 72.1 1.7 92.3 16.6

Forestry lnstitute (IMENA/CORFOP) 50.0 49.4 0.6 - 22.2 27.8

Tourism Institute (COTUR) 23.2 9.7 13.5 15.5 5.8 1.9

II. ECONOMIC INFRASTRUCTURE 1,599.6 1,040.7 558.9 747.5 690.8 161.3

Electricity Authority (INE) 720.1 665.8 54.3 167.7 419.4 133.0

Construction Ministry (MICONS) 385.7 277.3 108.4 360.7 16.0 9.0

Transportation Ministry (MITRANS) 430.4 86.5 343.9 202.6 212.8 15.0

Telecom- unication Ministry (TELCOR) 63.4 11.1 52.3 16.5 42.6 4.3

III. SOCIAL INFRASTRUCTURE 995.2 661.4 333.8 701.4 229.2 64.6

Public Health Ministry (MISALUD) 225.7 182.5 43.2 137.7 79.3 8.7

Education Ministry (MED) 177.7 130.2 47.5 116.9 49.1 11.7

Council of Higher Educatio- (CNES) 60.4 28.1 32.3 25.7 34.7

Housing Ministry (MINVAH) 259.5 175.3 84.2 239.4 20.1 -

Managua Reconstruction Authority (.1 R M) 92.3 36.4 55.9 87.7 4.6

Urban Affairs Secretary (SAM8) 19.8 3.6 16.2 13.6 6.2

Water and Sewerage Institute (INAA) 121.8 89.8 32.0 55.3 23.8 42.7

Social Security Institute (INSS) 23.5 6.5 17.0 16.5 5.6 1.4

Cultural Affairs Ministry (MICULTURA) 6.5 3.8 2.7 4.3 2.1 0.1

Ministry of Social Welfare (N B S) 5.2 5.2 - 4.3 0.9

Transport Ministry (MITRA) 2.8 - 2.8 - 2.8 -

IV. OTHER 10.9 0.7 10.2 0.2 6.7 4.0

Foreign Toads Ministry (MICOEX) 10.9 0.7 10.2 0.2 6.7 4.0

TOTAL 4,055.8 1,991.4 2,064.4 1,678.3 1,630.2 747.3

Structural % - Distributi-o 000.0 49.1 50.9 41.4 40.2 18.4

So-rces: Public Investment Program for 1981, Ministry of Planning.

- 97 -

Table 6.1: NICARAGUA - SUMMARY OF THE FINANCIAL SYSTEM ACCOUNTS1979 -1980

(Millions of Cordobas)

June Dec. June Dec.1979 1979 1980 1980

Net international reserves -1,571.5 -2,004.7 -2,333.8 -3,945.0

Foreign assets 599.5 1,482.3 1,683.3 808.0Short-term foreign liabilities -2,171.1 -3,487.0 -4,017.1 -4,'53.0

Net domestic assets 9,566.0 11,563.3 13,428.3 17,101.9

Net credit to public sector 1,186.3 1,802.8 2,562.8 3,310.7Central Government (1,152.9) (1,522.4) (1,559.5) (2,521.5)Rest of public sector (33.4) (280.4) (1,003.3) (789.2)

Credit to private sector and APP 7,785.5 8,643.4 9,785.2 12,008.6Other (net) 594.2 1,117.5 1,080.3 1,782.6

Medium- and long-term foreignliabilities 3,317.6 3,841.1 4,599.0 6,033.4

Liabilities to private sector 4,676.9 5,717.5 6,535.0 7,123.5

Money 2,213.5 3,508.1 4,151.4 4,503.2Currency (1,006.6) (1,571.5) (1,787.2) (1,968.8)Demand deposits (1,206.9) (1,936.6) (2,364.2) (2,534.4)

Quasi-money 2,463.4 2,209.4 2,383.6 2,620.3

Sources: Central Bank and Mission estimates.

