Nicaragua - Review of social sector issues

Report No. 10671-NI Republic of Nicaragua Review of Social Sector Issues February 3, 1993 Ml1POP1C11E (-)y Country Department l Human Resources Operations Division bep,ort No .: 1 ( 67 1 N- 1 I Latin America and the Caribbean Regional Office T i t I e: 1 Al I.B:('TOBR 1 ?RI ; . Aut.hrr-o: ABlfIA-A[)A, A. Ex t. .:-, ; 189. Por, ]s(: r v7 116 rDept. n.:L.A: FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  LIST OF ACRONYMS CARE Cooperative for American Relief Everywlhere CIDA Canadian International Development Agency CIPS Center for Supply of Pharmaceutical Products CNU National University Council DAM Procurement Directorate at the Ministry of Health DANIDA Danish International Development Agency DAR Directorate for Rural Water EEC European Economic Community FASO Fund for Assistance to Oppressed Sectors FINNIDA Finnish Department of International Development Cooperation FISE Social Investment Fund GON Government of Nicaragua IDA International Development Association IDB Inter American Development Bank IEC Information, Education and Communication INAA Nicaraguan Institute for Water and Sewerage INATEC National Technological Institute INCAP Nutrition Institute for Central America and Panama INEC National Institute of Statistics and Census INSSBI Nicaraguan Institute of Social Security IPPF International Planned Parenthood Federation KfW German Credit Institute for Reconstruction LSMS Living Standards Measurement Survey MEC Ministry of External Cooperation MCH Maternal and Child Health MEDE Ministry of the Economy MINPRES Ministry of the Presidency MIS Management Information System MOE Ministry of Education (or MED) MOF Ministry of Finance MOH Ministry of Health (or MINSA) NGO Non-Governmental Organization ORS Oral Rehydration Salts PAHO Pan American Health Organization PAMIC Micro-enterprise Support Program PAN Nicaraguan Food Program PHC Primary Health Care PRRN National Reconciliation and Rehabilitation Program PROFAMILIA Nicaraguan NGO for Family Planning RUTA Regional Unit for Technical Assistance SIDA Swedish International Development Authority SILAIS Local Systems of Integrated Health Services TFR Total Fertility Rate UNDP United Nations Development Programme UNESCO United Nations Educational, Scientific and Cultural Organization UNFPA United Nations Fund for Population Activities UNICEF United Nations International Children's Education Fund USAID U.S. Agency for International Development WFP World Food Program WHO World Health Organization  FOR OFFICIAL USE ONLY NICARAGUTA REVIEW OF SOCIAL SECTOR ISSU3S TABLE OF CONTENTS EXECUTIVE SUMMARY .............................................. i I. SOCIOECONOMIC CONTEXT ....................................... 1 A. Background and Recent Economic Developments ....................... 1 B. Social Conditions ........................................... 2 C. Social Sector Spending ........................................ 3 II. TRENDS AND ISSUES IN THE SOCIAL SECTOR .......................... 4 A. Population ............................................... 4 B. Poverty ................................................. 7 Incidence of Poverty ...................................... 7 Recent Trends .......................................... 7 Issues in Poverty Alleviation ................................. 9 C. Water and Sanitation ......................................... 10 Trends ................................................ 10 Issues in Water and Sanitation . ................................ 1 D. Nutrition . .................................... .......... 12 Trends ................................................ 12 Nutrition Interventions . .................................... 13 Issues in Nutrition ......................................... 14 E. Health .............................................. 14 Trends ................................................ 15 Organization of the Health Sector ........ ...................... 16 Main Issues in the Health Sector ......... ...................... 17 F. Education ............................................. 25 General Trends . ........................................ 25 Overview of the Education Sector ........ ...................... 27 Main Issues in the Education Sector ........ ..................... 28 a. Institutional Impediments in the Social Sector .......................... 34 Lack of a Coherent National Policy for the Social Sector ..... ........... 34 Budget Policy and Financial Management ......................... 34 Coordination of Donors Assistance ............................ 34 m. GOVERNMENT PROGRAMS AND STRATEGIES FOR THE SOCIAL SECTOR ...... 35 A. Safety Net Programs ......................................... 36 B. Improving Delivery of Basic Social Services .......................... 37 This report was based on findings of missions in September 1991 and February 1992 composed of Ana-Maria Arriagada, Task Manager (LA2HR); Thomas Bossert, Fernando Vio, Clemencia Chiappe, and Katherine Scott (Consultants) as well as findings from a November 1992 mission led by Laurent Msellati (LA2HR). It has benefitted greatly from the comments of Kye Woo Lee (LA2HR), Philip Musgrove, Juan Prawda, and Sandra Rosenhouse (LATHR), and Claudio Sapelli (LA2C2). Se -eral background papers prepared by USAID-Nicaragua, IDB, DANIDA, UNICEF, and PAHO also provided substantial inputs. Vinh Nguyen provided editorial input and production support. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  The Health Sector 1992-95 Action Plan .......................... 37 The Education Sector .A-2-95 Action Plan ........................ 38 C. Family Planning ............................................ 38 D. Analysis of the Government rrogram in the Social Sector .................. 39 IV. RECOMMENDATIONS ....................................... 40 Recommendation 1: Develop a Social Sector Strategy and Coordination ...... 40 Recommendation 2: Develop a Sound Safety Net Program for the Short-Term . . 41 Recommendation 3: Reduce High Fertility Rates .. . .i .............. 41 Recommendation 4: Im.prove Delivery of Basic Ser ices-Priority to PHC and Primary Education ................................ 41 Recommendation 5: Improve Efficiency in the Use of Resources .... ...... 44 Recommendation 6: Improve Equity in Social Spending .... ............ 48 Recommendation 7: Develop a Coherent Nutrition Strategy .......... 49 Recommendation 8: Target and Coordinate Foreign Aid ............ 49 BIBLIOGRAPHY .................................................. 50 List of Annexes i. Nicaragua: Family Planning Coverage - MOH and PROFAMILIA, 1991 2. Nicaragua: Changes in Consumer Price Index - Selected Goods, 1988-1991 3. Social Investment Fund (FISE) 4. National Reconcilia.ion and Rehabilitation Program (PRRN) 5. Nicaragua: Leading Causes of Death, 1989 6. Nicaragua: Infant Mortality Rates by Region, 1982-1983 7. Nicaragua: Causes of Infant Mortality, 1987-1989 8. Nicaragua Health Indicators MOH Expansion of Health Facilities, 1979-1990 Immunization Coverage, 1989-1990 Coverage of Growth Monitoring Activities, 1990 MOH Staffing Patterns, 1979-1990 Distribution of Health Expenditures by Recurrent and Capital Expenditures, 1984-1992 Distribution of Health Expenditures by Program, 1983-1992 Distribution of Health Expenditures by Region, 1986-1991 Internal and External Health Financing, 1981-1992 9. Nicaragua Education Indicators Gross Enrollment Ratios, 1978-1990 MOE Expansion of Facilities, 1978-1989 Enrollment Growth, 1979-1990 Distribution of Education Expenditures by Recurrent and Capial Expenditures, 1970-1992 Public & Private Enrollments, 1978-1989 Schools by Highest Grade Offered, 1978-1989 Distribution of Education Expenditures by Program, 1970-1992 Internal and External Education Financing, 1981-1992 10. Technical and Vocational Education System 11. Recommendations Matrices 12. Social Sector Policy Letter Map - IBRD No. 23958  EXECUIIVE RSUMARY 1. Nicaragua is one of Latin America's poorest counttis. Its per capita GDP fell from US$850 in the late 1970s to US$341 in 1991 due to the civil strife and inappropriate macroeconomic policies in the 1980s. Today, Nicaragua is in the midst of a stabilization and adjustment process entailing major devaluation of the cordoba, price adjustments, trade lit-ralization, financial sector reforms, reduction of the public sector and budget expenditures, and limiting of the scope of state intervention in the economy. Despite impressive achievements and the presence of significant foreign aid, the combined impact of these measures is expected to engender temporary social costs. The seriousness of such potential impacts, when viewed against the background of Nicaragua's widespread chronic poverty and socio-political instability, reinforces the need for social sector institutions to play a pro-active role, both to protect the most vulnerable groups in the short-term and to foster human resources as a basis for long-term growth. 