Nicaragua

Nicaragua Pension Reform Proposal, Miguel Navarro-Martin, Bank Report

• The parameters of the system need to be re-defined and a mandatory, defined contribution system based on individual capitalization accounts introduced simultaneously or shortly thereafter.
  
• The current PAYG system should be closed to new entrants, those younger than 45 years of age should move to the new mandatory system and those between 45 and 50 should be given the choice to remain in the old system or switch to the new system.
  
• The system should be administered by a limited number of pension fund managers who would bid for a license through an international competitive bidding process.

The reference salary, the averaging period, and the effect of inflation. The reference salary for the calculation of a pension is equal to average earnings during the last 5 years of a worker's career (based on contributions of 15 years). Basing the pension on salary toward the end of a worker's career is inequitable because it redistributes income to workers with rising age-earning profiles. An end-valued benefit formula encourages fraud in the form of under-reporting earnings in early years and over-reporting earnings during the last few years of work, thereby adding to the financial unsustainability of the system. These problems could be mitigated if the pension depended on average salary over some longer period of time (e.g. 10 years). For Nicaragua, however, the possibility of extending the averaging period should be carefully reviewed because contributions and pensions will have to be revalued for inflation. Otherwise, the system will penalize those who retire when inflation is high. This is further complicated in Nicaragua because contributions are determined based on the average weekly salary categories and not on individual salaries.

Reforming the PAYG system. The initial steps toward a sustainable pension system in Nicaragua should include the re-definition of its parameters to avoid any further deterioration of INSS finances and the progressive downsizing of the current PAYG system. A parametric reform can be designed to increase contribution rates; raise the retirement age; standardize eligibility requirements for all workers; reduce replacement rates; increase collection efficiency; tighten eligibility requirements for disability benefits; change the reference wage; and penalize early retirement. At the same time and/or shortly after the introduction of the parametric changes, a deeper structural reform of the system toward a defined contribution system, should be undertaken. Such a measure will consolidate the system and ensure its long term viability and sustainability.

Creating a mandatory, fully-funded, defined-contribution system based on individual capitalization accounts. The publicly managed PAYG pension system is replaced by a mandatory, fully-funded defined contribution system based on individual capitalization accounts administered by privately owned pension fund management companies. In such a system, the role of the government is reduced from directly providing old age security to regulating, supervising and (depending on national preferences), guaranteeing a minimum provision of old age security via minimum pension guarantees or a social assistance pension (Annex I) through direct budgetary transfers.

From total contributions to the DC system of 10% (6% from the employer, 3.5% from the employee and 0.5% from the workers compensation insurance currently paid to INSS), 7 percentage points will go to the individual capitalization accounts and 3 percentage points will be paid as fees to cover administrative costs and other insurances. After the third year of operation of the new system, this fee will not exceed 2.5%. The difference (minimum 0.5%) will be deposited to the individual accounts.

The system should be privately managed to maximize the likelihood that economic rather than political objectives will determine the investment strategy, thereby producing a better allocation of capital and the highest risk adjusted return on savings. Pension funds managed by governments are likely to be poorly invested due to multiple objectives. In contrast, pension funds managed privately are more likely to be invested more broadly and generate better returns

Issuing recognition bonds, places an explicit value on the debt owed to each worker but it is not met until workers retire. The value of the recognition bond equals the present value of a pension replacing a certain percentage of earnings (replacement rate) for a full contribution period. The value of the bond can be adjusted to inflation; earn interest; have a ceiling; and/or require a minimum period of contributions (Box 4). Payment, in the absence of pension reserves, should be made directly by the Government through reserves, general revenue, and/or other forms of revenue or taxation (see how to finance the transition below). Bonds are disbursed at retirement and can be paid through a lump sum or a monthly supplement to other pensions. By imposing restrictions on the payment of recognition bonds governments can reduce the fiscal cost of the transition.

While parametric changes are the first step, the following alternatives should also be evaluated, within the context of Nicaragua's overall stabilization program and financial constraints:

• Penalize early retirement, and enforce tight eligibility for disability benefits.
  
• Increase the system's revenues by reducing evasion and increasing collections.
  
• Use privatization proceeds.

How to administer the new system? Given the state of development of Nicaragua's financial sector and its weak regulation and supervisory capacity, privately owned pension fund management companies, devoted exclusively to this business, should administer the pension funds. The options to consider are whether to limit the number of fund managers (as in Bolivia) or leave it to the market to determine the number (as in Chile, Mexico and El Salvador). Since there is a positive relationship between the size of the market (number of insured workers) and the number of fund managers, Nicaragua (with approximately 200,000 participants expected to join the new pension system) should consider limiting the number of fund managers to 2 or 3 through an international competitive bidding process that could lower the cost of the system (see below) but allows competition and free choice by workers.

In such a system, licenses to fund managers are auctioned and awarded based on the lowest fees by bidders that have been previously certified on the basis of their past experience and performance as well as compliance with minimum capital requirements. Managers might form joint ventures with foreign financial institutions that could bring foreign expertise but, in no case should the still weak local banking sector be allowed to manage pension funds on its own

Disability and Survivor Insurance. With a defined contribution system, the two available options to administer disability and survivor insurances are either leaving them under INSS control or acquiring a policy with an insurance company. Since INSS role in the reform will most likely be limited to the collection and transfer of contributions, the best and most economic alternative in Nicaragua is to acquire a policy with an insurance company. However, it should be noted that international competition in this market should be allowed given the infancy state of the insurance sector and the lack of satisfactory supervision over this market.

Age in 1999	Age of Retirement	Year of Retirement
54	65	2010
55	64	2008
56	63	2006
57	62	2004
58	61	2002
59	60	2000

In addition, the benefit formula was changed so that:
1. Required length of service was increased from 15 to 25 by 2020.
2. Effective from the year 2000, the last ten years of a person's wage history would be used in determining entry level pensions.

Tax Reform - Two tax reform scenarios were considered:
B. Gradual Increase: Payroll contributions rise from 5.5% in 1999 to 10% by the year 2010.
C. One Shot Increase: Payroll contributions rise from 5.5% in 1999 to 10% by the year 2000.

Nicaragua - Pension and Financial Market Reform Technical Assistance Credit Project (Vol.1), 2000/04/13, 19680 Project, Appraisal Document

The Govemment's first step towards a more sustainable pension system includes a parametric reform of the current PAYG program designed to increase contribution rates, raise the retirement age, standardize eligibility requirements, reduce replacement rates, increase collection efficiency and tighten eligibility for disability benefits. However, these measures are only short-term fixes and will require ongoing increases in contributions and cuts in benefits to keep the system balanced. To make Nicaragua's pension system sustainable in the long run, the Govemment has legislated the introduction of a mandatory, funded, defined contribution pension system of privately managed individual accounts.

