## 1nicea2020001 ## Source details **Canonical URL:** [1nicea2020001](https://www.imf.org/-/media/files/publications/cr/2020/english/1nicea2020001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2020/english/1nicea2020001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2020/english/1nicea2020001.pdf.json) --- ### Context and recent economic developments - Social and confidence shock: - Social protests beginning in April 2018 triggered violence and a deterioration in confidence; some countries imposed sanctions which sharply reduced Nicaragua’s access to external financing. - Real GDP developments: - 2018: real GDP contracted by 3.8 percent. - 2019: economy projected to shrink by 5.7 percent. - 2013–17: annual average growth of almost 5 percent. - Employment and social impact: - Job losses in the formal sector are estimated at 180,000 (20 percent of formal employment) during March 2018–September 2019. - Inflation: - 2018: 3.9 percent. - End-2019 projection: 6.4 percent (spike reflects transient effect of tax measures adopted in March 2019). - Financial market and reserves: - Between April 2018 and September 2019, bank deposits and net international reserves shrunk by more than thirty percent. - GIR decreased by US$512 million in 2018 and projected to decrease by US$9 million in 2019; GIR placed at 4.9 months of non-maquila imports. - Social Security (INSS): - Central government transferred the equivalent of 1.2 percent of GDP in 2018 and estimated transfers of 0.7 percent of GDP in 2019. - Accumulated arrears for unpaid contributions during 1956–2013 totaled US$500 million (about 3.9 percent of GDP); agreement to pay INSS in 50 annual installments of about US$10 million each; 2018 transfer of approximately US$150 million included 15 installments; 2019 transfers of about US$70 million accounted for 7 installments. - Governance and fiscal transparency vulnerabilities: - NFPS operations are not audited on a regular basis; audits are not accessible to the public. - Many SOEs undertake de facto activities beyond de jure functions, creating unclear lines of responsibility. ### Economic outlook, potential output, and inflation outlook - Potential output and drivers: - Potential growth is estimated to have declined to 3 percent from a previous level of 4.5 percent (estimated in mid-2017). - Drivers: real gross capital formation decreased 48 percent in the first half of 2019 compared to the same period in 2017; underemployment increased from 43 percent at end-2017 to 48 percent in the first half of 2019. - GDP growth projections: - Projected to contract further in 2020, remain around zero in 2021, and grow at a slower pace over the medium term. - Projected to average 1.5 percent over 2022–25, well below the 5-year pre-crisis historical average of 4.7 percent. - Reported series (as presented): - GDP growth 4.7-3.8-5.7-1.20.00.81.41.7 - Consumer price inflation (e.o.p.)5.7 3.96.45.04.43.93.53.6 - Selected projection table entries: - GDP growth (annual percent change): 2018: -3.8; 2019: -5.7; 2020 (Prel./projected): -1.2; 2021 (Proj.): 0.0; 2022 (Proj.): 0.8; 2023 (Proj.): 1.4; 2024 (Proj.): 1.7 - Real GDP (US$ million): 2018: 13,118; 2019: 12,431; 2020 (Prel./projected): 12,416; 2021 (Proj.): 12,587; 2022 (Proj.): 12,793; 2023 (Proj.): 13,027; 2024 (Proj.): 13,326 - Consumer price inflation (e.o.p.): 2018: 3.9; 2019: 6.4; 2020 proj.: 5.0; 2024 proj.: 3.6 ### External position, reserves, and financing - Current account and external flows: - Current account: surplus of 0.6 percent of GDP in 2018 and estimated 1.5 percent of GDP in 2019 (from a deficit of 4.9 percent of GDP in 2017). - Current account projected to decline progressively starting in 2020 until reaching a 0.5 percent of GDP deficit in 2024. - Financial account deterioration: about 10.5 percent of GDP deterioration (from inflows of 8.3 percent in 2017 to outflows of 2.2 percent in 2018 and 1.5 percent in 2019). - FDI projected to average 2.7 percent of GDP over 2020–24 (about half of its 2017 level). - Reserve indicators and staff recommendations: - Gross reserves (US$ million): 2017: 2,593; 2018: 2,080; 2019: 2,071; 2020 proj.: 2,016; 2024 proj.: 2,272 - In months of non-maquila imports: 2017: 5.3; 2018: 4.8; 2019: 4.9; 2020 proj.: 4.8; 2024 proj.: 4.7 - NIR (US$ million): 2017: 1,802; 2018: 1,146; 2019: 1,321; 2020 proj.: 1,377; 2024 proj.: 1,722 - Staff recommends raising reserve coverage ratio to a range between 5 to 10 months of non-maquila imports (projected average 4.8 months for 2020-24). - SUCRE and exchange restriction: - Nicaragua signed the SUCRE treaty in October 2009; it entered in effect on January 2013 for the country. - Under the SUCRE, Nicaragua made four commercial transactions between 2013 and 2015, and since 2015 no transactions have been made. - Staff does not recommend approval of the exchange restriction arising out of SUCRE because it is discriminatory. ### Fiscal developments, 2020 budget, and public finances - NFPS fiscal balances (percent of GDP): - 2017: Revenues 29.1; Expenditure 31.1; Balance -2.1. - 2018: Revenues 27.6; Expenditure 31.7; Balance -4.1. - 2019 (p): Revenues 30.6; Expenditure 32.7; Balance -2.0. - NFPS primary balance: -0.9 (2017), -2.9 (2018), -0.6 (2019). - Central Government balance: -0.9 (2017), -3.3 (2018), -0.6 (2019). - 2020 staff projections and budget comparison: - Staff projects NFPS deficit in 2020 to increase to 2.6 percent of GDP. - Budget assumptions (selected, percent of GDP): Revenue 1/ 19.7 19.2 18.7; Expenditure 2/ 20.3 19.2 20.0; Overall Balance -0.6 0.0 -1.3. - Note on transfers: Budget envisages transfer from central government to INSS for US$40 million (0.3 percent of GDP) in 2020, versus staff estimate US$95 million (0.7 percent of GDP). - Fiscal measures and yields (percent of GDP): - Early 2019 fiscal package projected to yield about 4.2 percentage points of GDP. - Tax Policy (Mar-2019) total 2.7: Increased min. corporate income tax 1.5; Eliminated VAT exemptions 0.4; Increased excises 0.8. - Pension Reform (Mar-2019) total 