## cr17173 - 40.7 percent in 2015. ## Source details **Canonical URL:** [cr17173 - 40.7 percent in 2015.](https://www.imf.org/-/media/files/publications/cr/2017/cr17173.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17173.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17173.pdf.json) --- ### External position and reserves - Current account deficit narrowed: 2016 = -8.6 percent of GDP compared with 2015 = -9.0 percent of GDP. - Consolidation largely explained by better-captured maquila exports due to statistical improvements. - Deficit financed by foreign direct investments (FDI) and other long-term inflows. - Gross international reserves: US$2.3 billion at end-2016; coverage of about 4 months of non-maquila imports. - Remittances: increased by 6 percent to US$1.3 billion (9.6 percent of GDP). - Staff assessment: Nicaragua’s external position is broadly consistent with fundamentals. - Key reserve and external statistics (selected): - Gross reserves (U.S.$ million): 2015 = 2,353; 2016 = 2,296; 2017 (Proj.) = 2,393. - Net international reserves (U.S.$ million): 2015 = 2,262; 2016 = 2,236; 2017 (Proj.) = 2,354. - In months of imports excl. maquila: 2015 = 4.6; 2016 = 4.0; 2017 (Proj.) = 3.9. - Current account (Percent of GDP): 2015 = -9.0; 2016 = -8.6; 2017 (Proj.) = -8.3. ### Fiscal stance, public debt, and social financing pressures - Consolidated public sector (CPS) deficit: 2015 = -2.2 percent of GDP; 2016 = -2.4 percent of GDP; 2017 (Proj.) = -2.3 percent of GDP. - Tax revenue: increased by 0.7 percentage points to 16.4 percent of GDP in 2016 (staff table shows Revenue (excl. grants, Percent of GDP): 2015 = 26.3; 2016 = 27.9; 2017 (Proj.) = 27.9). - Public sector debt ratio: 2015 = 40.7 percent of GDP; 2016 = 41.9 percent of GDP; 2017 (Proj.) = 41.5 percent of GDP. - Staff recommendation: fiscal consolidation of 1.6 percent of GDP implemented over two years to maintain medium-term fiscal sustainability; achieved primarily through rationalization of subsidies and tax expenditures, particularly VAT exemptions. - INSS (Social Security Institute) urgent financing issue: - INSS liquid reserves projected to be depleted by 2019 without reforms. - Growing INSS deficits and potential takeover of social programs financed by Venezuelan cooperation likely to intensify spending pressures. - Potential policy risk: impact of the NICA Act could be significant if it affects investment, growth, and rates on public debt. - Key fiscal statistics (selected): - Public sector debt: 2015 = 40.7; 2016 = 41.9; 2017 (Proj.) = 41.5. - Overall balance, after grants (Percent of GDP): 2015 = -2.2; 2016 = -2.4; 2017 (Proj.) = -2.3. - Expenditure (Percent of GDP): 2015 = 29.6; 2016 = 31.2; 2017 (Proj.) = 31.1. ### Monetary and financial conditions, supervision, and bank soundness - Monetary and financial conditions remained stable in 2016. - Private sector credit growth: 2016 = 17.4 percent; 2017 (Proj.) = 14.0 percent. - Deposit growth: 2016 = 11.0 percent (deposit growth slowed to 11.0 percent in 2016). - Foreign lines of credit increased by 50 percent during 2016 versus an average annual growth of 20.5 percent from 2011 to 2015. - Bank soundness indicators at end-2016: - Non-performing loans: 1 percent of total portfolio. - Capital adequacy ratio: 13.5 percent of risk-weighted assets. - Liquidity and supervision recommendations: - Banks should further enhance liquidity, capital and provisioning buffers to guard against declining asset quality, higher interest rates and lower remittances. - Expand supervisory perimeter: every deposit-taking and systemically important non-bank should be subject to effective risk-based supervision and AML/CFT oversight. - Strengthen regional financial regulatory cooperation, improve stress test methodology, and introduce short-term liquidity management tools (short-term policy rate and corridor) to reduce interest rate volatility and deepen financial markets. - Financial Stability Map trends: - Increase in market and liquidity risks; monetary and financial conditions tightened slightly. - Credit risks increased slightly due to rise in unhedged FX lending. - Banking system structure and FX exposure: - Assets in foreign currency as percentage of banking system assets around 88.0–89.4 (2012–2016 series). - Correspondent banking relations: only two correspondent banks closed accounts for one small bank representing 2½ percent of total banking assets; that bank retains other correspondent accounts. ### Outlook and macroeconomic projections - Real GDP growth: 2016 = 4.7; 2017 (Proj.) = 4.5. - Inflation: - Consumer price inflation (period average): 2016 = 3.5; 2017 (Proj.) = 5.4. - Consumer price inflation (end of period): 2016 = 3.1; 2017 (Proj.) = 5.8. - Broad money growth (annual percentage change): 2016 = 11.0; 2017 (Proj.) = 10.8. - Credit to the private sector (annual percentage change): 2016 = 17.4; 2017 (Proj.) = 14.0. - GDP (nominal, U.S.$ million): 2016 = 13,230; 2017 (Proj.) = 13,942. - Staff medium-term projections (selected from the Medium-Term Macroeconomic Framework, 2015–22): - GDP growth series (2015–2022): 2015 = 4.9; 2016 = 4.7; 2017 = 4.5; 2018 = 4.3; 2019 = 4.5; 2020 = 4.5; 2021 = 4.5; 2022 = 4.5. - Consumer price inflation (e.o.p.) series (2015–2022): 2015 = 3.1; 2016 = 3.1; 2017 = 5.8; 2018 = 7.4; 2019 = 7.1; 2020 = 7.3; 2021 = 7.2; 2022 = 7.3. - Current account (percent of GDP) series (2015–2022): 2015 = -9.0; 2016 = -8.6; 2017 = -8.5; 2018 = -8.5; 2019 = -8.6; 2020 = -8.5; 2021 = -8.4; 2022 = -8.6. - Gross reserves (U.S.$ million) series (2015–2022): 2015 = 2,353; 2016 = 2,296; 2017 = 2,365; 2018 = 2,449; 2019 = 2,551; 2020 = 2,658; 2021 = 2,730; 2022 = 2,751. ### Key policy recommendations and priorities - Short-term priorities: - Urgent action to reform the social security system to avoid INSS reserve depletion and rising government transfers. - Expand the perimeter of financial supervision to include all deposit-taking and systemically important non-banks. - Medium-term priorities: - Fiscal consolidation of 1.6 percent of GDP over two years via rationalization of subsidies and tax expenditures, particularly VAT exemptions. - Build external and financial buffers: strengthen reserve position to reach IMF adequacy range; enhance bank liquidity, capital and provisioning. - Make fiscal policy more counter-cyclical and improve monitoring of fiscal risks; improve oversight of SOEs. - Maintain investment in infrastructure, increase human capital development, and address labor skills bottlenecks. - Data and statistical priorities: - Further improve data quality and scope of macroeconomic statistics, complete rebasing of national accounts, and apply IMF compilation methodologies. ### VAT exemptions, distributional considerations, and revenue measures - FAD estimate: VAT tax expenditures amount to 2.6 percent of GDP. - Distributional finding: Nearly one-half of VAT exemption benefits concentrated in the top two consumption deciles; poorest fifth receive 8 percent of benefits. - Staff revenue measures and yields: - Increasing the VAT rate on exempt goods to a low rate of 5 percent (apart from constitutionally mandated exemptions) would yield 0.6 percent of GDP. - Eliminating electricity and transport subsidies for all except the neediest could yield 0.6 percent of GDP. - Combined measures to reduce tax expenditures and rationalize subsidies could yield around 1.2 percent of GDP. - Remaining 0.4 percent of GDP could come from international taxation legislation, improved tax administration, and gradual phasing out of some Venezuela-financed programs. ### INSS sustainability and reform packages - Under current policies: INSS will run deficits and deplete liquid reserves by 2019, necessitating government transfers and threatening debt sustainability. - Indicative reform packages (impacts on IVM system balance and savings relative to baseline for 2020–2040): - Reform package 1: Index pensions to US$ exchange rate; increase retirement age to 63 by 2025; reduce average benefits by 20%. - Reform package 2: Index pensions to inflation; reduce average benefits by 30%; contributions for war victims to IVM. - Reform package 3: Index pensions to inflation; increase retirement age to 65 by 2025; contributions for war victims shifted to IVM. - Reform package 4: Index pensions to US$ exchange rate; reduce average benefits by 20%; increase contribution rate by 2%. - Policy advice: government, labor unions and private sector should reach a mutually agreeable solution promptly to avoid higher reform costs from delay. ### Debt sustainability, stress scenarios, and key DSA findings - Risk of external debt distress: assessed as Moderate. - Baseline public debt dynamics: - Public sector debt: 2015 = 40.7; 2016 = 41.9; 2017 (Proj.) = 41.5. - Under baseline, PV of PPG external debt rises from 21 percent to 28 percent of GDP but remains under the 40 percent threshold. - Baseline projects public debt to increase to 55 percent of GDP by 2037 absent reform. - Key stress/test scenarios and impacts: - One-time nominal depreciation shock of 30 percent in 2018 breaches standardized thresholds for external PPG debt. - Terms shock of 2 percentage points results in breach towards the end of projection period. - ALBANISA contingent liability scenario (one-time absorption of private debt to Venezuela at end-2017 equal to 22 percent of 2017 GDP or US$3.2 billion) raises external debt PV from 20 percent in 2017 to 35 percent in 2018. - Adverse customized scenario (Venezuela halt + NICA Act + reductions in FDI and less concessional financing) assumptions: - Growth falls to 2.9 percent in 2018 (from 4.5 percent baseline). - Effective interest rate averages 3.7 percent over the medium term. - FDI declines to average about 4 percent of GDP. - This adverse scenario breaches PV of external PPG debt-to-GDP threshold by 2022 and briefly breaches PV of debt-to-exports ratio. - Policy implications: - Continue borrowing on concessional terms where possible; implement comprehensive social security reforms; strengthen fiscal and external buffers; increase oversight of private debt; advance negotiations for relief of outstanding non-Paris Club debt. ### Fiscal risks, Box 3 findings, and recommended fiscal risk management actions - Identified salient fiscal risks: macroeconomic shocks, CCDs, loss-making SOEs, financial sector instability, INSS deficits, decline in Venezuelan cooperation, U.S. policy spillovers. - Areas for improving risk analysis and coverage: - Compile municipal and SOE domestic debt (only Managua included in CPS accounts; 152 municipalities excluded). - Harmonize SOE financial statements and consolidate statistics; include debt to