- 98 -

Table 6.2: NICARAGUA: SHORT AND LONG TERM CREDIT OF THEFINANCIAL SYSTEM, 1977, 1980

(Million of Cordobas and percentages)

1977 1980Portfolio a/ Net Portfolio NetEnd of Year Disbursements End of Year Disbursements

Commercial I,1_IQ 132 1,107 -106(% of GDP) ( 8%) (1%) (5%) _

Short-term (% of GDP) (1%) (3%)Long-term (% of GDP) - (2%) _

Agriculture 1,441 164 3,846 2,009(% of Agri. GDP) (40%) (5%) (78%) (41%)

Short-term (% of Agri. GDP) (4%) (60%) (35%)Long-term (% of Agri. GDP) (1%) (18%) (6%)

Cattle 754 64 939 274(% of Agri. GDP) (21%) (2%) (19%) (6%)

Short-term (% of Agri. GDP) (1%) (6%) (2%)Long-term (% of Agri. GDP) (1%) (13%) (4%)

Industrial 1,398 -3 3,222 743(% of Manufacture GDP) (45%) - (61%) (14%)

Short-term (% of Man. GDP) - (35%) (8%)Long-term (% of Man. GDP) - (26%) (6%)

Housing/Construction 1,476 245 1,734 183(% of Construction GDP) (208%) (34%) (364%) (38%)

Short-term (% of Con. GDP)Long-term (% of Con. GDP) (34%) (364%) (38%)

Other 781 126 137 53(% of GDP) ( 5%) (1%) - _

Short-term (% of GDP)Long-term (% of GDP) - -

Total Short-Term N.A. 359 5,827 1,890(% of GDP) (2%) (27%) (9%)

Total Long-term N.A. 369 5,159 1,265(% of GDP) (2%) (24%) (6%)

Total Credit 7,039 728 10,987 3,155(% of GDP) (48%) (5%) (51%) )15%)

a/ Breakdown between short-term and long-term not available for end of year portfolio 1977.

Source: Central Bank.

Table 6:3:INTEREST RATE STRUCTURE 1980-1981

Interest Rate Structure for 1980 Interest Structure after April 1. 1981

Lending Rates Annual Interest Lending Rates Annual Interest Rates (%)

Rates (%) Short Term Long Term

Short Term (less than 18 months) Agriculture 17 16- priority activity or enterprise 14 Cattle 14 12- medium priority 15 Industrial 18 17- others 17 Commercial 18 17

Personal 18 1/ -Longer Term Housing 16

-priority activity or enterprise 12-medium priority 14 Special Programs-others 15 ENABAS 12 -

Small Urban Enterprise 12-13Special Programs (such as rural credit) 8 Rural Credit

individuals 13service associations 10production associations 8

FENT-FSI 2/ 16 15Agro-Industry 16 15External Commerce 3/ 19

Deposit Rates Deposit Rates

Savings 7 Savings 8Time Deposits, Certificates, etc. Time Deposits, Certificates, etc.

3 to 6 months 7.5 3 to 6 months 96 to 12 months 8 6 to 12 months 10I to 2 years 9 1to 2 years 112 to 3 years 10 2 to 3 years 123 to 4 years 11 3 to 4 years 134 years and over 12 4 to 5 years 14

5 years and over 16

1/ To be applied to the original balance of loan. The equivalent rate in terms of "outstanding balance" calculations is approximately32%.

2/ "Fondo de Exportaciones No Tradicionales" and "Fondo de Sustitucion de Importaciones".

3/ Will be revised in August, 1981.

Source: Central Bank.

Table 7.1: NICARAGUA - AREA, PRODUCTION AND YIELDS OF MAJOR CROPS, CROP YEARS 1969/70-1979/80

(Thousands of manzanas, thousands of quintales and quintales/manzana)

1969/70 1970/71 1971/72 1972/73 1973/74 1974/75 1975/76 1976/77 1977/78 1978/79 1979/80

Cotton: Area Harvested 155.1 136.3 156.1 210.9 259.4 254.4 204.6 283.0 303.4 248.2 54.6

Production 1,488.5 1,711.5 2,231.4 2,303.7 3,173.7 2,670.0 2,396.8 2,557.0 2,673.2 2,466.2 474.1

Yield 9.6 12.6 14.3 10.9 12.2 10.5 11.7 9.0 8.8 9.9 . 8.7

Sesame: Area Harvested 16.4 14.0 11.0 7.3 6.1 6.5 9.3 8.3 8.6 9.0 20.2

Production 160.0 145.6 101.2 78.1 74.4 68.4 85.8 75.8 100.7 126.0 181.9

Yield 9.8 10.4 9.2 10.7 12.2 10.5 9.3 9.2 11.7 14.0 9.0

Rice: Area Harvested 36.9 47.7 48.3 42.6 35.6 46.8 42.2 30.0 35.0 39.4 27.2

Production 1,018.9 151.5 1,183.8 1,060.6 1,121.7 1,469.3 1,223.8 825.0 1,050.0 1,300.2 816.0