2. This study reviews trends, programs, and issues in the social sector in Nicaragua. It is IDA's first such study for Nicaragua, and covers the areas of population, poverty, water and sanitation, nutrition, health, and education. While trying to fill in large gaps in basic data over the last ten years, the study focuses primarily on issues now facing the Government of Nicaragud (GON) in the social sectors. Therefore, this report: (a) summarizes economic and social conditions; (b) examines issues in the social sector in the context of past and present efforts by the (JON and donor agencies; (c) outlines the GON's strategy as presented to the Bank in a social sector policy letter in October 1992; and (d) formulates recommendations addressing the major issues. Although the lack of reliable, systematic data in Nicaragua dictates a certain amount of unevenness in analysis among the topics covered, general agreement exists on the trends of social indicators; in some instances, analyses are based on qualitative evidence and/or experience of other countries. This executive summary begins with a brief discussion of overall sector trends and key issues now facing the GON in each of the sectors, points out the priority areas that require prompt Government attention, and expresses major recommendations. The body of the report covers each major topic area in more depth. A. Social Conditions 3. Poverty is widespread and, according to the Government, open unemployment increased from 5.6% in 1989 to 13.6% in 1991. Government data for 1985 classified 70% of the population as poor, of which 23% were in extreme poverty, and 16% in critical conditions of misery. The core poverty groups are children under 10 years old, women (particularly those heads of household), war- affected populations, and populations in the South and North Atlantic and Rio San Jinan regions. Population growth of 3.4% per annum far exceeds the Latin American average of 2.2%. The estimated total fertility rate (TFR) of 5.5 is higher than Central America's average of 4.8, and contraceptive prevalence among women of fertile age is estimated at 6.3%, the lowest such figure in Central America. Health indicators show large deficiencies. Infant mortality is 72/1,000, caused mJstly by diarrhoea and acute respiratory infections. Maternal mortality is 159/100,000. An estimated 10% of hospital-born children are underweight; moderate and severe malnutrition affects an estimated 13% of children under 5; and 22% of children aged 6-9 exhibit height/age deficits. Inadequate coverage of water and sanitation renders the population susceptible to water-borne diseases. Water coverage in 1989 was 78% in urban areas, but only 18% in rural areas where 40% of the population live. Sanitation coverage was only 32%, ranging from 65% in Managua to between 9% and 16% in rural areas. While the majority of children have access to the edu.Ation system, high repetition and dropout rates, especially in the first two grades (a combined 45%), yield low educational progress. Nationally, only 22% of primary school entrants complete the sixth grade (only 7% in rural areas).  ii B. Social Sector Issues: A Sunmmary 4. During the 1980s, the Governmient committed itself to provide universal health and education services. The share of public spending in the socr sector increased from 18% in 1979 to 22 % in 1989 and 36% in 1991, or from 3.7% of GDP in 1979 to 6.7% in 1989 and 9.1% in 1991, a share higher than in most Central American countries, and much higher than those typical for an eczonomy with its GDP level. When social indicators are assessed in the context of relatively high social sector expenditures, the current outcomes cannot be attributed to the lack of spendi:ig, but rather to issues such as absence of a coherent sector strategy, fragmented safety net programs, rapid population growth, ineffective delivery of social services, inefficient use of resources, inequitable allocation of resources, inadequate attention to nutrition issues, and deficient targeting and coordination of external aid. Issue 1: Absence of a Coherent Strategy for the Social Sector 5. The critical issue for each of the sectors reviewed is the absence of a coherent government strategy, reflecting a lack of strategic objectives, sectoral priorities, institutional capacity, and resource planning. The rest of the social sector issues follows. Issue 2: Fragmented Safety Net Programs 6. The GON has not clearly defined its strategy for poverty alleviation in the short-term. No definition of the most urgent problems has been carried out, and no priorities have been established between safety nets for the most vulnerable groups and those who need attention for security reasons. Because of undefined priorities and blurred division of roles, compounded by weak coordination of interventions, existing institutions lack the capacity to effectively formulate and implement policies and programs. For example, the FISE (Social Investment Fund), FASO (Fund for Assistance to Oppressed Sectors), and PAMIC (Micro-Enterprise Support Programn) all aim to create emergency employment; both the FASO and PRRN (National Reconciliation and Rehabilitation Program) target displaced, demobilized, and war-affected groups; and FASO and PAMIC both provide credit to informal sector workers. With the exception of the FISE, and possibly the PRRN, most programs have unclear institutional configurations, modes of operation, and financing arrangements. This state of affairs is also reflected in competing funding requests for donor support. Issue 3: Rapid Population Growth 7. A major factor explaining Nicaragua's insufficient progress in health and education is the low priority assigned by the public health system to the provision of services to space births and limit family size. Population growth is at 3.4% per annum, and it is estimated that by the end of the decade the number of children under age 5 will increase by 147,000 (an increase of 22%), the number of women of reproductive age by 500,000 (47%), and the number of school-age children (7- 12) by 210,000 (32%), which wi!l greatly increase the already strained public capacity to provide for maternal and child health care and education services. Family planning reduces maternal and child mortality by helping couples space births and limit family size. The ability to determine when they will bear children provides women with greater altematives, contributes to higher investments in children, and improves the living conditions of families. Reducing fertility also slows the population growth rate, buys time for development of the country's economic potential, increases the speed with which per capita incomes can be raised, and curbs the demand for health and education services.  iii Issue 4: neffective Delivery of Basic Seivices 8. Although on the surface coverage of !iealth and education services compares well with most Central American countries, primary health care (PHC) and primary education suffer from low internal efficiency and poor quality of services. Despite the espoused emphasis on PHC, the provision of services is biased toward curative care because: (a) doctors and hospitals are called on to cure ailments that could have been less expensively prevented by non-physician personnel at the primary level; (b) PHC programs are poorly integrated and referral systems inadequate; (c) community-based care does not emphasize -outine preventive activities; and (d) facilities and equipment are in disrepair. Inadequate coverage (particularly in rural areas) and poor quality of water and sanitation services are at the heart of the high incidence of water-borne diseases. Main issues in water and sanitation include the need to improve coverage and service quality, particularly in rural areas, the poor sustainability of in ^stments due to inadequate cost-recovery, and the lack of definition of the roles of the Nicaraguan Institute for Water and Sewerage (INAA), Ministry of Health (MOH), municipalities, and communities for the provision of services. Primary education suffers from low internal efficiency and poor quality because: (a) a large number of schools are incomplete (with three grades or less), particularly in rural areas (35%); (b) 19% of rural children attend multigrade schools where teachers are largely untrained; (c) preschool coverage does not reach rural areas (80% of all preschools are concentrated in urban areas) and lacks adequate educational materials and qualified teachers; (d) the quality of the teaching-learning process is low, with a arge number of unaccredited teachers and poor skills even among those who are accredited; (e) teaching and learning materials are insufficient. USAID donations satisfied the need for textbooks in the short- term, but other materials such as blackboards, chalk, notebooks, and pencils are still lacking; and (f) facilities and equipment are in disrepair. Issue 5: Inefricient Use of Resources 9. The resources that are available for social sector ptograms are poorly used. Inefficient allocation is reflected in the following three situations. First, there have been substantial increases in the share of pzrsonnel expenditures at the expense of operations and maintenance, resulting in a general deterioration of facilities and equipment and a lack of complementary inputs essential