• 121 pages
• For Official Use Only
• August 25, 2009

INTRODUCTION

This report provides (i) a brief overview of IFC’s investment environment and outlook for portfolio performance, (ii) a comprehensive review of IFC’s investment portfolio and performance and (iii) a review of the development effectiveness of IFC’s portfolio. The report should be viewed as a snapshot of portfolio trends as of the end of FY09 which will be supplemented throughout the year by IFC’s Quarterly Report to the Board, as well as other regular reports including IFC’s Annual Report, IFC’s Annual Report on Financial Risk Management and Capital Adequacy, IFC’s Business Plan and Budget, and IFC’s Road Map.

Section I of the report provides an overview of emerging market investment conditions. New to
this section is a brief discussion of portfolio performance going forward. Section II examines changes in
the size and composition of the portfolio and provides information on the most important portfolio trends
of the fiscal year. Section III analyzes equity portfolio trends, performance, and return volatility and
Section IV focuses on the loan and guarantee portfolio. Section V provides details on the development
effectiveness of IFC’s portfolio.

This year’s report contains three annexes and three appendices. Annex A provides a summary of
IFC policies and procedures with respect to Portfolio Management. Annex B lists IFC’s committed
portfolio by country and Annex C provides details of key portfolio performance trends in charts and
tables. Appendix I lists new approvals in FY09, Appendix II lists new commitments, and Appendix III
provides details on cancellations and prepayments.

Development results presented in Section V are based on data gathered through IFC’s
Development Outcome Tracking System, known as DOTS, which covers all active companies in the IFC
portfolio as well as all new business. The section highlights that development results for the Corporation
remained strong in FY09. Projects with high development results exceeded 70% for the past two years.
This year’s results compares favorably to the long run average of about 60% (prior to the past two years)
and the long run target of 65%. The financial crisis did negatively affect development results in hard-hit
Europe and Central Asia, but development results in Latin America improved substantially. As in prior
years, analysis shows that repeat projects and projects with larger IFC investments have a higher
likelihood of achieving better development results. In Sub-Saharan Africa, for example, weighted results
were 25% points higher than unweighted results, making Sub-Saharan Africa the most successful region when weighting development result by the size of investments.

In CY2008, IFC clients provided 2.1 million jobs, served 5.5 million health patients, and helped
educate 1.2 million students. Our clients reached over 200 million water, power, and gas customers,
provided phone connections to 220 million people, and provide 9.8 million loans to micro, small and
medium-sized enterprises.

The global financial crisis, which originated in the developed markets and spread rapidly to
developing markets, significantly affected IFC’s investment portfolio during the year. New investment
activity slowed significantly after the crisis unfolded in the first quarter of the fiscal year due to loss of
project pipeline. The Corporation responded to the crisis with a series of initiatives to meet client needs
in key areas, in particular, trade finance and bank capitalization. Despite the crisis, the Corporation
remained focused on growing its investment portfolio in IDA countries.

In FY09, new commitments totaled $10.5 billion, a 7% decline from FY08. New IDA country
commitments, however, grew strongly with new commitments in IDA countries up 25% to $4.4 billion,
an all time high. IDA commitments represented 42% of all commitments, up from a 31% share in FY08;
moreover, by project count, IDA projects represented more than 50% of total projects. On a regional basis, Sub-Saharan Africa was the only region to record an increase in new commitments with the volume of new commitments growing 32% over FY08. Although the Southern Europe & Central Asia region recorded a decline of almost 24% in new commitments, central Asian countries within the region
continued to grow strongly, with new commitments increasing more than 80% to $252 million.
Guarantees accounted for 24% of total new commitments as compared to 16% in FY08, largely due to
increased demand for trade finance guarantees. Trade guarantees grew 67% to $2,380 million in FY09
and represented 96% of total guarantee commitments.

The IFC portfolio became less concentrated on a country basis in FY09 with the top ten countries
representing 48% of the portfolio on a committed basis, down from 51% in FY08. The top ten countries
in the disbursed and executed portfolio represented 52% of the total portfolio as compared to 57% in
FY08.