suppliers in public debt statistics. - Estimate government’s probable maximum loss from potential financial sector bailouts and incorporate into DSA stress scenarios. - Add INSS risk scenarios and stress testing to monitoring. - Build capacity to analyze PPP- and contract-related contingent liabilities under the new PPP law. - Institutional and reporting recommendations: - Publish an annual report on fiscal risks coordinated by the Ministry of Finance, with initial focus on macro shocks, disasters and SOEs. - Improve flexibility in use of earmarked revenues and enforce data collection and information exchange across units and institutions. ### Exposure to U.S. economy and main spillover channels (Appendix I) - Trade exposure to U.S.: - Direct exports to the U.S.: 52 percent of total exports; 71 percent for FTZ exports; equivalent to 18 percent of GDP. - Central America: 11.9 percent of exports; Mexico: 10.7 percent of exports. - Indirect dependence: roughly 78 percent of exports from Central America and Mexico directed to the U.S. - Exports to the U.S. grew by 60 percent since 2006. - FDI and remittances: - FDI flows: average 3.9 percent of GDP (2001–07); 6.7 percent of GDP (2008–2016). - Share of FDI sources (2012–2016): Central America = 20.5 percent; United States = 17.8 percent; Mexico = 16.2 percent. - Remittances: during 2014–16, remittances offset over 45 percent of trade deficit on average; over 50 percent of remittances come from 300,000 Nicaraguans in the U.S. (about 4.5 percent of population). - Macroeconomic impacts of U.S. policy changes: - Spillovers expected to be higher in Nicaragua than regionally. - Potential trade disruptions, tighter immigration policy, or U.S. tax reform could affect exports, remittances, investment, and financing; a tightening of U.S. monetary conditions would likely spill into Nicaraguan rates. ### Climate change, disasters (CCDs) and downside risks - Nicaragua is highly vulnerable to CCDs; probability and average economic losses from disaster events above regional average. - Climate/disaster model selected figures: - Storm events: Number of Events 89; Probability 0.12; Impact on revenue as % of GDP -0.16. - Flood events: Number of Events 5; Probability 0.14; Impact on revenue as % of GDP -0.39. - Earthquake: Number of Events 4; Probability 0.08; Impact on revenue as % of GDP -0.09. - Drought: Probability 0.06; Impact on revenue as % of GDP -0.11. - Climate change reduces annual GDP growth by about 0.03 to 0.04 in absence of adaptation and mitigation policies. - Policy guidance: invest in climate-resilient infrastructure and adaptation to protect fiscal sustainability. ### Data, statistical, and surveillance issues - Data adequacy: broadly adequate for surveillance but with numerous shortcomings in national accounts, fiscal, debt and external statistics. - National accounts: base year changed to 2006; 2016 NA release revised 2010–13 data. - GFS coverage gaps: extra-budgetary institutions (public universities and 152 of 153 municipalities) excluded from consolidated public sector accounts; recording mostly on cash basis. - Monetary and financial statistics: sectorization incomplete; microfinance data exclude Caja Rural Nacional (Caruna); differences between data remitted to STA and CBN website. - External sector: BPM6 adopted since Sept 2013 within source limits; private sector coverage incomplete; large errors and omissions in BOP require enterprise-level cross checks. - Data quality flags and publication frequencies: table of common indicators shows varying methodological soundness and accuracy flags (O, LO, M, D) across series with latest observations around Mar–Apr 2017. ### Selected high-frequency and social indicators (selected exact figures) - GDP per capita (current U.S.$, 2016): 2,091. - GNI per capita (Atlas method, current U.S.$, 2015): 1,940. - GINI Index (2014): 47.1. - Unemployment (percent of labor force, 2016): 6.1. - Poverty rate (national pov. line, 2014): 29.6. - Population (millions, 2016): 6.3. - Adult literacy rate (percent, 2015): 82.5. - Life expectancy at birth in years (2014): 74.8. - Infant mortality rate (per 1,000 live births, 2015): 18.8. - Annual GDP growth (2012–2017): 6.5, 4.9, 4.8, 4.9, 4.7, 4.5. - Consumer price inflation (period average) 2012–2017: 7.2, 7.1, 6.0, 4.0, 3.5, 5.4. *Source: IMF staff report for the 2017 Article IV consultation with Nicaragua (cr17173).* ### 40.7 percent in 2015. ### cr17173 - 40.7 percent in 2015. ### External position and reserves - The external position improved moderately from the previous year. - The current account deficit for 2016 is estimated to have narrowed to 8.6 percent of GDP, compared with 9 percent in 2015. - The consolidation is largely explained by maquila exports, which have been better captured due to improvements in statistical compilation. - The current account deficit remained financed by foreign direct investments (FDI) and other long-term inflows. - Despite declining Venezuela cooperation inflows, gross international reserves remained broadly stable at US$2.3 billion at end-2016, with coverage of about 4 months of non-maquila imports. - Remittances increased by 6 percent to US$1.3 billion (9.6 percent of GDP). - Nicaragua’s external position is estimated to be broadly consistent with fundamentals. ### Fiscal stance, public debt, and social financing pressures - The deficit of the consolidated public sector (CPS) widened from 2.2 percent in 2015 to 2.4 percent in 2016. - Tax revenue increased by 0.7 percentage points to 16.4 percent of GDP in 2016. - The public debt ratio increased from 40.7 percent of GDP in 2015 to 41.9 percent of GDP in 2016, and is reported as 41.5 percent for 2017 (table). - The deficit of the CPS is projected to moderate to about 2.3 percent of GDP in 2017, implying a broadly neutral fiscal stance in line with the authorities’ fiscal anchor. - Executive Directors: staff recommends a fiscal consolidation of 1.6 percent of GDP, implemented over two years, to maintain fiscal sustainability in the medium term; this could be achieved primarily through a rationalization of subsidies and tax expenditures, particularly VAT exemptions. - Urgent action is recommended to address the deteriorating financial position of the Social Security Institute (INSS); INSS liquid reserves will be depleted by 2019, which could increase government transfers to finance pensions and health benefits. - The need to finance growing INSS deficits and to take over some critical social programs currently financed by Venezuelan cooperation are likely to intensify spending pressures in the next few years. - If approved, the potential impact of the NICA Act on public finances could be significant if it affects investment and growth, and rates on public debt. ### Monetary and financial conditions and supervision - Monetary and financial conditions remained stable. - Private sector credit growth slowed to 17.4 percent in 2016 but remained above nominal GDP growth. - Bank soundness indicators: non-performing loans below 1 percent of total loans; capital adequacy ratio of 13.5 percent of risk-weighted assets at end-2016. - Banks should further enhance their liquidity, capital and provisioning buffers to preserve financial stability against the potential impact of declining asset quality, higher interest rates and lower remittances. - Gaps in the supervisory perimeter remain: every deposit-taking and systemically important non-bank should be subject to effective risk-based supervision and AML/CFT oversight. - Additional efforts are needed to strengthen regional financial regulatory cooperation and improve stress test methodology. - The CBN continues to publish the audited financial statements in accordance with the Safeguards Policy; implementation of IFRS remains in progress. - Strengthening short-term liquidity management tools is important: introduce a short-term policy rate and a corridor to reduce interest rate volatility, deepen financial markets, and provide some cushion against external shocks. ### Outlook and macroeconomic projections - Real GDP growth in 2017 is projected at 4.5 percent. - Inflation is expected to remain contained anchored by the crawling peg at about 6 percent. - The current account balance is projected to remain stable at about 8.5 percent of GDP. - GDP (nominal, U.S.$ million): 2016 = 13,230; 2017 (Proj.) = 13,942. - GDP growth (annual percentage change): 2016 = 4.7; 2017 (Proj.) = 4.5. - Consumer price inflation (period average): 2016 = 3.5; 2017 (Proj.) = 5.4. - Consumer price inflation (end of period): 2016 = 3.1; 2017 (Proj.) = 5.8. - Broad money (annual percentage change): 2016 = 11.0; 2017 (Proj.) = 10.8. - Credit to the private sector (annual percentage change): 2016 = 17.4; 2017 (Proj.) = 14.0. ### Policy recommendations and priorities - Short-term priorities: - Urgent action to reform the social security system to avoid INSS reserve depletion and rising government transfers. - Expand the perimeter of financial supervision to include all deposit-taking and systemically important non-banks. - Medium-term priorities: - Fiscal consolidation of 1.6 percent of GDP over two years via rationalization of subsidies and tax expenditures, particularly VAT exemptions. - Build external and financial buffers: strengthen reserve position to reach IMF’s suggested adequacy range; enhance bank liquidity, capital and provisioning. - Make fiscal policy more counter-cyclical and improve monitoring of fiscal risks. - Improve oversight of SOEs. - Maintain investment in infrastructure, increase human capital development, and address labor skills bottlenecks to improve competitiveness and reduce vulnerability to external shocks. - Data and statistical priorities: - Further improve data quality and scope of macroeconomic statistics, complete the rebasing of the national accounts, and increase data quality by applying IMF compilation methodologies. ### Key statistics (selected from staff table) - Current account (Percent of GDP): 2015 = -9.0; 2016 = -8.6; 2017 (Proj.) = -8.3. - Gross reserves (U.S.$ million): 2015 = 2,353; 2016 = 2,296; 2017 (Proj.) = 2,393. - In months of imports excl. maquila: 2015 = 4.6; 2016 = 4.0; 2017 (Proj.) = 3.9. - Net international reserves (U.S.$ million): 2015 = 2,262; 2016 = 2,236; 2017 (Proj.) = 2,354. - Public sector debt: 2015 = 40.7; 2016 = 41.9; 2017 (Proj.) = 41.5. - Private sector external debt: 2015 = 44.9; 2016 = 44.8; 2017 (Proj.) = 42.6. - Overall balance, after grants (Percent of GDP): 2015 = -2.2; 2016 = -2.4; 2017 (Proj.) = -2.3. - Revenue (excl. grants, Percent of GDP): 2015 = 26.3; 2016 = 27.9; 2017 (Proj.) = 27.9. - Expenditure (Percent of GDP): 2015 = 29.6; 2016 = 31.2; 2017 (Proj.) = 31.1. *Source: IMF staff report for the 2017 Article IV consultation with Nicaragua (cr17173).