for adequate service delivery. In the health sector, wages as a share of total expenditures increased from 32% in 1989 to 59% in 1991; in the education secmor, they increased from 64% in 1989 to 77% in 1991 and to 86% in the 1992 budget. A number of provisions of the law governing the teaching profession, Ley de Carrera Docente, especially regarding retirement and training, are likely to worsen the situation at the Ministry of Education (MOE). Second, there is a poor skills-mix at both the MOH and MOE, which leads to major waste of resources. At the MOH, there is an excess of physicians and a critical shortage of paramedical staff, with a nurse to physician ratio of less than 1:1 compared to the international norm of 4:1, and there is an excess of specialists among physicians (42%). At the MOE, there is a serious shortage of qualified teachers (non-accredited teachers with lesser training, the emp*icos, comprise 55% and 23% of rural and urban teachers, respectively). Finally, there is a lack of drugs and medlcal supplies at MOH facilities (even though MOH annual per capita spending for these inputs is over US$5) and of teaching materials at the MOE. Issue 6: Inequitable Allocation of Resources 10. The professed GON objective to shift social sector spending from generalized subsidies to programs targeting the poor has yet to be realized. The existing allocation of public funds across the different levels of health and education are skewed toward hospital care and higher education. At least 56% of health expenditures are devoted to hospitals, and almost 30% of education expenditures to higher education. Moreover, by law, higher education receives an earmarked allocation of 6% of  iv Govermnent revenues. Meanwhile, investments with the highest social returns such as family planning, water and sanitation (especially for rural areas), preventive PHC activities, nutrition programs for children under-5' and pregnant and lactating we nen, and primary education-investments that most benefit the poor-remain underfunded. Issue 7: Inadequate Attention to Nutrtdon Issues 11. The lack of a consistent nutrition policy has generated disconnected and sometimes contradictory intenrentions. Considering that over 70% of child deaths in hospitals are related to malnutrition, this policy vacuum is :eaving the most vulnerable groups (children 0-5, pregnant and lactating women) clear!' 'inderserved. This void in leadership has frustrated the efforts of donor agencies. Issue 8: Deficient Targeting and Coordination of Foreign Aid 12. Foreign aid represeats about 39% of total public funding in health and 9% in education and also finances all safety net prograns. However, its effectiveness is hampered by: (a) lack of a woherent operational strategy, with no mechanisms in place to ensure that resources are directed toward priority programs; (b) inadequate control and coordination, since a large number of agreements bypass the Ministry of External Cooperation (MEC); (c) lack of mechanisms to er' ure the availability of counterpart funds as required bv most donors, which in many situations impedes the continuous flow of aid; and (d) lack of assessments of the recurrent cost implications of proposed investments on the Government budget. C. Recommendations for the Social Sector: A Summary Recommendation 1: Develop Government Strategy for the Social Sector 13. The Government should formulate a social sector strategy document clearly indicating priority programs and measures, including an implementation plan, to be pursued over the short- and medium-terms. The Government's social sector policy letter of October 1992 represents an important first step in the evolution of the Government's social sector strategy through its emphasis on targeted poverty alleviation and reform in the line ministries in order to improve the provision of basic social services. To develop its capability to effectively coordinate and monitor the implementation of its social sector strategy, the Government should: (a) organize, at the highest level of Government, a technical unit responsible for coordinating and monitoring the implementation of the social sector strategy, which should not be charged with the implementation of any specific program, but with ensuring adequate coordination, monitoring, and complementarity arnong interventions; (b) strengthen the capacity of the Ministry of Finance (MOF) for budgeting and financial management in the social sector institutions, including the allocation of Government resources and donor contributions; and (c) strengthen its institutional/policy analysis capability, by implementing a Living Standards Measurement Survey program (LSMS) and other institution-based monitoiing systems to monitor and evaluate the impact and efficiency of key Government interventions in the social sector. Recommendation 2: Develop a Soumd Safety Net Strategy for the Short-Term 14. The Government should concentrate on a small number of initiatives which should: (a) be part of the wider social sector strategy, focusing on priority interventions; (b) target the most vulnerable groups (women and children); and (c) have adequate institutional setups and management capacities with transparent resource allocation and accountability rules. Based on current experience, the Government should continue to support FISE, its most successful program to date.  v Recommendation 3: Reduce Hlgh Ferdlity Rates 15. The Government should formulate policies and programs to promote family planning services (by both the public health system and private agencies) and maternal and child health. Providing women with greater control over reproductive choices will help improve maternal and child health. Recommendation 4: Improve Delivery of Basic Sarvices - Priority to PHC and Primary Education 16. Improving PHC services. As a first step, the MOH should prepare an action plan (a) accentuates health promotion and disease prevention in PHC services, emphasizing the role of community volunteers into routine preventive care activities; main areas to be strengthened include water and sanitation, health education, pre- and postnatal care, immunizations, nutrition activities, and birth spacing; (b) strengthens organization of PHC services provision; (c) improves availability of drugs and materials; (d) provides systematic supervision and develops an adequate Management hlt;urmation System (MIS); and (e) rehabilitates PHC facilities and equipment and develops maintenance systems. Priority policy decisions which should accompany this strategy are: (a) a formal MOH commitment to increase the share of PHC in the domestically-financed health budget by two percentage points per annum for the next four years; and (b) MOH commitment to channm donor resources toward PHC (para. 21). 17. In addition, the GON should define a water and sanitation s,t.ategy aiming at improving coverage and services quality, emphasizing the needs of rural areas and the poor, and developing cost-recovery mechanisms and maintenance systems to ensure the sustainability of in.vestments in the sector. To ensure the proper development of this strategy, the GON should clearly define the roles of INAA, MOH, municipalities, and communities for the provision of urban and rural water and sanitation services. 18. Improving primary educaion services through: (a) strengthening content, quality and targeting of preschool programs; (b) completing, as much as possible, incomplete schools (those with three grades or less); (c) providing teacher training, especially to unaccredited teachers; (d) developing alternatives for teacher training, accreditation, and reward. 'the MOE should develop new strategies such as tying salary increases to merit certification through examinations and teacher performance reviews and establishing general examinations as a requirement for accreditation; (e) developing a textbook and curriculum improvement policy; and (f) rehabilitating schools and developing maintenance systems with community participation. Priority policy decisions that should accompany this strategy at the MOE are: (a) a formal commitment to increase the share of primary education in the domestically-financed education budgtet by three percentage points per annum for the next four years; (b) a commitment to continue channelling donor resources toward primary education priority (para. 23); and (c) a policy to assign the more experienced teachers to the first two grades; maintain teachers with the same students during the first two grades; and institute automatic promotion from first to second grade. Recommendation 5: Improve Efficiency in the Use of Resources 19. In health, the GON should take action in four areas. First, it should a4just staffing patterns at the PHC level, giving priority to nurses and auxiliary personnel. Second, it should develop a coherent pharmaceutical and medical supplies policy and system aiming at: (a) improving management of drugs and medical supplies for the public sector through a complete overhaul of current instittional arrangements in the DAM and CIPS; (b) controlling expenditures and  vi developing rational drug use practices among botL prescribers and consumers; (c) safeguarding the quality of consurmer products; and (d) removing constraints to development of local industry and supporting investments. Third, the MOH should develop supervision and management informatioii systems. Finally, the GON should address sectoral inancial issues by: (a) developing cost- containment strategies, including improving management of budget resources and of hospitals' administration so they can respond to the referral needs of the primary level; and (b) diversifying its financing sources. The latter should be achieved by: (i) introducing user fees for selected services and drugs, and using these revenues to increase budget allocations for PHC; (ii) developing incentives for private sector participation in the provision of health care services (i.e., commnercial enterprises, NGOs, churches, and local communities); (iii) targeting foreign aid to PHC; and (iv) strengthening implementation capacity at the local level. 