Droppages and cancellations more than doubled to $2,971 million with the increase underpinned
by the difficult economic environment. Loan prepayments slowed significantly, declining 57% to $490
million, as the financial crisis limited client access to alternative finance. The ratio of prepayments to the
disbursed loan portfolio was less than 3%, down from 7% in FY08 and 13% in FY06.
Gross portfolio income declined 16% to $2.5 billion and the gross return on the portfolio after
Fair Value Option losses and loss provisions was 3.1%. Principal outstanding on non-accruing loans
increased 24% to $457 million, but represented just 2.5% of disbursed principal at year end, up from
2.2% in FY08. With respect to the equity portfolio, the real IRR on the active equity portfolio was
15.0%, down from 27.6% in FY08.

…

International Finance Corporation

• Middle East and North Africa Region
• Iraq Country Management Unit
• Middle East and North Africa Region
• 82 pages
• For Official Use Only
• February 10, 2009

INTERIM STRATEGY NOTE FOR IRAQ (FY09-FY11)

EXECUTIVE SUMMARY

i. Recent positive developments suggest that Iraq has made important progress towards political and economic stabilization, although the situation remains fragile and reversible. Recent months have seen a sharp decline in incidents of violence, especially in the Baghdad area, and a corresponding decrease in the rate of internal displacement of the population. This reflects improved security as well as successful initial steps towards political reconciliation. Macroeconomic performance has also improved although growth has been volatile.

ii. The Government is signaling its commitment to reform and reconstruction, indicating that continued engagement with Iraq may produce further concrete results. The Government has succeeded in sharply reducing inflation and containing recurrent spending, while increasing capital expenditures to accelerate the recovery process. In addition, the machinery of government is slowly reviving as Iraq emerges from conflict. A more proactive and confident government is likely to devote more attention to the economy. Finally, high oil prices and – to a lesser extent – an increase in production produced an estimated US$70 billion of revenues in 2008, although a deterioration in Iraq’s fiscal balance is expected during part of the ISN period in view of
the recent declining trend in oil prices.

iii. However, results from past and ongoing reform efforts remain far from meeting the needs and expectations of the Iraqi people. Unemployment remains extremely high and access to basic services severely limited. Electricity supply is unreliable and is far exceeded by demand; access to clean water and sanitation is the lowest in the Region. Recent improvements in access to education and health services have not yet translated into significant welfare gains on the part of the people of Iraq.

iv. Iraq is resource rich and has benefited from a substantial increase in oil revenues over the past few years. At the same time, it is still subject to conflict, insecurity, political instability and revenue volatility. These features highlight Iraq’s uniqueness. As a conflict-affected, IBRD-eligible middle-income country, Iraq is clearly not the typical aid-dependent post-conflict country. The main challenge for the country – in addition to security and political stability – is to mobilize and effectively use its own
vast resources to improve the welfare of the Iraqi people and rebuild its infrastructure. The main role for the international community, including the World Bank Group, is therefore to help Iraq use its own resources more effectively.

v. Working in Iraq has been very challenging for the Bank Group and other donors. While some notable successes have been achieved, the effectiveness of assistance has been hampered by issues related to both the country’s operating environment and the approach followed by the donors. Operating environment issues – which also affect the Government’s ability to execute its own investment budget – include: the fragile political and security situation; the unstable policy and institutional environment; the Government’s weakened institutional capacity, and weaknesses in Iraq’s banking system. Issues related to the approach of the Bank to Iraq include the selectivity of assistance as well as business processes and fiduciary arrangements which have been unfamiliar to Iraqi counterparts and are challenging for Ministries with limited capacity.