As the retums on savings contributed by workers who are among the lifetime poor could not be sufficient to provide them with adequate income in their old age, the Govenmment's reform includes guaranteeing a minimum level of pension benefits to these workers upon retirement. The Govemment is committed to implementing a reform that is fair and can be justified for its distributional impact, both upon current and future workers, and across and within generations of Nicaraguan workers. The minimum pension guarantee will therefore be low enough, the contribution rate high and vesting period long enough to avoid a large unfunded future liability, strategic evasion, or significant leakage of old-age income transfers to the non-poor. Increasing coverage among evading formal sector employees and making the pension system open and attractive to informal and own-account workers by providing incentives and the opportunity for all workers to enroll in the pension plan are key goals in the Government's pension reform strategy.

The pension reform prgram will implement a parametric reform of the current PAYG pension system, acknowledge worker's rights acquired under the PAYG, and replace it with a mandatory, funded, defined contribution pension system of individual accounts administered by private pension fund management companies. The project will help to implement the Govemment's decision to carry out a full reforrn of the pension system to protect future fiscal solvency, decrease long-term debt and provide sustainable old-age income security for Nicaraguan workers.

Civil servants employed by the Government account for the majority of PAYG enrollees. Consultations about the reform have been made with this group of stakeholders, though the effects of the complete pension reform upon all enrollees will be assessed and more clearly signaled through education and promotion efforts included in the TA, as these workers will be the most immediately and directly affected by the reforms. The importance of including these groups in the consultation process of the reform is reflected in TA component activities, which include seminars and workshops directed specifically toward this group stakeholders, as well as a public information campaign.

Nicaragua - Pension Reform Technical Assistance Project (Vol.1), 2000/04/13, PID8081, Project Information Document

The Government's first step towards a more sustainable pension system includes a parametric reform of the current PAYG program designed to increase contribution rates, raise the retirement age, standardize eligibility requirements, reduce replacement rates, increase collection efficiency and tighten eligibility for disability benefits. However, these measures are only short-term fixes and will require ongoing increases in contributions and cuts in benefits to keep the system balanced. To make Nicaragua's pension system sustainable in the long run, the Government has legislated the introduction of a mandatory, funded, defined contribution pension system of privately managed individual accounts. As the returns on savings contributed by workers who are among the lifetime poor could not be sufficient to provide them with adequate income in their old age, the Government's reform includes guaranteeing a minimum level of pension benefits to these workers upon retirement. The Government is committed to implementing a reform that is fair and can be justified for its distributional impact, both upon current and future workers, and across and within generations of Nicaraguan workers. The minimum pension guarantee will therefore be low enough, the contribution rate high and vesting period long enough to avoid a large unfunded future liability, strategic evasion, or significant leakage of old-age income transfers to the non-poor.

Since 1991, the GON has made significant progress in eliminating or downsizing state-owned financial sector institutions, and introducing and strengthening banking sector supervision and regulation.

The objective of the Pension and Financial Market Reform Technical Assistance Project is to support the Government's plan to create a more equitable and sustainable system of old-age income security for Nicaraguan workers. Specifically, the Pension and Financial Market Reform TA will design and implement: i) parametric changes to the pay-as-you-go (PAYG) pension system; ii) a mandatory, funded, defined contribution pension system of privately managed individual pension accounts; iii) a financing plan for the recognition of acquired rights under the PAYG; and iv) a small, targeted public pension guarantee for lifetime poor contributors.

Preliminary Document (HIPC: August 1999)

Since 1990, the Government of Nicaragua has implemented a wide range of structural reforms. The underlying objectives were to support macroeconomic stabilization, enhance the conditions for faster and sustained growth by transforming the economy from a state-controlled into a market-based system, and to alleviate the country's widespread poverty. Key elements in this reform process were the public sector downsizing while redirecting expenditure toward the social areas, and the creation of an appropriate incentive and regulatory framework to foster private investment.

Public sector reform. The restructuring of the public sector over the past eight years has been remarkable. It included a significant reduction in public sector employment, the privatization of public enterprises, and a significant reduction in defense outlays. The public sector, which employed around 285,000 people (or 24 percent of the labor force) in 1990, was reduced to about 100,000 employees by 1998. 3 In 1990, the government owned and managed 351 commercial enterprises through a holding company (CORNAP), with production accounting for about 30 percent of GDP. By 1996, nearly all these enterprises either had been sold to the private sector, returned to former owners, or liquidated. In 1998, the national assembly approved the Law on Organization of the Executive Branch, which reduced the number of central government ministries from 15 to 12, the number of decentralized entities from 25 to 22, and the total number of high level public officials (department director or higher) by 25 percent.

Public utilities reform. Following the divestiture of commercial enterprises, attention shifted toward improving the efficiency of the public utilities, which had been operating as loss-making institutions. The first step consisted of the introduction of harder budget constraints, and the separation of operational and regulatory functions. Regulatory agencies were established in 1995 for the telecommunications and energy sectors, and in November 1997 for the water and sanitation sector. The structure of public utility tariffs was also revised and formulas were introduced in 1997 to adjust these tariffs gradually toward long-run marginal cost levels. Finally, privatization efforts are underway for the telecommunications and energy sectors, in parallel with efforts to strengthen the regulatory agencies in each sector. The national assembly approved several laws in 1998 that improved conditions for the privatization of the telephone company (ENITEL), and liberalized the exploration and sale of hydrocarbons. The state-owned petroleum company, PETRONIC, has been leased to the private sector. The legal charter of the power utility, ENEL, was changed in 1997 to permit private sector participation in electricity generation and distribution. Three private sector generation projects came on line in 1998.

Labor market and social security reform. Commodity-based remuneration practices were phased out in 1991-92, and a new labor code (1994) introduced greater flexibility in the contracting of labor. The reform of the social security system started in 1995 by separating the pension and health insurance system (INSS) from social welfare operations.

Financial sector reform. The financial sector has experienced a profound transformation since 1990, when state-owned banks and the insurance companies monopolized financial intermediation, which resulted in a gross misallocation of resources. In 1991, an independent banking superintendency was established and the commercial banking system was opened to private sector participation, and currently there are 14 private banks with more than 98 percent of total banking sector assets. At the same time, the conduct of monetary policy became progressively more market-oriented, including the abolition of most interest rate controls and directed lending statutes by 1994, and the unification of reserve requirements in 1997. To correct continuing problems with the public sector banks, the government closed and liquidated the largest state-owned bank, the National Development Bank (BANADES), during 1997-98 and awarded a majority share of the second largest state bank, the Commercial and Industrial Bank of Nicaragua (BANIC), to private investors in early 1999. Complementing these actions, the banking regulatory system was strengthened through revisions of the prudential norms (in 1994 and 1998) and a program of training for bank regulators. The insurance market was opened up to private firms in 1997 and there are currently five private companies competing with the public insurance firm (INISER).