20. In education, the GON should take action in three areas: First, the GON should strengthen MOE's organizatiGnal structure by streamlining non-teaching personnel, adding qualified technical staff at the central level, providing management training, and developing operational procedures. Second, the MOE should develop a Management Information System to track studeint flows, physical inventory, and personnel. Finally, the GON seiould address sectoral financial issues, including: (a) developing cost-containment strategies, including improving management of MOE budget and revising existing legislation on wages and promotion incentives for teachers (Ley de Carrera Docente); and (b) diversifying its financing sources through: (i) using fees collected at the primary and secondary levels to fund critically needed inputs such as materials, supervision, and maintenance in addition to increasing t cher salaries; (ii) reducing public subsidies to high- education and introduce student fees, channeling the savings toward primary education; (iii) promoting private provision of services at the secondary and higher education levels by deregulating licenses and fees; and (iv) reinforcing efforts to mobilize foreign aid, particularly for pre-primary education. Recommendation 6: Improve Equity in Allocation of Resources 21. The GON should increase the share of public resources devoted to basic services that benefit most the poor. Therefore, MOH and MOE should implement espoused priorities on PHC and primary education by shifling expenditures and investments accordingly. The Government should verify through the MOF that these priorities are implemented and resources shifted by monitoring both budget allocation and execution, including foreign aid. Although changes in financing practices along the lines of Recommendation 5 would improve overall equity by increasing the budget share for PHC and primary education, special attention should be paid by the GON to the following: (a) in the health sector, the introduction of fees for selected -.-r_ices and drugs should be based on ability to pay, with very low or zero charges for low-income users to ensure access to health care services for the poor. A significant share of these revenues should be used at the primary health facility level to fund key inputs for services delivery; and (b) in the education sector, consideration should be given to: (i) careful monitoring of the impact of voluntary fees at the primary level on actual access to schooling. A significant portion of revenues generated by user fees should be used at the school level; and (ii) supervision of the performance of private provision of education services to ensure minimum quality standards. Recommendation 7: Develop a Coherent Nutrition Policy 22. To this end the GON should: (a) identify a body responsible for nutrition polin.y-making and inter-institutional coordination; existing programs should be evaluated, and not to overburden local capacity, a limited but well-targeted number of interventions should be selected for support by  vii the GON and donor agencies; and (b) strengthen Mk q nutrition activities in its kHC services, ;ndtcding promotion of breast-feeding and weaning practices. Recommendation 8: Targeting and Coordination of Foreign Aid 23. The Government strategy document (Recommnendation 1) should serve as the central instrument for guiding coordination of donor efforts. Given the social sector's likely continued heavy reliance in the short- and medium-term on external assistance, the need for comprehensive donor coordination around a consistent Government strategy is particularly g;zat. The Government should: (a) sanction and enforce a policy to channel all dono --sources earmarked for its social sector strategy throug" MOF and MEC; and (b) develop mechanisms to effectively monitor limplementation of programs and projects financed under foreign aid.  I. SOCIOECOINOIViFIC CONT'EXT A. Background and Recent WEonomic Developments 1. Nicaragua is one of Latin America's poorest countries, with a per capita GDP estimnated at US$341 in 1991, substantially lower than the US$850 level prevailing in the late 1970s. This decline is explained by the serious economic deterioration during the 1980s, resulting from the combined imapact of inappropriate macroeconomic policier, institutional changes toward a centrally controlled economy, continued civil strife, and a trade embargo. By the end of the decade, production was well below the 1980 level, exports were running at abhcut half the pre-1980 level, hyperinflation reached a high of 14,700% in 1988, international reserves were depleted, and external debt had reached US$10 billion, equivalent to 27 times annual exports and 7 times GDP. The financial system, much of the productive structure, and external marketing of the principal export products were in the hands of an oversized public sector. What was left of the private sector, after e tensive expropriations, was heavily regulated, and productive capacity had diminished substantiadly due to lack of maintenance and spare parts. Moreover, serious damage had been done to the country's infrastructure. 2. Starting in March 1991, the GON launched an economic stabilization program designed to eliminate hyperinflation, arrest the decline in GDP, and strengthen the balance of payments through tight fiscal and monetary policies. The results of the stabilization progr-ln are encouraging. Following large price adjustments in March and April, the consumer price index has been stable since May 1991. Inflation is expected to be only around 4.5% in 1992. Contrary to expectations, the 1991 GDP declined only slightly from the previous year despite a drought that affected agricultural production, because industrial and commercial production showed recovery. For 1992, GDP growth is expected to be about 0.4%. 3. Fiscal adjustments played a leading role in achieving stabilization. The fiscal deficit of the non-financial public sector, excluding grants, was reduced from 30% of GDP in 1990 to 8% in 1991. After accounting for grants, this deficit shifted to a 5% surplus. Current expenditures in the central Goverrnent were reduced from 44% of GDP in 1990 to 25% in 1991, following large reductions in military and internal security outlays. The central government wage bill was also reduced substantially, from 9% of GDP in 1990 to 6% in 1991, while central government tax revenue increased from 14% of GDP in 1990 to 19% in 1991. The tight monetarv policy contributed to the stabilization effort. 4. In coordination with this stabilization effort, the GON began to implement a comprehensive program of structural adjustment aimed at reorienting the economy toward a competitive market system. The structural adjustment program builds upon three pillars: (a) public sector reforms; (b) liberalization of financial sector policies and the trade regime; and (c) the incentives system. Key barriers to private sector participation have been lifted and a trade liberalization program, including agriculture, is underway, including the elimination of public sector monopolies on import-export activities. Deregulation of agricultural trade was initiated by downsizing and limiting the scope of intervention by the state-owned basic grains marketing enterprise. In the financial sector, legislation allowing for the creation of private banks was approved (there are now six new banks in operation), and the restructuring and downsizing of state-owned banks have begun. The Central Bank is being reorganized and strengthened, as is a new Superintendency of Banks. To reduce the size and increase the efficiency of the central government, public finances are being strengthened through a complete overhaul of the tax system and through substantial expenditure reductions. The initial phase of a public employment reduction program has been completed, with the voluntary retirement of 8,200 central government civilian employees and demobilization of over 45,000 military personnel. In  2 addition, over 100 enterprises have been privatized, reducing the share of state-owned enterprises' production from 42% of GDP in 1990 to 25% in 1991. B. Social