Yield 27.6 24.1 24.5 24.9 31.5 31.4 29.0 27.5 30.0 33.0 30.0

Coffee: Area Harvested 124.3 120.1 118.4 118.6 118.9 119.0 120.0 120.0 120.0 .135.0 140.0

Production 737.1 856.9 913.3 762.5 797.7 890.7 1,068.2 1,287.5 1,200.0 1,415.0 1,224.0

Yield 5.9 7.1 7.7 6.4 6.7 7.5 8.9 10.7 10.0 10.5 8.7

Sugarcane:Area Harvested 42.7 45.8 44.0 43.1 44.6 51.5 58.7 59.6 57.4 59.3 53.1

Production 39,548.0 42,174.6 38,650.0 35,066.1 39,132.0 45,852.0 58,208.2 54,992.0 54,681.8 58,968.4 47,675.3

Yield 926.2 920.8 878.4 813.6 877.4 890.3 991.6 922.7 952.8 944.4 897.8

Beans: Area Harvested 58.0 66.6 69.5 57.0 67.1 93.0 80.2 96.5 88.0 95.0 75.0

Production 689.3 790.2 819.0 622.3 742.7 1,012.7 962.4 1,177.3 894.9 1,206.5 862.5

Yield 11.9 11.9 11.8 10.9 11.1 10.9 12.0 12.2 10.2 12.7 11.5

Maize: Area Harvested 261.4 299.0 294.4 244.4 292.7 374.0 298.3 323.8 303.2 325.0 240.0

Production 4,039.7 4,126.2 4,033.3 3,171.0 4,156.3 4,414.0 4,176.2 4,371.3 3,942.0 5,525.0 3,750.0

Yield 14.4 13.8 13.7 13.0 14.2 11.8 14.0 13.5 13.0 17.0 15.6

Sorghum: Area Harvested 68.1 59.1 61.7 54.0 59.8 79.3 85.4 80.0 62.0 73.0 67.5

Production 1,127.0 977.0 1,004.3 820.7 961.0 1,127.6 1,366.4 1,200.0 930.0 1,387.0 1,350.0

Yield 16.5 16.5 16.3 15.2 16.1 14.2 16.0 15.0 15.0 19.0 20.0

Tobacco: Area Harvested 1.5 1.6 1.7 1.4 1.9 2.4 2.7 2.4 2.5 2.7 2.1

Producton 40.1 45.4 44.4 39.3 47.9 64.7 66.7 58.6 63.0 70.8 60.2

Yield 26.7 28.4 26.1 28.1 25.2 27.0 24.7 24.4 25.2 26.2 28.7

Sources: Ministry of Planning and Mission estimates.

Table 7.2: NICARAGUA: AGRICULTURAL AREA PLANTED AND PRODUCTION: SELECTED PRODUCTS

(Percentage growth rates)

Product Average Annual 1979/80 1980/81 1980/81Growth Rate Compared to Compared to Compared to

1969/70 - 1971/72 1976/77 - 1978/79 1976/77-1978/79 1979/80to 1976/77 - 1978/79 Average Average

Area Production Area Production Area Production Area Production

Cotton 8.1 4h5 -80.4 -81.5 -51.5 -36.8 +146 +242.2Coffee 0.4 5.7 +7.2 -5,9 + 7.8 - 2.9 -3.7 -- +3.2Sugar Cane 3.6 4.3 -9.7 -15.2 + 4.8 - 9.4 +16.0 + 6.8Sesame -5.7 -3.6 +135.0 +80.2 +283.7 +102.4 +53.3 + 12.1Tobacco .6.0 5.0 -16.0 -6.1 + 24.0 + 37.0 +47.6 + 45.8