1.5: Increase pension contributions; Increased gov. health contrib. by 1.5 ppts.; Reduced replacement rate to 70% from 80%; other measures not fully implemented. - Public Wage Freeze (Aug-2019) 0.3 (frozen until Feb-2020). - Indexation of Pensions (Oct-2019) reduction from 5% to 3%. - Public sector debt trajectory (percent of GDP): - 2015: 40.7; 2016: 41.7; 2017: 44.2; 2018: 47.8; 2019: 51.0; 2020 (Proj.): 52.5; 2021 (Proj.): 55.0; 2022 (Proj.): 57.8; 2023 (Proj.): 60.9; 2024 (Proj.): 63.7 ### Monetary and financial sector developments and vulnerabilities - Deposit and credit shocks: - Retail deposit run of 31 percent or US$1.6 billion over the last nine months of 2018 and in 2019 (about 25 percent, or US$1.4 billion in 2018). - Banks reduced gross credit by about US$1.2 billion (reduction of almost 24 percent of gross credit portfolio in 18 months). - Financial soundness indicators (selected): - Capital Adequacy Ratio: 13.9 (2018), 17.0 (Q1 2019), 21.9 (Q4 2019). - NPLs to total loans: 1.1 (2018), 2.6 (Q1 2019), 3.8 (Q3 2019). - Provisions to NPLs: 226.3 (2018), 173.3 (Q1 2019), 155.3 (Q3 2019). - Provisions to distressed assets: 85.9 (2018), 26.8 (Q1 2019), 32.1 (Q3 2019). - ROA annualized: 2.1 (2018), 1.3 (Q1 2019), 0.8 (Q3 2019). - ROE annualized: 18.0 (2018), 10.5 (Q1 2019), 4.4 (Q3 2019). - Liquid assets to total deposits: 32.5 (2018), 36.1 (Q1 2019), 46.9 (Q3 2019). - Broader measures of borrower distress: - Officially reported NPL ratio through end-September 2019: 3.8 percent. - Broader measure including restructured, refinanced, repossessed, and forborne loans accounts for 18 percent of total loans. - Banking system cushions: - Banking system declared liquidity (47 percent of total deposits) and solvency (almost 22 percent of risk-weighted assets) through September 2019. - Monetary policy and measures: - Authorities introduced repos (May-18), reduced reserve requirements (Jun-18; Aug-19), phased-in regulatory provisioning, redesigned LAF, announced blanket deposit guarantee (Jun-18), and reduced crawl from 5 percent to 3 percent (Nov-19). - Drawing of US$200 million from CABEI (Jun-18); temporary lending to government (Feb-19). ### Debt assessment, stress scenarios, and risks of distress - Risk assessments: - Nicaragua assessed at moderate risk of debt distress. - Most debt burden indicators remain below thresholds over the 10-year projection horizon under the baseline, except in Albanisa contingent liability and growth shocks where debt levels breach thresholds. - Key stress findings: - Standardized shock with largest impact: contraction of GDP by 4.9 and 3.7 percent in 2020 and 2021, respectively. - ALBANISA contingent liability scenario: absorption of ALBANISA’s debt would increase public debt-to-GDP from 52.8 percent in 2020 to 76.1 percent in 2021 and breach PV public debt benchmark over the medium term. - Selected DSA figures and projections (selected exact values): - PV of PPG external debt-to-GDP ratio rises from 27 percent to 34 percent of GDP over the 10-year projection. - Gross external financing need (Million of US dollars): 2018: 691; 2019 (Prel.): 640; 2020 (Proj.): 700; 2024 (Proj.): 847. - Public domestic debt: 9.7 percent of GDP in 2018; NFPS accounts for 75 percent of public domestic debt. ### Policy recommendations — safeguarding fiscal sustainability and spending quality - Fiscal objectives: - Address fiscal sustainability while minimizing adverse impacts on economic activity and social outcomes. - Gradually reduce fiscal deficit over the medium term. - Recommendations to raise quality and reallocate public spending: - Curb current expenditures on goods and services, subsidies, and grants (which together represent close to one-third of total expenditures or 8.5 percent of GDP in 2018). - Rationalize capital expenditures by prioritizing projects with highest growth-enhancing and social impact and those with external financing. - Safeguard spending on social programs and strengthen social safety nets (example: conditional cash transfer program 2011-2017). - Reevaluate expenditure rigidities to ensure budget flexibility. - Fiscal transparency and risk management: - Publish financial statements including all financial assets and liabilities, cash flows, expenditures, and financing of all NFPS components. - Include SOEs, decentralized entities and municipalities in measures of overall fiscal stance. - Establish a fiscal risk unit to prepare risk assessments and support budget preparation and execution. - Strengthen financial governance among SOEs to reinforce fiscal risk management and reduce corruption risk. ### Policy recommendations — monetary, financial sector, and AML/CFT - Financial-sector resilience and crisis preparedness: - Develop contingency plans for possible failure of financial institutions. - Enhance framework for bank resolution and strengthen the financial safety net. - Ensure market-oriented rules to facilitate private bank mergers; operationalize emergency liquidity assistance facilities; reform legal framework to facilitate debt-workouts. - Asset quality monitoring and provisioning: - Enhance timely identification and provisioning of distressed assets; target 60 percent provisioning coverage of distressed loans as an illustrative benchmark (staff analysis indicates capital ratios would decline but remain on average well capitalized with reported ratio of 18.6 percent of risk-weighted assets). - Strengthen SIBOIF’s in-situ verification and expand scope of loan inspections; require semi-annual independent asset quality and collateral valuation reviews. - Introduce regulatory incentives to monitor foreign exchange positions of large non-exporter borrowers (they account for not less than 50 percent of total foreign currency-denominated loans). - Enforce regular financial reporting by rural credit and savings cooperatives. - AML/CFT and CBR monitoring: - Continuous progress on strengthening the AML/CFT framework is necessary to protect financial integrity and reduce risk of CBR pressures. - Areas for further