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                     INTERNATIONAL MONETARY FUND AND                                       v2
                 INTERNATIONAL DEVELOPMENT ASSOCIATION

                                 REPUBLIC OF NICARAGUA

   Addendum to the Joint Staff Advisory Note on the Poverty Reduction Strategy
                                     Paper


                 Prepared by the Staffs of the International Monetary Fund
                      and the International Development Association

               Approved by Miguel Savastano and Dhaneshwar Ghura (IMF)
                                and Pamela Cox (IDA)


                                           June 16,2010

1.      This addendum to the Joint Staff Advisory Note (JSAN) on Nicaragua's
Poverty Reduction Strategy Paper updates Executive Directors of developments
since the JSAN was distributed to the Boards of the Fund and the Bank on April 22,
2010. 1

2.      Board discussion on the JSAN was delayed~ The JSAN was originally expected
to be discussed at the Fund Board on May 5, 2010, together with the Article IV and the
Fourth Review of the ECF-supported program, and at the Bank Board on May 18,2010.
However, Board discussion was postponed following a decision in late-April by the
Nicaraguan authorities to grant a large wage increase to government employees,
breaching understandings under the Fund-supported program. The wage bonus would
increase the wage bill by Y2 percent of GDP in 2010, and imply a 10 percent increase in
the nominal wage bill (instead of the 3Yz agreed percent under the program). Discussions
are ongoing between Fund Staff and the Nicaraguan authorities to identify measures that
would allow bringing the ECF-supported program back on track.

3.      The thrust of the JSAN remains broadly unchanged, but there are a few new
elements that Executive Directors may want to consider in their consideration and
discussion of the JSAN.

4.      Signs of an incipient economic recovery are emerging. After a GDP
contraction of over 1Yz percent in 2009, there are indications that the economy is
bottoming out. The index of economic activity increased by 1.1 percent in the first
quarter of2010 (q-o-q, SA), with significant recoveries in agriculture, industry and
commerce. Also, in line with regional trends, exports, imports and remittances have
picked up, fiscal revenues have rebounded (particularly on the trade side), and the
demand for currency has strengthened. Inflation remains contained though rising

1 The JSAN is expected to be discussed by the IMF Executive Board together with Nicaragua's 2010

Article IV consultation.
commodity prices are putting upward pressure (cumulative inflation through May
reached 3.9 percent). Projected real GDP growth for 2010 remains at about 1% percent,
on the back of improved prospects for global demand.

Election-related spending pressures are also emerging, though the fiscal deficit is
projected to decline to 3.3 percent ofGDP in 2010 (down from 3.9 percent in 2009), on
the back of a combination of tax, expenditure and pension measures. The authorities have
indicated that the wage bonus granted in May will be financed with a grant from
Venezuela and will be treated off-budget, thereby not affecting the 2010 fiscal deficit.
Going forward, it will be essential to rationalize expenditures, including by containing the
growth in public sector wages, reducing large budgetary earmarks and streamlining
generalized subsidies, to put public debt on a firmly declining path, and to create the
space for higher pro-poor spending.