In the 1999-01 period, the government intends to consolidate its ambitious structural reform program and to introduce a series of "second generation" reforms. The second generation reforms will focus on the legislative and institutional framework necessary to promote financial savings and development of domestic capital markets, through the strengthening of the financial sector, a comprehensive social security reform and the improvement of governance. The scope for private sector activity will be broadened further through privatization of public utilities and contracting out to the private sector of government-provided services. To further improve the business environment, the government will strengthen protection of property rights and step up the resolution of pending property claims, improve transparency and accountability in public sector operations, and take further measures to strengthen the judicial process.

Public sector and public enterprises. Under its privatization program, the government has restarted the ENITEL privatization process, after taking cost cutting measures and raising tariffs to improve its financial situation, and it intends to bring the enterprise to the point of sale by January 2000. The distribution and generation units of. ENEL will be offered for sale or long-term leases, and several departmental units of the water and sewerage system (ENACAL) will be offered for long-term lease starting in December 1999. Also, the government will divest assets of the state food marketing enterprise (ENABAS) in 1999 and grant concession to the operation of major port facilities in 2000.

Streamlining of the government will continue primarily through contracting out of services (road maintenance and other public works done by the operating units of the ministry of transportation, and the security, and catering services in the health facilities). The government also is considering a further reduction in the size of the military, and retraining some of the redundant military personnel into the police force. The reform of government ministries in line with the mandates set in the law approved in 1998 will continue through 2001.

As regards divestiture of public banks, as mentioned above, majority control of BANIC was awarded to the private sector in January 1999. A law permitting the privatization of the remaining state bank (Banco de Crédito Popular) is expected to be approved soon, so that the bank could be offered for sale in 1999.

Social security. The government is committed to a comprehensive social security reform that will improve the position of the existing pension system and introduce a new system of individually funded accounts managed by the private sector (being prepared with IDA technical assistance). The first step was taken in April 1999 by separating the pension accounts and the health insurance accounts. The reform law, which has been prepared in consultation with IDA, the IDB, and the Fund, will be submitted shortly to the assembly. Changes in the contribution rates, retirement age, and at the parameters of the new system will be introduced following approval of the law. The implementation of the new system of individual account will start toward the end of 2000.

Main Areas of Reforms to be Implemented Before the Completion Point
--Bring remaining public enterprises (mainly public utilities) to the point of sale.
--Start satisfactory implementation of the social security reform.

· Public employment was reduced from 290,000 to 107,000 through downsizing of armed forces (from 83,000 to 15,000), privatization or closure of public enterprises (involving 74,000 employees) and an early retirement program. 1990-93
· Public sector employment was reduced by 10,700 positions through a voluntary retirement program (Programa de Movilidad Laboral). 1994-96
· Public employment was further reduced by 3,800 positions through extension of voluntary retirement program. October 97-June 99
· Complete implementation of voluntary retirement and contracting-out programs with further reduction of government by 400 positions. July-December 1999
· All but five of the 351 companies incorporated in the public sector holding company, CORNAP, and accounting for almost 30 percent of Nicaragua's GDP were privatized, returned to former owners or liquidated. 1990-95
· Implemented separation of ENEL into generation, transmission and distribution operations as a step towards privatization. April 1999
· Leased PETRONIC to private sector June 1999
· Offer distribution and generation units of ENEL for sale or long-term lease to private investors. December 1999
· Divest administration of at least two regional water and sewerage systems managed by ENACAL to private sector through concession. December 1999
· Offer at least 40 percent of ENITEL's assets plus management control for sale to private investors. January 2000
· Issue terms of reference and offer to sell or conclude a long-term lease for port operations. March 2000
· Submit to the national assembly a draft law to reform the social security system on the basis of a fully funded system with individual accounts managed by the private sector, and adjust parameters to reduce losses of the current system. August 1999
· Start to introduce a new pension system. September 2000
· State-banks were recapitalized and downsized, and one state-bank, Banco Inmobiliario was closed, yielding a total reduction from 9,100 employees in 1990 to 3,500 in 1993. 1990-93
· The largest state bank, BANADES, was closed and its branches were sold to the private banks, facilitating a rapid expansion of private banking services into rural areas. November 97-June 98
· A majority share (51%) of second largest state bank, BANIC, was awarded to private bidder. January 1999
· Approval by the national assembly of law permitting privatization of Banco de Credito Popular. September 1999

Economic Recovery Credit I (No. 2302-NI) September 26, 1991
To support the Government in its effort to transform the economy from a command to a market economy by: (i) downsizing and restructuring the public sector, including the privatization of state owned companies; (ii) reforming the financial system to improve resource allocation through the establishment of a competitive environment with private sector participation; and (iii) reforming the incentives systems by eliminating barriers to private sector entry to production and trade, liberalizing trade, domestic price controls and related regulations. None

Decision Point Document (HIPC: December 2000)

In the 1990s, Nicaragua made important progress in the areas of macroeconomic stabilization and structural reform. Since the beginning of the decade, financial policies were strengthened, price controls eliminated, and the foreign exchange and trade systems liberalized. Government revenue has been strengthened. A program of public asset divestment was implemented, and public employment and military outlays were reduced substantially. Private banks were allowed to operate again, public banks were liquidated or sold, the superintendency of banks was created and is being strengthened, and a new legal and regulatory framework for the financial sector was put in place. Appendix I provides the record of structural and social sector reforms and indicates the main challenges ahead. These policies have been supported by the IMF's ESAF and PRGF programs, the IDA, and the IDB structural adjustment and sector loans.

In early 2000, there were further macroeconomic slippages as fiscal outlays increased, inflation accelerated, and the external position weakened. Credit continued to expand vigorously, leading to increases in the share of risky assets in bank portfolios. Moreover, the passing of constitutional changes that risked weakening key democratic institutions raised serious concerns about governance among the international community, which led to a slowing of aid flows. However, since April, the government has satisfactorily implemented a policy package that is helping to bring performance back on a path toward fiscal and external viability. Measures to improve government revenue and restrain public expenditure and private sector credit growth have started to bring financial performance back toward the program path; advances in social security reform and the privatization of the public utilities were also made.

In September, the distribution units of the state-owned electricity company (ENEL) were privatized and the authorities intend to privatize the generation units in early 2001. Recent efforts to divest the telecommunication company (ENITEL) did not succeed as only one bid substantially below the reservation price was received. The authorities are presently reexamining the divestment strategy with a view to offering the company for sale again in the first half of 2001.