vi. The design of this third Interim Strategy Note benefited from a stocktaking of the Bank Group’s engagement with Iraq to date. The goal of the stocktaking exercise was to identify the key bottlenecks for the implementation of the previous ISNs and extract lessons for this ISN. This exercise informed the design of this ISN: (i) the continuing centrality of institution building; (ii) the critical importance of interest and engagement on the part of ministries and implementing agencies; (iii) the need for increased selectivity in terms of the ability to identify and seize opportunities as they arise to achieve concrete results; (iv) the need to focus on reform efforts that do not overtax Iraq’s existing capacity and that more clearly reflect the country’s current political and security situation; and (v) the need for increased flexibility in the design and programming of Bank assistance and for experimentation with alternative implementation arrangements for the Bank’s assistance program for Iraq.

vii. The ISN also benefited from extensive consultations with the Government of Iraq, the donor community, and other stakeholders, including representatives from private sector and civil society organizations. These consultations were extremely helpful in identifying the country priorities, defining promising engagement arrangements to maximize Bank assistance results, and highlighting the centrality of donor coordination. Some of the main priority areas identified during the consultations include:

(i) public financial management; (ii) banking sector reform; (iii) support to planning processes and strategy design (not only at the central level, but also at the sectoral and provincial levels); (iv) private sector development; and (v) energy and services.

viii. Given Iraq’s unique characteristic of a well resource endowed Middle Income Country (MIC) with a fragile environment, this ISN is proposed for a longer time horizon than the typical ISN. The time horizon for this ISN is proposed to be from mid-FY09 through FY11, to be updated to a full Country Assistance Strategy if and when circumstances allow. This interim strategy contains lessons and principles of engagement. The work program beyond FY09 would be kept up to date through Annual Business Planning, jointly with the Iraqi Government to ensure it meets the evolving needs of the Government as well as evolving opportunities for engagement.

ix. The central guiding principle of this ISN is that Iraq is well-endowed with natural and financial resources, and that the main role for the World Bank in this context is to help Iraq use its resources more effectively and transparently. This principle impacts both the form and the content of the proposed work program for the next two years. However, it needs to be tempered by recent developments in the global economy and their impact on Iraq’s projected oil revenues for the next few years and its increasing need for external financing in the short-to-medium term. Hence, this ISN anticipates IBRD financial support as requested by the Iraqi authorities.

x. Regarding the form of the assistance, the main instruments of Bank Group support under this ISN include: (i) operational support to accelerate implementation of the current portfolio, totaling about US$1 billion; (ii) advisory services in selected sectors and areas; (iii) IBRD financial support in priority sectors to be selected on the basis of funding needs and implementation capacity; (iv) IFC investment and advisory services products; and (v) MIGA’s political risk guarantee products. Under this ISN, an IBRD envelope of US$500 million can be committed for investments projects over FY09-11. The Bank is currently administering 16 active grants funded from the Iraq Trust Fund, totaling US$471.6 million to provide textbooks, schools, health clinics, improved social safety nets, water supply and sanitation, irrigation and drainage, and a comprehensive household survey. The ongoing IDA portfolio consists of five projects, worth US$508.5 million, in the areas of education, roads, electricity, and water supply. IFC will support PSD through prioritized investments and advisory services in key sectors. The Bank’s Analytical and Advisory Activities (AAA) program will support the Government in its efforts to enhance its ability to effectively use its oil revenues to the benefit of the Iraqi people. Key analytical work undertaken since re-engagement in 2003 includes a study on subnational public financial management (2007), a joint IFC/IBRD Construction Industry study (2008), a Country Economic Memorandum (2006), a pension reform study (2005), a report on Iraq’s Public Distribution System (2005), an investment climate report (2004), and a study on stateowned
enterprise reform (2004). The Government has also expressed interest in borrowing from IBRD as the need arises, increasing IFC support, and getting MIGA guarantees that could leverage private financing. Other instruments include the State and Peace Building Fund, and possibly, Treasury services.