progress: update ML/TF National Risk Assessment; ensure registration and reporting capacity of new reporting entities; implement risk-based supervision and sanction non-compliance; collect up-to-date beneficial ownership information; strengthen prevention, investigation, and prosecution of money laundering including proceeds of corruption. - Nicaragua is under FATF observation; progress will be assessed in February 2020. ### Competitiveness, governance, anti-corruption, and structural priorities - Medium-term priorities: - Improve infrastructure; invest in human capital; address labor skills bottlenecks; upgrade technological readiness; strengthen institutions for contract enforcement, dispute resolution, property rights, investor protection, registering property, and resolving insolvencies. - Anti-corruption measures: - Strengthen asset declaration regime for high-level public officials: finalize migration to electronic submission; expand categories to cover beneficial interests and assets; streamline public online access. - Enhanced anti-corruption measures could boost tax revenues, improve resource allocation, and improve fiscal risk management. - Authorities’ emphasis: - Safeguard macroeconomic stability and guarantee public capital spending; progress in fiscal accounting, SOE governance, and anticorruption noted as important for restoring confidence. ### Statistics, capacity development, and data provision - Data adequacy and shortcomings: - Macroeconomic data broadly adequate for Article IV surveillance but insufficient for more intensive surveillance. - Needed improvements: real sector source data (tourism, manufacturing, retail); incorporate household survey results into national accounts; harmonize public sector debt with external sector debt data; monitor assets/liabilities of public enterprises; improve FDI coverage. - Resuming timely publication of IMAE, inflation, fiscal position and external debt is critical. - TA and capacity building: - Substantial technical assistance since June 2017 across fiscal, monetary, financial supervision, and statistics (selected missions listed in source). - Planned TA for next 12 months aligned with surveillance priorities. ### Staff appraisal — synthesis of key findings and priorities - Main challenge for 2020 and beyond: preserve macroeconomic and financial stability. - Outlook: further but more moderate contraction in 2020 before gradual recovery to low growth over the medium term, reflecting sharp decline in bank credit and financing flows. - Policy priorities: - Restore confidence and external financing flows to avoid renewed contraction in credit and jobs. - Moderate fiscal easing in 2020 appears broadly adequate to support recovery, conditional on financing; rebalancing expenditure is a priority to generate fiscal space for social programs. - Over the medium term, gradually reduce fiscal deficit to ensure sustainability. - Increase international reserve coverage to support the crawling peg regime. - Enhance timely identification and provisioning of distressed assets, improve crisis preparedness, and strengthen the financial safety net. - Continue strengthening AML/CFT implementation and address anti-corruption weaknesses. - Improve the quality and timeliness of data provision and resume timely publication of data. *Source: IMF staff report, 1nicea2020001 (selected excerpts).* ### 2019. The mission team comprised R. Garcia-Saltos (Head), ### CONTEXT AND RECENT ECONOMIC DEVELOPMENTS ### Recent macroeconomic shock and impact - Social protests beginning in April 2018 triggered violence and a deterioration in confidence; some countries imposed sanctions which sharply reduced Nicaragua’s access to external financing. - Real GDP developments: - 2018: real GDP contracted by 3.8 percent. - 2019: economy projected to shrink by 5.7 percent. - 2013–17: annual average growth of almost 5 percent. - Employment and social impact: - Job losses in the formal sector are estimated at 180,000 (20 percent of formal employment) during March 2018–September 2019. - Inflation: - 2018: 3.9 percent. - End-2019 projection: 6.4 percent (spike reflects transient effect of tax measures adopted in March 2019). ### Financial market and reserve developments - Confidence loss led to liquidity hoarding and higher demand for foreign exchange; banks’ funding stressed and crawling-peg regime challenged. - Between April 2018 and September 2019, bank deposits and net international reserves shrunk by more than thirty percent. - Gross international reserves (GIR): - Decreased by US$512 million in 2018 and projected to decrease by US$9 million in 2019. - GIR placed at 4.9 months of non-maquila imports (below suggested range of 5 to 10 months for LICs with a pegged regime). - External flows and financing: - External financing (net) fell to 1.9 percent of GDP in 2018 and 2.4 percent of GDP in 2019 (table indicates 3.3 in 2017). - The deterioration in the financial account was about 10.5 percent of GDP (from inflows of 8.3 percent in 2017 to outflows of 2.2 percent in 2018 and 1.5 percent in 2019). - Current account: surplus of 0.6 percent of GDP in 2018 and estimated 1.5 percent of GDP in 2019 (from a deficit of 4.9 percent of GDP in 2017). ### Fiscal developments and measures - NFPS (Non-Financial Public Sector) fiscal balance: - 2017 revenues and expenditure snapshot (percent of GDP): Revenues 29.1; Expenditure 31.1; Balance -2.1. - 2018: Revenues 27.6; Expenditure 31.7; Balance -4.1. - 2019 (p): Revenues 30.6; Expenditure 32.7; Balance -2.0. - NFPS primary balance: -0.9 (2017), -2.9 (2018), -0.6 (2019). - Central Government (CG) balance: -0.9 (2017), -3.3 (2018), -0.6 (2019). - CG transfers to INSS: 0.0 (2017), 1.2 (2018), 0.7 (2019). - Policy response: - Early 2019 fiscal package of tax and pension reforms projected to yield about 4.2 percentage points of GDP (some pension reform measures remained unimplemented). - Selected fiscal measures with projected yields (percent of GDP): - Tax Policy (Mar-2019) total 2.7 (Increased min. corporate income