IMF Executive Board Concludes 2012 Article IV Consultation with Nicaragua

Public Information Notice (PIN) No. 12/75
July 12, 2012

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On June 27, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 and discussed the Ex Post Assessment of Longer-Term Program Engagement (EPA)2 with Nicaragua.


Macroeconomic developments in Nicaragua have been broadly positive since 2010. Real gross domestic product (GDP) grew on average 4.6 percent during 2010-11, underpinned by robust consumption and investment. Inflationary pressures abated somewhat to 8 percent by end-2011 (from 9.2 percent at end-2010), as world commodity prices eased. Although the external current account deficit widened in 2011 (to 18 percent of GDP), larger capital inflows (mainly sizable foreign direct investment) produced a small surplus in the balance of payments, thus increasing international reserves.

The fiscal outturn of 2011 surpassed expectations. The tax reform of 2009 and the strong output recovery boosted tax revenues, while central government spending as a share of GDP remained broadly stable. As a result, the central government recorded a surplus of 0.6 percent of GDP (following a deficit of 1 percent of GDP in 2010), which was primarily used to pay down debts of the state-owned electricity generation company. Elsewhere in the public sector, a deterioration in the fiscal result of the social security system, the municipality of Managua, and the state-owned enterprises was partly offset by a smaller operating deficit of the central bank than in 2010. On net, the consolidated public sector recorded a small surplus for the first time since 2007.

Monetary policy continued to bolster the international reserves position and conditions in the financial system strengthened. The central bank maintained the crawling-peg system, which helped anchor inflation expectations. Banks’ liquidity remained ample while credit growth picked up significantly towards the end of the year. Nonperforming loans ratios declined as banks’ profitability improved and deposits (in local and foreign currency) rose.

Looking ahead, real GDP growth is expected to slow in 2012 and inflation to rise to between 8 and 9 percent owing to oil price increases. The consolidated public sector is projected to post a deficit in 2012 as some spending pressures resurface, but its fiscal position is expected to improve gradually in the medium term with expenditure restraint at the level of the central government, central bank, and state-owned enterprises. The external current account balance is expected to widen in 2012 on the back of weaker external demand and a larger oil bill, which would reduce moderately the international reserves coverage. Risks to the economic outlook for 2012 are tilted to the downside given Nicaragua’s exposure to economic activity abroad.

The Ex Post Assessment (EPA) reviewed Nicaragua’s performance under the 2007–11 program supported by an Extended Credit Facility (ECF) arrangement. The EPA concluded that although the Nicaraguan economy was buffeted by a series of adverse shocks between 2007 and 2011, the ECF-supported program was effective in helping the authorities develop an appropriate policy framework to support macroeconomic stability. The program also paved the way for some reforms of the tax system and the energy sector, but it fell short in key areas, such as pensions and public financial management.

Executive Board Assessment

Executive Directors welcomed Nicaragua’s robust economic recovery and favorable macroeconomic performance on the back of sound policies, high export prices, and large investment inflows. Nevertheless, Directors underscored that important macroeconomic and structural challenges remain to be addressed, including widespread poverty and large external imbalances. With downside risks prevailing due to the uncertain global environment, Directors encouraged the authorities to maintain prudent macroeconomic policies and step up the pace of structural reform.

Directors stressed that fiscal consolidation should be the cornerstone of macroeconomic stability. With wage bonuses and higher electricity subsidies worsening the fiscal outlook for 2012, Directors urged firm expenditure restraint. In the medium term, reforms to strengthen further the revenue effort and to revamp the pension system will be critical, alongside current expenditure restraint, in accommodating higher social and infrastructure spending while maintaining fiscal sustainability. Particularly important will be to widen the tax base by curtailing exemptions.

Directors underscored that reducing external vulnerabilities related to the large external current account deficit will be a key challenge in the period ahead. They supported plans to cut back on oil imports and increase international reserves. They also stressed the importance of reducing the size and improving the composition of the public debt, and encouraged the authorities to step up efforts to obtain debt relief on HIPC terms from non-Paris Club creditors.

