*NICARAGUABudget Support Group (BSG)2005 2007 More Effective Cooperation?

4TH LAC PRS-Donor Meeting, June 14 2007, Washington, D.C.

*CONTENTSBackgroundAlignmentConditionalityRelationship with the IMFDialogue Challenges

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*BSG Background2-year on-going dialogue to join partners and prepare arrangement for budget supportIn May 2005, 9 donors signed a Joint-Financing Arrangement (JFA) with the Republic of Nicaragua, to support the Governments efforts to achieve long term sustainable economic growth and poverty reduction as defined in its PND (PRSP)

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**MembersBilateralGermany, Finland, Norway, Sweden, The Netherlands, Switzerland, United Kingdom (DFID)MultilateralEuropean Commission, The World Bank In 2005:Bilateral BSG member funds totaled 34% of all bilateral assistanceMultilateral BSG member funds accounted for 36% of all multilateral assistance

BSG Deliveries 2005-2007

*BSG assistance at the macro level*

*Need for alignment?2005 raw data43 donors present in Nicaragua 397 project implementation units, of which 138 were parallel to the line ministriesTotal disbursed ODA = U$542 million, of which only U$305 were registered in the BudgetApproximately 400 missions visited the country, averaging 1.3 missions per day!

The Alignment storyBefore 2005Non-transparent national budget planningLine ministries received donor funds outside control of the Ministry of FinanceIn 2005The Government took responsibility approving the Financial Administration Law (LAF)

LAF implementationGreater discipline required for line ministries and donors to get support on time and on budgetDifficult transition in 2006: apprx. US$36 million of donor support left outside the budgetProposed Budget for 2007could not be approvedIn 2007, the US$36 million have been included in approved National Budget, according to the LAF Now, there are better conditions for alignment

How does BSG operate in practice? Key issues for Dialogue includeFundamental PrinciplesMacro-economic stability and growthProgress on the implementation of the PRSPublic sector reform and political governanceAlignment and harmonization practicesAnnual Meeting (May-June)Decision on preliminary financial commitments Mid-Year Meeting (Sep-Oct)Confirmation of financial commitmentsPresentation of National Budget to the National Assembly (Oct-Nov)

*ConditionalityConditionality defined as the specific set of conditions attached to the disbursement of budget support ranging from explicit agreements to implicit understandings and from traditional ex ante conditions based on promises to ex post conditions based on actual completed measures /1JFA Fundamental PrinciplesPerformance Assessment Matrix (PAM)

/ 1 WB 2005, Conditionality Revisited

*Fundamental Principles for the provision of Budget SupportNicaragua has agreed to adhere to the following principles:Commitment to international law and conflict preventionRespect for human rightsDemocratic principles, including free and fair electionsRule of LawIndependence of the judiciaryTransparent and democratic processesAccountability and the fight against corruptionSound macro-economic policiesCommitment to Poverty ReductionThe breach of any of the these principles may result in the stop of disbursements.

*Performance Assessment Matrix (PAM)

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

PAM EvolutionDuring 2005, targets were based on existing bilateral/multilateral agreementsComplexity of matrix evidenced the need for simplification

Character of BSG conditionalityAll conditions are agreed jointly Mainly ex-post: Respect to fundamental principles Performance PAM n-1Progress in the year-to-date until MYMOverall satisfactory performance of PAM and Fundamental Principles is neededPartially ex-ante:Appraisal of budget and planned actions and targets to be accomplished in n+1Planned actions and targets should meet satisfactory level of ambition and realismIndividual member decision with high influence from group discussion following dialogue with the authorities

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

*Special CasesEuropean Commission: Decides in Annual Meeting (year n) disbursement of fixed tranche in year nDecides in Mid-Year Meeting (year n) disbursement of variable tranche in year n+1Amount of variable tranche depends on % of fulfilled actions/targetsThe World BankPrior actions/triggers and benchmarks are agreed directly with Government and later included in the PAMFunds become available after compliance with prior actions

*Relationship with the IMF (1)Macroeconomic stability is a fundamental principle of the JFAThis can be achieved with or without the FundIMFs assessment and advice are important for the Government and the BSGNevertheless, a program with the Fund is not a condition sine qua non for BSG commitments or disbursementsGood coordination between BSG and IMF

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

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

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

*Progress in Dialogue2005Conflict between parliament and government about their division of roles/responsibilities All structural reforms were put on holdDisagreement on national budgets for 2005 and 2006Off-track PRGFBSG postponed disbursement until (November):Reestablishment of understanding between parliamentand government (Ley Marco agreement Bolaos-Ortega) Approval of structural reforms and national budgets 2005 and 2006Macro-economic stability and pro-poor spending

*Progress in Dialogue 2006Good discussions in technical working groups and plenary in Annual and Mid Year Meeting, in spite of deficiencies in information Satisfactory continuity in macroeconomic policy, public finance management, economic growth, and pro-poor spending.Agreement on simplification of PAMConcerns about:Free and fair electionsLack of independent judiciary Quality /effectiveness of pro-poor expendituresPenalization of therapeutic abortionPostponement of audit on budget implementation

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

Dialogue so far in 2007Slow start of dialogue with BSGFirm ownership central governmentFirst ever audit of national budget implementationPostponement documentation on poverty and poverty spendingSome concerns:Insignificant poverty reductionHuman rights for women (therapeutic abortion, violence, access to justice and health service)Weak statistical systemLack of transparency in new public debt to Venezuela

Challenges on the donor sideConsolidation BSG and open minded inclusion of new membersModality mix on macro-meso and micro levelIncreasing division of labor and convergence of instruments (shared appraisals, silent partnership)Continuity in coordination with the IMFSome differences between conditionalities of individual BSG members should not restrain the joint analysis and dialogue

*Challenges in dialogueBroadening dialogue with stakeholdersMutual understanding and agreement on conditionalityJoint evaluation of past experience in PRS and economic policySimplifying PAM, in-sourcing sectorial analysis and monitoringIncreasing joint (demand driven) technical assistance and support for institutional strengthening.Limit preaching in favor of practical support and mutual responsibility

Final remarksThe Bottom-line:High levels of investment and disappointing growthHigh levels of poverty spending and disappointing poverty reductionMission of budget support:Long term commitment (avoiding stop and go)Priority to improving confidence in national institutions and conditions of good governanceMay result in higher effectiveness and efficiency of national investment and pro-poor expenditures

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

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