This document reviews Nicaragua'sdevelopment agenda from a growth perspective. That focusemerges from the country's Poverty Reduction StrategyPaper (PRSP), which traces the widespread poverty observedin Nicaragua, to the collapse of the 1980s, and considers acontinued, broadly-based economic recovery as the best wayto eliminate it. The focus on growth guides the review ofpolicy developments in various economic, social, andinfrastructure sectors. The Development Policy Review (DPR)has the objective of providing analytical underpinnings,both for the Government in developing and refining itsgrowth strategy, and the Bank and other donors, in designingtheir assistance programs for Nicaragua. The macroeconomicprogram agreed with the International Monetary Fund (IMF)seeks to promote sustained growth, and poverty reduction ina stable manner, by connecting the country's largefiscal, and external imbalances, addressing keyvulnerabilities, and removing long-standing barriers togrowth. Key focal points of the program are measures toimprove governance, and accountability in the public,private sectors, rein in sustainable government spending,raise the tax effort, and strengthen the banking sector. Onthe structural front, significant advances were made in 2002in education and health, including strengthening of thepublic sector management, through an integrated financialmanagement system, and other important reforms. However, keymacroeconomic challenges outline the country'scontinuing dependence on a few primary commodity exports andaid, both of which have contributed significantly to thehigh level of economic volatility. A second issue concernsthe sustainability of Nicaragua's macroeconomicframework, a weak spot in policymaking, deserving carefulattention. To address shortcomings, the report suggestsaccompanying the Fiscal Transfers Law with additionalmeasures, or legislation that 1) defines the spendingresponsibilities; 2) strengthens project planning andexecuting capacities of the weaker municipalities; and, 3)establishes appropriate accountability, and financialmanagement mechanisms. In addition, the pension reforminitiated in the mid-1990s, seeks to replace the currentdefined-benefit, pay-as-you-go system, by adefined-contribution system. The status of the pensionreform is being reviewed, reassessing its fiscal costs withassistance form the Bank.
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