* ### 10. Financial and bank soundness indicators appear robust. Private sector credit growth ### 10. Financial and bank soundness indicators appear robust. Private sector credit growth slowed to 17.4 percent in 2016, above nominal GDP growth. ### Financial and banking sector soundness — key indicators - Private sector credit growth slowed to 17.4 percent in 2016, above nominal GDP growth. - Deposit growth slowed to 11.0 percent in 2016, forcing banks to rely on foreign lines of credit. - Foreign lines of credit increased by 50 percent during 2016, compared to an average annual growth of 20.5 percent from 2011 to 2015. - Only two correspondent banks have closed the accounts for one small bank; this bank represents 2½ percent of total banking assets and still has other correspondent bank accounts. - Bank soundness indicators at end-2016: - Non-performing loans: 1 percent of total portfolio. - Capital adequacy ratio: 13.5 percent of risk-weighted assets. - Liquidity coverage ratio requirements in córdobas and U.S. dollars, aligned with Basel III, are being gradually implemented. - Easy access to relatively inexpensive lines of credit augurs well for the maintenance of correspondent bank relations (CBR), though CBR termination remains a regional concern. ### Financial Stability Map and evolving risks - Since the last Article IV, the Financial Stability Map shows: - An increase in market and liquidity risks. - Monetary and financial conditions tightened slightly. - Market and liquidity risks increased driven by higher reliance on foreign liabilities. - Credit risks increased slightly, driven by the increase in unhedged foreign exchange (FX) lending. - Inward spillover risks and risk appetite remain broadly unchanged. ### Macroeconomic outlook and key projections (Nicaragua: Medium-Term Macroeconomic Framework, 2015–22) - Real GDP growth projected at 4.5 percent in 2017 and the medium term, in line with potential GDP growth. - Inflation expected to be anchored by the crawling peg at about 6 percent. - Current account deficit expected to remain broadly unchanged in 2017, assuming prices of major export commodities recover and REER remains broadly stable. - Selected table entries (showing historical and projected values): - GDP growth: 2015 4.9; 2016 4.7; 2017 4.5; 2018 4.3; 2019 4.5; 2020 4.5; 2021 4.5; 2022 4.5 - Consumer price inflation (e.o.p.): 2015 3.1; 2016 3.1; 2017 5.8; 2018 7.4; 2019 7.1; 2020 7.3; 2021 7.2; 2022 7.3 - Consolidated public sector revenue (incl. grants): 2015 27.6; 2016 28.8; 2017 28.8; 2018 28.6; 2019 28.6; 2020 28.5; 2021 28.2; 2022 28.2 - Consolidated public sector expenditure: 2015 29.6; 2016 31.2; 2017 31.1; 2018 31.0; 2019 30.6; 2020 30.3; 2021 30.6; 2022 30.7 - Overall balance, after grants: 2015 -2.2; 2016 -2.4; 2017 -2.3; 2018 -2.2; 2019 -1.9; 2020 -1.7; 2021 -2.4; 2022 -2.5 - Public sector debt 1/: 2015 40.7; 2016 41.9; 2017 41.5; 2018 40.0; 2019 39.1; 2020 38.2; 2021 38.5; 2022 38.5 - Current account: 2015 -9.0; 2016 -8.6; 2017 -8.5; 2018 -8.5; 2019 -8.6; 2020 -8.5; 2021 -8.4; 2022 -8.6 - Gross reserves (U.S.$ million) 2/: 2015 2,353; 2016 2,296; 2017 2,365; 2018 2,449; 2019 2,551; 2020 2,658; 2021 2,730; 2022 2,751 - In months of imports excl. maquila 2/: 2015 4.6; 2016 3.9; 2017 3.9; 2018 3.8; 2019 3.8; 2020 3.8; 2021 3.6; 2022 3.4 - Notes: - 2/ Excludes the Deposit Guarantee Fund for Financial Institutions (FOGADE). - 1/ Assumes that HIPC-equivalent terms were applied to the outstanding debt to non-Paris Club bilaterals. Does not include SDR allocations. ### Potential GDP and Box 1 findings - Decomposition using a Cobb-Douglas production function, 1994-2015 data, perpetual inventory model for capital. - Contributions to GDP growth (2000-2009 vs 2010-2015): - Labor: 1.8 percentage points → 1.3 percentage points. - Capital: 2.3 percentage points → 2.6 percentage points. - TFP: from negative in 2000-2009 to 1.4 percentage points in 2010-2015. - Electricity generation increased almost 50 percent during 2005-15; electricity coverage increased from about 50 percent to over 90 percent of the population. - Potential GDP growth estimate revised upwards from 4 percent to 4.5 percent; a backward-looking estimate is about 4.4 percent. - Public sector planned investment in major infrastructure projects for 2017-2020 amount to about US$ 0.5 billion or 3.5 percent of 2016 GDP. - Staff estimates these investments would contribute about 0.4 percentage points to GDP growth per year. - If implemented and efficiency improves, PPP law (approved in 2016) should further boost infrastructure investment and FDI. ### Financial sector supervisory gaps and vulnerabilities - Gaps in supervisory framework: - Savings & loans (S&L) cooperatives and some microfinance institutions are not subject to risk-based regulation and supervision; only the largest are monitored by the AML/CFT vigilance unit. - Information gaps remain despite progress in consolidated supervision of cross-border banking groups. - GAFILAT withdrew Nicaragua from the “gray list” in 2015 following AML/CFT framework strengthening, but further enforcement is needed, including for non-banks and Politically Exposed Persons. - Credit quality risks: - Credit quality may deteriorate as financial conditions tighten in a context of high dollarization and potential financial spillovers from U.S. policies. - A stronger U.S. dollar and higher interest rates, in the context of high dollarization, could strain banks and unhedged borrowers’ balance sheets. - Banks’ increased reliance on foreign liabilities to obtain liquidity in U.S. dollars may put upward pressure on lending rates and increase risks of cross-border financial spillovers. - U.S. dollar interest rate increases are expected to be largely passed on to borrowers and, along with lower remittances, may deteriorate credit quality. - Climate change may affect the repayment capacity of borrowers, particularly in the agriculture sector. ### Uncertainties and downside risks (Appendix IV summary) - Risks tilted to the downside; main concerns: - Spillovers related to U.S. policies. - Decline in Venezuelan oil cooperation. - Exposure to climate change and disasters (CCDs). - U.S. policy spillovers (Appendix I): - Potential trade disruptions may significantly reduce exports, investments and foreign financing. - Tighter U.S. immigration policy could reduce remittances and increase deportations. - Passage of the NICA Act could reduce availability of external financing from multilateral institutions, increase borrowing costs, and affect investment, growth, and tax revenue. - Venezuelan oil cooperation (Appendix II): - Further decline may threaten continuity of some social programs and pressure the budget to absorb them. - Debt service of the US$3.2 billion of private sector debt associated with the Venezuela oil collaboration is projected at 1.3–1.4 percent of GDP per year in the medium term, which may encumber the FX market. - CCDs (Selected Issues Paper—SIP): - Nicaragua is highly vulnerable to the economic and social costs of CCDs. - The probability and average economic losses from disaster events are above the regional average and could substantially impact long-term growth and revenue. ### Key policy issues and recommended priorities - Overall policy aim: - Strengthen policy framework to build buffers against external, financial sector and fiscal contingencies over the medium term, without jeopardizing social and infrastructure programs. - Fiscal stance and recommendations: - The fiscal stance for 2017 is broadly appropriate; the projected CPS deficit of 2.3 percent of GDP represents a broadly neutral fiscal stance given a closed output gap and stable external debt ratio (DSA). - Adhering to the fiscal anchor of no more than 2 percent of GDP for the CPS deficit would help increase transparency and credibility of fiscal policy. - Adverse scenario and recommended adjustment: - Authorities indicate they may absorb social programs financed by Venezuelan cooperation for about 0.6 percent of GDP if cooperation winds down. - Staff projects that replacing half of anticipated financing from the World Bank and the IaDB over 2018-2022 with less concessional external and domestic resources would raise the average interest rate on public debt by about two percentage points relative to the baseline. - Fiscal consolidation amounting to about 1.6 percent of GDP over two years would be adequate to cope with these risks, provided that a comprehensive pension reform is also undertaken. - Fiscal savings would increase by the gradual phasing out of the 0.6 percent of GDP of social programs absorbed by the budget and medium-term savings from pension reform. - Revenue and expenditure measures: - Focus on broadening the tax base, further strengthening tax administration, and improving expenditure composition and quality. - Measures to reduce tax expenditures and rationalize some subsidies could yield around 1.2 percent of GDP. - Staff estimates: increasing the VAT rate on exempt goods to a low rate of 5 percent (apart from constitutionally mandated exemptions) would yield 0.6 percent of GDP. - Eliminating electricity and transport subsidies for all except the neediest could yield an additional 0.6 percent of GDP. - Remaining 0.4 percent of GDP could come from legislation on international taxation, further improvements in tax administration, and gradual phasing out of some social programs financed by Venezuelan resources. - Improve expenditure quality by enhancing efficiency and oversight of major state-owned enterprises (SOEs) and strengthening public investment management processes and practices. - Fiscal risk analysis: - Progress on fiscal risk analysis by authorities is welcome; further advances are encouraged. ### VAT exemptions and distributional considerations (Box 2) - Nicaragua has an extensive list of VAT exemptions; FAD estimates VAT tax expenditures amount to 2.6 percent of GDP. - Nearly one-half of the benefits of VAT exemptions are concentrated in the top two household consumption deciles; the poorest fifth of households receive only 8 percent of the benefits. - Policy options: - Consider maintaining exemptions on a few basic goods most consumed by the poor (such as rice, beans, and maize). - Consider introducing a second, lower VAT rate of 5 percent applied to certain goods in the canasta básica rather than the full 15 percent. - Complement tax changes with focused expenditure-side assistance for the poorest. ### INSS (pension system) sustainability (SIP) and reform packages - Under current policies, the INSS