Conditions 5. During the 1980s, the GON committed itself to provide universal education and health services to the population, which translated in increased budgetary allocations for the social sector. Although a number of indicators compare favorably with the rest of the Central American region, the gains have not been as great as one might have expected, showing poor h--alth, malnutrition and low levels of educational attainment (Table 1). Table 1 - CENTRAL AMERICA AND MEXICO: SELECTED SOCIAL INDICATORS GNP per lliotracy Not Enrollment Primary Infant Child Maeiourihed Low Weight Matemal Cpita' hi Primary Sohool Mortality Mortality Children4 of Infants at Mortality per Schools Completion per 1,000 (1-4 yr) (Underweight) Birth4 100,000 livo US$ (%) 1%)2 Rste3 BMirths per 1,000 1%) (%l births' 1989 19at9 1988 l%) 1 yr-old. 1980-88 1986 1980-87 Costa Rio, 1,780 7.0 92.0 80.5 17 4 3 9 26 El Salvador 1,070 27.7 76.8 40.0 6S 30 60 15 *-140 Guatemla 810 62.0 60.7 35.5 56 61 60 16 110 Hondure 800 32.4 91.2 n/a 88 48 20 20 82 Nioargttau 400 20.47 75.6 22.0 72 42 *22 27 '159 Panama 1,760 12.0 90.0 81.6 22 12 16 8 90 AveragoforCentral 1,137 26.2 80.1 51.9 47.8 12 28.8 16.8 101 America Mexloo 2,010 9.7 98.0 65.3 40 9 14 15 92 ' Stunting J.Jarquim & F.Roouts, Epidermlologl y Prevenchon de / Muene Matemr /nrtkiuoionsen El S&aldor, 1989. - Govemment of Nioaragua estimate. Souroes: World Bank Devlopment Report, 1991. World Bank. 2 Enrolment of ohildren of primary sohool age whiohb Is le thar total enrollment which inoiudes ohildren above primary sohool age, UNESCO Centroamerle V Panem. Siruaceon avances, lmitaehones y perspetveas dela 1acoldziaclon. affab.tizac,on V calidaed doe .dueselon, San Joae, Coste Rica, 1'91. a UNESCO. Statistical Yearbook, 1986. 4 UNICEF, State of the World'. Children 1990. 6. The stabilization and adjustment program, despite Table 2 impressive achievements and NICARAGUA - Index of GDP and GDP per capita significant foreign aid, is expected to (1970=100) engender temporary social costs. The seriousness of such potential 160 impacts, when viewed against the 140 - - - -- - - - -- - - - - - - - - - - - - - -- - enormous deterioration in the overall 120 - - ______________ level of welfare over the last 15 I years, with per capita GDP declining 100 ----- - - -- to one-third of its 1977 level (Table so0 so _ 2), emphasizes the need for the social _ o - - - - - - - - -- - - - sector to play a critical role, both to 40 ________________________"--- protect the most vulnerable groups in the short-term and to foster human 20 - ________ resources as a basis for long-term o gresource as a basis forlong-term 70 71727374757677787980818283848586878889909192 growth. Year -GDP Index GDP per capita Index  3 C. Social Sector Spending 7. Starting in 1979, the Government expanded basic social services to the population. Given the policy of providing health and education services free of charge, expansion of the service coverage undertaken during the 1980s relied almost exclusively on public revenues. The share of public spending in the social sector increased from 18.2% in 1979 to 21.7% in 1989 and 35.9% in 1991, or from 3.7% of GDP to 6.7% in 1989 and 9.1% in 1991, a share higher than most Central Amer,-an countries (Table 3), and much higher than is typical for an economy with its GDP level. Health Spending 8. Health spending, which had been on average 1.6% of GDP during the 1970s, experienced a sharp rise in 1981 to 4.5% of GDP, remaining at about 5% of GDP throughout the decade. In real per capita terms, between 1976 and 1985, health spending increased by 26%, and then declined steadily during the second half of the decade by a total of 8%, to reach in 1991 a level slightly above that of 1970 (Table 4). This descent was less than half the fall in overall public spending in the same period. In sum, the health sector suffered less in terms of expenditure cuts than did government spending as a whole, showing the Government's priority toward the provision of health services. Table 3 CENTRAL AMERICA: HEALTH AND EDUCATION SPENDING (% of GDP and Central Government Expenditures (CGE)) 1989-91 Health Education Total Country % of GDP % of CGE % of GDP % of CGE % of GDP % of CGE Costa Rica 5.9 15.9 4.8 12.9 10.7 28.8 El Salvador 0.8 8.8 2.1 17.0 2.9 25.8 Guatemala 1.2 9.8 2.3 16.0 3.2 25.8 Honduras 1.4 10.3 3.5 20.0 4.9 30.3 Nicaragua4 4.9 18.2 4.2 17.7 9.1 35.9 Panama - 16.7 - 15.6 - 32.3 Sources: World Bank, World Development Report, various years. Notes: - not available. AL 1991 figures; sources: GON, MOF. Education Spending 9. Education spending also increased its share of GDP from an average of 2.5% in the 1970s to about 5% of GDP in the first half of the 1980s, declining steadily thereafter to 2.7% by 1989. In real per capita terms, between 1976 and 1985, education spending increased by 24%, and then declined sharply (over 60%) through 1989. This drop was 10% faster than the decline in overall public spending in the same years (Table 4). Although education spending has recovered slightly since to 4.2% of GDP in 1991, it remains 30% below its 1970 level. In short, the education sector suffered not only more than the health sector in terms of expenditure cuts, but also more than overall government spending.  4 Table 4 NICARAGUA HEALTH & EDUCATION EXPENDITURES 1970-1991 __197011978 8 1 1 198211983 1984 1_9I5 1986 1987 1988 1989 1990 11991 6 % Health 1.7 1.1 4.5 4.2 4.6 4.4 4.9 5.3 4.6 4.0 3.4 6.8 4.9 of GDP Education 2.3 2.6 4.2 4.11 5.0 5.5 5.7 5.5 5.1 3.6 2.7 6.9 4.2 % of Health 14.0 5.2 13.6 ii.o 7.7 7.6 9.0 10.7 10.4 9.1 13.2 14.3 18.2 Central Govt. Expend. Education 19.5 13.0 12.7 10.71 8.4 9.7 10.4 11.2 11.5 7.5 9.1 14.6 17.7 Index of Health 100 65 189 168 186 172 176 181 152 120 100 166 118 Per _ Capita Education 100 116 126 117 146 158 146 136 120 70 50 121 71 Expend. -I - - - (1970=1 00) Total GON 100 174 194 213 339 316 273 237 204 183 110 162 91 Source: World Bank estimates, February 1992. H. TRENDS AN!D ISSUES IN THE SOCIAL SECTOR 10. The GON is now confronted with the delicate task of implementing its economic stabilization and structural adjustment programs while protecting the poor. From each of the areas of the social sector reviewed below (population, poverty, water and sanitation, nutrition, health, and education), common patterns emerge: (a) lack of comprehensive and sustained sectoral policies; (b) low institutional cepacity for policy formulation and implementation; (c) inadequate targeting of expenditures; (d) inefficient use of resources; and (e) deteriorated condition of facilities and equipment. A. Population Trends 11. Demographic data on Nicaragua are scarce. Current population estimates are based on the last national census, conducted in 1971, and on data from two demographic surveys, one conducted in 1978 and the other in 1985.11 Nicaragua's estimated annual population growth rate of 3.4% far exceeds the 2.2% average in Latin America, and is higher than the Central American region's 2.9%. The population, estimated at 3.86 million in 1990, doubled over the past twenty years (Table 5).2/ In 1985, approximately 47% of the population was under 15 years of age and 4% was over 64 years of age, resulting in a dependency ratio of 1.04.2' 12. Geographical Distribution. The geographical distribution of the population is uneven. Sixty-five percent of the population live in the Pacific lowlands, 15% of the territory. The Atlantic 1/ 1978 Encuesta Demogrdfica de Mcaragua (EDENIC), and 1985 Encuesta Socio-Demogrdfica Nicaraguense (ESDENIC- 85). _1 INEC-CELADE, Fasciculo F-NIC 1, "Nicaragua: Estimaciones y Proyecciones de Poblaci6n 1950-2025", revised September-December 1982. 3/ INEC, "Principales Resultados de la ESDEN7C-85', November 1990, Managua, Nicaragua.  5 region is the most sparsely populated, with 8% of the population in 56% of the Table 5 territory. Nicaragua has become NICARAGUA ESTIMATED POPULATION GROWrH progressively more urbanized, with the 1985-2000 urban population increasing from 35% in Thouswds 1950 to 53% in 1985 and 60% in 1990. The economic crises and the prolonged 2500 - - - - - - - - - - - - UWs - - - - - - - - - - - - civil war were probably the main causes 2000 - _ _1417 -_ ---------| for the accelerated migration away from 1 85 1 1013 rural areas since 1985. 13. Fertility. The estimated TFR 600 li of 5.5 is higher than the Central 0o American region's 4.8. The TFR has 0-4 6-14 15-34 35-64 65 + had a limited decline since 1965, when it Population Growth by Age Group was estimated at 7.3. In the last decade I e1985 E1990 U 1995 E02000I the decline has occurred primarily in Sources: Las Condloones de Salud en las Americas, Volumen 1. rural areas, changing from 8.4 in 1978 to Publicacion Clentifica No. 524. OPS. Wash. DC, 1990. 