xi. With respect to the content of the assistance, activities under this ISN will fall under at least one of three thematic areas of engagement: (i) continuing to support ongoing reconstruction and socio-economic recovery; (ii) improving governance and the
management of public resources, including human, natural and financial; and (iii) supporting policies and institutions that promote broad-based, private-sector-led growth, with the goal of revitalizing the private sector and facilitating job creation. IFC and MIGA will play a key role particularly (but not exclusively) with respect to the third thematic area. New activities under the ISN will be chosen on the basis of criteria for selectivity reflecting opportunities to achieve concrete results on the ground.

xii. The three thematic areas are closely linked with the key goals of the International Compact with Iraq. The first ISN theme responds to the goals of the International Compact with Iraq (ICI) which are related to Iraq’s reconstruction and recovery efforts, including strengthening the energy sector and developing a stable, competitive and sustainable agriculture. The second ISN theme responds to the ICI goals of improving public financial management as well as strengthening institutions and improving governance. The third ISN theme responds to the ICI goals of implementing economic reform to create an enabling environment for private investments as a driver for broad-based growth.

xiii. To achieve tangible results in a relatively short term, the Bank Group will place a renewed emphasis on how this ISN will be implemented. Building on lessons learned from the implementation of the previous Interim Strategy Notes and the various
consultations held, this ISN will aim to: (a) enhance the effectiveness of instittion building and analytical and advisory activities; (b) strengthen the implementation of the current portfolio; (c) introduce more flexibility in the Bank Group’s programming and ability to experiment with alternative implementation arrangements; and (d) foster donor coordination. For planning purposes, this ISN is based on the assumption that progress in the security situation over the next two to three years would continue to be slow and incremental, with a risk of reversal.

xiv. Risks. There are high risks to the World Bank Group’s program in Iraq. The most important risk pertains to the political and security situation, which remains fragile, as does the country’s operating environment. To mitigate this risk, the strategy emphasizes flexibility, and the Bank will adjust its activities as appropriate. Given the current limitations on mobility within the country, maintaining a vibrant dialogue with counterparts on issues of policy reform as well as implementation, and ensuring adherence to core fiduciary and safeguard requirements will remain challenging. These risks are substantial despite the Bank’s mitigating measures, which include capacity building, local oversight capacity, and prudent financial management procedures.

Document of the World Bank

• International Bank for Reconstruction and Development
• International Development Association
• International Finance Corporation
• For Official Use Only
• 51 pages
• August 23, 2005

EXECUTIVE SUMMARY

i. Political Developments. Iraq has had two political transitions over the past year, taking steps toward a constitutionally-elected government. Nevertheless, the country faces a violent insurgency that is impeding reconstruction and economic recovery. Immediate challenges are to restore rule of law, establish political legitimacy, and begin to build credible and inclusive institutions. The ability of the Iraqi Transitional Government to include ethnic and religious groups in the political process over the coming months will be important in determining whether a future constitutionally-elected government will improve security and stability, which are preconditions for successful reconstruction.

ii. Economic Developments. After hitting a low in the wake of the 2003 invasion, real GDP rose by about 47 percent in 2004, reflecting strong oil prices and partial recovery of the oil sector. Income per capita—about US$940—is still only a quarter of what Iraqis enjoyed twenty-five years ago. Although data remain unreliable, surveys suggest that poverty has worsened in recent years; and unemployment is estimated to be at least 30 percent. The government continues to provide large untargeted subsidies for food, fuel, and utilities, amounting in total to about 50 percent of GDP. Although the subsidies provide important support for the poor and vulnerable, they distort markets, disproportionately benefit the wealthy, encourage black markets and smuggling, and burden the budget, crowding out potentially more efficient spending on targeted social programs.

iii. Economic Prospects. Real GDP growth is projected at about 3.7 percent in 2005 due to stagnating oil production and exports. Growth is expected to accelerate to 17 percent in 2006, predicated on increased security and political stability, higher oil production and exports, and continued strong world oil prices. Strong growth also depends on introducingtargeted safety nets and implementing structural reform —including a gradual reduction in subsidies—to contain recurrent spending and allow for sufficient investment and reconstruction. Iraq’s overriding challenge—for both stability and economic sustainability— is to improve the management and transparency of oil revenues.

