Document ofThe World Bank

Report No. T-7279-NI

TECHNICAL ANNEX

FOR A PROPOSED CREDIT

OF SDR 36.1 MILLION

TO THE

REPUBLIC OF NICARAGUA

FOR A

HURRICANE EMERGENCY PROJECT

December 14, 1998

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CURRENCY EQUIVALENTS1 US Dollar ($) C6rdobas (C) 11.07 (December 1, 1998)

FISCAL YEARJanuary 1 to December 31

WEIGHTS AND MEASURESMetric System

ABBREVIATIONS AND ACRONYMS

BANADES State Development Bank (Banco Nacional de Desarrollo)BANIC Nicaraguan Bank for Industry and Trade (Banco Nicaraguense de Industria y

Comercio)CAETF Central America Emergency Trust FundCAS Country Assistance StrategyCG Consultative GroupECLAC Economic Commission for Latin America and the CaribbeanENITEL Nicaraguan Telecommunications Company (Empresa Nicaraguense de

Telecomunicaciones)ESAF Enhanced Structural Adjustment FacilityHEP Hurricane Emergency ProjectHIPC Highly-Indebted Poor Country InitiativeIDB Inter-American Development BankIMF International Monetary FundNEC National Emergency CommitteePFP Policy Framework PaperRAAN Autonomous Region of the North Atlantic (Regi6n Aut6noma del Atlcintico Norte)RAAS Autonomous Region of the South Atlantic (Regi6n Aut6noma del Atlintico Sur)RUTA Multi-agency Regional Unit for Technical AssistanceSDR Special Drawing RightsUJNDP United Nations Development Programme

Vice President: Shahid Javed BurkiCountry Director: Donna Dowsett-CoiroloSector Leader, PREM: Ian BannonTeam Leaders: Suzana Augusto/ John Stein

NICARAGUAHURRICANE EMERGENCY PROJECT

Table of Contents

I. COUNTRY BACKGROUND AND HURRICANE MITCH .. IA. Background ............................................................ 1B. Hurricane Damage ........................................................... 1IC. Response to the Hurricane ............................................................ 3

II. ECONOMIC IMPACT OF HURRICANE MITCH ................................................ 4A. Macroeconomic Framework Prior to the Hurricane .............................................4B. Economic Impact ............................................................ 5C. Government Measures ............................................................ 6

III. PROJECT OBJECTIVES AND DESCRIPTION ..................................................7A. IDA Strategy ............................................................ 7B. Project Objectives ............................................................ 8C. Project Description ............................................................ 8

IV. INSTITUTIONAL ARRANGEMENTS/PROJECT IMPLEMENTATION ....... 9A. Project Organization and Management ............................................................ 9B. Procurement ............................................................ 9C. Disbursements ............................................................ 10D. Financial Management and Monitoring ........................................................... 11

V. AGREEMENTS REACHED ....................... 12

Text Tables:Table 1: Summary of DamagesTable 2: Key Economic Indicators, 1996-99Table 3: Procurement Procedures

Attachments:Attachment 1: Positive List of ImportsAttachment 2: Monitoring IndicatorsAttachment 3: Balance of Payments, 1996-99Attachment 4: Consolidated Operations of the Public Sector, 1996-99Attachment 5: Map Section

I. COUNTRY BACKGROUND AND HURRICANE MITCH

A. Background

1. Nicaragua is the second poorest country in the Latin America and CaribbeanRegion, with income per capita of $410 in 1997, over half of its population in poverty,one fifth in extreme poverty and weak social indicators. The Nicaraguan highlands crossthe country from the northwest to the southeast, with several mountain ranges cutting thehighlands from east to west. A chain of volcanoes, which contribute to earthquakeactivity, rises between the Nicaragua and Managua Lakes and the Pacific coast. The fourprincipal rivers (San Juan, Coco, Grande and Escondido), empty into the Caribbean.Like its neighbors in Central America, Nicaragua is prone to national disasters, especiallyhurricanes and earthquakes. The most recent natural disaster that caused extensivedamage was the earthquake that hit Managua in 1972.

2. On October 24, Tropical Storm Mitch was upgraded to a hurricane that quicklydeveloped into one of the strongest and most damaging storms to ever hit CentralAmerica. At its height on October 26 and 27, Hurricane Mitch sustained winds of 290kph and dumped heavy rains over Central America. Although the winds diminished asthe hurricane traveled inland over Honduras on October 30, the storm continued toproduce torrential rains. Mitch inflicted its greatest damage in Nicaragua through severerains that caused extensive flooding and landslides. The northwestern corner ofNicaragua bore the brunt of the storm and a side of the Casitas Volcano collapsed causinga massive mudslide that buried ten communities at its base.