Sub-total 4.6 - -42.5 -36.0 - 22.4 - 10.2 +36.0 + 9.1 o

Maize 1.4 1.6 -24.4 -18.7 - 19.6 - 15.8 + 6.2 + 3.6Beans 4.7 4.5 -19.5 -21.1 - .2 - 22.7 +22.7 - 2.0hice -3.0 -0.7 -21.4 -22.9 + 56.9 + 28.9 +98.5 + 57.3Sorghum 1.6 1.6 -5.9 +15.2 + 7.4 + 72.3 +14.1 + 49.6

Sub-total 9.7 - -20.7 -17.0 - 7.4 + 2.2 +16.9 + 19.7

Total Crops 4.7 31.2 -32.8 - 14.4 - 8.7 +24.5 + 10.4

Cattle Slaughter 1/ 3.3 +24.0 o + 3.0 -17.0Milk Production 27 2.9 -16.5 - 11.6 + 5.9Pig Slaughter 2F_ n.a. -15.6 - 13.1 + 3.0Chicken Slaughter 2/ n.a. -31.4 + 6.9 +55.8

Value of AgriculturalProduction 4.5 -23.3 - 9.8 +17.4

1/ Calendar years (1968-70 to 1975-77; 1978/79 Average; 19bU/81 Average)

2/ Calendar years (1976-78; 1979; 1980)

Sources: Table 7.3 and published price series, Ministry of Agriculture.

Table 7.3: NICARAGUA: AGRICULTURAL PRODUCTION VOLUME INDICES

(Thousands of manzanas, thousands of quintales and quintales/manzana)

Average 1976/77 - 1978/79 1979/80 P1 1980/81 e/

Area Production Yield Price Value Area Production Yield Value jLreA Production Yield Value

(000 as) (000 qq) (qq/sz) (t/qq) (Mill.0 at current (000 mz) (000 qq) (qq/mz) (Mill. 0 of 1976 - 78) (000 mz) (000 qq) (qq/iz) (million ) ef 1978)prices)

Cotton (lint basis) 278.2 2565.5 9.2 414 1062.1 54.6 474 8.7 196.2 134.8 1622 12.0 671.5

Cottoseed - 4.1914.2 15.1 34 142.6 - 729 13.4 104.0 - 2831 18.9 96,3

Sugarcane 58.8 56214 956 3.30 185.5 53.1 47675 898 157.3 61.6 50941 824 168.1

Coffee 125.0 1300.8 10.4 906 1178.5 140 1224 8.7 1108.9 134.8 1263 9.4 1144.3Bananas 3.5 3400 - 14.5 49.6 3.6 2720 756 39 4 4.1 2120 517 30.7Tobacco, black 0.9 26.0 29 923 24.0 o.8 27.2 32.9 25.1 1.4 35 24.8 32.1

Sesame Seed 8.6 100.8 11.6 482 48.6 20.2 182 9.0 87.7 33 204 6.2 98.3

Sub-total 475.G 2690.9 272.3 - 1718.7 369.7 2241.3

MaIze 317.3 4612.8 14.5 51.2 236.2 240.0 3750 15.6 192.D 255 3885 15.2 198.9 °Beans 93.2 1092.9 11.7 129.7 141.7 75.0 862 11.5 111.8 93 845 9.1 109.6Rice (milled) 34.8 1058.4 30.4 101.2 107.1 27.2 816 30.0 82.6 54 1365 25.3 138.1Sorghum 71.7 1172.3 16.4 43.3 50.8 67.5 1350 20.0 58.5 77 2020 26.2 87.5Tobacco, bright 1.6 38.1 23.8 420 16.0 1.3 33.0 25.4 13.9 1.7 53 31.2 22.3

Sub-total 518.6 551.8 411M. 458.8 480.7 556.4

Cattle (000 head) _ - 361 - 1228 443.3 - 448 - 625.0 - 372 - 518.9

Pigs (000 head) - 237 - ,r 385 91.2 - 200 - 77.0 206 - 79.3Chickens (Mill. lbs) 2/ - 17.5 - v 2.7 47.2 - 12.0 - 32.4 _ 18.7 - 50.5Eggs (Mill. dozen)2/ - 37.5 - 4. 150.0 - 25.0 - 100.0 o 25.0 - 100.0Milk (Mill. litersT - 449 - 1.20 538.8 - 375 - 450.0 - 397 - 476.4

1270.5 - 1284.4 1225.1

Total Above 992.6 4513.2 683.3 3461.9 850.4 4022.8

/ Average for CY 1975-77; 1978-79; 1980-81.