tax 1.5; Eliminated VAT exemptions 0.4; Increased excises 0.8). - Pension Reform (Mar-2019) total 1.5 (Increase pension contributions; Increased gov. health contrib. by 1.5 ppts.; Reduced replacement rate to 70% from 80%; Decrease min. pension and other measures not fully implemented). - Public Wage Freeze (Aug-2019) 0.3 (frozen until Feb-2020). - Indexation of Pensions (Oct-2019) reduction from 5% to 3%. - Financing adjustments included drawing US$200 million from CABEI and drawing down government deposits (from around 8 percent of GDP at end-2017 to 6 percent by end-2018). ### Social Security (INSS) position - INSS exhausted liquid reserves in 2018 and required central government transfers: - Central government transferred the equivalent of 1.2 percent of GDP in 2018. - Estimated transfers of 0.7 percent of GDP in 2019 against accumulated central government arrears to INSS. - Accumulated arrears for unpaid contributions during 1956–2013 totaled US$500 million (about 3.9 percent of GDP). In 2018 the government agreed to pay INSS in 50 annual installments of about US$10 million each; the 2018 transfer of approximately US$150 million included 15 installments, and transfers for 2019 of about US$70 million accounted for 7 installments. ### External position and external sustainability - External assessment highlights: - REER: moderate overvaluation estimated at 7.4 percent (ES approach). - Net international investment position (IIP): about -125 percent (lower than regional average by 50 percent of GDP). ### Monetary and financial sector policy response - Policy easing and liquidity measures since March 2018 included: - Banks enhanced liquidity buffers largely by reducing lending. - Authorities introduced repos, reduced reserve requirements, phased-in regulatory provisioning, redesigned lines for emergency liquidity assistance (LAF), and announced blanket deposit guarantee mechanisms. - In 2019 authorities reduced the rate of the crawl from 5 percent to 3 percent (signal to maintain low inflation). - Selected monetary and financial policy actions and dates: - Introduction of instruments to provide liquidity, including repos (May-18). - Temporary forbearance of problem loans ("Aliviados") (May-18). - Reduction of daily reserve requirements in FX and NC from 12 to 10% and weekly requirements in NC from 15 to 13% (Jun-18, and Aug-19). - Required temporary additional bank capital (Nov-18). - Drawing of US$200 million from CABEI (Jun-18). - Temporary lending to government (Feb-19). - Announcement of a blanket deposit guarantee (Jun-18). - Crawling peg reduction from 5% to 3% (Nov-19). ### Financial sector vulnerabilities and indicators - Deposit and credit shocks: - Retail deposit run of 31 percent or US$1.6 billion over the last nine months of 2018 and in 2019 (about 25 percent, or US$1.4 billion in 2018). - Banks reduced gross credit by about US$1.2 billion (reduction of almost 24 percent of gross credit portfolio in 18 months). - Financial soundness indicators (selected, as reported): - Capital Adequacy Ratio: 13.9 (2018), 17.0 (Q1 2019), 21.9 (Q4 2019). - NPLs to total loans: 1.1 (2018), 2.6 (Q1 2019), 3.8 (Q3 2019). - Provisions to NPLs: 226.3 (2018), 173.3 (Q1 2019), 155.3 (Q3 2019). - Provisions to distressed assets (adding restructured, refinanced and forborne loans): 85.9 (2018), 26.8 (Q1 2019), 32.1 (Q3 2019). - Return on assets (ROA) annualized: 2.1 (2018), 1.3 (Q1 2019), 0.8 (Q3 2019). - Return on Equity (ROE) annualized: 18.0 (2018), 10.5 (Q1 2019), 4.4 (Q3 2019). - Liquid assets to total deposits: 32.5 (2018), 36.1 (Q1 2019), 46.9 (Q3 2019). - Liquid assets to total liabilities excluding long FIs loans: 36.7 (2018), 36.5 (Q1 2019), 39.4 (Q3 2019). - Broader measures of borrower distress: - Officially reported NPL ratio through end-September 2019: 3.8 percent. - A broader measure including restructured, refinanced, repossessed, and forborne (“Aliviados,” unreported restructured borrowers) loans accounts for 18 percent of total loans. - Banking system cushions: - Decline in bank profitability to 4.4 percent of system equity in September 2019 from 18.0 percent in March 2018 is largely explained by contraction of loan portfolio and holdings of low-yield liquid assets. - Declared liquidity (47 percent of total deposits) and solvency (almost 22 percent of risk-weighted assets) through September 2019 suggest the banking system still holds cushions. ### Governance and fiscal transparency vulnerabilities - Weaknesses in fiscal governance and anticorruption frameworks: - NFPS operations are not audited on a regular basis; audits are not accessible to the public. - Many state-owned enterprises (SOEs) undertake de facto activities beyond de jure functions, creating unclear lines of responsibility across managers, ownership entities, ministries, government, and legislature. - Gaps in fiscal transparency complicate ascertaining fiscal risks from contingent liabilities (example: oil cooperation agreement with Venezuela operated outside fiscal accounts). *Source: IMF staff report, “CONTEXT AND RECENT ECONOMIC DEVELOPMENTS” (excerpts).* ### 10. The drastic economic downturn points ### 1nicea2020001 - 10. The drastic economic downturn points ### Economic outlook and potential output - Potential growth is estimated to have declined to 3 percent from a previous level of 4.5 percent (estimated in mid-2017). - Drivers of the reduction in potential growth: - Lower rate of capital accumulation (real gross capital formation decreased 48 percent in the first half of 2019 compared to the same period in 2017). - Lower formal sector employment and increasing informality (labor market statistics indicate an increase in underemployment from 43 percent at end-2017 to 48 percent in the first half of 2019). - GDP growth projections and medium-term path: - The economy is projected to contract further in 2020, remain around zero in 2021, and grow at a slower pace over the medium term. - Projected to average 1.5 percent over 2022–25, well below the 5-year pre-crisis historical average