iv. The Government’s Strategy and the International Response. Iraq’s National Development Strategy (NDS), which emphasizes good governance, private sector-led growth, and strong social safety nets, provides a framework for donor assistance. Although donors pledged US$32 billion at the International Conference for Iraq in Madrid in October 2003, continued lack of security has complicated delivery of donor assistance and lessened its impact on the ground. Donors have deposited about US$1 billion in the International Reconstruction Fund Facility for Iraq (IRFFI), which consists of two trust funds, one administered by the World Bank and another by the United Nations. Nearly all donor deposits to IRFFI have been allocated to projects that are ongoing. Most aid to Iraq takes the form of bilateral assistance, mainly from the United States. Japan is the second largest donor. v. Progress under the World Bank’s First Interim Strategy. The First Interim Strategy, discussed by the Executive Directors in January 2004 and originally intended to cover nine months, was designed to rely on the World Bank Iraq Trust Fund (ITF) within the IRFFI to finance projects. Between March and December 2004, the Bank approved and launched nine emergency projects amounting in total to US$366 million. A first capacity building project is completed, an emergency textbook project is nearly completed, and seven additional operations are under implementation, addressing capacity building, healthcare, private sector development, rural infrastructure, school construction, urban upgrading, and water supply and sanitation. The ITF portfolio balances immediate needs and near-term employment with medium-term interventions to improve service delivery. The Bank, using its own budget, is also helping to lay the groundwork for Iraq’s medium-term program through analytical and advisory activities (AAA).

vi. Objectives. The Bank’s overarching objective is to help Iraq build efficient, inclusive, transparent, and accountable institutions as needed for stability, good governance, and sustainable economic prosperity. Better institutional frameworks, policies, and systems will improve the efficiency and effectiveness of both national expenditures and international aid. Under the umbrella of institution building, the Bank Group’s work program is organized into four pillars, supporting government efforts to: (1) restore basic service delivery; (2) enable private sector development; (3) strengthen social safety nets; and (4) improve public sector governance. Investment projects fall under Pillar 1: Restore Basic Services. Pillars 2, 3, and 4 are mainly supported by AAA.

World Bank Document

• Argentina, Chile, Paraguay and Uruguay Country Management Unit Latin America and the Caribbean Region
• International Bank for Reconstruction and Development, Regional Vice President: Pamela Cox, Country Director: Axel van Trotsenburg Task Team Leaders: Maria Luisa Masutti and James Parks
• 116 pages
• For Official Use Only
• May 10, 2005

Uruguay is currently in the midst of a dual transition. First, there is an economic transition from the 2002 crisis towards a path of equitable and sustainable development, as the economy continues to recover strongly. Second, there is a political transition, as the victory of the Frente Amplio – Encuentro Progresista – Nueva Mayoría coalition in the October 2004 elections marked a new phase in the country’s political history.

The Government faces three main challenges in order to succeed with the economic transition, namely: (i) reducing vulnerability; (ii) sustaining growth; and (iii) improving living standards. The challenge of reducing vulnerability relates to debt sustainability, fiscal management and financial sector reforms. Debt sustainability will continue to be a major development challenge in the medium term given the sharp increase in the public debt to GDP ratio as a result of the crisis. Heavy amortizations due in the period 2006-07 constitute a particular source of vulnerability. Strong fiscal management will be the key to reducing the debt burden over time while ensuring an environment of price and exchange rate stability. Policymakers can build on Uruguay’s impressive fiscal performance since the crisis which culminated in a primary surplus of 3.8 percent of GDP in 2004. Meeting the challenge of putting Uruguay on a path of higher longer-run growth will depend upon structural reforms aimed at increasing investment, enhancing competitiveness, and creating an enabling environment for the private sector. Uruguay’s strong rebound from the crisis, with 12.3 percent growth in 2004, has helped create a sound basis for these reforms. In improving living standards, the new administration faces the challenge of bringing the escalating costs of public pensions and health care under control in order to free up fiscal space for essential social investments including an expanded social safety net. Uruguay has experienced a deepening of social exclusion during the crisis and the new Government is committed to addressing the problems associated with society’s most vulnerable groups.