Directors urged the authorities to prioritize and address the key structural impediments to growth and poverty reduction. They highlighted the need to strengthen governance and institutions, improve public financial management, reduce labor market informality, and tackle weaknesses in the energy sector.

Directors welcomed the progress in improving banking supervision, reflected in the overall soundness of the financial system. They encouraged concerted action to deal with remaining vulnerabilities, including increased collaboration with regional supervisors. Directors welcomed the creation of a financial intelligence unit, and urged the authorities to seize the opportunity to bring the regime against money laundering and terrorism financing into compliance with international standards.

Directors welcomed the conclusion of the Ex Post Assessment that the Fund’s engagement in Nicaragua during 2007–11 contributed to macroeconomic stability. They noted, however, that exogenous shocks and at times weak program ownership led to uneven progress in structural reforms. In light of this, Directors highlighted several lessons for the future. In particular, Directors stressed that policies should have strong ownership by the authorities, structural reforms should be well designed and well targeted, and implementation should be flexible to accommodate unexpected shocks and capacity constraints.

Nicaragua: Selected Social and Economic Indicators, 2008–13
  2008 2009 2010 2011 2012 2013


      Est. Proj.

Real sector


GDP growth

2.8 -1.5 4.5 4.7 3.7 4.0

GDP deflator

15.0 3.9 6.0 11.1 8.6 7.9

Consumer price inflation


End of period

13.8 0.9 9.2 8.0 8.6 7.5

Period average

19.8 3.7 5.5 8.1 9.2 7.9
  (Percent of GDP; unless otherwise indicated)

External sector


Current account

-24.6 -13.4 -14.7 -18.0 -21.4 -19.0

Exports of goods, f.o.b

39.7 38.5 47.9 55.6 57.2 57.7

Imports of goods, f.o.b.

-74.2 -63.2 -72.7 -83.9 -87.7 -86.1

Of which: oil

-15.1 -10.9 -11.4 -16.7 -17.0 -14.7

Capital and financial account 1/

24.1 19.7 17.7 18.8 21.1 20.2

Of which: FDI

9.8 7.0 7.7 13.3 10.6 9.6

Gross reserves (US$ m)1/

1,141 1,573 1,799 1,892 1,879 1,990

(in months of imports excl. maquilas)

2.9 4.9 4.7 4.0 3.5 3.6

Fiscal sector


Central government overall


balance, after grants

-1.2 -2.8 -1.0 0.6 -0.5 -0.4


19.0 18.9 19.6 21.1 21.5 21.6


23.2 24.1 23.0 23.2 24.4 23.9


2.9 2.4 2.5 2.7 2.4 1.9

Combined public sector (CPS)


balance, before grants

-4.6 -6.5 -4.0 -2.9 -4.7 -3.5

CPS overall balance, after grants

-1.5 -3.1 -1.4 0.1 -2.1 -1.3


1.5 3.1 1.4 -0.1 2.1 1.3


1.9 3.9 3.3 2.6 2.9 3.3


-0.3 -0.8 -1.9 -2.7 -0.8 -1.8

(including BCN operating balance)


Public sector debt



74.8 80.1 78.0 73.1 68.7 65.8


19.7 21.2 19.2 17.3 13.7 11.0


55.1 58.9 58.8 55.8 55.1 54.8
Sources: Central Bank of Nicaragua; Ministry of Finance; World Bank; and Fund staff estimates and projections.
1/Figures include the SDR105.1 million (US$165 million) allocation of September 2009.
2/Figures for 2010-13 include off-budget wage bonus.
3/Actual and projection are based on the 2011 DSA Update. Estimates up to 2010 correspond to the legal situation.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:

2 An EPA is required for all members having longer-term program engagement with the Fund. EPAs are intended to provide an opportunity to step back from continuing program relations to consider an analysis of the economic problems facing the country, review progress under Fund-supported programs, and draw forward-looking lessons for future Fund engagement.


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