1. Country and Sector Background
Between early 2006 and mid 2008 global food prices have increased dramatically. The food price index compiled by the World Bank increased by 113 percent between January 2006 and June 2008. Nicaragua is no exception to this trend and indeed domestic food price inflation increased from 10.7 percent in January 2006 (year-on-year) to 34.2 percent in August 2008.
High food prices affect a majority of Nicaraguans, but the poor are affected disproportionately. Bank analysis indicates that about 90 percent of Nicaraguans are net food consumers, 79 percent in rural areas and 98 percent in urban areas. The poor are disproportionately affected by high food inflation rates, as the share of their incomes devoted to food purchases is larger than higher income groups: in 2007, the extreme rural poor and the poorest decile experienced an inflation rate 3.4 percentage points higher than the average (2.6 for the extreme urban poor).
The poverty impact of large shocks which affect entire groups of the population can be substantial. Experience from the coffee crisis that affected Nicaragua in 1998-2001 suggests such external shocks can have significant impacts on nutrition and enrollment in schools, as well as on productive capacity. This happens when households engage in depletive coping strategies, such as, the sale of their productive assets, the withdrawal of children from school, the deferred utilization of preventive and curative health services, or drastically reducing food intake. These risk-management mechanisms can push households deeper into chronic poverty through longterm productivity loses and increased likelihood of intergenerational transmission of poverty.
In response to the food crisis, the Government of Nicaragua has adopted a two-pronged strategy, which combines actions to support the most vulnerable groups of the population and actions aimed at expanding the supply of agricultural goods. The Bank has articulated its response to this request around two operations.
The first operation, described here, would provide immediate relief for the most vulnerable population groups. The proposed operation would be financed by a grant in the amount of US$7.0 million under the Food Price Crisis Response Trust Fund. It would support two existing Government programs, thereby ensuring their continuity and targeting to areas and individuals most affected by the crisis. The first program is the Integral School Nutrition Program (PINE), which is part of the Government's National Policy for Food and Nutrition Security. The operation would ensure that poor children in the most vulnerable areas continue to receive lunch at school, maintaining their intake of nutritive food at a time of crisis and encouraging their continued attendance. The second program is the Agro-Seeds Program (PAS), which supports small farmers to increase their production during the 2008/09 agricultural cycle. The PAS was launched in 2007 and aims at providing small producers in the areas most affected by the crisis with seeds, fertilizer and technical assistance to ensure production during the forthcoming agricultural cycles. This first operation builds on existing programs with established systems to minimize risks and ensure prompt implementation.
A second operation is expected to be submitted to the Board for consideration in December 2008. Its medium-term objective is to improve the availability of, and access to, high quality seeds in order to sustainably increase agricultural productivity. The operation would work across the country and would strengthen the entire seed supply system. It would focus on basic grains (beans, maize, sorghum and rice), as they are key staples in the diets of the poor most affected by the crisis, and because Nicaragua has excellent conditions to increase production of these crops.
The proposed Project's Development Objectives are to mitigate the negative nutritional impact of the food price increase on pre-primary and primary school children and to promote poor rural households' food security by increasing agricultural production.