of 4.7 percent. - With considerable slack, inflation is expected to remain under 4 percent in 2020 and over the medium term. - Relevant reported series (as presented): - GDP growth 4.7-3.8-5.7-1.20.00.81.41.7 - Consumer price inflation (e.o.p.)5.7 3.96.45.04.43.93.53.6 ### External position and financing - Current account and external flows: - Current account surplus generated primarily by sharp import compression will decline progressively starting in 2020 until reaching a 0.5 percent of GDP deficit in 2024, following the projected bottoming out of activity and increasing import demand. - Financial account projected to strengthen moderately as FDI increases marginally over 2020–24 (averaging 2.7 percent of GDP, about half of its 2017 level). - External financing projected to remain below historical levels but more than required to finance the small current account deficit in 2024. - Reserve and balance of payments indicators (as presented): - Current account (% of GDP)-4.90.61.51.10.80.30.0-0.5 - Gross reserves (US$million)2,5932,0802,0712,0162,0472,1082,1612,272 - In months of non-maquila imports5.34.84.94.84.74.84.74.7 - NIR (US$million)1,8021,1461,3211,3771,4501,5391,6201,722 ### Fiscal financing, 2020 Budget Proposal, and public finances - Fiscal stance and projections: - Staff projects NFPS deficit in 2020 to increase to 2.6 percent of GDP due to economic contraction and partial dissipation of higher excise effects because of increased contraband. - INSS deficit for 2020 projected to widen in tandem with lower growth and continued weaknesses in formal employment; INSS expenditures projected to stabilize in 2020 because of parametric changes introduced by the reform; INSS deficit projected to be covered by additional transfers from the budget. - External financing for the NFPS assumed to remain below historical levels; CABEI financing projected to increase over 2020-24 partially offsetting the reduction in financing from other multilaterals. - Given the estimated NFPS deficit path for 2020–24, which incorporates additional revenues from the 2019 tax reforms, a drawdown of the remaining stock of government deposits, and no additional measures, the estimated level of public financing available would be insufficient to satisfy rising NFPS deficits beyond 2024. - Box 2 — 2020 Budget Proposal (authorities’ submission vs staff view): - Budget assumptions and measures: - The submitted budget for 2020 shows a modest reduction in the central government’s deficit. Revenues projected to increase slightly in nominal terms, while expenditures contract by 1.6 percent in nominal terms. - Reductions in transfers to local governments and the INSS and, to a lower extent, in capital expenditures. - Freeze on public wages and hiring (excluding education and health); wage bill reduction relative to GDP more than offsets increase in government’s employer contributions to the INSS from the 2019 pension reform. - Budget proposal assumes real GDP growth of 0.5 percent in 2020. - Staff’s projections vs budget (selected items, percent of GDP): - Revenue 1/ 19.7 19.2 18.7 - Expenditure 2/ 20.3 19.2 20.0 - Current 2/ 16.8 16.0 16.6 - ow/ transfers to INSS 0.7 0.3 0.8 - Capital 3/ 3.5 3.2 3.4 - Overall Balance -0.6 0.0 -1.3 - External Financing 1.3 0.9 0.9 - Domestic Financing -0.7 -0.9 0.4 - Staff projects an increase in the 2020 deficit owing to economic contraction and higher INSS expenditures against a zero-balance assumed in the budget; staff’s revenue and pension contribution projections are less optimistic than the authorities’, and increased contraband is projected to affect excises on cigarettes and alcoholic beverages. - Note on transfers: The budget envisages a transfer from the central government to the INSS for US$40 million (0.3 percent of GDP) in 2020, versus an estimated of US$95 million by staff (0.7 percent of GDP). - CABEI financing: CABEI’s financing to the NFPS in 2019 reached 1.4 percent of GDP, 0.5 percentage points of GDP more than in 2018. ### Debt assessment and risks - Nicaragua is assessed at moderate risk of debt distress: - Risks of external and public debt distress assessed as moderate because maturities are long and debt carries concessional interest rates. - Most debt burden indicators remain below the threshold over the 10-year projection horizon under the baseline, except in the Albanisa contingent liability and growth shocks, where debt levels breach the threshold. - Main downside risks to the medium-term outlook: - Domestic risks: - Continuation of political frictions eroding confidence, fueling additional outflows of bank deposits and international reserves. - Additional asset quality deterioration in loan portfolios, depressing credit and economic activity. - Ongoing concerns on AML/CFT framework could exacerbate CBR pressures; governance vulnerabilities could impact confidence. - External risks: - Additional sanctions reducing external financing or limiting benefits from regional trade agreements such as CAFTA. - Intensification of regional geopolitical tensions and security risks generating social unrest and negatively affecting investment and recovery prospects. ### Policy discussions — Safeguarding fiscal sustainability - Fiscal policy objectives: - Address fiscal sustainability while minimizing adverse impacts on economic activity and social outcomes given tight financing. - The moderate widening of the fiscal deficit projected by staff in 2020 appears broadly appropriate to begin offsetting some headwinds to economic activity, conditional on financing availability and evaluation of tax reform impacts on growth. - Recommendations to raise quality and reallocate public spending: - Curb current expenditures on goods and services, subsidies, and grants (which together represent close to one-third of total expenditures or 8.5 percent of GDP in 2018). - Rationalize capital expenditures by prioritizing projects with highest growth-enhancing and social impact (e.g., basic infrastructure, schools, health facilities), and those with external