B. Hurricane Damage

3. The areas of Nicaragua most severely affected by the hurricane were the northernand northwestern parts of the country, comprising the Departments of Le6n, Chinandega,Esteli, Nueva Segovia, Madriz, Matagalpa and Jinotega, and along the Rio Coco in theNorth Atlantic Autonomous Region (RAAN). Severe damage also occurred along theRio Grande de Matagalpa in the South Atlantic Autonomous Region (RAAS), and someparts of Managua Department fronting the lake. Preliminary estimates indicate that about870,000 people were affected (or almost one in five Nicaraguans), of which 45 percentare children. According to the poverty maps prepared by the Social Investment Fund, ofthe 58 poorest municipalities in Nicaragua, 40 are located in the hardest hit departments.The departments in the Pacific and Central Regions with the most damage include thecoffee-growing heartland, and in the Pacific region, they coincide with the former cotton-growing areas, which are characterized by extreme levels of deforestation and soildepletion. Prolonged exposure to heavy rains renders the denuded hillsides especiallyprone to mudslides-as witnessed most terrifyingly on the slopes of the Casitas Volcanoon the morning of October 30, when eleven communities were buried by a mudiside.Numerous roads were washed out and bridges destroyed, including significant portions ofthe Pan-American Highway, which is Nicaragua's main trunk road and connection toneighboring countries. There were direct and indirect impacts on fishing, cattle ranching,manufacturing, tourism, commerce and service industries. Another tragic effect of the

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mudslides and floods is the washing away of land mines to undetermined areas, posing aserious risk to people living in those areas.

4. The Atlantic Coast also suffered from Hurricane Mitch, although the pattern ofdamage was different. About 38,000 people were affected and the damage toinfrastructure, except for housing, was comparatively light, in part because the region hasso little infrastructure compared to the rest of the country. The damage to crops,however, is large since cultivation mainly takes place around the edge of rivers.5. Estimates of the damage are being prepared by teams of Government, donors andUINTDP/ECLAC. Preliminary damage assessments are presented below:

* The Human Cost. Preliminary estimates indicate that about 2,870 people died, 950were reported missing and 390 injured. As a direct result of the hurricane, anestimated 65,300 people were placed in temporary shelters, and 370,600 wereevacuated. People in the affected areas are also suffering psychologically due to theloss of family members and social disruptions.

o Transport. Immediately after the storm, about 70 percent of Nicaragua's roadnetwork was considered impassable. Several key trunk road connections (at Tipitapa,Sebaco, Izapa, Guasaule and Ocotal) were completely cut off, paralyzing transportand communications. Preliminary estimates indicate that two bridges werecompletely destroyed, 49 damaged, and 26 cut off. About 1,500 km of paved roadsand 6,500 km of unpaved roads were damaged to some extent and many smallvillages, particularly in the north-central and northeastern part of the country,remained cut off for over a month after the hurricane.

* Water. The water supply and sewerage systems, including 9 water works forcapturing superficial runoff, more than 33 km of water pipes, and 37,200 latrineswere damaged. About 288,600 houses were affected, and 79 potable water systemsand 9 sewer systems were damaged.

* Energy and Telecommunications. Generation, transmission and distribution systemswere damaged, including 2 hydroelectric facilities, 10 transmission lines, and 381 kmof distribution lines. Substantial telecommunications infrastructure was also affected.

* Education. Preliminary estimates from the Ministry of Education show that 315primary schools were damaged and 255 are being used as temporary shelters. Therewas also damage to school materials and books.

* Health. Seven health centers and 250 health posts suffered major damage, with mostof the damage to facilities and equipment. Unsanitary conditions and the lack of safewater are placing many people at risk of transmitted diseases such as dengue andcholera.

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* Housing. ECLAC estimates that about 369,000 people lost their homes, between32,000 and 50,000 houses were destroyed, 112,600 were damaged, and 94,500suffered minor damage.

* Agriculture. The hurricane affected some of the most fertile areas of Nicaragua. Alarge proportion of basic grains production was lost, severely impacting poor, small-scale farmers. Other products also suffered extensive damage or their access tomarkets was affected, including bananas, coffee, corn, sorghum, beans and shrimp.