7.6 in 1985. No change was evident in __ urban areas. The highest fertility is found in the rural areas of Matagalpa and Jinotega (among the poorest in the country), where the TFR in 1985 was 9.3, while Managua had the lowest fertility, with a TFR of 4.1 the same year. 14. Contraception. The most recent survey available is a Contraceptive Prevalence Survey conducted in 1981 indicating that only 23% of married women of reproductive age were using contraception. Use decl:ned significantly due to political and economic changes during the 1980s. A gradual erosion of family planning in the public sector services resulted in a current estimated modem contraceptive prevalence of 6.3 %1/ (Annex 1), the lowest in Central America, where the next lowest is Guatemala with 23 % in 1987. The only country in the region that has such low use of contraception is Haiti, with prevalence of modem methods at 5 %. Issues in Population 15. The main population issues facing Nicaragua are: (a) high fertility, resulting in excess mortality for mothers and children, as well as in high population growth; and (b) lack of an adequate population policy. 16. High fertility increases health risks for women and children. The risks of pregnancy-related illnesses are highest for very young women, women over 35, and women who have already borne four or more children. Short birth intervals raise infant and child mortality for the most recently born child as well as for a previous child. Children born to very young women, older women, high parity women, and women in poor health are, like their mothers, subject to a higher mortality risk. The use of family planning can be a very effective means of reducing maternal and child mortality, as it would reduce the number of women at risk as well as the number of high-risk pregnancies. 17. Having the choice of when to bear children increase opportunities for women to engage in non-domestic activities and may, therefore, increase family education and income and allow for 4/ Estimate based on coverage by MOH and PROPAMILIA (argest NGO in family planning in Nicaragua). A 1993 demographic and fertlity survey sponsored by USAID will provide up-wto-date infonnaion on contraceptive prevalence.  6 greater investment of time and resources in children. High fertility and poverty are mutually reinforcing conditions: while poverty encourages some families to have more children, it is also often the large number of children that prevent them from escaping poverty. High fertility takes women out of the labor market, often during their most productive years, or prevents them from attaining educational objectives. Poor families often cannot send all their children to school. Health consequences associated with high fertility for both mothers and children further worsens conditions of the poor who cannot afford proper care. 18. The public health system has assigned a low priority to the provision of family planning services, which are mainly carried out by the private sector. Initiatives for family planning services over the last decade have come mostly from relief agencies and the private sector, namely PROFAMILIA (Asociaci6n Demogrdfica Nicaragaense); even so, the 6.3% contraceptive prevalence is far short of the MOH's own estimate of demand-that more than half of women of childbearing age desire access to contraception. To meet this estimate of demand, 478,500 women would have to be covered, and just to maintain the current low level of coverage, an additional 44,000 would have to be covered by the end of the decade. As important as reaching all women desiring contraception is the quality of family planning services. Quality is mainly a function of accessibility of services, wide choice of methods, respect for clients' sensibilities, and sufficient information about proper use as well as risks and benefits. Women who make informed choices about which contraceptive to use have fewer side effects and are less likely to discontinue using family planning. 19. Reducing high fertility will reduce the population growth rate, which is currently very high in Nicaragua. Assuming an optimistic decline in the population growth rate to 3.2% in 1995 and 2.9% in 2000, the population is projected to reach 5.2 million by the end of this decade (Table 5), with an increase of over 147,000 in the number of children under 5 years of age (a 22% increase), greatly compounding the already strained public capacity to provide maternal and child care. The number of women of reproductive age will also increase by 47%, from 1.03 million in 1990 to 1.52 million in the year 2000. There wili be an additional 32% (210,000) school-age children (aged 7-12) who will require expanded educational services. Health, education, and other services will have to meet the requirements of twice as many individuals in the year 2025 as they do now. 20. The Government has expressed its intention to introduce intensive family planning education programs and improve the capacity of the health system to respond to the unmet demand for family planning servicesY In the meantime, donor sources and funds have multiplied and services are starting to be expanded. USAID is supporting PROFAMILIA to improve and expand family planning services, with the help of the International Planned Parenthood Federation (PPF). UNFPA and the Noiwegian Government are supporting a MOH maternal and child care project with a strong emphasis on family planning, with technical assistance from PAHO/WHO. In addition, a number of donor-funded agencies are providing technical assistance, training and logistical support for family planning to the MOH. 21. Firm GON commitment and intervention to curb rapid population growth are necessary because the rapid expansion of the population will have profound implications for every aspect of Nicaragua's economy and society. If the economy cannot grow at least at the same pace as the population, the determinants of living conditions, especially income levels, would worsen on a per capita basis. Gains in GDP would be undermiried by the increased number of persons to feed and dissipated in the support of a large non-working population. The creation of productive employment 5! Letter of Social Sector Policies dated October 8, 1992 from the Minister of Finance, GON, addressed to the President of tie World Bank.  7 opportunities would be overwhelmed by the more rapid increase in the numbers needing employment, leading to expansion in the ranks of the unemployed and underemployed. Development, both economic and social, would proceed more slowly than it would have otherwise, constrained by a large dependent population, composed mostly of children. B. Poverty Incidence of Poverty 22. As demographic data for Nicaragua are scarce, there is a dearth of information with respect to poverty trends.Y There can be little doubt that poverty in Nicaragua is not only widespread, but increased during the 1980s, affecting large portions of both rural and urban populations due to the fact that per capita income fell by over 50% between the late 1970s and 1990 (para. 6). The Ministry of the Economy (MEDE) estimates that by 1989, private consumption and real wages had fallen to 42% and 24%, respectively, of their 1977 levels.-' 23. For the period 1977-85, the GON estimated that 21 % of the urban population and 19% of the rural population were in conditions of extreme poverty. In 1985 it was estimated that 70% of the country's population was poor, of which 23% were in extreme poverty, and 16% in critical conditions of misery.Y The Atlantic region (North and South Atlantic and San Juan River) exhibited the highest proportion of people in critical conditions of misery (36%), followed by Region VI (Jinotega and Matagalpa, with 25%) and Region V (Zelaya Sur, Boaco and Chontales with 22%). Figures for 1989 show that poverty affected rural areas more severely than urban areas: 86% of the rural population was classified as living in poverty, versus 55% in urban areas; this is consistent with 1985 data showing that the population in critical misery in major urban centers such as Managua, Granada, and Masaya was below 7%. Available food consumption data show that between 1986 and 1989, the average per capita caloric and protein intake fell by 26% and 14%, respectively (para. 41). Consumption of staples did not necessarily fall in rural areas, however, since basic food crops (maize, beans and rice), mostly produced by peasants, increased in the same period. 24. Based on ESDENIC-85, the population at risk comprises: (a) 1.3 million children under 10 years of age, of which 75% live in poor households; (b) women, particularly those head of households (25% of all households are headed by women), of which 55% are characterized as poor; (c) war-affected population, approximately 600,000 persons (of these, 58% are displaced, 34% repatriates and demobilized, and 7.5% war victims); and (d) populations in the special zones of the North and South Atlantic regions and Rio San Juan (RAAN, RAAS, RSJ), 8% of the country's population, which have been traditionally isolated from the rest of country. Recent Trends 25. The stabilization program initiated in 1991 has involved an initial 400% devaluation of the cordoba, large price adjustments (March-April 1991), trade liberalization, financial sector reforms, 6/ The Last household survey at the national level took place in 1985, ESDENIC-85 (footnote 1), and the 1989 follow-up srvey suffered from major data collection problems due to the war. 2/ MEDE, Lineamntos Generalespara wua Estrategia Nacional de DesarroUlo, 1991-2000, draft, November 22, 1991. 