financing. - Safeguard spending on social programs and strengthen social safety nets (example cited: conditional cash transfer program implemented with World Bank during 2011-2017 targeting families in extreme poverty). - Reevaluate expenditure rigidities to ensure budget flexibility to reflect current priorities; staff views favorably the 2020 budgetary reallocation that superseded some rigidities. - Medium-term fiscal strategy: - Gradually reduce fiscal deficit to ensure sustainability. - Aim to reduce the current level of INSS deficit and improve operating efficiency and sustainability of SOEs so they graduate out of central government assistance. - Conduct social impact analysis of critical fiscal reform options to ensure the poor receive the lowest burden of adjustment. - Fiscal transparency and risk management: - Publish financial statements including all financial assets and liabilities, cash flows, expenditures, and financing of all NFPS components. - Include SOEs, decentralized entities and municipalities in measures of overall fiscal stance. - Establish a fiscal risk unit to prepare risk assessments (including revenue losses from tax expenditures), support budget preparation and execution, and assess SOE institutional arrangements and corporate governance. - Strengthen financial governance among SOEs to reinforce fiscal risk management and reduce corruption risk. ### Policy discussions — Monetary and financial sector policies - Banking system resilience and capital adequacy: - Banks’ reported distressed loans at end-September 2019 were 18 percent of total loans. - If banks increase provisions of distressed loans to reach a coverage level of 60 percent of their gross amount, capital ratios would decline but remain on average well capitalized (reported ratio of 18.6 percent of risk-weighted assets). - Under a stress scenario, keeping provisions at a 60 percent coverage level would still leave most banks above the minimum capital requirement of 10 percent of risk-weighted assets. - Recommended financial-sector measures: - Develop contingency plans for possible failure of financial institutions. - Enhance framework for bank resolution and strengthen the financial safety net to increase resilience. - Ensure market-oriented rules to facilitate private bank mergers; operationalize emergency liquidity assistance facilities established in June 2018; reform legal framework to facilitate debt-workouts. - Asset quality monitoring and provisioning: - Enhance timely identification and provisioning of distressed assets to avoid additional loan quality deterioration as borrowers adjust to lower economic activity. - Strengthen the bank superintendence’s in-situ verification of proper loan classification and provisioning using a forward-looking assessment of borrower repayment capacity. - Expand scope of loan inspections and require banks (according to well-defined criteria) to conduct semi-annual independent asset quality and collateral valuation reviews. - Introduce regulatory incentives for banks to monitor closely the foreign exchange position of large non-exporter borrowers (they account for not less than 50 percent of total foreign currency-denominated loans). - Enforce regular financial reporting by rural credit and savings cooperatives to allow authorities to monitor their financial situation. *Source: 1nicea2020001 - 10. The drastic economic downturn points (IMF staff report content).* ### 25. Pressures on correspondent banking relations (CBR) need careful monitoring. To ### 25. Pressures on correspondent banking relations (CBR) need careful monitoring. To ### Correspondent banking relations, AML/CFT, and operational impacts - Some financial institutions have terminated business relationships with individuals and entities deemed risky to minimize the impact of sanctions over CBRs. - Authorities report that CBRs have so far remained stable, but noted: - an increase in the submission of suspicious transactions reports; - an increase in the level of scrutiny and monitoring visits from correspondent banks to local institutions. - Market participants expressed concerns about: - the impact of additional compliance requirements on operational costs; - increased scrutiny of transactions, particularly for the export sector; - a consequent setback to increase financial inclusion. - Adoption of the recommendations of the 2017 Financial Action Task Force (FATF) Mutual Evaluation Report (MER) is necessary to protect the integrity of financial transactions and mitigate exposure to illicit flows. - Nicaragua is under FATF’s observation period; progress in complying with AML/CFT international standards and improving effectiveness in areas with strategic deficiencies identified in the MER will be assessed in February 2020. - Since July 2018, Nicaragua has made overarching reforms to its AML/CFT legal framework, which have translated in significant re-ratings for technical compliance; however, implementation is still in its early stages. - Areas for further progress identified: - updating Nicaragua’s ML/TF National Risk Assessment, incorporating all relevant sectors (public and private), and developing analysis on the effect of informality and financial exclusion; - ensuring registration of all financial institutions that became reporting entities and building their reporting capacity; - implementing risk-based supervision and sanctioning non-compliance; - collecting up-to -date beneficial ownership information and facilitating access to this information regardless of the complexity of the corporate structure; - strengthening the prevention, investigation, and prosecution of money laundering cases including proceeds of corruption. ### Authorities’ views on AML/CFT and CBR - Authorities highlighted resilience of the banking sector to the severe economic downturn and credited Central Bank actions to enhance banks’ liquidity buffers and a decade of record bank profits. - At the time of the Article IV visit last November, liquidity and solvency ratios of Nicaraguan