Fiscal policy will aim at keeping the combined public sector deficit after grants below 8 percent of GDP on average in 2000-03, notwithstanding a substantial loss of revenue owing to the operation of private pension funds starting in September 2001. Fiscal consolidation would be pursued through tax revenue buoyancy associated with a broadening of the tax base (reduction of exemptions and tax loopholes and improvements in administration), as well as the lower investment expenditure resulting from reduced reconstruction outlays and the privatization of the utilities. Although foreign financing may continue at relatively high levels in the near term, the ratio of public external debt to GDP is projected to decline substantially.

The continued implementation of structural reforms and improvements in governance are essential to sustaining private sector confidence, strong economic growth, and international support. Structural reforms in 2001-02 will focus on implemen-tation of the recently approved pension system reform and related measures to help develop the domestic capital market, strengthening the financial system, improvements in the tax system, and completion of privatization of the public utilities. Good governance will be promoted through legislative and policy measures to create an efficient civil service, strengthening of the CO, further steps in decentralization, improvements in transparency and accountability in the use of public funds, resolution of property rights, and further modernization of the judiciary.

Implementation of the social security reform will over time improve the welfare of Nicaragua's working people by restoring soundness of the pension system and increasing its coverage. The pending actions involve: (i) approval of a law on supervision of private pension funds, and establishment of a supervisory agency; (ii) awarding of licenses to the private pension fund managers; and (iii) transfer of the eligible contributors to the new system of funded individual accounts. The approval of the securities and insurance laws is expected to contribute to the development of a domestic capital market. To strengthen the financial system, the superintendency of banks will fully implement the recently approved prudential norms on capital adequacy, credit risk and provisioning, and on limits on lending to related parties, a law on deposit insurance will be passed and implemented, and the superintendency will be strengthened (with support from IDA and IDB). The government will also sell its remaining shares in a domestic bank (BANIC) and dissolve a small public housing bank (BAVINIC). The privatization of public utilities will be completed by divesting the telecommunications company (ENITEL) and selling the generation units of the electricity company (ENEL), and by leasing the management of port facilities and urban water and sewerage systems to private investors.

Poverty Reduction and Structural Measures for the Floating Completion Point
· Implementation of remaining actions needed to introduce a satisfactory pension system of funded, private sector-managed, and individual accounts. This includes especially the passage of a law to create a supervisory authority for pension funds, the staffing of this supervisory authority, and the restructuring of the social security institute.
· Divestment of ENITEL and of all electricity generating units of ENEL.

Progress with Structural and Social Reforms and Challenges Ahead
· Public employment was reduced from 290,000 to 107,000 through downsizing of armed forces (from 83,000 to 15,000), privatization or closure of public enterprises (involving 74,000 employees), and an early retirement program. 1990-93
· Public sector employment was reduced by 10,700 positions through a voluntary retirement program (Programa de Movilidad Laboral). Public employment was further reduced by 3,800 positions through extension of voluntary retirement program. 1994-96 October 1997-December 1999
· All but 5 of the 351 companies incorporated in the public sector holding company, CORNAP, and accounting for almost 30 percent of Nicaragua's GDP, were privatized, returned to former owners or liquidated. 1990-95
· Major challenges are the privatization of ENITEL and completing the privatization of ENEL's generation units; the concessioning of major port facilities and major urban water and sewerage systems; and the creation of a road maintenance financing mechanism.
· The national assembly approved a social security reform law that establishes a system of fully funded individual accounts managed by the private sector, and adjusts parameters to reduce losses of the current system. The adjusted parameters were implemented. March-June 2000
· Major challenges are the passage by the national assembly of a law on supervision of private pension funds, the establishment of a supervising agency, the issuance of licenses to the private fund managers, and transition to the reformed system.
· State banks were recapitalized and downsized, and one state bank, Banco Inmobiliario was closed, yielding a total reduction from 9,100 employees in 1990 to 3,500 in 1993. 1990-93
· The largest state bank, BANADES, was closed and its branches were sold to the private banks, facilitating a rapid expansion of private banking services into rural areas. November 1997-June1998
· A majority share (51 percent) of second largest state bank, BANIC, was sold to private investors. January 1999
· Major challenges are the approval of a school autonomy law to facilitate continued implementation of school decentralization process; the improvement in quality of primary education through intensified teachers' training and evaluation, improved curricula, more and better textbooks, and better performance-linked pay for teachers.

Letter of Intent, January 9, 1998

During 1994-96 progress was made on structural reforms, although advances in some areas were slower than expected. In November 1995, the National Assembly approved legislation for the privatization of the telephone company (ANETHOLE). However, following an unsuccessful international bidding process, a new process of privatization has been undertaken which contemplates the sale of the company by mid-1998. To this effect updated and improved legislation has been sent to the National Assembly for its consideration. Regarding property rights, progress has been made in the process of delivering urban and rural property titles to the poor, the continuing return of state-owned properties, and the compensation of claimants. Interest on compensation bonds (issued to compensate owners of confiscated property) is being paid on time. Reflecting a political consensus, a new law ("Ley de la Propiedad Reformada Urbana y Agraria") was approved in November 1997 by the National Assembly, that will allow the resolution of pending claims and speed up the delivery of property titles. This law should allow the settlement of a large number of small property claims and it also creates special property courts to address pending cases. The government plans to deliver 90,000 property titles to small urban and rural plot holders in the next two years.

Current outlays of the central government are programmed to decline from about 22½ percent of GDP in 1996 to 18½ percent of GDP in 2000 (one-half of this reduction is to take place in 1997-98) reflecting a freeze in these expenditures (excluding interest payments and transfers mandated by the constitution but including wages) and a reduction in export subsidies. The government will request technical assistance from the Fund to establish mechanisms to ensure compliance with this objective. In an effort to increase the transparency of government operations, the fiscal accounts include almost 2 percentage points of GDP of expenditure that previously were part of extra budgetary expenditure. The decline in current outlays will be achieved, in part, through a civil service reform program consistent with the restructuring of the government. In addition to the 1,800 public sector positions closed during 1997, it is estimated that a further 1,500 positions a year will be cut during 1998-99. These figures are subject to revision in light of the law for restructuring the Executive Branch, that has been presented to the National Assembly for approval.

The government intends to carry out a study to develop options for the reform of the social security system. This study, which will be concluded with the technical assistance from the IBRD and the IDB, will aim at strengthening the current system while allowing participation of the private sector in the supply of health services and ensuring actuarial viability of the pension system. In the meantime, in order to improve the finances of the social security system, the government intends to revise contribution rates, pensions, retirement age, and to improve the financial management of the social security institute.