* Environment. Direct impacts on the environment from the storm include the loss offertile soil, mainly around watersheds, due to erosion, landslides and flooding aroundriver beds. Water was also contaminated due to toxins and agro-chemicals, overflowsof sewers and latrines, and decomposition of dead animals. The coastal zones havebeen affected by flows from contaminated rivers, and there has been damage to standsof trees and losses in reforested areas resulting in loss of habitat and biodiversity.

6. Preliminary Estimates of Damage and Replacement Costs. A preliminaryestimate prepared by UNDP and ECLAC (Table 1) suggests total direct and indirectdamage of $900 million (equivalent to 45 percent of Nicaragua's 1997 GDP). The costsof replacing the damage to infrastructure and the productive sectors would amount to$1.2 billion.

Table 1: Summary of Damages and Replacement Costs ($ million)Direct Indirect Total Replacement

Damage Damage Damage CostsTOTAL 498.8 398.9 897.7 1,209.2Social Sectors 196.0 43.1 239.1 296.5Housing 157.7 12.7 170.4 225.0Health 25.0 28.1 53.1 44.4Education 13.3 2.3 15.6 27.1Infrastructure 182.9 157.3 340.2 354.9Roads, bridges, telecommunications 159.0 147.2 306.3 310.7Water and sanitation 11.0 3.1 14.1 18.3Energy 12.9 7.0 19.9 25.9Productive Sectors 111.4 198.5 309.9 557.8Agriculture, livestock, fisheries and forestry 94.8 58.3 153.1 275.6Manufacturing 14.2 61.2 75.4 135.7Trade, restaurants, hotels 2.4 79.0 81.4 146.5Environment 8.5 n.a. 8.5 n.a.Source: UNDP/ECLAC, A Preliminary Assessrnent of Damages Caused by Hurricane Mitch, December 10, 1998.

C. Response to the Hurricane

7. In responding to the hurricane emergency, the Government created a NationalEmergency Committee (NEC) to coordinate relief efforts and assess damages,particularly in terms of rescue efforts and emergency assistance to areas affected by

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mudslides and other isolated communities. Customs warehouses in Managua were usedto store incoming relief supplies and the private sector lent refrigerated facilities to storeperishables. NEC and Government teams worked with the UN system, the Red Crossand emergency response teams from IDA and other donors to determine priorities,channel immediate support and coordinate international assistance. The Government alsoput in place mechanisms to provide food and emergency health care to thousands ofpeople in approximately 200 shelters, much of this with help from relief agencies, othergovernments, and the private sector. In terms of transport infrastructure, the Pan-American Highway and other key routes were reopened within a week using temporarysolutions (such as Bailey bridges). The Government is implementing a vaccinationcarnpaign and working with the Pan-American Health Organization to rehabilitate basichealth services and implement a vector control program. As emergency needs subsided,NEC was disbanded and the Governrnent set up six Sector Reconstruction Commissions(Social, Cooperation and Finance, Infrastructure, Production and Services, Environment,and Civil Society) to coordinate the longer-term reconstruction effort. The Commissionsare chaired by Government representatives, and also include representatives of politicalparties and community members.

8. The international community responded swiftly to the disaster. The initialresponse, especially relying on the UN system and the emergency response capability ofa number of countries, focused on rescuing communities, re-establishing communicationsand transport links, distributing emergency food and medicines to affected communities,and organizing shelters for displaced populations. IDA staff on the ground in Nicaraguamoved quickly to help the Government coordinate with other donors and conduct apreliminary damage assessment. IDA also reallocated funds and restructured existingoperations, and quickly disbursed the second tranche of the Financial Sector AdjustmentCredit ($15 million), which provided balance of payments support.

II. ECONOMIC IMPACT OF HURRICANE MITCH

A. Macroeconomic Framework Prior to the Hurricane

9. Following a period of stagnation in the early 1990s, Nicaragua's economy hadbeen growing at a steady pace since 1994 and was heading toward a GDP growth rate ofaround 6 percent in 1998 (Table 2). Unemployment had declined from over 20 percent in1994 to less than 14 percent in 1997, while the annual inflation rate remained steady inthe neighborhood of 10 percent since 1994. These positive developments wereunderpinned by an ESAF agreement reached with the IMF in March 1998. Themacroeconomic mainstay of the ESAF arrangement was the fiscal adjustment program,designed to reduce the overall public sector deficit (before grants) from almost 16 percentof GDP in 1996 to 4 percent in 2000. The reduction in the fiscal deficit, in turn, was topermit a rise in public savings from less than 2 percent of GDP in 1996 to 8 percent in2000, thereby rendering the country's future growth less dependent of foreign savings.