banks were significantly higher than regional levels. - Authorities reported a significant increase in the Bank Superintendence’s (SIBOIF) in-situ loan-quality assessment and in the number of examinations per institution. - Authorities ruled out any further regulatory forbearance affecting timely recognition of loan-loss provisioning and acknowledged the need to enhance loan-loss provisions, identify further asset distress sources (including valuation of collateral), and enhance the financial safety net. - Authorities appreciated suggestions to enhance effective implementation of the AML/CFT framework and pointed to adoption of a new AML/CFT law and a new law for the Financial Intelligence Unit as evidence of commitment. ### CBR risk mitigation summary - Continuous progress on strengthening the AML/CFT framework is necessary to protect financial integrity, mitigate exposure to illicit flows, and reduce risk of CBR pressures. - Implementation efforts since July 2018 should be strengthened. --- ### External position, crawling peg exchange rate regime, and SUCRE - Maintaining resilience of the crawling peg exchange rate regime requires a stronger external position over the medium term. - Tighter external financing, weaker fiscal situation, and sanctions have put additional pressures on the external position. - Given high degree of dollarization and exposure to volatile terms of trade and FDI flows, staff recommends raising the reserve coverage ratio to a range between 5 to 10 months of non-maquila imports—compared to the projected average level of 4.8 months for 2020-24. - The November 2019 reduction in the rate of crawl from 5 to 3 percent could alleviate inflationary pressures, but its impact on the external position needs careful monitoring. - Staff identified an exchange restriction arising from Nicaragua’s participation in the SUCRE (Sistema Unitario de Compensación Regional de Pagos) regional payments arrangement. - Nicaragua signed the SUCRE treaty in October 2009; it entered in effect on January 2013 for the country. - Under the SUCRE, Nicaragua made four commercial transactions between 2013 and 2015, and since 2015 no transactions have been made. - Staff does not recommend approval of the exchange restriction arising out of Nicaragua’s participation in the SUCRE regional payments arrangement because it is discriminatory. --- ### Competitiveness, governance, and anti-corruption - Restoring business confidence and addressing supply-side bottlenecks are crucial to promote sustainable economic growth. - Medium-term policy priorities to improve competitiveness and growth potential: - improve infrastructure; - invest in human capital; - address labor skills bottlenecks; - upgrade technological readiness; - strengthen government institutions in contract enforcement, efficiency of legal framework in settling disputes, protection of property rights, investor protection, registering property, and resolving insolvencies. - Addressing anti-corruption policy weaknesses could boost confidence, competitiveness, and growth by: - improving understanding of corruption risks among public officials and the private sector; - updating related policies and strategies; - enhancing dialogue and institutional coordination for prevention, investigation, and prosecution. - Strengthening the existing asset declaration regime for high-level public officials is recommended, including: - finalize migration to electronic submission; - expand categories of information requested to cover interests and assets beneficially-owned; - streamline public access so relevant information from the declaration is accessible on-line without requiring a prior consultation process. - Stronger anti-corruption measures could help collect more tax revenues, improve resource allocation, upgrade fiscal risk management, and provide better quality and quantity of social and physical infrastructure. ### Authorities’ views on competitiveness and anti-corruption - Authorities stressed safeguarding macroeconomic stability and guaranteeing public capital spending as paramount for reestablishing business confidence. - Central bank support to commercial banks’ liquidity helped restore financial stability, evidenced by recovery of bank deposits. - Government efforts to access external financing for infrastructure spending and a budget revision reallocating additional tax resources to road improvements and two key customs posts were noted as helping underpin recovery in confidence and private sector credit. - Authorities emphasized commitment to tackling corruption, citing efforts by the Comptroller General and the General Attorney’s office in transparency and government procurement; they acknowledged scope to strengthen asset declaration regime but noted many identified cases refer to low ranking officials. --- ### Statistics, capacity development, and data provision - Macroeconomic data are broadly adequate for Article IV surveillance purposes but insufficient for more intensive surveillance. - Further data improvements needed: - improve source data in the real sector, particularly for tourism, manufacturing, and retail; - incorporate results of the household survey in the national accounts; - harmonize public sector debt with external sector debt data; - monitor assets and liabilities of public enterprises; - improve coverage of FDI statistics. - Resuming timely publication of data, in particular IMAE, inflation, fiscal position and external debt, is critical to maintain business confidence and ensure policy credibility. - Capacity development since the 2017 AIV consultation has focused on domestic public financial management, revenue administration, diagnosis of financial sector stability, and statistics. - Planned TA for the next 12 months is aligned with surveillance priorities and includes strengthening fiscal reporting and the institutional framework for financial stability, BOP and fiscal statistics. - Authorities remain committed to timely provision of good quality macroeconomic data and intend to