8/ The poverty index used to classify households was based on the presence of one or more of the following conditions: (i) inadequt quality of housing determined by dirt floors and/or walls and ceilings of tin or waste materials; (ii) crowding if four or more people sleep in the same room; (iii) low educational levels if there is at least one school-age child not attending school; and (iv) high dependency ratio, if there are at least two individuals economically dependent on a head of household who has not completed primary school.  8 downsizing of the public sector and its expenditure levels, and limiting the scope of state intervention in the economy (paras. 2-4). Foreign aid has played a major role in buffering the social costs of stabilization by providing grants of about US$500 million in 1991 alone, or over 20% of GDP. Unfortunately, no information is available to pinpoint the groups that have benefitted from this aid, as it is extremely difficult to obtain a clear picture about poverty trends over the last two years. A 1992-93 LSMS supported by the Bank, UNDP, USAID, UNICEF, and the Government of Sweden will help provide information on the true extent and distribution of poverty in Nicaragua. These data will be the basis for the preparat.on by the Bank of a poverty assessment during 1993. 26. Recent GON data estimate that open unemployment increased from 5.6% in December 1989 to 13.6% in December 1991, the latter representing about 188,000 workers. Available estimates on the evolution of real wages in the formal sector (including cejitral government, autonomous agencies in the public sector, religious organizations, and private firms with five or more workers) show that they have increased since 1989.2Y However, the formal sector is estimated to encompass only about 20% of the labor force, mostly in Managua (where approximately 64% of such jobs are located). On average, their annual wages were over four times per capita GDP in December 1991A.0 It is not known whether the wages of the more than 1 million workers in the informal sector have fallen relative to their past standing, or how these wages now compare with subsistence levels. In December 1991, the Ministry of Labor and the National Institute of Statistics and Census (INEC) estimated an underemployment rate of 46% or 553,000 workers. However, this figure might be exaggerated because the definition of underemployment differs from international practice and includes those working less than full-time and those whose earnings are below the minimum wage.!-" While there has been drastic reduction in public sector employment and demobilization of military personnel (para. 4), these workers received an average of 20 months' salary as severance payment, and therefore their welfare levels should not be presumed to have fallen. 27. Major shifts in prices took place throughout 1989 until April 1991. Notably, the rise of food prices appears to have been significantly lower than those for all other goods (Annex 2). Inflation was set back after the second quarter of 1991 and is expected to be around 10% for 1992. In general, lowering inflation brings relatively greater benefits to those living off fixed income, but in Nicaragua this seems to be a small group of the population. As of now, the Government has maintained some price controls, import quotas, and prohibition on the export of several basic grains which constitute the staple diet of the poor (beans, rice, maize); these products, however, are scheduled to be liberalized shortly. It is likely that the removal of these price controls will erode real incomes for net food-buying rural and urban households in the very short-term and benefit the real incomes of peasants, the main producers of basic grains. Most clearly, adjustment has affected the poor because of lower GON expenditures in real terms, especially in health and education, which negatively affect the availability of basic services, especially key inputs. 28. Although the current government took office without a defined short-term poverty alleviation strategy, a number of programs were started over the last two years. Main GON initiatives include: (a) the Sodal Investmet Fund (FISE), intended to prevent further deterioration in the already V Sebastan Edwards, Rea Exchange Rate. Comtetiiveness and Mac_economic Adiuetment in Nicaragua: A Proeress Ra, drad, Febnuay 20, 1992. lOI Minidry of Labor, Direc&ln de Entpleo, Diembre 1991. lbis estimate of the formal sector is relatively consistent with dat from INSSBI data, showing a coverge of 15.5% of the labor force (average January-October 1991). IL/ For exle, it is bighly questionable Iat 46% of d work= in the fnancial sector, and 31% of those in the utlities meator (power, gs, water) could be classified as undemployed (dat from Minisay of Labor, Direcadn de Empleo, Dlcimbre 1991).  9 precarious living standards of the poorest groups of society while line ministries strengthen their institutional capacity and implement reform programs;121 (C) the Fund for Assistance to Oppressed Sectors (FASO), to provide immediate relief to special groups such as displaced and disabled persons; (c) the Micro-Enterprise Support Program (PAMIC) at the Ministry of the Economy (MEDE), to strengthen urban micro-enterprises in productive and service sectors, particularly those headed by women and youth; and (d) starting in 1992, the National Reconciliation and Rehabilitation Program (PRRN), to aid vulnerable population groups in regions affected by the war through special projects that would ease the reentry of these groups into Nicaraguan society. 29. Social Investment Fund (FISE). As of July 31, 1992, FISE had approved 549 subprojects for a total of US$21 million. The average size of subprojects is US$38,250. This is a significant effort considering that FISE is a new institution that has had to organize its administrative structure, recruit its staff, design its operating procedures, inform potential beneficiaries and executing agencies of its objectives and methods of operation, as well as coordinate with line ministries and agencies to complement their efforts. FISE finances a range of small-scale subprojects in the following areas: (a) social infrastructure; (b) economic infrastructure; (c) social services; and (d) community training for maintenance of subprojects. FISE is now close to reaching its goal of covering all 143 municipalities of the country. By June 30, 1992, 94% of all municipalities in Nicaragua had received financing for subprojects. In the future, FISE will devote a larger proportion of its resources to the financing of social infrastructure and social services subprojects essential for the development of human capital, the poor's only resource. Employment creation will remain an important objective, but less so than at the beginning of the economic reform program when it was the primary objective of FISE. Financing to cover subprojects, technical assistance, and an LSMS survey for the 1993- 1994 period has been obtained, including US$25 million from IDA, US$16 million from IDB, US$13 million from the Government of Germany, US$3.5 million from the Government of Switzerland, US$0.7 iaillion from the Government of Japan, and US$0.4 million from UNDP. The GON and beneficiaries will contribute US$6.3 million and US$3.1 million, respectively. (Annex 3 provides details on the FISE program.) 30. atJional Reconciliation and Rehabilitation Program (PRRN). The PRRN consolidates several previously separate programs and attempts to resolve earlier overlap and coordination problems. It is administered by the Ministry of the Presidency, with support from the MOF and the Ministry of the Interior. The PRRN has defined as its target population demobilized personnel from the Sandinista and resistance armies, displaced groups, and peasants in extreme poverty, an estimated total of 604,000 persons. Priority areas are the departments of Madriz, Nueva Segovia, Jinotega, Rio San Juan, Matagalpa, Bluefields, and Boaco. As of August 1992, the PRRN was administering 8 different programs for about US$55 million, financed by several donors and the Government. Annex 5 provides available basic data on these programs, which are to be implemented over the period June 1990 to March 1997. Issues in Poverty Alleviation 31. Major issues to be confronted by the GON with regard to addressing poverty alleviation include: (a) lack of a coherent strategic framework for short-term interventions, which has resulted in little or no coordination among various programs; (b) weak and diffused institutional capacity for 12/ FISE was started by the GON in February 1991 with twong initial support from USAID, which transfenred a US$10 million progam from the Instite for Municipal Development (INIFOM) to FISE. Soon, the IDB came in with US$3 milion for financing of subprojects and US$1 million for institutional developmenL Ihis was complemented by a US$500,000 technicad asistance grant fiom UNDP. The Government of Canada, tbrough the Canadian Intenational Development Agency (CIDA), has also approved US$1 million.  