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10. The ESAF arrangement is a key element of the HIPC process, for whichNicaragua is eligible on the grounds of its low income level and extremely high externaldebt burden. Until October 1998, the macroeconomic and structural reform program hadbeen on track, so that the decision point under the HIPC was tentatively envisioned forlate 1999. Following the passage of major fiscal reforms, the public sector deficit wasreduced to less than 10 percent of GDP in 1997 and was projected to drop to under 6percent in 1998. Also, the current account deficit declined from 53 percent of GDP in1994 to 32 percent in 1997, mainly due to the rapid expansion of non-traditional exports,which grew at annual rates averaging 20 percent in both dollar and volume terms over thelast three years.

11. Nicaragua's rapid economic recovery was accompanied by a resurgence of privatesector confidence, reflected in a more than doubling of private investment, from 7 percentof GDP in 1994 to an estimated 17.5 percent in 1997. The rapid increase in privateinvestment levels, in turn, was accompanied by a modest decline in public investment,reflecting the Government's commitment to private sector-led growth. Over the last sixyears, Nicaragua had made significant progress in transforming itself from a centralized,publicly managed to a private sector-owned economy through the divestiture of around350 state-owned enterprises since 1991 and the closure of the largest state bank(BANADES) in early 1998. Preparations are also well underway to privatize the secondlargest public bank (BANIC), with IFC support, by early 1999 and the statetelecommunications company (ENITEL), by April 1999. Other reforms supported byIDA include measures to strengthen the regulation and prudential supervision of thefinancial system, improve the legal framework for private investment, downsize andstreamline the public sector while building up institutional capacity, and improve thestate's capacity to deliver social services.

Table 2: Key Economic Indicators, 1996-99Projections

Pre-Hurricane Post-Hurricane1996 1997 1998 1999 1998 1999

GDP growth (%) 4.5 4.8 6.0 6.0 4.0 6.0Inflation (end-year, %) 12.1 7.3 11.0 8.0 17.2 14.8

Combined Pub. Sec. Balance (% GDP) -15.7 -9.7 -5.2 -6.1 -6.7 -10.7

Current Account Balance -32.6 -32.0 -28.3 -24.0 -31.2 -31.9Gross Reserves (months of imports) 1.4 0.2 1.2 3.0 0.8 2.5Contractual Debt Service (% exports) 91.7 51.4 42.4 39.6 45.6 44.0Source: Staff estimates, IMF and Govemment of Nicaragua.

B. Economic Impact

12. The assessment of damage to the economy are still being refined. Since thedamage occurred fairly late in the year, only part will be reflected in the macroeconomicindicators for 1998, and much will be shifted to 1999. These will be some slowdown ofeconomic growth due to the loss of crops and indirect damages in the form of reduced

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economic activity resulting from production bottlenecks arising from the damages toinfrastructure and other capital goods losses. These negative indirect effects are expectedto carry through into 1999, and will be partially offset by intensified reconstructionactivities, financed through additional foreign inflows from official and private sources.The loss of domestic goods not easily replaced by imports also is expected to placeupward pressure on prices, so that inflation is expected to rise to 17 percent in 1998,falling to 15 percent in 1999, compared with about 9 percent a year envisaged before thehurricane.

13. Preliminary 1998 estimates suggest that the hurricane would result in realtivelyminor fiscal slippages compared to pre-hurricane projections. The 1998 combined publicsector savings would be about one percentage point, of GDP lower after the hurricane,while the combined public sector balance (before grants) would increase by 1.5percentage points of GDP to 6.7 percent in 1998. For 1999, the pre-hurricane scenariohad envisaged that the overall deficit would narrow to 6.1 percent of GDP. However, theGovernment is discussing with the Fund, possible adjustments to the fiscal programbecause of the needs associated with the reconstruction effort and additional socialexpenditures.