will continue to run deficits and deplete its liquid reserves by 2019, potentially necessitating transfers from the government and posing a threat to debt sustainability. - Deterioration factors: lower contributions, more beneficiaries of reduced pensions than anticipated, higher wage and capital expenditures. - A sustainable outcome requires measures on revenues, costs, efficiency and possibly limited assumption of some expenditures by the government. - Indicative reform packages (impact on IVM system balance and savings relative to baseline shown for years 2020–2040): - Reform package 1: Index all pensions to US$ exchange rate; increase retirement age to 63 by 2025; reduce average benefits by 20%. - Reform package 2: Index all pensions to inflation 1/; reduce average benefits by 30%; contributions for war victims to IVM 2/. - Reform package 3: Index all pensions to inflation 1/; increase retirement age to 65 by 2025; contributions for war victims shifted to IVM 2/. - Reform package 4: Index all pensions to US$ exchange rate; reduce average benefits by 20%; increase contribution rate by 2%. - The government, labor unions, and the private sector should reach a mutually agreeable solution as a priority to avoid higher reform costs from delay. ### Fiscal policy stance for resilience and CCD adaptation - Fiscal policy should aim to be more counter-cyclical and build space in good times to manage volatility and avoid abrupt adjustments if tail risks materialize. - Investments in climate-resilient infrastructure and mitigation/adaptation policies will further contribute to fiscal sustainability. - Preliminary impacts: - Changes in U.S. trade policies could reduce GDP growth by 2.3 percentage points from baseline, increase CPS deficit by 0.9 percent of GDP and public debt by 4.3 percent of GDP. - Potential changes in immigration policies would reduce GDP growth by 0.1 percentage points and increase fiscal deficit and debt by 0.2 percent and 0.8 percent of GDP, respectively. - Climate/disaster model (selected figures): - Storm events modeled: Number of Events 89; Probability 0.12; Impact on revenue as % of GDP -0.16. - Flood events: Number of Events 5; Probability 0.14; Impact on revenue as % of GDP -0.39. - Earthquake: Number of Events 4; Probability 0.08; Impact on revenue as % of GDP -0.09. - Drought: Probability 0.06; Impact on revenue as % of GDP -0.11. - Climate change note: Climate change is reducing annual GDP growth by about 0.03 to 0.04, in absence of adaptation and mitigation policies. *Source: IMF staff report excerpt (cr17173).* ### Box 3. Mapping Fiscal Risks in Nicaragua ### Box 3. Mapping Fiscal Risks in Nicaragua ### Overview - Fiscal risks are factors that may cause fiscal outcomes to deviate from expectations or forecasts. - The staff’s fiscal baseline is subject to important downside risks. Compiling information and building capacity to analyze explicit and implicit contingencies is essential for risk management, robust public finances, and, if sovereign issuance were to be considered, for building market credibility. - Nicaragua is a highly open economy, and its public finances are vulnerable to a range of fiscal risks, including fluctuations in the terms of trade, external demand, oil prices, private capital flows, remittances, CCDs, loss-making SOEs, financial sector stability, and the INSS. ### Identified fiscal risks and existing information - For some fiscal risks, reliable information is available: - A registry of claims against the state by the Attorney General’s office. - Quantifications of the fiscal impact of disasters. - Publication of a debt sustainability analysis based on relatively comprehensive public debt statistics. - The financial supervision authority (SIBOIF) collects detailed data on financial institutions, allowing analysis of risks arising from most of the financial sector. ### Areas where risk analysis could be strengthened - Macroeconomic risks: - Sensitivity analysis could be prepared to examine the impact of deviations from public finances’ baseline macroeconomic assumptions. - CCDs: - Authorities have made progress mitigating the financial effect of these events through contingent credit lines and insurance; nevertheless, there is scope for further risk mitigation. - Municipalities: - Only the accounts of Managua municipality are included in the consolidated public sector accounts while the other 152 municipalities are excluded. - Regulations limit the extent to which municipalities can borrow, but monitoring of compliance appears inadequate. - SOEs: - Monitoring assets and liabilities of SOEs is challenging as financial statements are not standardized. - Debt to suppliers is not recorded in public debt statistics and, on occasion, is settled through budget transfers. - Priority: harmonizing and consolidating statistics. - Positive steps: compilation of SOE’s domestic debt and the recent establishment of a new unit in the Ministry of Finance to provide greater oversight to the SOE sector. - DSA: - Further efforts should be made to increase the scope of the standardized stress scenarios to include newly compiled SOEs’ and municipalities’ domestic debt. - Financial sector: - Authorities should attempt to estimate the government’s probable maximum loss for financial system bailouts, and incorporate this in a stress scenario in their DSA. - INSS: - Risk scenarios and stress testing should be an important addition to authorities’ monitoring of INSS finances. - PPPs: - Debt-like obligations could be generated where the government commits to paying for services over the life of the contract and may commit the government to a range of contingent obligations. - The Ministry of Finance needs to urgently develop the capacity to analyze related risks to implement the recently approved PPP law. ### Recommended institutional and reporting actions - Publish an annual report on fiscal risks to provide a roadmap for risk mitigation and contingency planning. - The report should be coordinated by the Ministry of Finance, with inputs from various other government entities, and be submitted to the Economic Cabinet as part of the budget process. - Initial focus could be on the most salient risks: macroeconomic shocks, disasters, and SOEs. - Improve flexibility in revenue use and better understand earmarked revenues: - An important proportion of fiscal revenues are earmarked, leaving little space to confront risks and creating incentives to underestimate revenues during the budget process. - A better understanding of fiscal risks and a more flexible use of revenues would help safeguard macroeconomic credibility. ### Staff appraisal — key findings and recommendations - Fiscal stance and sustainability: - The fiscal stance is broadly adequate to maintain macroeconomic stability in the near term, but fiscal buffers are needed to confront risks. - The need to finance growing INSS deficits and to take over some critical social programs currently financed by Venezuelan cooperation are likely to intensify spending pressures in the next few years. - Staff recommends a fiscal consolidation of 1.6 percent of GDP, implemented over two years, to maintain fiscal sustainability in the medium term. This could be achieved primarily through a rationalization of subsidies and tax expenditures, particularly VAT exemptions. - Social security reform: - Reforming the social security system is a priority. - INSS liquid reserves will be depleted by 2019, which could increase government transfers to finance pensions and health benefits. - Urgent action should be taken using a combination of measures to improve sustainability, which, to the extent possible, should be introduced gradually. - Counter-cyclical fiscal policy and SOE oversight: - In the medium term, fiscal policy should strive to improve resilience against potential external shocks and be more counter-cyclical given risks related to U.S. policy spillovers and CCDs. - Better monitoring of fiscal risks and improved oversight of SOEs are important steps forward. - External and financial buffers: - Under current policies, total public debt would stabilize at around 40 percent of GDP over the medium term, and then begin to increase due to transfers to the INSS. - Nicaragua is assessed at a moderate risk of external debt distress. Although external public debt is sustainable in the baseline, the threshold is breached under the adverse scenario described above. - In the absence of policy action, debt would eventually become unsustainable in the baseline scenario, although not within the 20-year time horizon of the DSA. - To preserve external stability, authorities should increase the level of reserves to above the standard norms and strengthen banks’ liquidity, capital and provisioning buffers. - Supervisory perimeter and financial sector policy: - Gaps in the financial supervisory perimeter need to be addressed (regulatory framework for the microfinance industry incomplete; S&L cooperatives not subject to any type of financial supervision). - Every deposit-taking and systemically important non-bank should be subject to effective risk-based supervision and AML/CFT oversight. - The Central Bank of Nicaragua (CBN) and the SIBOIF should continue strengthening monitoring and reinforcing their macroprudential framework, including conducting regular systemic stress tests and crafting contingency plans. - Introduce short-term liquidity management tools, aim to establish a short-term policy rate and a corridor, reduce interest rate volatility, and deepen interbank and domestic bond markets. - Statistics and data: - Significant progress has been made in strengthening macroeconomic statistics, but shortcomings remain. - Scope of data on public debt should improve substantially with the compilation of domestic debt of SOEs and municipalities. - Regulations to enforce data collection and facilitate exchange of information across units and institutions should be implemented, and procedures need to be established to monitor data quality. *Source: International Monetary Fund (Box 3, Mapping Fiscal Risks in Nicaragua).