Response from Mr. Ian Bennett, IMF Executive Director representing Canada

7 November 2001

Dear Mr. MacCuish:

Thank you very much for your e–mail of October 12, 2001. I appreciate that you have taken the time to share your views with me.

Canada is a strong supporter – and indeed a leader – in supporting initiatives to reduce the debt burdens of developing countries. Canada provides support for this important goal through a number of mechanisms, including the IMF's Poverty Reduction Growth Facility (PRGF). In thisrespect, Canada shares your concern about the suspension of Nicaragua's PRGF.

As you may be aware, the PRGF was established in September 1999 to provide concessional lending with an explicit focus on poverty reduction in the context of a growth oriented strategy. Under the arrangement, the borrowing country, with the participation of civil society-including the poor–and other development partners develop a poverty reduction strategy. This strategy includes identifying specific policies to reduce poverty, as well as establishing broad economic policies, such as spending and deficit targets. Concessional lending is then provided on the condition that the strategy is closely adhered to by the borrowing country. The conditionality provides safeguards to the Fund to ensure that successive tranches of financing are delivered only if key economic policies and poverty reduction initiatives are on track.

Unfortunately, Nicaragua veered significantly away from the policy targets that it had agreed to. In the spring of 2001, it was established that Nicaragua had accumulated significant unreported arrears. Specifically, the debt was approximately two per cent of GDP higher for 2000 than initially reported. This level of unsustainable expenditures continued in 2001 not as a result of external events beyond the control of Nicaragua but as part of the spending excesses in the lead–up to this November's election. Nicaragua's authorities could not provide assurances that government spending could be controlled. It was therefore with regret that the IMF had to suspend the PRGF.

That being said, the IMF – in co–operation with the Nicaraguan authorities – has put in place a short–term Staff Monitored Program. If a good track record is re–established under this program, negotiations for a new arrangement under the PRGF should begin shortly. I agree that a new PRGF arrangement would provide much–needed financial support to Nicaragua and we will monitor progress closely.

Thank you again for your e–mail on this important topic.

Yours sincerely,

Ian E. Bennett