14. Permanent damage to the main export crop, coffee, was relatively light (less than10 percent of production area was affected), but more extensive for bananas and sugar.The heaviest damage occurred in the basic grains sector, which threatens to lead to foodshortages in isolated areas, and particularly affects small, subsistence farrners. There willalso be higher import levels associated with disaster relief, food imports andreconstruction needs. As a result, preliminary estimates indicate that the current accountdeficit could widen by about $60 million in 1998 (about 3 percent of GDP) and about$200 million in 1999, compared with pre-hurricane projections. The current accountdeficit would widen to 31.2 percent of GDP in 1998 (compared to 28.3 percent estimatedprior to Mitch) and 31.9 percent of GDP in 1999 (compared to 24.0 estimated prior toMitch). Rough estimates indicate a financing gap of about $150 million in 1999 (about 6percent of GDP). The Government expects to fill the 1999 financing gap through thereprogramming of credits (mainly from IDA and IDB), disbursements of new grants andcredits, emergency balance of payments support from IDA, a proposed augmentation inthe ESAF, and further debt relief, including disbursements under the recently-establishedCAETF. reconstruction expenditures, and lower tax revenues in the wake of reducedeconomic activity.

C. Government Measures

15. The Government is taking steps to limit the macroeconomic effects of thedisaster, and set the stage for economic recovery. The Government has reiterated itscommitment to the policies and objectives of the economic program supported by thecurrent ESAF arrangement. Within this framework, the authorities are intensifying theirefforts to help finance part of the additional reconstruction and social programs throughexpenditure and revenue measures. On the revenue side, the Government recentlysubmitted to the Assembly a reform to the tax system raising excises on cigarettes, liquor,

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and soft drinks, and is continuing efforts to improve tax administration. On theexpenditure side, the Government plans to pursue efforts aimed at shifting resources fromlower priority areas to the reconstruction effort. In the structural reform area, the focuswill be on privatization, strengthening of the financial system, reform of the socialsecurity system, and the strengthening of governance.

III. PROJECT OBJECTIVES AND DESCRIPTION

A. IDA Strategy

16. The proposed Hurricane Emergency Project is consistent with the goal ofmaintaining macroeconomic stability in the Bank Group's Country Assistance Strategy(CAS) for Nicaragua. The proposed Project is a key element of the three-part strategy toassist Nicaragua respond to this natural disaster. The three-part strategy involves:

Emergency Financing, Macroeconom;- Assistance and Debt Relief. TheGovernment has an urgent need for emergency financing to cover additional importneeds generated by the emergency, while maintaining macroeconomic stability. Theproposed fast-track Hurricane Emergency Project (HEP) would help to meet thisimmediate need. It complements actions by IDA in the two weeks following thehurricane to release the second tranche of the Financial Sector Adjustment Credit (allconditions were met satisfactorily), which provided balance of payments support at acritical juncture. IDA staff have also been collaborating with the IMF on apreliminary reassessment of Nicaragua" macroeconomic situation. Finally, at therequest of several governments, IDA has established a Central America EmergencyTrust Fund (CAETF) to which donor contributions are being channeled to supporthurricane-affected countries in Central America cover multilateral debt servicepayments. As soon as conditions permit, IDA and the IMF, in consultation with theIDB, will carry out a comprehensive debt sustainability analysis, as an input todetermining the appropriate timing for Niearagua's decision point under the HIPC.

* Short- to Medium-Term Rehabilitation. IDA staff are working with counterpartGovernment agencies and other development partners to reprogram IDA operationsand/or process supplemental financing to provide for urgent rehabilitation of damagedsocial and economic infrastructure. In view of the extent of the damage and the needfor quick support, IDA staff believe that reprogramming of the existing portfolio-asopposed to designing a new, multi-sector hurricane rehabilitation project-is thefastest and most flexible way to meet Nicaragua's short and medium-termrehabilitation needs, given that speed is of the essence. Based on preliminary damageestimates, we anticipate that 7 of the 10 ongoing IDA operations would berestructured within existing credit amounts to finance about $70 million ofrehabilitation-related expenditures. In addition, supplemental funding will beproposed for an ongoing education project, in the amount of $13 million, andsupplemental financing of about $15 million for transport is under consideration.

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Longer-Term Reconstruction. The Country Assistance Strategy (CAS) forNicaragua was discussed by the Board on April 9, 1998. The emergencyConsultative Group for the countries affected by the hurricane in Central America onDecember 10-1 1 discussed preliminary indications of needs for new assistance. Overthe next few months, the Government will be preparing a more detailedreconstruction program, to be presented at a following Consultative Meeting inStockholm in the Spring. IDA will review its existing CAS in light of thereconstruction program. We do not expect that this will require a major reformulationof the CAS or its key priorities. If this is not the case, we would present a CASupdate to the Board in mid-1999. In addition, IDA is already exploring with theGovernment and other donors ways to strengthen Nicaragua's institutional capacityfor disaster preparedness and management. As soon as conditions permit, we expectto initiate preparation of either a freestanding technical assistance operation, or add acomponent to an existing or future operation. This is consistent with the strongemphasis already in the CAS on institutional development. In addition, we have beenexploring with the Government ways in which the National Integrity Systemlaunched early this year with EDI support, can be adapted to support efforts by theGovernment and civil society to ensure that rehabilitation and longer-termreconstruction programs are appropriately and transparently handled.