* ### 45. It is proposed that the next Article IV consultation with Nicaragua be held on the ### 45. It is proposed that the next Article IV consultation with Nicaragua be held on the ### Real Sector - High-frequency indicators point to moderating growth. - Growth is "close to its potential". - Growth was driven by strong domestic demand. - Unemployment remained broadly stable. - Inflation is anchored due to low food price. - Selected figures and indicators (as shown in figures): - IMAE 6 month moving average and real GDP series spanning Jun-08 to Dec-16. - Output gap and potential GDP series spanning 2007–2016. - Real GDP growth contributions (2010–2016): consumption, investment, net exports. - Private consumption and oil prices (YoY growth rates, percent) series 2011Q1–2016Q4. ### Fiscal Developments - The CG balance for 2016 contracted slightly, with stronger revenues mostly offset by higher spending. - INSS posted another deficit in 2016 despite a contribution rate increase. - The CPS deficit widened slightly in 2016, driven by higher deficits in INSS and Managua municipality. - Overall spending increased across the board, with the highest increase in capital spending. - Public debt remained relatively stable as the deficit was financed from both debt and non-debt sources. - Key fiscal figures (from tables and figures): - Consolidated public sector revenue (percent of GDP): 2012–2017: 25.4, 25.3, 25.5, 26.3, 27.9, 27.9 (Table 1). - Consolidated public sector expenditure (percent of GDP): 2012–2017: 28.3, 28.3, 28.6, 29.6, 31.2, 31.1 (Table 1). - Overall balance, after grants (percent of GDP): 2012–2017: -0.8, -1.3, -2.0, -2.2, -2.4, -2.3 (Table 1). - Public debt (percent of GDP): 2014–2017: 40.2, 40.7, 41.9, 41.5 (Table 9). ### External Sector - Prices of major exports were weak in 2015–16. - Low oil prices and changes in cooperation terms reduced inflows from Venezuela. - Reserve coverage remained stable. - Improvements in the maquila sector supported exports. - External debt remained high but stabilizing. - The current account deficit narrowed in 2016. - Key external figures (Table 7 and figures): - Current account (U.S.$ million): 2014–2022: -844, -1,144, -1,133, -1,181, -1,267, -1,358, -1,445, -1,509, -1,666. - Current account (percent of GDP): -7.1, -9.0, -8.6, -8.5, -8.5, -8.6, -8.5, -8.4, -8.6 (2014–2022). - Exports, f.o.b. (U.S.$ million): 2014–2022: 4,150; 3,859; 3,772; 4,082; 4,218; 4,405; 4,583; 4,881; 5,190. - Imports, f.o.b. (U.S.$ million): 2014–2022: 6,319; 6,405; 6,384; 6,803; 7,120; 7,457; 7,766; 8,186; 8,739. - Gross reserves (U.S.$ million): 2014–2022: 2,147; 2,353; 2,296; 2,365; 2,449; 2,551; 2,658; 2,730; 2,751. - Oil price (U.S.$ per barrel): 2014–2022: 96; 51; 43; 55; 55; 54; 54; 54; 55. - ALBA-related flows, gross (percent of GDP): 5.6, 2.9, 1.6, 0.4, 0.3, 0.3, 0.3, 0.3, 0.3 (2009–2017 series referenced). ### Monetary and Financial Sector Developments - Deposit growth is driven by deposits in U.S. dollar. - Credit growth is steady but moderated slightly. - Liquidity conditions remain ample; banks increased their long position in U.S. dollar. - Lending and deposit rates in U.S. dollar remain stable. - Bank asset quality and profitability indicators are robust. - Key monetary and financial figures: - Total deposits (C$ millions) series Jan-11 to Nov-16 peaking near C$140,000 (figure). - Credit to the private sector (y-o-y growth, real) and FX credit (y-o-y growth, real) series Jan-11 to Nov-16. - Bank assets in FX (US$ millions) and liabilities in FX (US$ millions) series Feb-11 to Nov-16. - Nonperforming loans and Return on equity (percent) series May-08 to Nov-16 show low nonperforming loans and robust ROE. ### Expenditure Composition and Public Investment - Current and capital spending (in percent of GDP), 2015: - Nicaragua: Capital spending and current spending plotted among regional comparators (Figure 5). - Public capital stock and infrastructure quality (2015) show relative rankings (1 = best, 144 = worst). - Government education expenditure per student (PPP$ adjusted, latest value available) compared across groups. ### Selected Social and Economic Indicators (Table 1 highlights) - Main export products: beef, coffee, and gold. - GDP per capita (current U.S.$, 2016): 2,091. - GNI per capita (Atlas method, current U.S.$, 2015): 1,940. - GINI Index (2014): 47.1. - Income share held by the richest 10 percent (2014): 37.9. - Unemployment (percent of labor force, 2016): 6.1. - Poverty rate (national pov. line, in percent, 2014): 29.6. - Population (millions, 2016): 6.3. - Adult literacy rate (percent, 2015): 82.5. - Life expectancy at birth in years (2014): 74.8. - Infant mortality rate (per 1,000 live births, 2015): 18.8. - Annual GDP growth (2012–2017): 6.5, 4.9, 4.8, 4.9, 4.7, 4.5. - Consumer price inflation (period average) 2012–2017: 7.2, 7.1, 6.0, 4.0, 3.5, 5.4. ### Public Finance Tables and Projections (selected exact figures) - Budgetary central government cash receipts from operating activities (Millions of córdobas): 2014–2022: 53,731; 61,470; 70,328; 77,575; 86,596; 96,150; 107,029; 118,999; 133,419 (Table 2a). - Purchases of nonfinancial assets (Millions of córdobas): 2014–2022: 11,883; 14,058; 16,514; 19,341; 21,765; 24,398; 28,242; 32,851; 36,825 (Table 2a). - Consolidated Public Sector cash surplus/deficit (Millions of córdobas): 2014–2022: -6,118; -7,664; -9,047; -9,586; -10,338; -9,875; -10,215; -15,558; -18,372 (Table 3a). - Nonfinancial public sector cash surplus/deficit (percent of GDP): 2014–2022: -1.8; -1.9; -2.2; -2.1; -2.0; -1.8; -1.8; -2.3; -2.4 (Table 3b). - NFPS primary deficit (before grants, percent of GDP) 2014–2022: 2.1; 2.1; 2.1; 1.9; 2.0; 1.8; 1.8; 2.2; 2.1 (Table 4). - Gross financing needs (percent of GDP) 2014–2022: 4.2; 4.4; 4.5; 4.6; 4.5; 4.1; 3.8; 4.2; 4.2 (Table 4). ### Monetary Accounts and Banking System (selected exact figures) - Net international reserves (billions of US$) 2014–2022: 2.0; 2.3; 2.2; 2.3; 2.4; 2.5; 2.7; 2.7; 2.8 (Table 5). - Broad money (Billions of córdobas) 2014–2022: 113.6; 135.1; 150.0; 166.3; 185.5; 208.4; 231.0; 255.7; 285.5 (Table 5). - Credit to private sector (Billions of córdobas) 2014–2022: 96.1; 118.8; 139.5; 159.9; 183.9; 213.2; 242.4; 276.8; 317.9 (Table 5). ### Financial Soundness Indicators (Table 8 highlights) - Regulatory capital to risk-weighted assets (percent) series 2012–2016 around 13.0–13.5. - Nonperforming loans to total gross loans (percent) series shows values near 0.9–1.7 in 2012–2016. - Return on assets (percent) around 3.0–3.4; Return on equity (percent) around 28–31 (series 2012–2016). - Assets in foreign currency as percentage of banking system assets around 88.0–89.4 (2012–2016 series). ### Medium-Term Macroeconomic Framework (Table 9 highlights) - GDP growth (2014–2022): 4.8; 4.9; 4.7; 4.5; 4.3; 4.5; 4.5; 4.5; 4.5. - Consumer price inflation (average) (2014–2022): 6.0; 4.0; 3.5; 5.4; 7.4; 7.1; 7.3; 7.2; 7.3. - Consolidated public sector revenue (percent of GDP) 2014–2022: 26.6; 27.4; 28.8; 28.8; 28.8; 28.7; 28.5; 28.2; 28.2. - Consolidated public sector expenditure (percent of GDP) 2014–2022: 28.6; 29.6; 31.2; 31.1; 31.0; 30.6; 30.3; 30.6; 30.7. - Overall balance, after grants (percent of GDP) 2014–2022: -2.0; -2.2; -2.4; -2.3; -2.2; -1.9; -1.7; -2.4; -2.5. - Current account (percent of GDP) 2014–2022: -7.1; -9.0; -8.6; -8.5; -8.5; -8.6; -8.5; -8.4; -8.6. ### Saving-Investment Balance (Table 10 highlights) - Gross domestic investment (percent of GDP) 2014–2022: 27.3; 30.0; 29.4; 29.3; 29.8; 29.5; 29.5; 29.5; 29.5. - National saving (percent of GDP) 2014–2022: 20.2; 21.1; 20.8; 20.8; 21.3; 21.0; 21.0; 21.2; 20.9. - External saving (percent of GDP) 2014–2022: 7.1; 9.0; 8.6; 8.5; 8.5; 8.6; 8.5; 8.4; 8.6. ### Millennium Development Goals (selected social progress indicators, Table 11) - Employment to population ratio, 15+, total (percent): 1990–2015 progression shows values 49.9 (1990) to 60.6 (2015). - Mortality rate, infant (per 1,000 live births): 1990–2015: 50.9; 41.4; 32.6; 26.3; 22.0; 18.8. - Improved water source (percent of population with access): 72.7 (1990) to 87.0 (2015). - Internet users (per 100 people): 0.0 (1990) to 19.7 (2015). - Mobile cellular subscriptions (per 100 people): 0.0 (1990) to 116.1 (2015). *Source: Country authorities and Fund staff calculations and estimates as presented in the document.* ### Appendix I. Exposure to the U.S. Economy ### Appendix I. Exposure to the U.S. Economy ### Trade exposure to the U.S. - Nicaragua is highly integrated with the U.S. economy, with external exposure well above regional peers. - Direct exports to the U.S.: - 52 percent of Nicaragua’s total exports. - 71 percent for FTZ exports. - 18 percent of GDP (the highest share in Central America). - Nicaragua’s second and third largest international partners: - Central America: 11.9 percent of exports. - Mexico: 10.7 percent of exports. - Indirect U.S. market dependence: - Roughly 78 percent of exports from Central America and Mexico are also directed to the U.S., including products containing inputs produced or assembled in Nicaragua, thus adding to total trade dependence on the U.S. market. - Trend: - Exports to the U.S. grew by 60 percent since 2006, mainly due to participation in CAFTA-DR and the indirect benefits of NAFTA. - Nicaraguan share of exports to other major markets has declined despite the Central American free trade agreement with the European Union, in part due to the loss in competitiveness associated to the depreciation of the euro. ### FDI, trade policy, and investment composition - Open trade and investment policy has promoted Nicaragua’s attractiveness for FDI. - FDI flows: - 3.9 percent of GDP between 2001–07 (average). - 6.7 percent of GDP between 2008-2016. - Drivers: FTZ’s tax incentives (SIP) and low comparative salaries. - Major FDI sectors: textile, auto harnesses and medical equipment. - Source composition of total FDI between 2012 and 2016: - Central America: 20.5 percent. - United States: 17.8 percent. - Mexico: 16.2 percent. - Free capital flows and exchange rate stability increased the attractiveness of U.S. portfolio and long-term investors. ### Remittances and labor links to the U.S. - Remittances from migrant Nicaraguan workers in the U.S. are an important offset to trade deficits. - During 2014–16, remittances offset over 45 percent of the trade deficit, on average. - Over 50 percent of total remittances come from the 300,000 Nicaraguans currently residing in the U.S. (about 4.5 percent of Nicaragua’s population). - Remittances have been growing over the last years. - The current 0.5 percent deportation rate, as a share of total stock of migrants, is among the lowest in Central America. ### Monetary and financial conditions - Exchange rate regime and dollarization: - The existing peg and dollarization levels imply that inflation and interest rates are largely determined by U.S. domestic economic conditions and monetary policies. - Credit and monetary spillovers: - Loose monetary conditions in the U.S. contributed to credit growth in Nicaragua since 2011. ### Macroeconomic impact of U.S. spillovers and policy scenarios - Overall assessment: - Macroeconomic impact of spillovers from the U.S. is expected to be higher in Nicaragua than in