FILE COpy W.H.-8 RESTRICTED INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT THE ECONOMIC SITUATION OF NICARAGUA.

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized FILE COpy W.H.-8 RESTRICTED This report is restricted to use within the Bank. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT THE ECONOMIC SITUATION OF NICARAGUA August 28, 1953 Department of Operations Western Hemisphere

2 Par value U. S. $1 = 5 cordobas $200,000 1 million cordobas Basic import rate U. S. S1 X 7.05 cordobs $141,844 1 million cordobas

3 GENERAL STATISTICS Area Population ,000 square miles 1.09 million Output per head, 1950 (GNP) Approx. $125 Trade ($ million) June Exports Imports (f. o. b,) S 39.7 Trade Balance QlQ2t& ExChange(8 million) Governmgnt Finance (million cordobas),1949-5q Ž25S2 Revenues Expenditures Jume 1953 Dec.: nmillion cordobas) Retail orices, Managua (1948 = 100)

4 TABLE OF COWYTENTS Page No. DOI'STIC ECONOMIC POSITION 1 Money Supply and Banking 1 Government Finance 1 Development Activities 2 Output Growth 2 EXVER1lAL POSITION AND PROSPSCTS Trade and Payments 3 General Prospects 3 External Debt 4 Creditworthiness 5

5 THC ECOICMIC $ltuation OF NICARAGUA DOMESTIC Money Suly and8bankin 1. The serious inflationary situation which Drevailed in 1951 improved considerably in Prices, as measured by the indices of both wholesale and retail prices in MIanagua, showed virtually ho change in 1952, compared with an increase of 13% in wholesale prices and 12% in retail prices in The domestic sources of inflation were brought under control by balanced budgets in 1951 and 1952, and by selective credit policies applied by the National Bank, which resulted in a diminished rate of new banking credits to business and individuals. Nevertheless, money supply continued to expand as rapidly in 1952 as in 1951 due primarily to a considerable inflow of foreign exchange. Government Finance 2. The success of sound government financial policies is evidenced by the fact that in the last two years the administration has been able to expand considerably its fiscal revenues, permitting larger developmental expenditures together with budget surplus. Government revenues expanded from 95 million cordobas in 1949/50 to 156 million cordobas in 1951/52. The comparable figure in the budget estimate for 1953/54 is 187 million cordobas. This increase in revenue reflects nainly the first fruits of an improvement in tax administration and collection. inew taxes have been introduced on coffee exports, on coffee and cotton production, and on personal and corporation incomes, the last a complete innovation in Nicaragua. Revenue collections in 1952 do not yet reflect the yield from the income tax; this addition, together with the prospective continued high level of economic activity, may be expected to further increase goverrment revenues in 1953/ Increased revenues have been applied mainly to new developmental investments,and to the expanded personnel and maintenance requirements resulting from the development program. About 29% of the P-thortzpd budget for the present fiscal year (1953/54) is for economiu uevtlopment, narrowly defined; on an expenditures basis the proportion of development investment will be substantially higher, due to the carry-over of unexpended balances from prior authorizations for such purposes. It is significant of the changed orientation of government expenditures that whereas three years ago the army budget exceeded the expenditures on -griculture, health and education, in the present fiscal year the latter three sectors received more than twice the funds allocated to the army. Of the authorized budget of the

6 - 2 - executive departments- (excluding autonomous self-financing..agenciess as well as service of the public aebt) the economic and financial functions in general, including agriculture, account for about 28.5%; highways, public works and related activities 21.5%; education 14%; health 5.2%; communications 7.4%; and the army and police 18.5%. 4. Budget surpluses have made possible a considerable reduction of government borrowing from the National Bank. At the end of 1950, National Bank loans to the Government and official entities stood at 38 million cordobas; at the end of 1952, at 26 million; and in June 1953, at 19 million. At the same time official deposits have grown by 28 million cordobas. Development Activities 5. This fiscal improvement has provided the resources for official development investment and, indeed, was undertaken with that objective. The Bank has maintained a apecial mission in Nicaragua since July 1951 to assist the Government in drawing up and carrying out a development program. In September 1952, this special mission submitted its report on the Economic Development of Nicaragua, upon the general analysis and recommendations of which the Government is basing its development program. Nicaragua has already undertaken a number of administrative and fiscal reforms recommended by the Bank. Already mentioned above is the new general income tax. A comprehensive review and reorganization of the Government's financial organization and procedures (indluding fiscal, budgetary and accounting arrangements) is underway. The report of an I?F mission, submitted in February 1953, is serving as the basis for fundamental reforms in the banking and credit. system, now under consideration by the Govermaent. The administration of highway and public works functions has been streamlined and greatly strengthened, and the major public utilities are being established on a sound basis that will permit efficient operation and expansion to meet the country3a rapidly growing needs. A new National Development Institute has recently been established to furnish initiative,financing and technical help in new fields of production, and a far-reaching industrial development law has been presented to Congress by the Government. The National Economic Council has been revivified and made the central organ of economic policy and planning. 6. Thus in two years, since mid-1951, the Government of Nicaragua has greatly improved the availability of resources for development and the administrative machinery to handle those resources; continued progress in both respects seems assured. Output Growth 7. Underlying and supporting this improvement in the financial position, there has been a continuing expansion of Nicaragua's agricultural production. The acreage devoted to the principal annual crops--cotton, sesame, rice and sugar--has expanded steadily; in 1951/52 it increased by over one-half compared with the previous year, and plantings were further