B. Project Objectives

17. The proposed Hurricane Emergency Project is part of the first phase of IDA'sstrategy to assist in the reconstruction of Nicaragua (para. 16). It would assist theGovernment in implementing its program to maintain macroeconomic stability whilehelping to finance import costs associated with rebuilding social and economicinfrastructure, and re-establishing production levels, in response to the damage caused byHurricane Mitch. The performance of the project would be measured by how wellNicaragua maintains macroeconomic stability in 1999 and beyond, especially in terms ofthe current account deficit, and the budget deficit (Attachment 2).

C. Project Description

18. The Hurricane Emergency Project will provide immediate, quick-disbursingsupport to finance a positive list of imports needed for the rehabilitation programsupporting macroeconomic objectives. While the proposed credit would be entirelyquick-disbursing, it is only one part of an unbundled set of actions by the Bank Group torespond to the effects of the hurricane. The project will, inter alia, provide assistance forimports of: (i) construction materials and equipment, water, land and air transportvehicles, petroleum, and fuel products that are needed for rehabilitation of physicalinfrastructure; (ii) seeds, fertilizers, agricultural equipment, materials, machinery and fuelneeded to reestablish agricultural production; (iii) medical supplies and equipmentneeded to replenish stockpile of hospitals, health centers, health posts and outreachprograms; (iv) school supplies and equipment for educational facilities that weredamaged or destroyed; and (v) machinery, spare parts and equipment for commercial andindustrial companies. No disbursements will be made to cover used or luxury goods ormilitary equipment.

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19. The size of the proposed credit at SDR 36.1 million ($50.0 million equivalent) isbased on the Government's request for emergency assistance and an assessment of theadverse effects of Hurricane Mitch on the balance of payments after taking account of theassistance expected from the IMF, IDB, and other donors.

IV. INSTITUTIONAL ARRANGEMENTS/PROJECT IMPLEMENTATION

A. Project Organization and Management

20. Project implementation arrangements have been streamlined to conform to theemergency nature of IDA's assistance. In addressing IDA's fiduciary responsibilities,IDA has sought to ensure that: credit proceeds are administered prudently, and only usedto finance imports of items included on the positive list; required procurement,accounting and auditing procedures are followed; and, appropriate retention ofdocuments is provided to allow for IDA supervision and independent audits.

21. The Project will be implemented by the Ministry of Finance and Public Creditwith the assistance of the Central Bank of Nicaragua. The execution of anImplementation Agreement, satisfactory to IDA, defining the assistance to be providedby the Central Bank of Nicaragua is a condition of effectiveness. The Ministry ofFinance and Public Credit will provide the basic information on imports (based onCustoms Declarations) and the General Directorate of Customs will maintain therespective supporting documentation. The credit will finance 100 percent of thedelivered cost of eligible imports, excluding import duties and taxes, of a positive listagreed with Government (Attachment 1).

B. Procurement

22. Credit proceeds would be made available to finance public and private sectorimports against documentation evidencing that the imported goods were both on thepositive list and procured following agreed procurement procedures. Imports financedwith credit proceeds would be limited to goods from eligible countries as per the Bank'sProcurement Guidelines (Guidelines for Procurement under IBRD Loans and IDACredits, dated January 1995, revised January and August 1996, and September 1997).No more than 50 percent of the credit would be used to finance the import of anycategory of eligible imports on the positive list.

22. The credit would be used to finance only imports procured in accordance with theprocedures presented in Table 3 below. All procurement of imports by the private sectorof $3 million or above will be based on Simplified International Competitive BiddingProcedures subject to prior review by IDA. Imports by the private sector less than theequivalent of $3 million will be acquired based on established commercial practices andwill not need the prior review of IDA

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23. Public sector imports financed under this project would follow SimplifiedInternational Competitive Bidding procedures, as provided under IDA's ProcurementGuidelines (Clauses 2.63 and 2.64). Contracts let by the public sector of $1 million orabove and contracts awarded after June 30, 1999 will be subject to prior review by IDA.However, to facilitate the speedy import of items required immediately for the recoveryeffort, public sector imports of less than $1 million equivalent and awarded betweenOctober 25, 1998 and June 30, 1999 may be made based on international shoppingprocedures as per IDA's Procurement Guidelines (Clauses 3.5 and 3.6). The Projectwould finance the import of fuel and fertilizers by both private and public importersthrough established international commodity markets, or through simplified procurementprocedures provided for under the IDA's Procurement Guidelines.