2/ Calendar years 1978, 1979, 1980.

a/ 1978-79 average.

b/ Average "pool".

p/ Preliminary.

e/ Estimates.

Sources: Published and unpublished official data, Ministry of Agriculture.

Table 7.4: ESTIMATED PUBLIC SECTOR (APP) PARTICIPATION IN AGRICULTURAL PRODUCTION, 1980

(Millions of Cordobas and percentages)

Value AddedProduct of Total Production APP Value Added APP Particioation

(Mill. ) (Mill. e) (Percent)

g.ugar Cane 3°4.9 131.1 43Cotton (ginned) 337.9 50.7 15Coffee (beans) 1,477.4 177.1 12Tobacco, dark 52.1 62.1 100

br_ht 23.0 3.0 13Rice (milled) 196.1 96.1 49Cottonseed 4r.3 5-*o 15MLaize 317.6 28.6 9Beans 209.1 35.5 17 1Sorghum 89.7 23.3 26 C

Other Crops 168.8 - -

Total Crops 3,226.9 613.7 18

Beef Cattle 1,193.8 95.5 8Chicken - Eggs 143.4 18.6 13Other Livestock 144.5 - -

Total Livestock 1,503.0 120.2 8

Total Estimated Agricultural GD? 4,729.9 700.2 15

Forestry 33.3 23.7 52Fishing 135.8 85.9 64

Total Primary 4,904.0 811.6 17(except mining)

Sources: Ministry of Planning and Mission estimates.

Table 7.5: NICARAGUA: CHANGES IN PRODUCER AND CONSUMER PRICE INDICES OFPRINCIPAL AGRICULTURAL COMMODITIES

Annual Averages1972-78 Annual Rate 1978 to 1979 1979 to 1980 p/

Conmodity Producer Consumer Producer Consumer Producer Consumer

(%) (%) (%) (%) (%i) (%)

Rice 8 13 72 55 8 -12.0Iaize 5 7 141 69 7 26.6Beans 10 9 43 34 9 7.3Sorghum 10 - 42 - 15 -Eggs and MilkProducts - 7 60 12.5

Sub-Total 8 - 46 9 -

Tobacco 2 n.a. 25 n.a. 17 (40.o0)Cotton 10 - 19 - 51 -Coffee 24 17 -21 5 65 18Sugar Cane,Sugar 9 13 20 13 6 4

Beef 7 9 33 47 8 92Shrimp 6 - 60 - 35 -

Sub-Total 13 23 - 39

All PrincipalCormodities 12 9 27 47 33 23

LI Preliminary.

a/ October 1979 to October 1980.

Sources: Computed from published and unpublished data of the Ministry of Planning and the

Statistics and Census Institute.

Table 7.6: NICARAGUA: COMPARISON OF MINIMUM WAGES FORAGRICULTURAL WORKERS AND CONSUMER PRICE INDICES, 1973 - 1980

Minimum 1/ Percent Increase ofWage Percent Increase- Consumer Price Index

(Cordobas/Hour Day) Current Cumulative Current Cumulative

Sept. 9, 1973-April 30, 1975 10.80

May 1, 1977-April 30, 1979 15.20 40.7 40.7 37.9 c/ 37.9

May 1, 1979-May 31, 1980 21.20 a/ 39.5 96.3 34.5 d/ 85.5 t

June 1, 1980-Present 25.30 b/ 19.3 134.3 60.8 e/ 198.2

a/ Pacific Region

b/ Increase of ¢ 4.1 per day of all time and piece wages equivalent to ¢ 1,200 per month or less applied to

previous minimum wage.

c/ December 1973 to average, 1977.

d/ To May 1979.

e/ To June, 1980.

1/ Between beginning dates of each period

Sources: Official government records and the Statistics and Census Institute.