The proposed CAS aims to support the Government’s efforts to meet Uruguay’s development challenges in areas where the Bank has a comparative advantage. CAS preparation has benefited from extensive consultations and AAA work. This has included: (i) public discussion of a Sources of Growth study with the current Minister of Finance and his immediate predecessor, (ii) a two day Policy Notes seminar with the full Cabinet, (iii) a Client Survey conducted in July 2004 which highlighted widespread interest in maintaining or expanding Uruguay’s relations with the multilateral financial institutions, (iv) consultations with civil society, and (v) the lessons learned presented in the Completion Report on the 2000 CAS and the 2002 CAS Progress Report.

The proposed Bank assistance strategy is anchored around a series of programmatic development loans that are expected to be multi-sectoral in focus and support the Government in key policy areas including public sector management, financial sector reform, and reform of social programs. The investment lending pipeline will be rebuilt with new operations planned to support priority investments in infrastructure (transport, energy), social programs (reform of the national health insurance system, support to education), institution building (tax administration, expenditure management), and innovation, science and technology. The CAS envisages a base case scenario of up to US$800 million over the period through fiscal year 2010. The lending program will be modulated on the strength of the Government’s program and its ability to implement it, as well as the country’s creditworthiness and the Bank’s exposure. Self-correcting mechanisms are built into the CAS to modulate Bank exposure in line with performance benchmarks. If the macroeconomic framework, reform implementation, or improvement in debt sustainability were to fall below expectations, the Bank would revert to a low case scenario, with total lending commitments
reduced by at least US$300 million with respect to the base case envelope. Unsatisfactory portfolio implementation would also be grounds for slowing new investment lending. Were reform and investment program implementation to exceed expectations, allowing Uruguay to largely recover its investment grade status, this would open up the perspective of accelerated implementation of the lending program and a possibly enhanced level of Bank support to be discussed at the time of the CAS Progress Report planned for FY08.

Document of The World Bank

• International Development Association
• International Finance Corporation
• Central America Country Management Unit,  Latin America and Caribbean Region, International Bank for Reconstruction and Development
• For Official Use Only
• October 11, 2007

EXECUTIVE SUMMARY

1. The FY03-05 CAS and the FY06-07 ISN were aligned around Nicaragua’s first Poverty Reduction Strategy Paper (PRSP) which was later revised and renamed the National Development Plan in 2005. Although Nicaragua’s core objective to reduce extreme poverty was not achieved to the extent desirable, achievements were made across the program with considerable progress in promoting a stable macroeconomic environment, reducing the fiscal deficit significantly, and lowering external debt to sustainable levels by achieving the HIPC Completion Point and obtaining further debt reduction through the Multilateral Debt Relief Initiative (MDRI). Growth has been modest averaging around 3.2 percent per year since 2002, and exports have doubled. Though the Bank was instrumental in the increase of poverty spending from 9.6 percent of GDP in 2002 to 13.6 percent in 2006, greater expenditure has yet to translate into significant gains in poverty reduction.

2. Nicaragua remains the second poorest country in Latin America after Haiti. Although economic gains have reduced the scale and severity of poverty in Nicaragua, it is still unacceptably high with 46 percent of the population living below the poverty line. To achieve the Millennium Development Goals (MDGs), the rate of progress will have to be stepped up. The key development challenges are to accelerate growth over a sustained period and ensure that its benefits are broadly shared. To achieve these objectives, Nicaragua will need to maintain a sound macroeconomic and fiscal policy, improve poverty targeting and efficiency of public expenditures, dramatically improve human capital formation, and expand economic opportunities for the poor by creating an enabling environment for investments and job creation.

