Nicaragua - Education Project

RESTRICTED FILE COPY Report No. P-586 . ~R 'COPY . . This report was prepared for use within the Bank and its affiliated organizations. They do nrot accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF NICARAGUA FOR AN EDUCATION PROJECT February 5, 1968  INTE.RNiTIONAL B:NK FOR RECONJSTRUCTION AND DEVELOPIMNT REPORT AND RECOOIENMTION OF UiE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN A1N AMOUNT DI VWRIOUS CURRENCIES EQUIVALENT TO US$4,o MILLION TO TiE REFIJBLIC OF NICAfRAGU.A, FOR AN EDUCILTICN PROJECT 1. I submit the following report and reconmendation on a proposed loan in an amount in various currencies equivralent to US$4 milLion to the Republic of Nicaragua to assist in the financing of an Education Project. PA;RT I - HISTORICAL 2. In 1965, with the assistance of UNESCOS the Governmeint of Nicaragua identified and prepared an education project consisting of the expansion of secondary education, The project Twas submitted to the Bank and it was appraised, with appropriate modifications, late in 1966 and in 1967. Ne- gcotiations for the proposed loan tookc place in Washington on November 30 thr-ough December 6. Tie Government of Nica:agua was represented by the Nicaraguan Arnbassa-or, I 1,- Guillermo Sevilla Sacasa, the Minister of Education, Mr, Rwairn Sacasa Guerrero, Mr0 Cfilio Lacayo, (Treasury), Ing. Jorge Hayn, (Public Uorks),3 Hessrs. Guillermo Rothschtuch and Fernando Diaz (I,zi.stry of Education), and Lic. Gustavo Escoto, the Embassyts Counselor for Economic Affairs. 3 Since 1951 the Bank and IDA have made 13 loans and 1 credit to Nicaragua for a total original amount of US$46.1 million. The proposed loan would increase the total Bank and IDA lending to Nicaragua to US$50.1 million. Following is a summary statement of Bank loans and IDA credits to Nicaragua as of December 31, 1967: Amount (USS mil.lion) Year Loan Borrower purpose Banik IMA Undis- No. bursed 1951 45 Republic of Nicaragua Roads 3R5s 1951 52 Republic of Nicaragua Grain Silos O-5 1951 44 Banco Nacional Agriculture 1.2 - 1953 81 Republic of Nicaragua Roads 3.5 - 1953 82 Republic of Nicaragua Power 0.5 - 1955 130 INFONAC Aigriculture 1,5 _ 1955 121 ENALUF Power 7l _ 1955 122 INFONAC Power 0.4 - 1956 143 ILutoridad Portuaria de Corinto Port 3.2 - 1956 154 ENA,LUF PowTer 1.6 _ 1960 259 ENALUF Power 12.5 - 1962 26 Republic of Nicaragua IJater Supply 3,0 - 1963 332 Republic of Nicaragua Irrigation 0.3 .13 1966 470 ENALUF Power 5.0 .87 778 et0 1.00 Conts do  -2- Cont d. Amount (US$ mijlion) Undis- Bank ThA. bursed Total (less cancellations) 4.o8 3 O of which has been repaid to Bank and others 17,4 Total now outstanding 23e4 Amound sold 3.6 of which has been repaid 2.2 J.0.4 Total now held by Band and IDA. 22_O 3M Total undisbtursed loO _ 17 . On December 21, 1967 the Board of IFC approved a loan of $1 million and an equity participation of $1 million in Fabritex, a new cot- to-a and synthatic fiber textile company6 This is the first operation of IFC in Nicaragua. 5,, The appraisal of a fifth loan to ENALUF has been completed and a proposal for a loan for thermal and hydro power generation will be submitted to the Executive Directors shortly. PART II - DESCRIPTION OF TEHE PROPOSED LOAN 6. BORROWER: Government of HTicaragua AMOUNT: The equivalent in various currencies of US$4eO million PURPOSE: (1) Construction, equipment and furnishing of two teacher training schools and extension of a third school, anid (2) Construction, equipment and furnishing of nine secondary schools, the extension, equipment and fur- nishing of seven schools and equip- ment and furnishing only of two schools.  -3- LMORTIZATION: Principal repayments semi-annually frcm May 1.5 1978 - May 15, 1993 INTEREST RATE: 614 percent per annum COMMITMENT CHARGE: 3/4 of one percent per annum PART III - THE PROJECT 7. A report entitled "Appraisal of an Education Project in Nicaragua" (TO-609) is attached hereto. 8,, Ninety percent of Nicaraguan labor force has not even completed primary school and only 0h percent attended university. Lack of qualified manpower at intermediate level severely hinders development in all sectors of the economy, The shortage of manpower is largely due to the lack of sufficient educational facilities, to tie poor quaLity of education impar- ted by the existing schools and the imbalance of specializations offered by such schools in relation to the specializations needed on the labor market. Secondary education is especially inadequate: existing school facilities are overcrowded, curricula are obsolete and teaching is poor - as very few secondary school teachers are academically qualified, Secon- dary schools have a high proportion of dropouts and repeats and each grade includes pupils of a too wide age range to make learnirng effective. 9, The proposed project is designed to deal with these deficiencies in The secondary schools in Managua as well as in the most importa:at towns of Nicaragua. The project would provide 11,540 student places, of which 8,100 are in addition to the existing ones and 3,440 are in re- placement of existing unsuitable schools. Enrollment in individual sub- jects will reflect the demand for skills of different kinds. 