the rest of the region.1 - Potential trade policy changes: - Potential trade effects from a CAFTA-DR or NAFTA revision would be magnified by Nicaragua’s comparatively large trade exposure to the U.S. - Immigration policy: - A tightening of U.S. immigration policy would reduce remittances and strain the labor market on a lesser scale than Central America’s northern triangle. - U.S. tax reform: - A U.S. tax reform that provides incentives to relocate investments in the U.S. would have little effect on Nicaragua’s low-value added industrial production. - Financial conditions: - Tighter financial conditions in the U.S. would likely spill into Nicaraguan rates as fast as in the fully dollarized economies of the region and might appreciate the córdoba REER. - Footnote: - 1 A note quantifying the macroeconomic impact of spillovers from changes in U.S. policies is included in the SIP. *Source: Appendix I. Exposure to the U.S. Economy, cr17173* ### Appendix IV. Risk Assessment Matrix ### Appendix IV. Risk Assessment Matrix ### Overall level of concern - Overall level of concern (scale: medium) ### Risk entries - Source of risk: Retreat from cross-border integration - Relative likelihood: Medium - Impact if realized: High. Curb or reverse trade agreements that affect direct and/or indirect trade with major partners would significantly hurt Nicaragua’s export, investment, growth and poverty reduction progress. On the other hand, full implementation of CAFTA-DR, while beneficial from a macro perspective, might have severe microeconomic impact on certain subsectors and regions. Remittances and labor market will also be affected. - Policy advice: Measures to improve investment climate, productivity and competitiveness. - Source of risk: Policy and geopolitical uncertainty 3/ - Relative likelihood: High - Impact if realized: High. The policy uncertainty associated with the major partners may delay investments, affect remittance and labor market, and hurt growth in the short-term. - Policy advice: Measures to improve the investment environment, promote competition, and strengthen the rule of law will be key to promoting a robust and sustainable economic growth. - Source of risk: Significant further strengthening of the US dollar REER and/or higher interest rates - Relative likelihood: High - Impact if realized: Medium. Persistent dollar strength may impose strain on dollar borrowers that do not generate dollar revenues. Significant strengthening of the U.S. dollar would boost import demand and hurt Nicaragua’s competitiveness against other trading partners. Debt sustainability would likely not be significantly affected, given that most public debt is at fixed interest rates. - Policy advice: Prudential measures for non-hedged borrowers shall be strengthened and bank credit to the private sector be monitored closely. Policy measures to maintain macro-financial stability. - Source of risk: Reduced financial services by correspondent banks - Relative likelihood: Low - Impact if realized: Medium. Loss of correspondent banks would limit the capacity of the banking sector to support economic activities and incur reputational costs. - Policy advice: Strengthen AML/CFT framework. - Source of risk: Weaker-than-expected global growth - Relative likelihood: Low/Medium - Impact if realized: Medium. Lower-than-expected growth in key trading partners would lower export demand and remittances, in turn reducing activity and tax revenues. It may also delay investments and hurt growth in the short-term. - Policy advice: Measures to improve the investment environment, promote competition, and strengthen the rule of law will be key to promoting a robust and sustainable economic growth. - Source of risk: Lower energy prices - Relative likelihood: Low - Impact if realized: Low. Low oil prices benefit the economy as external financing needs fall and households and firms have more resources at their disposal. - Policy advice: There is scope for phasing out fuel and electricity subsidies which do not benefit the poorest households and introduce mechanisms that target better the poor. - Source of risk: Further reduction in volume and concessionality of Venezuela cooperation. - Relative likelihood: High - Impact if realized: Medium. Further deterioration in the financial conditions or levels of Venezuela financing will add pressure to private sector and balance of payment financing and may threaten the continuity of some social programs. - Policy advice: Maintain fiscal discipline to keep the public debt sustainable and to build buffers to face external and fiscal vulnerabilities. Enhance oversight on financial intermediaries depending on Venezuela’s financing. ### Notes - 1/ The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path discussed in this report (which is the scenario most likely to materialize in the view of the staff). The RAM reflects staff's views on the source of risks and overall level of concerns as of the time of discussions with the authorities. The relative likelihood of risks listed is the staff’s subjective assessment of the risks surrounding this baseline. - 2/ To quantify the risks from a change in U.S. policies, staff will also present the results of a stress scenario in the staff report, which will be developed with the assistance of the Research Department. The scenario will estimate the impact on the Nicaraguan economy of potential U.S. spillovers using the FSGM, and then to feed this information into staff’s projections of an alternative medium-term macroeconomic framework. - 3/ Including the risk of the U.S. congress passing the NICA Act in 2017. *Source: Appendix IV. Risk Assessment Matrix, NICARAGUA STAFF REPORT FOR THE 2017 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX* ### 4. The pipeline for IADB approvals in 2017 includes three operations in the public sector ### 4. The pipeline for IADB approvals in 2017 includes three operations in the public sector ### IADB 2017 pipeline — operations and status - Total pipeline value: US$197.5 million. - Composition: - (i) a Policy-Based Loan for US$65 million to improve productivity in Nicaragua through strengthen financial regulations, improving access to financing, and enhancing the business climate and competition. - (ii) US$87,5 million to improve basic human needs services for the rural population of the Dry Corridor, focusing on integrated health services, water and sanitation, road access and rural electrification. - (iii) a Water and Sanitation program of US$45 million to improve the living conditions of poor vulnerable populations in urban and peri-urban areas by increasing the coverage of sewage services in an efficient and sustainable manner, and improving the management of water and sanitation services. - Approval status as of March 31: the Policy-Based Loan of US$65 million has been approved; the rest of the pipeline will be approved later in the year. ### IADB Sovereign Guaranteed Loan Portfolio in Nicaragua (As of March, 31, 2017) - Sector — Current — ApprovedAvailable Amount - Transport 330.7 229.2 - Health 221.2 125.2 - Energy 191.6 139.8 - Science and Technology 50 48.9 - Value Chains and Financial Markets 85.0 74.6 - Trade 55.0 46.6 - Agriculture and Rural Development 40.0 6.8 - Modernization of the State 10.0 2.9 - Total 983.5 674 ### IDBG Non-sovereign Guaranteed Loan Portfolio in Nicaragua (As of February, 28 2017) - Sector — Current — Approved Exposure - Financial services 32.5 26.2 - Energy 9.5 23.9 - Agro-industry & Manufacture 42.1 10.9 - SMEs 40 33.3 - Non-financial services 20 3.4 - Total 144.1 97.7 ### IADB disbursements and net flows (2012–16) - IADB Disbursement of Sovereign Guaranteed Loan Portfolio in Nicaragua 2012–16 (In millions of US Dollars) - 2012 168.3 - 2013 154.7 - 2014 169.7 - 2015 207.2 - 2016 151.9 - IADB Annual Net Flows with Sovereign Guarantee (In millions of US Dollars) - Repayments: 2012 15.8; 2013 17.2; 2014 19.6; 2015 24.4; 2016 30.6 - Disbursement: 2012 168.3; 2013 154.7; 2014 169.7; 2015 207.2; 2016 151.9 - Net Loan Flow: 2012 152.5; 2013 137.5; 2014 150.1; 2015 182.8; 2016 121.3 - Subscriptions and Contributions: 2012 6.1; 2013 6.1; 2014 6.7; 2015 1.7; 2016 1.7 - Net Capital Flow: 2012 146.4; 2013 131.4; 2014 143.4; 2015 181.1; 2016 119.6 - Interest and Charges: 2012 16.1; 2013 20.1; 2014 23.1; 2015 26.3; 2016 33.8 - Net Cash Flow: 2012 130.3; 2013 111.3; 2014 120.3; 2015 154.8; 2016 85.8 ### Statistical issues — assessment of data adequacy for surveillance (As of March 31, 2017) - General: Data provision is broadly adequate for surveillance but there are numerous data shortcomings in national accounts, fiscal, debt, and external sector statistics. - National Accounts: - Central Bank of Nicaragua (CBN) changed the base year of the annual national accounts (NA) to 2006. - Complete set of integrated economic accounts by institutional sector for 2005-06 are disseminated, in accordance with 1993 SNA and relevant recommendations of 2008 SNA where source data are available. - In March 2017, releasing 2016 NA data, the CBN revised earlier years, specifically the 2010–13 data, addressing trade and producer price indexes, new employment matrix, revised agricultural production, and discrepancies between NA and BOP trade data in tax-free zones. - Price and Labor Statistics: - CPI uses expenditure weights from a 2006/07 household expenditure survey; CPI covers Managua and eight other cities and is published monthly; expenditures and prices in rural areas are excluded. - PPI (July 2006=100) covers small and medium-size establishments and goods for processing in the maquila sector; scope to expand PPI to services. - Labor market statistics are scarce and unemployment figures are available irregularly. - Government Finance Statistics (GFS): - Institutional coverage not in line with international standards: extra-budgetary institutions such as public universities and 152 of 153 municipalities (Managua excepted) are not included in consolidated public sector accounts. - Recording mostly on a cash basis with inconsistencies (e.g., checks recorded at issuance rather than when cashed). - MHCP compiles monthly fiscal statistics, remits to CBN for publication with about a 5-week lag; MHCP also produces its own quarterly budget execution report. - Annual financial statements of public enterprises are produced but not externally audited or published. - Need to improve monitoring of fiscal financing and classification of expenditure items; strengthen MHCP–CBN collaboration to estimate external and domestic financing of the nonfinancial public sector and monitor domestic public debt beyond the budgetary central government. - Some progress in compiling