7 - 3 - extended in 1952/53, especially for rice. Much of this increase has taken place on new land opened up by new roads, and it has been greatly facilitated by increased imports of tractors; the Bank's loans have been important factors in both cases. Agricultural exports are continuing to expand and to become more diversified; although coffee remains a major factor and coffee exrorts should further increase, cotton, rice and cattle are developing more rapidly. The index of nroduction of major crops in 1951/52, taking 1946/47 as 100, is as follows: sesame 290; corn 225; beans 262; rice 319; and cotton /53 is likely to show relatively smaller increases in rice, corn and cotton output, and some decline in sesame. EXTERNAL 8- The inprovenept in.-ilicaragua's dqmestic f-inanria1 -situation has been accuw±pan1ed by a&nu reflected in a iaarked improvement of her balance of payments position: TRADE AND EXCHANGE (millions of U.s.$) 124L D22 2a2. Exports Imports (f. o. b.) Over-all balance of payments result -2.3 $ /6.7 $6.4 Gold and exchange holdings (Dec.) l/ Excluding gold. 9. This improvement stemmed initially from the adoption in November 1950 of a new exchange rate system which involved increasing the average rate for imnorts by about 40%, and requiring 100% local deposits against foreign exchange licenses as an additional measure to discourage over-importation. It was sustained in 1951 and 1952 by the growth of export earnings, which resulted partly from more favorable prices and partly from higher

8 - 4 - export volumes made possible by the increase in production already described, Gold exports have remained relatively stable at about $8-9 million; but since the mines are operated by foreign concessionaires, the foreign exchange accruing to Nicaragua amounts to only about U2 million annually. 10. The major nart of Nicaraguan export proceeds (up to 85%) normally accrues in the first half of the year, while imports are fairly well distributed. Hence the sharp increase of $13.5 million in foreign exchange reserves that occurred in the first six months of 1953 cannot be expected to continue in the last half of the year. General Prosnects 11. The prospects for a continuation of a satisfactory balance of payments position are favorable. Export earnings for 1953 whould equal those of 1952 and may be expected to increase thereafter, although at a somewhat slower rate than in the recent past. On the average about half of Nicaragua's exchange earnings are from coffee. No serious decline in coffee prices or in the U. S. demand for coffee is expected. The second largest exchange earner-cotton--should continue to give satisfactory returns, although prices have declined somewhat; exports go mainly to Europe, especially Germany, and Japan. Production of rice, for which there is an excellent market in the Caribbean area, is increasing rapidly. Nicaraguan corn and meat also find nearby markets. In the last two years virtually all exports were made against dollar payment. 12. Within the general expansion of agricultural acreage and output, there has been considerable fluctuation in production of specific export crops, in response to changing world market conditions. Thus, in 1952 lower prices for cotton halted increase in cotton acreage (in 1951 it rose from 28,000 acres to 50,000 acres planted) and perhaps produced some decline. Similarly a decline in world prices for sesame seed was reflected in a sharp drop in the area sown to this crop in On the other hand, many farmers turned to rice, and the area planted rose by over 20%. This adaptability, and the good land and climatic conditions that make it possible, are factors favorable to maintenance of Nicaraguan export proceeds over the long run. 13. Export earnings are and should continue to be adequate to cover import requirements unless heavy domestic inflation recurs. Exports are runrning at approximately 20% of total national output (GMP). Nicaragua is practically self-sufficient in foodstuffs, importing only some wheat. Although imports of petroleum may be expected to increase, neither oil nor wheat requirements are likely to expand at a rate exceeding export potential. External Pebt 14. In view of the favorable financial situation, the Government has

9 - 5 - repaid a substantial amount of its foreign indebtedness in advance of due date. The remainder ($800,000) of a Bank of America loan scheduled for final payment in 1955 was paid off in A prepayment of $245,000 has been made to the IBRD on the farm machinery loan; the first amortization payment, of $37,500 only, had been scheduled for March The Government has given public notice that it will liquidate in October 1953 the entire outstanding balance (E St. 216,000) of the Ethelburga sterling loan of 1909; this will eliminate a considerable bulge in total debt service which would otherwise have occurred in On June 30, 1953, Nicaragua's external debt amounted to $6.86 million equivalent, including undisbursed IBRD and Eximbank commitments and the Ethelburga loan ($1.05 million equivalent at 4.86) which is the only non-dollar debt outstanding. There are no privately held dollar public debt securities. 16. Debt service forecasts, made upon the assumption that the Ethelburga loan will he wholly repaid in 1953, indicate a total debt service averaging $910,000 annually during 1955 through 1958, then falling to t704,000 during 1959 through 1961, with all debt due to be paid off in From 1954 all service payments would be in dollars. Creditworthiness 17. The presently outstanding external debt principal is roughly 4% of the total annual output (GNP) of Nicaragua, 30% of annual Government budget revenues in 1951/52, and 16% of 1952 exports. The peak service on present debt (excluding the Ethelburga loan) is $967,000 in 1955, which is only 2.3% of 1952 exports, and 4.3% of 1951/52 budget revenues. 18. In view of the improvement of her fiscal position and administrative machinery, together with the growth and diversification of her export output, Nicaragua could without difficulty assume higher external debt service payments upon obligations incurred to support the present program of developmental investment. The potential limitation on future.borrowi6g;ii6more.. likely to be Nicaragua's own absorption capacity, set by technical.'factors and domestic finance, rather than by her expected balance of payments position. She should be able without strain to meet new annual service obligations of around $1 million, or approximately double the present service level. The loans now proposed would involve annual service somewhat under $650,000, and thus fall well within Nicaragua's repayment capacity.