10. A portion of the project concerns the training of teachers for primary schools; 1,505 new places would be provided by the project, and would make it possible to extend the teacher training course to three years and substantially improve the curriculum0 Provisicr. for training secondary school teachers is not included in the project since the action already taken by the Schools of Education of the National and Central American Universities ensures the availability of qualified teachers in sufficient numbers. 11. The execution of the project to simple standards would be en- trusted to a special project unit, within the Mlinistry of Education. Its completion should take four years.  120 Physically, the project consists of construction and equipment of various schools, some of them completely new and same of them to be just re-equipped. Specifically, the project includes (a) construction and equipment of two new primary teacher training schools and the extension of a third, (b) construction and equipment of nine new general secondary schools, (c) the extension and equipment of seven other general aecondcu'y schools, and (d) equipment only of two secondary schools. The proposed schools will be in all the main population centers, 130 The total cost of the project is estimated at US$8.0 million, with the major portion, 68 percent, of the total going for construction costs. The foreign exchange component is estimated at US$2.7 million9 The Bank will finance one half of the cost of the project and the Govern- ment of Nicaragua will finance the other half and provide the necessary funds for the operation of the schools. 14. Procurement of goods and services for the project will be made on the basis of international competitive bidding both for building con- tracts and purchases of equipment. Disbursement would be made for the full cost of imported equipment, and for about 25 percent of the cost of the remainder of the project. PART IV - LEGAL INSTRUMENTS AND AUTHORITY 15. The draft Loan Agreement between the Republic of Nicaragua and the Bank and the Report of the Committee provided for in Article III, Secticn 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 16. The establishment of the special project unit referred to in paragraph 11 above and approval of the loan by the Congress of Nicaragua are conditions of effectiveness. PART V - THE ECONOMY 17. The last economic report dealing with Nicaragua WH-170-a. dated June 5, 1967 observed that during the period 1960 - 1965 the economy of Nicaragua grew rapidly, GDP increasing by nearly 8 percent per year or 5 percent per capita, in real terms. Most of the increase was attributable to growth in agricultural production for export, mainly cotton. The favorable export performance permitted a considerable build-up of the bank- ing systemts gross international reserves, which increased from US$12.7 million at the end of 1960 to $62.6 million at the end of 1965. 18. The consequent expansion of the tax base, moreover, coupled with improvements in tax collection and administration, resulted in substantial  surpluses in the budget of the Central Govermnent2 which was able to ac- cur,mlate cash balances of over US$10 million at the Central Bank. 190 Things have changed somewhat during the past two years. Unfa- vorable weather conditions and lower export prices combined to bring about a reversal of this trend in 1966, and the deterioration continued during 1967. GDP growth was 3.6 percent in 19.66 and slightly over 4 per- cent in 1967. In 1966 export earnings declined by 5 percent; this, ac- companied by a 13 percent i.ncrease in imports, resulted in a negative trade bal.ance for the first time in nearly a decade. During 1967 ex- ports grew by less than 2 perceznt while imports increasedb; over 8 per- cent, aggravating the trade balance deficit. Capital movements, par- ticularly direct foreign investment and drawings on external loans cush- ioned the impact of these deficits but were insufficient to offset them entirely. As a consequence, Nicaraguals gross international reserves declined by an estimated $27.3 rillion during 1966 and 1967. 20. Nicaraguats trade with the rest of Central America, which has expanded rapidly s4.nce the Cormon Market was established in 1961, has contr:?. to this recent deterioration in external finances. The growth of imports (from US$2.9 million in 1961 to $35.8 million in 1967) far outpaced the growth cf exports ($1.8 and $l7.6 million respectively) during each of these years. Imports from Central America constitute at present 18.4 percent of Micaraguals total imports; exports to Central America, 12.2 percent of total exports. A number of projects now under way are designed to increase substantially exports to Central America in 1968 and beyond, particularly insecticides, rice, textiles and metal and miJil products. 