- 106 -

Table 8.1: GROSS VALUE OF PRODUCTION IN MANUFACTURING SECTOR, 1977-1980

(Millions of current Cordobas)

1977 1978 1979 1980 Y/

Food 3,077.7 3,392.5 3,969.2 4,485.9

Beverages 536.1 565.8 654.1 1,260.3

Tobacco 181.1 197.1 223.1 384.9

Textiles 330.3 328.7 298.5 363.1

Footwear and Carment 239.8 225.0 181.6 386.8

Wlood and Cork 217.1 179.2 153.5 194.9

Furniture 52.7 55.5 54.0 51.7

Paper and Paper Products 96.8 114.2 115.2 168.1

Printing 96.6 90.7 98.2 150.0

Leather and Leather Products 55.0 66.0 81.1 117.0

Rubber Products 19.6 21.5 23.7 59.7

Chemicals 979.0 1,074.9 1,111.0 1,417.6

Petroleum Products 615.9 568.3 721.7 1,535.2

Non-Metallic Mfir.erals 260.8 235.4 188.6 329.5

Metallic Products 238.5 257.1 217.0 427.7

Machinery 127.4 138.9 122.4 105.3

Transport Material 14.9 15.8 15.8 18.5

Other 191.3 217.3 230.0 265.4

TOTAL 7,330.6 7,743.9 8,458.7 11,721.6

*p] Preliminary

Source: Ministry of Planning,

Table 8.2: GROSS VALUE OF PRODUCTION IN MANUFACTURING SECTOR, 1977-1980

(Millions of 1958 Cordobas and percentage growth rates)

Gro%v.-h, Rates

Subsector 1977 1978 1979 .980 1978/77 1979/7S 19i0/'79(?ercent)

Food 1,571.3 1,655.2 1,390.6 1,341.9 5.3 -16.0 -3.5

Beverages 285.7 291.4 233.1 353.9 2.0 -20.0 51.3

Tobacco 106.8 103.6 80.8 1410.8 -3.1 -22.1 74.3

Textiles 177.5 171.9 107.7 102.4 -3.3 -37.4 -4.9

Garment and Footwear 98.3 85.4 48.4 112.3 -13.1 -43.3 132.0

Wood 124.1 99.2 5S.5 55.7 -20.1 -41.1 -4.3

Furniture 27.3 26,. 7 18.3 16.6 -2.2 -31.5 -9.3

Paper Products 85.8 94.2 56.2 42.5 9.8 -40.4 -24.4

Printing 61.0 50.4 37.0 38.0 -7.4 -26.6 2.7Leather Products 23.1 26.0 23.4 26.8 12.6 -10.0 14.5

Rubber Products 10.9 11.1 8.3 14.2 1.8 -25.3 71.1

Chemicals 5,4 7 554.8 375.6 356.1 1.1 -32.3 -5.2Petroleum Derivat. , 153.0 136.9 96.6 140.2 -10.5 -29.5 45.1Non-Metallic Minerals 130 1G9 9. 4.Non-Metallic Produ als . 174.0 143.2 64.8 92.2 -14.9 -56.3 42.3Metallic Products 166.7 171.0 84.1 82.6 2.6 -50.8 -1.8

hinery 73.5 75.5 39.6 30.2 2.7 -47.6 -22.5

Transport Material 10.7 11.1 6.6 7.1 3.7 -L0.5 7.6Other I.7 1. . . . 4. .

1.3 95.8 57.4 36.2 4.9 -40.1 -36.9

Total 3289.24 2,787.0 2-990.2 0.5 -26.8 7.3

Source: Ministry of Planning.

Table 8.3: NICARAGUA: GROSS VALUE OF PRODUCTION, EXPORTS AND EMPLOYMENT BY AREAOF OWNERSHIP, 1980

Number of Gross Value of Production Exports EmploymentEnterprises (million (million (December 1980)

Number Cordobas) % Cordobas) % Number %

APP - 100% 62 38 1,538 21 704 42 16,153 41- COIP 42 26 579 8 46 3 5,324 13- AGROINRA 12 7 657 9 358 21 8,933 23- INPESCA 8 5 302 4 300 18 1,896 5

APP - Majority Owned 22 13 796 11 76 5 5,790 15- COIP 21 -T3 739 10 51 3 5,029 13

- CORFOP 1 - 57 1 25 2 761 2

APP - Minority Owned 2/ 19 12 1,218 16 305 18 4,061 10- COIP 19 12 1,218 16 305 18 4,061 10

PRIVATE - 100% 60 37 3,908 52 581 35 13,445 34

TOTAL 163 100 7,459 100 1 ,666 100 100

1/ 50-99.9% state owned.

2/ 0.1-49.9% state owned.

Source: Ministry of Industry, based on survey of 163 industrial enterprises.