3. The proposed Bank Group Country Partnership Strategy (CPS) for Nicaragua (FY08-12) is aligned to the Government’s priorities and its evolving poverty reduction strategy, and is structured around support for four strategic objectives: (i) reactivating the economy, stimulating productivity and competitiveness; (ii) human capital development by improving social equity and opportunity; (iii) infrastructure and sustainable development; and (iv) strengthening governance and accountability by modernizing state institutions and promoting citizen
participation.

4. Indicative International Development Association (IDA) allocations for the five year period FY08-12 could amount to around US$ 240 million. In the proposed CPS, the Bank Group has selectively chosen focal areas for engagement. The annual series of budgetary support operations, the Poverty Reduction and Support Credits (PRSCs), together with an associated technical assistance credit would allow the Bank to engage in the reform program of the Government focused on governance and public sector modernization, the investment climate (property rights and regulatory institutions), and improvements in social service provision. New investment operations would be limited to urban and rural water and sanitation, public sector management, land administration, and rural roads.

5. The Bank’s ongoing portfolio of eleven operations, many of them relatively new, and recent analytic work provide ample opportunities to stay engaged on key policy issues. In energy, the Bank will work closely with the lead donor, the Inter-American Development Bank (IADB), to ensure that our programmed Analytical and Advisory Activities (AAA) contribute to improved sector performance. We will also continue to support the education sector through the Education for All Fast Track Initiative’s (EFA-FTI) Expanded Catalytic Facility, and help the Government develop a national strategy to combat chronic malnutrition through appropriate advisory services.

6. Complementing the Bank, the International Finance Corporation (IFC) aims to help accelerate private sector development supporting projects both at the regional and country levels. In Central America, IFC has been focusing on deepening regional integration, with priorities including: i) strengthening and broadening the financial sector, including access to term financing by micro, small, and medium size enterprises (MSMEs); ii) helping improve physical infrastructure; iii) supporting competitive firms in agriculture, industry and services; and iv) promoting south-south investments and helping local companies become regional and global players. These priorities are reflected in IFC’s operations in Nicaragua with a focus on: a) improving the investment climate by simplifying business regulations at the municipal level; b) strengthening MSMEs’ competitiveness and improving their access to finance; c) assisting exporters and hard currency earners, such as in agribusiness and tourism; and d) addressing critical infrastructure needs such as transport and energy (including renewable energy).

7. Nicaragua remains highly aid dependent with over 30 percent of its budget coming from Official Development Assistance (ODA) in its recent past. With annual aid disbursements of around US$550 million annually and with over forty donor countries and institutions involved, aid harmonization and alignment are major challenges. The Bank Group will work with donor partners under the Government’s leadership to ensure greater donor alignment to the new administration’s priorities, and a more coordinated attempt at harmonization to improve overall
development impact.

8. The main risks to the Bank Group’s FY08-12 Country Partnership Strategy arise from the possibility that the new administration may be unable to generate broad consensus on the politically challenging reform agenda or to resist measures that could threaten macro stability, undermine investor confidence and jeopardize growth prospects. These challenges will beaddressed by maintaining a continuous and close dialogue with the authorities and coordinating with key stakeholders, including the International Monetary Fund (IMF) and the Budge Support Group (BSG), a roundtable of key donors. Weak institutional capacity could hinder reform and program implementation. This will be partially mitigated and supported by capacity building and strengthening fiduciary and sectoral oversight at the Country Office. Natural disasters pose a significant risk during the CPS period, which will be partially mitigated by AAA to better identify risk and its impacts (i.e., theFY08 Central American Probabilistic Risk Assessment) and help with the design of a regional risk insurance mechanism. A final key risk stems from the challenges of effective donor harmonization and alignment. The Bank will strengthen its strategic role in enhancing the Government’s capacity to lead these processes and work closely with our donor partners to follow up on the implementation of the national harmonization and alignment plan. A mid-term CPS Progress Report is scheduled for early 2010, which will allow the Bank to review and discuss necessary adjustments.