domestic debt of state-owned enterprises. - Monetary and Financial Statistics: - Monetary statistics generally consistent with MFSM (2000); Nicaragua publishes detailed daily, weekly, and monthly monetary data and remits monthly data to STA timely. - 2015 TA enhanced coverage to include insurance companies and microfinance institutions; sectorization incomplete and microfinance data exclude Caja Rural Nacional (Caruna). - Major differences exist between data remitted to STA and monetary data published on the CBN website, not consistent with MFSM 2000. - Authorities submit Financial Soundness Indicators (FSI) quarterly, but coverage needs to extend to all deposit-taking institutions. - External Sector Statistics: - Since September 2013, BOP statistics follow BPM6 within limits of available sources; resident institutional units defined in conformity with BPM6. - Coverage of private sector incomplete for current and financial accounts; revisions of FDI and reinvested earnings are in process but hampered by low survey response and inconsistent enterprise data. - Central bank needs enterprise-by-enterprise cross checks of trade flows, FDI and external debt to address large errors and omissions in the balance of payments, which hinder assessment of external sustainability. - Data Dissemination and Quality: - Nicaragua has participated in the GDDS since February 2005. Data ROSC published in December 2005. ### Table of Common Indicators Required for Surveillance (As of April 30, 2017) — selected entries and data quality flags - Exchange Rates: Date of latest observation 4/28/2017; Date received 4/28/2017; Frequency Daily (D); Publication frequency D; Data Quality — Methodological soundness D; Accuracy and reliability D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 4/27/2017; Date received 4/28/2017; Frequency D; Publication frequency D; Data Quality — Methodological soundness D; Accuracy and reliability D - Reserve/Base Money: 04/27/2017; received 4/28/2017; Frequency D; Publication frequency D; Data Quality D - Broad Money: 04/27/2017; received 4/28/2017; Frequency D; Publication frequency D; Data Quality D; Memo: O, LO, LO, LO (Methodological soundness); LO, O, LO, LO, LO (Accuracy and reliability) - Central Bank Balance Sheet: 02/28/2017; Date received 4/26/2017; Frequency M; Publication frequency M; Data Quality M - Consolidated Balance Sheet of the Banking System: 03/31/2017; Date received 4/26/2017; Frequency M; Publication frequency M; Data Quality M - Consumer Price Index: March 2017; Date received 4/7/2017; Frequency M; Publication frequency M; Data Quality — Methodological soundness O, LO, LO, LO; Accuracy and reliability LO, LO, LO, O, LO - Revenue, Expenditure, Balance and Composition of Financing – General Government: Dec. 2016; Date received 3/8/2017; Frequency M; Publication frequency M; Data Quality — Methodological soundness LO, LNO, LNO, LO; Accuracy and reliability LO, LO, LO, LO - Stocks of Central Government and Central Government-Guaranteed Debt: Q1 2017?; Date received 3/3/2017; Frequency Q; Publication frequency Q; Data Quality Q - External Current Account Balance: Q4 2016; Date received 4/7/2017; Frequency Q; Publication frequency Q; Data Quality — Methodological soundness LO, LO, LO, LNO; Accuracy and reliability LO, LO, LO, LO, LNO - Exports and Imports of Goods and Services: Q4 2016; Date received 4/7/2017; Frequency Q; Publication frequency Q; Data Quality — Methodological soundness LO, LO, LO, LNO; Accuracy and reliability LO, LO, LO, LO, LNO - GDP/GNP: Q4 2016; Date received 4/7/2017; Frequency Q; Publication frequency Q; Data Quality — Methodological soundness O, O, O, LO; Accuracy and reliability LO, O, LO, O, LNO - Gross External Debt: Q4 2016; Date received 4/7/2017; Frequency M; Publication frequency M; Data Quality M - International Investment Position: Q4 2016; Date received 4/7/2017; Frequency Q; Publication frequency Q; Data Quality Q ### Debt Sustainability Analysis — key findings and policy implications - Risk assessment: - Risk of external debt distress: Moderate. - Assessment augmented by significant risks stemming from domestic public and private external debt. - Macroeconomic context: - Real GDP growth projections for the forecast horizon have been revised upward, based on improvements in infrastructure. - Financing on relatively concessional terms is expected to continue. - External risks have increased, arguing against a low risk rating. - Notable risks: unwinding of the Venezuela cooperation and potential passage of the NICA Act. - Specific debt vulnerabilities: - External public risk rating augmented by domestic public debt risks related to financial problems of the social security institute (INSS), which, absent policy action, is expected to run increasingly larger deficits due to demographic dynamics. - External private debt risks from debt with Venezuela, which has financed some government social programs and public infrastructure. - Policy recommendations: - Continue to borrow as much as possible on concessional terms. - Implement comprehensive social security reforms. - Strengthen fiscal and external buffers. - Increase oversight of private debt. - Remain vigilant about risks from the unwinding of the oil collaboration with Venezuela. - Advance negotiations for relief of outstanding debt as much as possible. - Debt composition and concessionality: - PPG external debt stands at 32 percent of GDP and is mostly owed to multilateral creditors. - About 76 percent of external debt is held by multilaterals; IaDB accounts for 38 percent of outstanding external PPG debt; CABEI accounts for 14 percent. - Nicaragua is eligible for blended loans from both the IaDB and CABEI; in IaDB’s case, 40 percent of new funding is on a highly concessional basis and 60 percent carries a low but market-linked adjustable rate. - Until 2015 Nicaragua was IDA-only with a grant element requirement of at least 35 percent; since 2015 it has been an IDA-gap country and that requirement no longer applies. - About 72 percent of PPG external debt outstanding is at fixed rates. - Outstanding non-Paris Club debt and HIPC considerations: - Large stock of debt to non-Paris Club creditors pending HIPC relief: about US$1 billion, with total relief expected in the range of US$700 million. - Most of this debt is on the Central Bank’s books; two official creditors account for the bulk of this debt. - Agreements exist at a technical level but political-level progress has stalled; this debt is not currently being serviced. - DSA coverage and assumptions: - DSA covers consolidated public sector debt (budgetary central government, decentralized entities, SOEs, and the central bank). - Assumption: relief on HIPC terms for all eligible debt where negotiations are pending. *Prepared by the staffs of the International Monetary Fund and the International Development Association (as presented in the source material).* ### 4. Public domestic debt is about 10 percent of GDP. Of this, 28 percent is comprised of Bonos de ### 4. Public domestic debt is about 10 percent of GDP. Of this, 28 percent is comprised of Bonos de ### Composition of public domestic debt - Public domestic debt is about 10 percent of GDP. - Breakdown of domestic debt: - 28 percent: Bonos de la República de Nicaragua (BRNs), government bonds with an original maturity of 3–7 years. - 24 percent: Bonos Para la Indemnización (BPIs), issued as compensation for expropriations of the 1980s; BPIs are not used for funding purposes and issuance has declined substantially. - 11 percent: Bonos Bancarios (banking bonds), issued to banks during the early 2000s banking crisis; outstanding stock is gradually declining. - 29 percent: Domestic debt of SOEs and municipalities, mainly to the banking sector and institutions associated with the cooperation with Venezuela (CARUNA, Bancorp and ALBANISA). - Remainder: Outstanding central bank securities used by the central bank for open market operations. - Currency composition: - Most domestic debt instruments are dollar-denominated or dollar indexed, except for a portion of the banking bonds. - Historical stock example: - Total stock of BPIs declined from US$975 million at end-2006 to US$312 million at end-2016. - Market structure and liquidity: - A joint technical assistance mission from the Bank, Fund and CEMLA identified market segmentation due to multiple debt instruments and a small investor base. - Mission recommendations include issuing BRNs with shorter maturities to increase liquidity. ### Fiscal risks and data coverage - Key fiscal risk sources: - Vulnerability to climate change and disasters (earthquakes, floods). - Fiscal risks arising from municipalities and SOEs; authorities are broadening debt statistics to compile municipal and SOE domestic debt data. - Financial sector is sound and well-supervised but with gaps in the supervisory perimeter. - Data notes: - Preliminary municipal and SOE domestic debt data were provided to staff and incorporated in the analysis. - Box 3 of the Staff Report highlights main fiscal risks and areas for improved data and analysis. ### Macroeconomic framework and baseline assumptions underlying the DSA - Real GDP growth: - Assumed to converge to potential level of 4.5 percent from 2019 onwards. - Staff revised up potential GDP growth from 4 percent in the 2013 and 2015 DSAs to 4.5 percent. - Inflation and exchange rate: - Inflation anchored by crawling peg; GDP deflator in dollar terms broadly reflects U.S. inflation. - External assumptions: - Non-interest current account deficit will remain between 6½ and 8 percent of GDP. - Remittances decline slightly from 9½ percent to 9 percent of GDP over the medium term. - FDI inflows moderate from 6½ percent of GDP historical average. - External public sector borrowing remains at 3.9 percent of GDP annually, mainly multilateral with declining concessionality. - Venezuela cooperation concessional financing flows assumed at about 0.3 percent of GDP annually (revision from 2015 DSA assumptions). - Public sector fiscal assumptions: - A steadily rising primary deficit beyond 2019 driven by public investment remaining at current levels and rising pensions and healthcare spending of the social security institute (INSS). - INSS reserve fund liquid assets projected to be depleted by 2019; transfers from the budget assumed to finance its deficits up until 2037. - External grants projected to stabilize at 0.6 percent of GDP. - Real interest rate on public debt declines initially then rises as domestic bond issuance increases and grant element declines. - Domestic debt issuance treated as the residual; no further issuance of BPIs assumed. ### External debt