On financial system reform, the government is reducing state participation in the banking sector while ensuring that financial services remain available to small farmers. The government is taking steps to cease the banking function of the largest state bank (BANADES) and to sell to the private sector its controlling interest in Banco Nicaraguense (BANIC). The IBRD and the IDB will provide support to finance the losses resulting from the negative net worth of BANADES branches that have been or will be sold. As of October 1997 a total of 22 agencies and branches representing 80 percent of BANADES deposits had already been sold to private banks. By May 1998 the Banking Superintendency will withdraw BANADES' license to operate as a financial intermediary. To serve the credit needs of small poor farmers, the government will establish a small farmers fund that will operate as a second tier institution relying on commercial bank branches, cooperatives, and specialized NGOs with the best practices in rural finance to directly reach poor farmers.

The government will increase BANIC's capital by issuing shares to the private sector and in the process diluting its ownership, becoming a minority shareholder by mid-1998. To address possible legal issues concerning the ownership of the bank, a law will be passed by March 1998 establishing that the government is responsible for the eventual indemnization of the previous owners. In addition, the government intends to privatize a second-tier financial institution (FNI), which provides financing to commercial banks with government-guaranteed external borrowing.

The government plans to privatize public utilities, the state oil distribution company, and the services of major ports. To establish the relevant legal framework, legislation for the hydrocarbon, electricity, and water sectors is under discussion in National Assembly and is expected to be approved by February 1998. The government will coordinate the privatization process to ensure transparency and efficiency, reform the tariff structure of electricity and water services to reflect marginal costs, and eliminate cross subsidization; and will initiate the required reorganization of EEL and IAA. Consistent with the electricity law, EEL will be vertically separated and its generation and distribution assets will be sold or given in concession. Required new law to privatize ANETHOLE will be approved by February 1998 and the bidding process finalized by end-1998.

Implement a labor mobility program aiming at reducing public sector positions by a minimum of:
-1,800 Through end-December 1997
-2,550 Through end-June 1998
-3,300 Through end-December 1998
These figures are cumulative from January 1997, do not include reductions resulting from the privitization of public enterprises, and are subject to revision in light of the law for restructuring the Executive Branch, that has been presented to the National Assembly for approval.

November 1997: Apparoval by the National Assembly of the electricity law and regulations as agreed with the IDB. This law will allow to divide ENEL's operations into transmission, generation and distribution. In addition, it would enable to divest ENEL's assets or grant concessions to the private sector for generation and distribution.

June 1998: Approval by the National Assembly of a new law to privitize the telecom company (ENITEL).

June 1998: Offer for sale of at least 40 percent of ENITEL's capital, as agreed with the IBRD.

June 1998: Commission a study of the social security to rationalize and strengthen the current pension system, define alternatives to ensure medium and long-term actuarial viability of the pension system, and allow private sector participation in the pension system.

Letter of Intent, January 27, 1999

Substantial progress is being made on the structural front. The banking system is being strengthened with the closing or privatization of financially weak state banks. In June 1998 the large state bank, Banco Nacional de Desarrollo (BANADES) was liquidated, and the National Assembly approved the law for the privatization of the another major state bank, Banco Nicaraguense de Industria y Comercio (BANIC). In November, private investors were invited to bid for ownership of 51 percent of BANIC's equity. In December, the shares of the second tier state-owned financial institution, the Fondo Nicaraguense de Inversion (FNI), were offered for sale, and the government submitted to the Assembly a bill that would permit the partial privatization of the last state bank, Banco de Credito Popular. In addition, the Assembly approved the laws for the sale of the state telephone company (ENITEL), for the restructuring of the power company (ENEL) and the leasing of its units of generation and distribution, for the private sector management of the water supply system, and for the opening of the oil sector to private investors. Finally, the Assembly also approved the law for the restructuring of the Executive Branch aimed at reducing the number of ministries and streamlining the government.

However, the offer for sale of 40 percent of the shares of ENITEL-which was a structural performance criterion-was not announced in June as envisaged. As noted above, the National Assembly approved the law for the privatization of ENITEL in June but the authorities decided to take certain actions to improve the prospects for sale, including the implementation of a new tariff structure. In addition, the preparation of the sale with transparent procedures conducted by an international investment bank (Rothschild and Sons) required more time than had been envisaged. The sale process for ENITEL started in October 1998, and in December ENITEL's new tariff structure was approved and the pre-qualified potential investors were made public. Following two rounds of consultations with potential investors, final invitation to bid is expected in April 1999. On this basis, the government requests a waiver for the nonobservance of the performance criterion related to the sale of ENITEL.

In an effort to mobilize domestic resources, the government has submitted to the Assembly a tax package, which includes an increase in excises on cigarettes, soft drinks, and liquor. On the side of expenditures, the government is in the process of identifying a number of projects from the public investment program that could be delayed or eliminated to make additional room for those associated with the program of reconstruction. Control on less priority outlays (non-social and non-hurricane related outlays) will be tightened, in particular the public sector wage bill. Following long overdue adjustments in the salaries of teachers, health personnel, and police in 1998-99, no other general or sectoral increases will be granted in the government wages and salaries during 1999.

Continuing progress is being made in the structural front. On public employment reduction, some 970 positions were eliminated by the end of December 1998, compared with a revised target of 1,200. With an acceleration of the early retirement program it is expected that implementation of the program would be completed by end-March 1999. The social security reform is being prepared with the help of international advisors, and the authorities will proceed with the separation of the pension and health accounts no later than February 1999. On privatization, the government plans to divest or grant long-term concessions of ENEL's activities in the areas of distribution and generation; in preparation for this, ENEL's assets and activities will be separated into distribution, transmission and generation before mid-1999, and an international invitation for the pre-qualification of investors will be made by September 1999. Also, the state oil company, PETRONIC, will be offered for a long-term lease and private management is expected to take over by the end of June 1999.

Letter of Intent, August 19, 1999

Further progress was made in implementing the structural reform program in the first half of 1999. In the area of public sector reform, the government payroll was reduced by an additional 700 positions for a total of 1,200 programmed for 1999 (following a reduction of 3,300 in 1997-98), and the health and pension accounts of the social security institute were separated in preparation of the planned social security reform; management of the state oil distribution company (PETRONIC) was transferred to an international trading company under a ten-year contract, and the electricity enterprise (ENEL) was broken down into distribution, generation, and transmission units, in preparation for the divestment of the first two units. In the financial sector area, the sale of the second largest state bank (BANIC) to a foreign financial institution was completed; an increase in the capital adequacy requirement of commercial banks, in line with improved prudential norms issued by the Superintendency of Banks, is being implemented; and agreement was reached with the staffs of the Fund, the World Bank, and the IDB on draft legislation related to modifications to the central bank charter and to laws governing the banking system and the Superintendency of Banks. In the trade policy area, the ceiling on the great majority of import tariffs was reduced to 20 percent in mid-1998, and further to 15 percent in January 1999, together with the phase out of most duties on imports originating in other Central American countries.