Table 3: Procurement Procedures' _-___

Public Sector ProcurementCommodities Through established international commodity

markets, or other channels of competitiveprocurement as defined in Clause 2.65 of IDA'sProcurement Guidelines

Goods, valued at or more than $1 million Simplified international competitive biddingprocedures under Clauses 2.63 and 2.64 ofIDA's Procurement Guidelines

Goods, for contracts awarded between In accordance with international shoppingOctober 25, 1998 and through June 30, procedures under Clauses 3.5 and 3.6 of IDA's1999, valued at less than $1 million Procurement Guidelines

Private Sector ProcurementCommodities Through established international commodity

markets, or other channels of competitiveprocurement as defined in Clause 2.65 of IDA'sProcurement Guidelines

Goods for contracts valued at or more than Simplified international competitive bidding$3 million procedures under Clauses 2.63 and 2.64 of

IDA's Procurement GuidelinesGoods for contracts valued at less than $3 Based on established commercial practicesmillion

C. Disbursements

24. The proceeds of the credit would be disbursed against 100 percent of thedelivered cost of imports, excluding imports duties and taxes, of the agreed positive list.In order to avoid excessive transaction costs for IDA, public and private sector importcontracts of less than $20,000 would not be eligible for financing with credit proceeds.With the exception of disbursement for goods procured by the public sector estimated tocost the equivalent of $1.0 million or more, or after June 30, 1999, or of goods procuredby the private sector and estimated to cost $3.0 million equivalent or more, alldisbursements would be made against Statements of Expenditures for which supporting

documentation would be retained by the General Directorate of Customs and madeavailable for review by IDA financial management and procurement specialists andproject auditors. The project would be implemented over a one-year period and isexpected to be completed by December 31, 1999. The Closing Date for this credit wouldbe June 30, 2000.

25. Retroactive Financing. Retroactive financing in the amount of SDR 7.22million, 20 percent of credit amount, would be provided to finance expenditures incurredbefore credit signing but after October 25, 1998, the approximate date of onset ofdevastation caused by Hurricane Mitch.

26. Special Account. The Borrower may request disbursement through a US DollarSpecial Account to be established in the Central Bank of Nicaragua, with an initialauthorized allocation of $12.5 million, 25 percent of the total Credit amount. The SpecialAccount would be replenished as and when needed to ensure timely disbursements offunds to cover eligible imports.

D. Financial Management and Monitoring

27. The Central Bank of Nicaragua has in place an appropriate mechanism to monitorand report on the financial transactions pertaining to this operation. The Ministry ofFinance and Public Credit would provide at all times adequate staff for managing theProject and maintaining proper accounts and records. The quarterly financial reports willreflect the total transfers of resources of the credit and show the total of eligible financedimports based on the agreed positive list (corresponding to the lists of imports providedby the General Directorate of Customs).

28. Quarterly progress reports of monitoring indicators, the project's financialtransactions, and quarterly audits of project accounts, the Special Account and Statementsof Expenditures by an independent private accounting firm acceptable to IDA, will beprovided by the Ministry of Finance and Public Credit within 30 days of the end of eachcalendar quarter. The fourth quarter audit report will present the cumulative balances tothe end of the year. The retaining of an auditing firm acceptable to IDA is a condition ofeffectiveness.

29. The Project's monitoring indicators are described in Attachment 2. Reports onthe progress against these macroeconomic indicators will be prepared and sent to IDAquarterly.

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V. AGREEMENTS REACHED

30. Effectiveness Conditions

(a) Execution of an Implementation Agreement with the Central Bank ofNicaragua;

(b) Retaining of independent auditors acceptable to IDA for purposes ofauditing project accounts, the Special Account, and disbursements againststatements of expenditures.