sustainability (baseline and scenarios) - Baseline projections: - Present value (PV) of PPG external debt rises from 21 percent to 28 percent of GDP but remains under the 40 percent threshold. - Private external debt stood at 45 percent of GDP at end-2016; private external debt rose by about 8 percentage points of GDP between 2010 and 2013 and has been declining since 2013. - Stress scenarios: - One-time nominal depreciation shock of 30 percent in 2018 breaches standardized thresholds for external PPG debt; probability approach suggests lower probability of distress. - Terms (interest rate) shock of 2 percentage points results in a breach towards the end of the projection period. - ALBANISA contingent liability scenario (one-time absorption of private debt to Venezuela at end-2017 equal to 22 percent of 2017 GDP or US$3.2 billion) increases external debt in PV terms from 20 percent of GDP in 2017 to 35 percent of GDP in 2018, but no longer breaches the PV debt-to-GDP threshold in this DSA. - Adverse customized scenario (Venezuela + NICA Act): - Assumptions include a complete halt of flows from Venezuela, one-time 25 percent reduction in both FDI and domestic investment in 2018 relative to baseline, reduction by 50 percent of financing from the IaDB and World Bank from 2018 onwards replaced by less concessional sources, and a complete stop of FDI and loan financing from Venezuela by 2018. - Impact on indicators: - Growth falls to 2.9 percent in 2018 (from 4.5 percent baseline). - Effective interest rate averages 3.7 percent over the medium term. - FDI declines to an average of about 4 percent of GDP. - The adverse scenario breaches the PV of external PPG debt-to-GDP threshold by 2022 and briefly breaches PV of debt-to-exports ratio. - Assessment: - Staff considers Nicaragua at moderate risk of external debt distress given baseline resilience but material risks from the unwinding of Venezuela cooperation and potential NICA Act impacts. ### Public debt sustainability (baseline and shocks) - Baseline projection: - Public debt projected to increase to 55 percent of GDP by 2037. - External public debt remains largely stable; domestic public debt declines initially then rises as new issuance covers INSS pension and healthcare obligations. - Baseline does not breach PV public debt benchmark of 56 percent of GDP. - Drivers of rising public debt: rising primary deficits and increasing average real interest rate due to shift to domestic debt and reduced concessionality. - Shock sensitivity: - A shock to real GDP growth in 2017-2018 where growth falls to 1.4 percent in these two years has the most adverse impact by 2027. - Long-run GDP growth at 3.8 percent (one standard deviation below historical average) has most negative impact beyond 2027. - A fixed primary balance at current levels would be more favorable than baseline; a historical scenario with a lower primary deficit would lead to declining public debt. - Customized scenarios: - One-off absorption of ALBANISA’s debt to Venezuela would raise public debt-to-GDP from 42 percent in 2017 to 63 percent in 2018 and would breach PV public debt benchmark by 2035. - The adverse scenario (NICA Act + Venezuela halt) would exceed the public debt benchmark by 2031. - Policy implication: - Without reform to the social security system, INSS deficits are projected to grow over the next 20 years and be financed by domestic debt issuance, worsening public debt outlook unless INSS finances are improved. ### Conclusions and policy priorities - Overall risk assessment: - Nicaragua remains at moderate risk of external debt distress. - Concessional external debt, prudent macroeconomic management, sustained FDI inflows, and real GDP growth support medium-term sustainability under baseline. - Heightened uncertainty from the unwinding of Venezuela cooperation and potential passage of the NICA Act justifies retaining the moderate risk rating. - Key policy priorities implied by the DSA: - Improve INSS finances to avoid rising domestic debt issuance and worsening public debt dynamics. - Address market segmentation and broaden investor base to improve domestic debt market liquidity (including issuing BRNs with shorter maturities). - Improve coverage and transparency of municipal and SOE domestic debt data and strengthen supervision/perimeter of financial sector entities (including ALBANISA and CARUNA oversight and audits). *National authorities and staff calculations* ### 21. The authorities questioned aspects of staff’s analysis. The authorities consider the assumption ### cr17173 - 21. The authorities questioned aspects of staff’s analysis. The authorities consider the assumption ### Authorities’ main critiques and alternative baseline - The authorities consider the assumption of no action on INSS in the baseline scenario to be unrealistic. - They note that continued financing of INSS deficits from the budget would not be feasible. - Their own baseline scenario therefore: - Has lower primary deficits. - Shows a decline in the public debt to GDP ratio, as the legacy domestic debt is paid down while external debt remains relatively stable. - The authorities project potential growth at 5 percent to GDP, compared to staff’s 4.5 percent. - They consider that the impact on investment of the NICA Act is overstated in the adverse scenario, even if the bill were to be passed. - They argue that Venezuela cooperation has already declined significantly and that fiscal and external balances have not been significantly affected. - They reiterated there is no intention for the government to absorb any of ALBANISA’s debt to Venezuela, and that the return on ALBANISA’s assets is sufficient to be able to service this debt, even with no additional inflows. ### Key projections and quantitative findings (selected from staff tables) - External debt (nominal) sequence (selected values as presented): 76.7, 76.5, 77.2, 76.1, 74.2, 72.5, 70.7, 69.2, 67.6, 66.2, 64.9, 63.6, 62.3, 61.0, 50.4. - Share of external debt that is public and publicly guaranteed (PPG) (selected values): 32.0, 31.7, 32.4, 33.5, 34.2, 34.9, 35.4, 36.0, 36.5, 37.1, 37.6, 38.0, 38.2, 38.4, 37.9. - Change in external debt (selected values): -1.3, -0.2, 0.6, -1.1, -1.9, -1.7, -1.8, -1.5, -1.6, -1.4, -1.3, -1.3, -1.3, -1.3, -0.8. - Non-interest current account deficit (selected values including repeated entries): 5.6, 7.3, 6.8, 7.9, 1.6, 6.9, 7.2, 7.1, 7.0, 6.9, 6.9, 7.0, 6.8, 6.8, 7.0. - Net FDI (negative = inflow) (selected values): -6.7, -7.1, -6.5, -6.6, 1.3, -6.3, -6.4, -6.4, -6.4, -5.8, -6.0, -6.2, -6.0, -6.0, -6.0. - Endogenous debt dynamics (selected values): -4.4, -3.5, -1.0, -1.7, -1.7, -1.7, -1.5, -1.5, -1.2, -0.9, -0.9, -0.9, -0.9, -0.9, -0.6. - PV of external debt (selected values): 66.9, 65.5, 63.5, 61.9, 60.4, 59.3, 57.7, 56.2, 54.8, 53.5, 52.3, 51.1, 42.4. - PV of PPG external debt (selected values): 22.1, 22.9, 23.6, 24.3, 25.1, 26.1, 26.6, 27.1, 27.5, 27.9, 28.3, 28.5, 29.9. - PV of PPG external debt (in percent of exports) (selected values): 56.6, 57.6, 61.0, 64.1, 68.1, 71.4, 73.1, 74.5, 75.7, 76.9, 78.1, 78.9, 83.6. - Debt service-to-exports ratio (in percent) (selected values): 13.2, 15.7, 13.8, 15.2, 14.5, 14.4, 14.4, 13.8, 14.2, 14.3, 13.7, 13.5, 13.3, 13.2, 11.7. - Total gross financing need (Billions of U.S. dollars) (selected values): 1.1, 1.4, 1.4, 1.7, 1.7, 1.7, 1.8, 2.0, 2.1, 2.2, 2.2, 2.3, 2.4, 2.5, 3.9. - Key macroeconomic assumptions (selected entries): - Real GDP growth (in percent): 4.8, 4.9, 4.7, 4.2, 2.8, 4.5, 4.3, 4.5, 4.5, 4.5, 4.5, 4.5, 4.5, 4.5, 4.5. - GDP deflator in US dollar terms (change in percent): 3.2, 2.3, -0.9, 2.7, 3.4, 0.8, 2.3, 2.0, 2.2, 2.1, 2.2, 1.9, 2.1, 2.1, 2.1. - Effective interest rate (percent): 2.1, 2.4, 2.4, 2.3, 0.1, 2.1, 1.9, 2.1, 2.3, 2.3, 2.6, 2.2, 3.0, 3.0, 3.0. - Growth of exports of G&S (US dollar terms, in percent): 7.7, -4.3, 1.0, 9.9, 11.4, 7.3, 3.7, 4.4, 4.0, 5.8, 6.4, 5.3, 6.5, 6.5, 6.4. - Government revenues (excluding grants, in percent of GDP): 25.5, 26.3, 27.9, 27.9, 27.9, 27.9, 27.8, 27.6, 27.6, 27.6, 27.6, 27.6, 27.6, 27.5, 27.5. - Nominal GDP (Billions of US dollars) (selected): 11.9, 12.7, 13.2, 13.9, 14.9, 15.9, 16.9, 18.1, 19.3, 20.6, 21.9, 23.4, 25.0, 26.6, 50.7. - Gross workers' remittances (Billions of US dollars) (selected): 1.1, 1.2, 1.3, 1.3, 1.4, 1.5, 1.5, 1.6, 1.7, 1.8, 1.9, 2.1, 2.2, 2.3, 4.5. ### Stress tests and sensitivity analysis (high-level) - Table 2 and subsequent sensitivity tables identify a range of alternative scenarios and bound tests, including: - A1. Key variables at their historical averages in 2017-2037. - A2. New public sector loans on less favorable terms in 2017-2037. - A3. Contingent Liability Scenario. - A4. Alternative Scenario: NICA Act/Venezuela. - B1–B6 bound tests: shocks to real GDP growth, export growth, US dollar GDP deflator, net non-debt creating flows, combinations of shocks, and a one-time 30 percent nominal depreciation relative to the baseline in 2018. - The most extreme stress tests vary by indicator (e.g., one-time depreciation shock, terms shock, exports shock) as noted in figure annotations. ### Public sector debt baseline highlights (selected) - Public sector debt (percent of GDP) (selected values): 40.2, 40.7, 41.9, 41.5, 40.0, 39.1, 38.2, 38.5, 38.6, 41.0, 54.7. - Change in public sector debt (selected): -2.1, 0.5, 1.1, -0.4, -1.5, -0.9, -0.9, 0.3, 0.1, 0.6, 2.0. - Primary deficit (selected): 1.1, 1.1, 1.2, -0.1, 1.2, 1.1, 1.1, 0.9, 0.9, 1.6, 1.5, 1.2, 2.1, 2.9, 2.3. - Revenue and grants (percent of GDP) (selected): 26.6, 27.4, 28.8, 28.8, 28.8, 28.7, 28.5, 28.3, 28.2, 28.6, 28.2. - Automatic debt dynamics (selected): -2.3, -1.7, -0.4, -1.0, -1.6, -1.6, -1.7, -1.6, -1.5, -1.2, -0.6. - PV of public sector debt (selected): 31.6, 30.9, 29.3, 28.4, 27.9, 28.6, 28.7, 31.1, 46.8. - Gross financing need (percent of GDP) (selected): 6.0, 5.8, 5.1, 5.8, 4.7, 3.8, 3.4, 3.8, 3.8, 5.0, 9.7. ### Notable policy-relevant numeric thresholds and assumptions - Authorities’ alternative growth assumption: potential growth at 5 percent (authorities) vs 4.5 percent (staff). - One-time nominal depreciation shock used in bound tests: 30 percent nominal depreciation relative to the baseline in 2018. - Grant element of new public sector borrowing (selected values): 34.2, 33.6, 33.0, 25.3, 24.6, 26.9, 29.6, 24.4, 24.9, 22.8, 19.2, 19.0, 14.2, 17.1 (as presented across projection years). - Memorandum: PV of PPG external debt (Billions of US dollars) (selected): 2.9, 3.1, 3.4, 3.8, 4.1, 4.6, 5.0, 5.4, 5.9, 6.4, 6.9, 7.4, 14.8. *Sources: Country authorities; and staff estimates and projections.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17173.pdf_