The privatization process of the telephone company (ENITEL), however, suffered a setback early this year, with the withdrawal of the prequalified potential investors following disclosure of a weaker-than-expected financial and external debt position of the enterprise. To address this problem, the government has completed a detailed review of the situation of ENITEL, and with the advice of the World Bank is implementing an action plan to substantially strengthen the enterprise's financial position. ENITEL cancelled a previously contracted, but not disbursed, large external loan on nonconcessional terms and has started to implement tariff adjustments and cost reduction measures

The government will follow a cautious policy on expenditure, continuing to aim at reducing unproductive outlays. In particular, consumption, transfers, and the wage bill will be tightly controlled. Following exceptional salary adjustments to teachers, health personnel, and police, granted in two steps in 1998 and 1999, no other general or sectoral salary increases are to be granted in the second half of 1999. Subsequently, the increase in the wage bill of the central government-including the effects carried over from the above-mentioned adjustments-is not to exceed 9.5 percent in 2000, and 6 percent in 2001. To this effect, the existing system of civil service reduction will continue through 2001. In addition, the government plans to further reduce military personnel (by some 2,000 positions) and to use the resulting savings to strengthen the civil police. All in all, noninterest current outlays of the combined public sector will be targeted to decline by 4 percentage points of GDP over the three-year period through 2001.

The government is implementing an ambitious structural reform agenda in the public sector, the financial system, social security, and governance, while carrying out an expansion and strengthening of its social and poverty reduction programs. Among public sector reforms, the program to divest the distribution and generation units of the state power company (ENEL) is on schedule under a plan proposed by the advisory international investment bank. The regulatory agency, INE, is expected to issue tariff regulations before the issue of final bidding documents in December 1999. Regarding the telephone company, ENITEL, as noted earlier, the government is taking actions to strengthen the enterprise's financial position in the context of a program agreed with the World Bank, which provides, inter alia, for raising average tariffs by 10 percent and reducing operating expenditures by 20 percent. With the technical assistance of an international investment advisory bank, ENITEL's privatization process is being reactivated, and through a new international tender, the government plans to bring the company to the point of sale in January 2000. Progress is being made with the implementation of the law on Organization, Functions, and Procedures of the Executive approved in 1998, aimed at streamlining central government activities and reducing civil service personnel in a process to be completed in early 2001.

The social security system is programmed to undertake a major reform with the main objectives of strengthening its financial position, eliminating existing inefficiencies and inequities, and introducing a fully-funded system based on individual and privately managed capitalized accounts. The expectation is that this reform will raise in time the level of pension benefits. The reform draft law (prepared with technical assistance of the World Bank and the IDB, and reviewed by the Fund staff) will soon be submitted to the national assembly, and should be approved by end-1999. Changes in the contribution rates, retirement age, longer minimum contribution period, and other parameters of the new system will be introduced in January 2000 after passage of the law. Following the necessary institutional preparations, the new system of privately managed accounts would start to be implemented in the second half of 2000.

Continue to implement a labor mobility program aiming at reducing public sector positions (excluding reductions resulting from privatization of public enterprises). 700 positions to June; 1,200 positions to December 1999 About 740 positions reduced in January- June

ENITEL (reactivated privatization program): Final offer expected for January 1999 was postponed because the prequalified potential investors withdrew.

Start to introduce the new pension system based on individually- funded accounts. September 2000

Policy Framework Paper, 1999-2001, August 23, 1999

Important progress has been made in implementing structural reforms. In 1998 the Assembly approved laws permitting divestment of the electricity generation and distribution units, and leasing to private sector the units of the water and sewerage system; an improved law for the privatization of the telephone company, ENITEL; and a law that strengthens the judiciary system. In the financial sector, the largest state-owned bank, the National Development Bank (BANADES), was liquidated in June 1998, and the second largest state bank, the Commercial and Industrial Bank of Nicaragua (BANIC), was awarded to a private investors group in January 1999. New bank prudential norms were issued in the second half of 1998 that require banks to raise capital to 10 percent of risk-adjusted assets by mid-2000, increase provisioning for nonperforming loans, and set limits on loan concentration and lending to related parties. The reforms and streamlining of the government were intensified. Retrenchment through the program of voluntary exit was accelerated; the Law on Organization, Functions, and Procedures of the Executive was approved in June 1998, leading to the elimination of three ministries and, by June 1999, a 25 percent reduction in the number of high ranking officials throughout the government.

The program envisages a tight control of government consumption, transfers, and the wage bill. To this effect, the ongoing civil service restructuring and reduction program will continue to 2001. In addition, the government plans to further reduce military personnel, and the resulting savings would be used to strengthen the civil police. The government will continue to shift current expenditures toward social expenditure, particularly health and education, and will emphasize programs to alleviate poverty. Owing to such efforts and additional financing made available to the Supplementary Social Fund (SSF), overall social expenditure is programmed to increase to more than 15 percent of GDP in 2000-01.

Implementation of the new program for voluntary employment termination, the labor mobility program, which started in October 1997, aims at reducing 4,800 positions by end-1999 (6 percent of the general government employment at end-1996). Implementation is broadly on track as about 3,900 positions were reduced as of June 1999, despite temporary delays caused by an extended strike in the health sector in 1998 and the hurricane. In 1999 about 1,200 positions will be eliminated with the bulk associated with the health sector reform and the implementation of the new organization of the Executive.