Attachment 1

NICARAGUA

HURRICANE EMERGENCY PROJECT

Positive List of Imports

Fertilizer

Seeds

Agriculture equipment and inputs

Cement, pipes, and other construction materials and supplies

Water, land and air transport vehicles

Medical supplies and equipment

School supplies and equipment

Construction equipment, industrial machinery, equipment, spare partsand raw materials

Petroleum, fuel products and lubricants

Attachment 2

NICARAGUA

HURRICANE EMERGENCY PROJECT

Monitoring Indicators

The objectives of the Hurricane Emergency Project is to assist the Republic of Nicaraguato finance critical imports needed for the rehabilitation and rebuilding effort, while maintainingmacroeconomic stability. The following indicators would be used to monitor progress towardachieving the Project's objective:

* The balance of payments current account deficit expected not to exceed 32.0 percent of GDPin 1999.

* The combined public sector overall deficit expected not to exceed 11.0 percent of GDP in1999.

Progress toward meeting these targets will be monitored quarterly and the indicators willbe adjusted, by agreement between the Borrower and IDA, as macroeconomic estimates andprojections are refined, in line with the Government's economic program and the PolicyFramework Paper.

Attachment 3

NICARAGUA

HURRICANE EMERGENCY PROJECT

Balance of Payments, 1996-99($ million)

Pre-Hurricane Post-Hurricane

1996 1997 1998 1999 1998 1999

Current Account -639 -645 -600 -527 -661 -733

Trade Balance -380 -434 -557 -526 -637 -791

Exports 670 704 667 685 617 601

Imports -1,050 -1,234 -1,225 -1,211 -1,254 -1,392

Services & Net Transfers -259 -114 -43 -1 -24 58

Capital Account 106 522 485 512 515 547

Overall Balance -533 -123 -116 -15 -146 -186

Change in Intern. Reserves (- = increase) 2 -58 -30 -115 0 -95

Rescheduling and Change in Arrears 531 181 145 131 146 131

Financing Gap 0 0 30 150

Source: Staff estimates, IMF and Government of Nicaragua.

Attachment 4

NICARAGUA

HURRICANE EMERGENCY PROJECT

Consolidated Operations of the Public Sector, 1996-99(% of GDP)

Pre-Hurricane Post-Hurricane

1996 1997 1998 1999 1998 1999

Total Current Revenues 30.6 33.4 35.9 35.9 35.5 33.9

Total Current Expenditures 28.7 28.9 26.9 27.9 27.5 27.7

NFPS Savings 1.9 4.5 8.9 8.0 8.0 6.2

Central Bank Balance -0.2 -0.5 -3.0 -1.7 -3.0 -1.5

Combined Public Sector 1.7 4.0 6.0 6.3 5.0 4.7SavingsCapital Expenditures' 17.4 13.7 11.2 12.4 11.7 15.3

Combined Pub. Sector -12.2 -4.3 -1.3 -1.2 -3.0 -5.9Primary Balance (bef. grants)Combined Pub. Sector -15.7 -9.7 -5.2 -6.1 -6.7 -10.7Balance (before grants)

Grants 8.6 5.2 4.1 4.4 4.7

Combined Pub. Sector -7.1 -4.5 -1.2 -1.7 -2.1Balance (after grants)

Financing: 7.1 4.5 1.2 1.7 2.1

External (net) 6.7 2.6 6.7 6.7 6.0

Domestic (net) 0.4 1.9 -5.5 -5.0 -4.0

1. Includes net lending.Source: Staff estimates, IMF and Government of Nicaragua.

MAP SECTION

IBRD 30018

940 920 ' 9Q00' 88' 860 840 820

NICARAGUA

/ L. HURRICANE EMERGENCY PROJECT-18, .'~ / _ _ _ .-- Track of Hurricane M4t4.

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This mnap was produced by the' i, . ,. , ;,, b ' tj Map Design Unit of The World Bank.

The boundaries, colors, denominationsand onyother information shown onthis map do not imply, on the part ofThe World Bank Group, any judgment

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DECEMBER 1998

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AREAS OF POVERTY Raiti S e a

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POVET PERCENT OF NUMBER OFCLASSIFIAIN POPULATION MUNICIPAUITIES

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This map wos producnd by the Mop Design Unit of Thu World UNIkT STAE.S OF AR> The boundaries, colors, denominations and anyother information shown S COSTA VENEZUELA

r on this map do not imply, on the port of The World Bonk Group, any CO;.SH: . aPNM r jod gment on the legol status of any territory, or any codorsement or C,. s,. S TA R I C A ot> (p _. acceptance of such boundories. COLOMBIAHAMAS

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