21. During 1966 and 1967 the fiscal situation suffered a deterior- ation similar to that encountered in the balance of payments. Current revenues grew by only 6,h percent in 1.966 and 5.6 percent in 1967, whlile current expenditures increased by 12.8 percent and 25.3 percent respec- tively. Current account surplus declined correspondingly, and the re- sulting investment financing gap was met by larger utilization of external loans and by the use of previously accunmulated Government deposits, which, by the end of 1967, had been almost entirely depleted0 The substantial inc;eases in current expenditures in 1966 and 1967 were primarily due o higher salaries and increased number of public school teachers, both steps to ensure the success of the program cf investment in education which is now getting under way. 22. Public investment during the period 1961 - 1965 was heavily or- iented toward infrastructure development, particularly transportation and power. Beginning in 1966 agricultural investment has been receiving increasing attention. Present plans call for a more balanced development effort in the future0 The Government is also taking a number of steps to improve the project preparation and execution process and establish a clearer division of responsibilities for project execution in order to accelerate its development effort.  23. In transportation the Central Go-;ermment will continue to pre- pare and supervise projects, particularly roads, but construction work will increasingly be executed by private contractors. External financing for these projects is being provided by USAID, the Inter-American Development Bank and the Central American Bank for Economic Integration. Investment in education, thus far comparatively neglected, is to receive a major push during the coming years. External financln- for elementary and university training has been arranged withi;S,,3-- and D1DB respectivrely; IBRD financing for secondary education projects constitutes the object of the present loan. External financing is also being sought for expanded invesqtznt in agriculture and industry. 24. The deterioration in the international reserve position led the Nicaraguan authorities, for the first ti-me since 1964, to request in December 1967 a stand-by agreement for US$19 million) wbich is ilow being considered by the Internabioaral Monetary Fund0 As part of the proposed agreement, Nicaraguan authulrJties have announced their intention to adopt a series of measures designed to curb Whe grourth of jmports, with- out resorting to direct control.s or exchange restricti.ons. Basically, the steps to be tal.;ii consist ia limits on domsstic credit and short-term external borrowing, as well as determined efforts to reduce Central Government's administrative expenditures and improve fiscal administra- tion so as to increase the yield of existing taxes. 25. A far-reaching program of export diversification was initiated in Nicaragua in mid-1966. i. number of projects are oriented to the Central American market; othiers, such as banianas, coffee, seafood and wood products, to the rest of the world. As these projects begin to bear fruit in 1968 and 1969, Nicaragua's export earnings are expected to improve fairly soon. Nicaraguats overall external finances should improve in step with the new financial policies now being initiated. 26. During 1966 and 1967 substantial amounts of short and medium term external loans were contracted by the Nicaraguan Goverment and autonomous agencies. As a consequence, service payments on the external debt rose considerably and, given the stagnation of export earnings, the debt service ratio increased as well. The ratio stood at 4h8 percent in 1965 and rose to about 9.5 percent in 1967. Present plans contemplate increased utilization of external loans by the Government and autonomous agencies during the coming years; the new funds, however, will be mostly forthcoming from long term loans, and service payments on them should not increase appreciably the debt ratio in the foreseeable future, assuming even a moderate degree of success in the export diver-sification program. 27. To sUm up, Nicaragua is beginning to confront in an orderly manner the new problems which have,emerged in the past two years. Close attention will have to be given during this adjustment to the adequacy of public sector savings needed for greater development, to ensure the continuation of Nicaragua's good performance of past years,  -7- PART VI _ CCMIPLI'NCE -WITH THE ARTICLES OF AGREEMENT 28. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VTI - RRCONNENDATION 29. I recommend that the Executive Directors adopt the following resolution: RESOLUTION NO. Approval of a Loan to the Republic of Nicaragua (Education Project) in an amount equivalent to US$t9 OGO,OOO RESOLVED: THAT the Bank shall grant a loan to the Republic of Nicaragua in an amount in various currencies equivalent to four million United States Dollars (US$,o0009000), to mature on and prior to May 15, 1993, to bear interest at the rate of six and one quarter percent (6we.) per annum, and to be upon such other terms and conditions as shall be substantially in accordance with the terms and conditions set forth in the form of Loan Agreement (Education Project) between the Republic of Nicaragua and the Bank, which has been presented to this meeting. George D. Woods President by J, Burke Krnapp Washington, D.C. February 5, 1968