The government is committed to privatizing or granting long-term concessions for the remaining public enterprises. To resume the privatization process of ENITEL, the government has canceled a contract for a loan on commercial terms (to increase the number of lines), and in accordance with a program supported by IDA/IFC has restructured and raised telephone tariffs (revenue will increase by 10 percent), bringing the rates in line with those of the already reformed systems in the neighboring countries; introduced a program to lower operating costs by 20 percent; and started discussions with CABEI to assume a loan owed by ENITEL. According to the new schedule agreed with IDA/IFC and the international advisory investment bank, final bidding documents for 40 percent of ENITEL assets will be issued in January 2000. As envisaged in Law 293, the government intends to place the remaining shares for sale in the stock exchange.
35. A decree on the division of ENEL into generation, transmission, and distribution units in preparation for privatization was issued in May 1999. A regulation revising the tariff structure and setting the rules for future adjustments is expected to be issued in October 1999. The generation and distribution units will be offered for sale to the private sector by December 1999.
36. With the support of the IDB and KFW of Germany, the government is decentralizing the water and sewerage system and plans to involve the private sector in management. To this end, the recently approved law established a regulatory agency, and created a new operating company (ENACAL). Water and sewerage operations are being split into urban and rural units, and the rural units are being linked to municipalities and put under local management. Larger sub-systems are being prepared for private management concessions. Two sub-systems (Matagalpa and Jinotega) accounting for about 13 percent of the national system are expected to be offered for private management in 1999, and two more units (Leon and Chinandega) accounting for 25-30 percent of the system would be offered by mid-2000 (as autonomous units of the ENACAL system.
37. The major ports need rehabilitation and modernization. To the extent possible, these improvements will be funded by the private sector. A study on reorganization of port services is expected to be completed by the end of 1999, while the state port authority (ENAP) is expected to be converted into a regulatory agency. The government intends to issue terms of reference with the offer of port facilities for sale or long-term concession by March 2000.
38. The government will continue to rehabilitate the road system, especially the major export corridors, by implementing projects supported by IDA and the IDB. The feeder and rural roads also will be improved. The government is working with IDA on the establishment of a road fund that will streamline the contracting out of maintenance to the private sector where feasible. In this process, at least three of the seven state-owned road maintenance units (CERCs) are expected to be privatized by December 1999.

The government is committed to a comprehensive social security reform, which is being prepared with technical assistance by the World Bank and the IDB. The reform will entail a tightening of parameters of the existing pension system and introduction of a new system of individually funded accounts managed by the private sector. The first step of dividing the pension from the health insurance accounts was implemented in April 1999. To reduce losses of the existing system, the retirement age will be raised, the contribution rate increased, and the minimum period of contributing lengthened. The reform envisages a compulsory transfer to the new system of contributors younger than age 45, to provide sufficient time horizon for the contributors to generate adequate savings by age 65, and a minimum number of accounts in the new system to generate interest of private managers. Some elements of the reform, related to specifics of the benefits and the cost and financing of the transition to the new system, will need to be defined before implementation. The draft reform bill is expected to be submitted to the Assembly shortly. The parametric changes of the existing system would be introduced following approval of the law, and transition to the new system would start in the last quarter of 2000.

The government intends to further promote the development of a sound and competitive financial system. To this end, it plans to complete the privatization of state banks and take important measures to strengthen the financial sector. The law permitting privatization of the remaining state bank (Banco de Crédito Popular) is expected to be approved soon, and the bank would be offered for privatization by the end of 1999. The enforcement of higher prudential standards set in the banking norms revised in the second half of 1998 will ensure that the calendar for compliance is observed.

Strucutral Adjustment Policies [matrix]

Continue to implement a labor mobility program aiming at reducing public sector positions (excluding reductions resulting from privatization of public enterprises):
700 positions to June; 1,200 positions to December 1999; About 740 positions reduced in January-June

In six months from issue of the regulation (November 1998) eliminate three ministries, three autonomous government entities and 144 positions (net) of officials at director or higher levels. June 1999 Done

Invite final bids of potential investors for 40 percent of ENITEL assets -- January 2000

Offer ENEL's generation and distribution units for sale or long-term lease to the private sector: December 1999

Divest 75 percent of ENABAS's assets, compared to value of end-1997 through sale or long-term leases to the private sector. December 1999

Privatize at least three of the construction enterprises under the ministry of transportation December 1999

Issue terms of reference and offer to sell or conclude a long-term lease for port corporation(s): March 2000
Transfer the state oil distribution company (PETRONIC) to the private sector under a long-term lease. June 1999 Done

Submit to the National Assembly a draft social security reform law with revised parameters to reduce losses of the current system and introduce a new system of individually funded accounts managed by private sector. August 1999

Implement the revised parameters (the retirement age, minimum duration of contribution, level of contribution) January 2000
Start to introduce the new pension system based on individually funded accounts. September 2000

A Strengthened Poverty Reduction Strategy Paper, August 15, 2000

Public sector reform. The reforms of the public sector undertaken in the last ten years have contributed significantly to the country's poverty reduction strategy. The downsizing of the state has strengthened fiscal policy implementation. Public expenditures were cut by reducing the army by three-fourths, the privatization of 351 government-owned businesses which accounted for almost 30 percent of GDP, the implementation of voluntary retirement programs for public employees, and execution of the law on organization of the Executive Branch approved in 1998 by the National Assembly. This law reduced the number of ministries from 15 to 12, and the number of decentralized institutions from 25 to 22. Defense outlays alone fell from about 14 percent of GDP in the 1980s to less than 3 percent in the last few years. As a result of these policies, public sector employment was reduced from 285,000 employees (24 percent of the economically active population) in 1990 to 80,000 in 1999.

The government also began a program to privatize public utilities. Accordingly, it separated the operational and regulatory activities of these entities, and tightened their budgets in order to attain financial sustainability. In 1995, the government created regulatory institutions for telecommunications and energy, and two years later it did the same for water and sewerage. It revised the structure of public service rates, and made gradual adjustments in order to recover long run marginal costs. In 1998, the National Assembly approved a number of laws that created a framework for the privatization of the government telephone company (ENITEL) and liberalization of the exploration and sale of hydrocarbons. The government-owned oil company (PETRONIC) was leased to the private sector. Likewise, in 1997 the organic law of the government-owned electricity company (ENEL) was modified in order to permit private sector participation in the generation and distribution of electricity.

In 1997-1998, the government liquidated its largest bank, the National Development Bank (BANADES), and the insurance market was opened to the private sector. In 1999 the majority of shares of Banco Nicaragüense (BANIC) were privatized. Both transactions, while salutary for a growing private banking system, left the government with the bad debts of these banks.

Pension reforms. In 1999, the government began a comprehensive reform of the pension system, a system reduced to a crude pay-as-you-go fund by prior hyperinflation. A new system of privately-funded individual retirement accounts administered by the private sector will be introduced. In April 1999, the pension and health insurance sub-systems were separated. At the beginning of the year 2000, the National Assembly approved a law for reform of the social security system. Full-scale application of the new system is expected by the end of this year. This reform, when fully implemented, will strengthen not only the pension system, but likely increase national savings and over the long term deepen the nation's financial markets as well.

The sale of the partitioned electricity firm as well as the telephone company continues apace; controlling shares in both will be sold this year. The remainder should be completely sold next year.

After a tariff revision, major urban water systems will also begin to be offered for concession this year; in addition concessions will be offered to lease and manage major ports starting this year.