10 implementation; (c) poor coordination of foreign aid; and (d) lack of adequate financing for FISE, the most robust of Nicaragua's short-term initiatives. 32. The GON has r.ot clearly defined its strategy for poverty alleviation in the short term. More specifically, no priorities have been established between safety nets for the most vulnerable groups and those groups who need attention for security reasons (contras, compas, recontras, recompas, and revueltos). No definition of the most urgent problems has been carried out, and consequently target groups of safety net programs have not been clearly identified. This environment has allowed for the emergence of a number of programs with overlapping objectives and unclear division of labor (i.e., FISE, FASO, and PAMIC all aim to create emergency employment) and of target groups (i.e., FASO and PRRN both target displaced, demobilized, and war-affected people, while FASO and PAMIC both provide credits to informal sector workers). Only recently has the Government started to improve coordination between programs for war affected populations (para. 30). Indeed, little effort has been made to promote complementarity among interventioas. It is also unclear how these programs fit within the GON's broader social sec43r strategy and overall macroeconomic policies. Further, no linkages have been established between short-term interventions and medium-term reform programs in the social sector agencies. It would even appear that some interventions have been inconsistent with such policies (e.g., FASO's provision of subsidized credit to infcrmal sector workers), while others may be creating additional recurrent expenditures for the GON. As a result, sometimes contradictory interventions have been implemented, such as construction of health facilities and schools without considering the availability of resources at the MOH and MOE to provide resources necessary for operations (such as personnel, inputs, and maintenance). 33. With the exception of the FISE and possibly the PRRN, the majority of the programs, if expected to be continued for extended periods, have still to define suitable institutional configurations, modes of operation, and financing arrangements. There are no estimates of total actual costs of the short-term programs, and cost information of individual programs is often conflicting even among participating agencies. Most programs do not benefit from staff with the necessary technical skills, specifically in the areas of project design, monitoring, or evaluation, methods of targeting, and financial management. This current state of affairs undermines the potential effectiveness and impact of short-term GON poverty alleviation efforts by spreading too thinly its limited institutional capacity. 34. Without an overall GON strategy, targeting and coordination of foreign aid is inadequate. At present, different programs initiate separate and competing funding requests for donor support that lack strategic rationale and adequate total cost estimates (particularly regarding recurrent costs). Donors are thus faced with a "shopping list" of diffuse initiatives and as a result, exert undue influence on the content of programs and further contribute to the fragmentation of strategic initiatives. Instead of aid going to support established priorities, priorities end up being set based on the aid that can be mobilized. C. Water and Sanitation Trends 35. Nicaragua has an abundance of water resources throughout the country. Contamination is prevalent in urban areas, however, and water systems coverage in rural areas is insufficient: while from 1980 to 1989 coverage in urban areas increased from 67% to 789%, coverage in rural areas over the same period increased only from 6% to 18%. Poor piped water quality is a major problem: in  11 1987, only 2.6% of the population consumed chlorinated waterAl3 Of those who have access to piped water, half regularly experience losses and/or inadequate capacity; this creates a breeding ground for system contamination and disease-in 1989, 36% of water quality samples taken in Managua by the MOH tested positive for bacteria. Sewer coverage did not increase significantly in the 1980-1989 period, servicing about 32% of the population, according to the Inslituto Nicaragaense de Agua y Alca 'tarillado (INAA), the enterprise in charge of the country's water ard sanitatior. In rural areas, only between 9 to 16 percent of the population have latrines; an estimated 120,000 additional latrines are needed. Urban coverage ranges from 65% in Managua to only 6% in Boaco. Issues in Water and Sanitation 36. Inadequate coverage of water and sanitation services results in consumption of poor quality water, causes the high incidence of water-borne infectious diseases, and limits the impact of health interventions. Main issues include the need to improve coverage and service quality, particularly for rural areas and the poor, sustainability of investments through cost-recovery, and lack of definition of the roles of INAA, MOH, municipalities, and communities for the provision of urban and rural water and sanitation services. 37. Rural areas have been assigned little priority. Of the US$145 million included for water and sanitation in the Public Investment Program for the next five years, only US$14.1 million (9.7%) have been assigned to rural areas, where 40% of the population live. Even though PAHO has committed to provide 10,000 latrines for Managua, and the Ministry of the Presidency (MINPRES) has pledged resources for 10,000 more, no plans exist to mobilize additional resources for water and sanitation, as well as hygiene education, particularly for rural areas. 38. The sustainability of water and sanitation services in urban areas is hampered by major water losses and consequently reduces revenues, which are crucial for maintenance. The system for meter reading, billing, and collection is inadequate and INAA's real costs are understated, thus preventing the setting of an appropriate tariff system. An equally important problem is that rural areas receive little financing (mostly from external donors) and INAA does not have the capability to ensure the maintenance and operation of the few investments that take place in these areas. 39. Although it has the mandate to cover the entire country, INAA operates principally in the cities. Furthermore, INAA is currently fully occupied with an IDB-financed project to improve the water systems in 15 cities. Even though the agency has a Directorate for Rural Water (DAR), no important programs to increase coverage in rural areas have been carried out over the last two years. The only agencies to support water projects in small rural communities have been UNICEF, CARE, and other NGOs. Only recently did INAA enact a policy requiring all future rural and marginal urban development projects to have a health education component, and all rural projects to include latrines. 40. Role of Water in Sanitation in Health Issues. The MOH's role in this sector is to establish, in conjunction with INAA, health standards for water quality and preventive interventions such as hygiene education. The threat of cholera in 1990 was the catalyst for the MOH's most successful campaign by adopting a preventive, rather than curative, approach to health interventions. The health volunteers, the brigadistas, have been effectively used to disseminate information on proper water and sanitation usage and hygiene practices. This preventive approach reduced mortality 13/ MOH evaluation, 1988.  12 and morbidity from diarrhoeal diseases by 46% and 10%, respectively, between 1990 and 19910. In the short-term, FISE is expected to help improve the provision of water and sanitation services, particularly in rural and urban marginal areas. FISE will operate in close coordination with INAA to ensure that water and sanitation systems are properly maintained. In the longer term, a decentralization of management responsibilities to municipalities needs to be deflied. D. Nutrition Trends 41. Food Consumption. Between 1986 and 1989 it is estimated that the average per capita caloric and protein intake fell by 26% and 14%, respectively, to 14% and 25% below the recommended daily minimums of 1,850 calories and 50 grams of protein (Table 6). While middle- income urban households met recommended caloric needs and exceeded protein requirements, the caloric and protein intakes of poor urban households were, respectively, 37% and 30% below critical minimums. Even after 1987, when food prices held against inflation and supplies increased, access to food decreased for the groups most in need because of declining real wages and Government channeling of food aid to public employees and the military ("AFA' program, para. 45). 42. Child Malnutrition. In 1966 an INCAP nutritional survey found that 57% of Table 8 children under the age cf 5 suffered from NICARAGUA CALORIE PROTEIN CONSUMPTnON mild malnutrition. This increased to 68% in 1977, then declined to 56% in 1980. The 140- MOH estimates moderate and severe - - - ---___ ---__---___---__ malnutrition to be 13% among children less 100-- r- -