The remaining government shares in BANIC, a large commercial bank, will be sold this year. Subsequently, the housing bank BAVINIC will be dissolved and its portfolio sold. A new housing institute that will replace the housing bank will oversee a program of 5,000 annual construction subsidies for the poor (not including the houses to be built for those left destitute by hurricane Mitch). Both actions, however, will reduce even further direct governmental responsibilities.

The National Assembly has already approved a major change in the pension system. This permits workers under 43 years of age to establish individual accounts managed by approved private administrators. The Assembly is also likely to soon pass legislation that will create a supervisory authority for these new pension funds and their administrators. This reform, combined with a restructuring of the Social Security Institute, will permit the government to target its direct pension support towards lower-paid workers and the poor. It should also have a major effect on capital markets; lengthening the terms of financial instruments, increasing national savings, and deepening equity markets.

Primary teachers will receive incentive pay supplements linked to their performance; by
2002, 18,000 such teachers should be within this new system. By then a program to
construct rural teachers' housing should be well underway. Equally, 330,000 rural primary
students will receive free scholastic material this year; the government's goal is to expand
their access to books by 2 percent a year.

MAIN STRUCTURAL REFORMS - PAST MEASURES
Public employment was reduced from 290,000 to 107,000 through downsizing of armed forces (from 83,000 to 15,000), privatization or closure of public enterprises (involving 74,000 employees) and an early retirement program: 1990-93

Public sector employment was reduced by 14,000 positions through a voluntary retirement program (Programa de Movilidad Laboral): 1994-99

Public employment was further reduced by 3,800 positions through extension of voluntary retirement program: Oct. 97-Jun. 99

All but five of the 351 companies incorporated in the public sector holding company, CORNAP, and accounting for almost 30% of Nicaragua's GDP were privatized, returned to former owners or liquidated.: 1990-95

Leased PETRONIC to private sector Jun. 1999

Final bids of pre-qualified investors for 40 percent of ENITEL assets where invited Jun. 2000

Leased 80% of ENABAS to private sector 1999

National Assembly approved the new Law of the pension system which is based on individual accounts administrated by private enterprises: Mar. 1999

State banks were recapitalized and downsized, and one state bank, Banco Inmobiliario was closed, yielding a total reduction from 9,100 employees in 1990 to 3,500 in 1993: 1990-93

The largest state bank, BANADES, was closed and its branches were sold to the private banks, facilitating a rapid expansion of private banking services into rural areas: Nov. 97-Jun. 98

A majority share (51%) of second largest state bank, BANIC, was awarded to private bidder: Jan. 1999

MATRIX OF POLICY ACTIONS
Announce the results of the bidding of 40% of ENITEL assets -- Sept.2000
Offer for sale the remaining shares, following the sale of 40% -- 2001-2002
ENEL
· Announce the results of the bidding of the distribution units: Sept.2000
· Announce the results of the bidding of the thermal generating plants: Nov. 2000
· Complete privatization of hydroelectric generating plant: Dec. 2000

ENAP
· Offer to private investors long term concession for operation of major public port
facilities (Corinto, Potosí, and San Juan del Sur).: Dec. 2001

BANIC
· Approval of law authorizing sale of the remaining government shares in BANIC.: Dec. 2000

Letter of Intent and Memorandum of Economic and Social Policies, August 30, 2000

In the structural area, the National Assembly passed legislation to help improve transparency and efficiency in government procurement. Laws relating to the central bank, commercial banks and the Superintendency of banks approved in the fourth quarter of 1999 strengthened the autonomy of the central bank and improved the legal basis for prudential regulation and supervision of financial institutions. At the same time, the remaining state-owned bank (which was financially weak) was closed and the divestiture of its assets will soon be completed. Moreover, stricter prudential requirements on banks (including phased-in higher capital adequacy requirements) began to be implemented. To improve government efficiency and increase resources for funding high priority poverty reducing programs, some 1,100 government positions were eliminated in 1999, bringing the total streamlining under this administration to about 7,900 positions (equivalent to 11 percent of government employment at end-1996).

In the structural area, a major effort is being made to implement fully the reforms envisaged in the 1999-2000 program (Table 8), notwithstanding the difficulty of mobilizing political support for many of them. In April 2000, the National Assembly approved the social security law that reforms the existing, financially nonviable public system and provides for the introduction of funded individual retirement accounts managed by appropriately regulated private firms, while providing for a government guaranteed minimum pension to eligible individuals. The revised pension system parameters became effective in June, and a law on the supervision of the private pension funds will be submitted to the National Assembly by September 2000. Also, legislation was passed to allow for a restructuring of the internal revenue and customs departments to help improve tax administration and bolster collection. All the envisaged preparatory actions for the privatization of ENITEL and ENEL (which is necessary to increase the supply of electricity and telecommunication services and reduce the costs of these essential services in the medium term) have been taken, including inviting the final bids from the prequalified investors. ENEL's distribution and thermo-generating units will be awarded shortly and its hydroelectric plant will be sold in the fourth quarter of 2000. Port facilities will be offered for long-term lease to the private sector by end-2000.

Prior Actions for the Completion of the Second Review
under the Second Annual PRGF Arrangement
Privatization: Approval of regulations on future telephone and electricity tariff adjustments for the privatized companies and issuance of final invitations of bids for the privatization of the telephone and electricity companies. During the privatization process of the distribution and generation units of ENEL, the Government will not negotiate or contract new electricity purchase commitments for the national grid beyond those in existence as of end-December 1999, in order to maintain valid the approved tariff structure for private sector participation.
· Status: Done in June; the opening of bids (award) expected in the first half of September.
Nicaragua: Structural Benchmarks and Performance Criteria for 1999-2000
Continue to implement a labor mobility program aiming at reducing public sector positions (excluding reductions resulting from privatization of public enterprises). Done; 1,085 positions were eliminated in 1999, the plan of reducing 3,300 positions in 1997-99 was exceeded

ENITEL (reactivated privatization program):

- Implement a program to reduce the enterprise's Done. Employment reduced by about 830 or 26
operating expenditure by at least 20 percent in 1999. percent since October 1998, of which about 540
during June-September 1999.

Invite final bids of pre-qualified investors for 40 percent of ENITEL assets.1 2 Done in June 2000; January 2000 in 2nd. year PRGF.

ENABAS

- Divest or lease 75 percent of assets For December 1999 in PFP. Done. Facilities
accounting for 80 percent of capacity have been leased to the private sector.

ENAP
- Offer to private investors long-term concessions for ports facilities (Puerto Cabezas, Potosi, Corinto, San Juan del Sur). December 2000.

Implement the revised pension system parameters (the For January 2000 in 2nd. PRGF. Effective from June
retirement age, minimum contribution period, and the level of contribution). 2000, but being challenged by the Controller's Office and in courts