continue building on the Fund’s technical assistance. --- ### Staff appraisal — key findings and recommendations (paragraphs 37–45) - Main challenge for 2020 and beyond: preserve macroeconomic and financial stability. - Outlook: further but more moderate contraction in economic activity in 2020 before gradual recovery to low growth over the medium term, reflecting sharp decline in bank credit and financing flows over the past two years. - Restoring confidence and external financing flows is critical to avoid renewed contraction in credit and jobs. - The moderate fiscal easing projected in 2020 is broadly adequate to support economic recovery and should mitigate increases in poverty; rebalancing expenditure is a priority to generate fiscal space for social programs and safety nets. - Over the medium term, the fiscal deficit should be gradually reduced to ensure fiscal sustainability. - Structural reforms to address medium-term fiscal challenges require broad public support; social impact analysis of critical fiscal reforms (e.g., pending pension reforms, SOEs) should be conducted. - External position is assessed moderately weaker than fundamentals; international reserve coverage should be increased to support the crawling peg regime and increase resilience to shocks. - Nicaragua is assessed at moderate risk of debt distress; most debt burden indicators remain below thresholds under the baseline except in shock scenarios that lower GDP growth or from contingent liabilities. - Authorities should enhance timely identification and provisioning of distressed assets, enhance crisis preparedness and the financial safety net, and strengthen coordination for resolution activities. - Continuous progress on strengthening the AML/CFT framework is necessary to protect financial integrity and reduce risk of CBR pressures; implementation efforts since July 2018 should be strengthened. - Addressing anti-corruption weaknesses, restoring business confidence, and improving the business climate are crucial for sustainable growth; prioritized anti-corruption policy and enhanced institutional coordination are recommended. - Staff encouraged authorities to make progress in strengthening the quality and timeliness of data provision and to resume timely publication of data. *Source: IMF staff report (sections 25–45) on Nicaragua.* ### 46. Staff expects that the next Article IV consultation with Nicaragua will take place ### 46. Staff expects that the next Article IV consultation with Nicaragua will take place on the standard 12-month cycle. ### Real sector: contraction, output gap, and inflation - Large and sharp contraction in activity with protracted sectoral effects; depressed aggregate demand generating a potentially large output gap. - GDP growth (annual percent change): - 2018: -3.8 - 2019: -5.7 - 2020 (Prel./projected): -1.2 - 2021 (Proj.): 0.0 - 2022 (Proj.): 0.8 - 2023 (Proj.): 1.4 - 2024 (Proj.): 1.7 - Real GDP (nominal, US$ million): - 2018: 13,118 - 2019: 12,431 - 2020 (Prel./projected): 12,416 - 2021 (Proj.): 12,587 - 2022 (Proj.): 12,793 - 2023 (Proj.): 13,027 - 2024 (Proj.): 13,326 - Real GDP deflator and consumer inflation: - GDP deflator (2018): 3.4; (2019): 5.4; (2020 proj.): 5.0; (2024 proj.): 3.6 - Consumer price inflation (period average): 2018: 5.0; 2019: 5.4; 2020 proj.: 5.0; 2024 proj.: 3.6 - Consumer price inflation (end of period): 2018: 3.9; 2019: 6.4; 2020 proj.: 5.0; 2024 proj.: 3.6 ### Fiscal developments: revenue shock, INSS transfers, deficits, and debt - Fiscal impact from weaker demand reduced revenue collections in 2018; pension system (INSS) transfers increased expenditures. - Central government transfers to INSS in 2018 include US$150 million (1.2 percent of GDP) as partial repayment of historical debt; projections assume continued transfers to close pension deficits. - Consolidated public sector overall balance after grants (percent of GDP): - 2018: -4.0 - 2019: -2.0 - 2020 (Proj.): -2.7 - 2021 (Proj.): -3.3 - 2022 (Proj.): -3.5 - 2023 (Proj.): -3.6 - 2024 (Proj.): -3.6 - Revenue and expenditure (consolidated public sector, percent of GDP): - Revenue: 2018: 28.0; 2019: 31.2; 2020 proj.: 30.3; 2024 proj.: 30.8 - Expenditure: 2018: 32.0; 2019: 33.2; 2020 proj.: 33.1; 2024 proj.: 34.4 - Public sector debt (percent of GDP) rising across the period: - 2015: 40.7 - 2016: 41.7 - 2017: 44.2 - 2018: 47.8 - 2019: 51.0 - 2020 (Proj.): 52.5 - 2021 (Proj.): 55.0 - 2022 (Proj.): 57.8 - 2023 (Proj.): 60.9 - 2024 (Proj.): 63.7 ### External sector: lower imports, export disruptions, capital outflows, and reserves - Weak domestic demand led to lower imports, mostly of durable goods. - Non-oil current account improved, offsetting a rising oil bill. - Key export developments: sharp drops in coffee and beef exports due to domestic supply disruptions and lower prices. - Bank deposit outflows translated into capital outflows; external debt ratio began to increase. - Current account (percent of GDP): - 2018: 0.6 - 2019: 1.5 - 2020 (Proj.): 1.1 - 2021 (Proj.): 0.8 - 2022 (Proj.): 0.3 - 2023 (Proj.): 0.0 - 2024 (Proj.): -0.5 - Gross international reserves and net international reserves (US$ million): - Gross international reserves: 2018: 2,080; 2019: 2,071; 2020 (Proj.): 2,016; 2023 (Proj.): 2,161; 2024 (Proj.): 2,272 - Net international reserves: 2018: 1,146; 2019: 1,321; 2020 (Proj.): 1,377; 2023 (Proj.): 1,620; 2024 (Proj.): 1,722 - Coverage of gross reserves declined as bank deposit withdrawals reduced international reserves. ### Monetary sector: deposit and reserve losses, FX demand, and monetary aggregates - Accumulated deposits and net international reserves fell dramatically following the socio-political crisis starting April 2018; money demand contracted. - Worsening confidence increased demand for US dollars and FX pressures. - Broad money (y-o-y percent change) and credit to the private sector (annual percent change): - Broad money: 2018: -18.7; 2019: -6.0; 2020 proj.: 2.0; 2024 proj.: 5.4 - Credit to private sector: 2018: -8.7; 2019: -15.4; 2020 proj.: 2.3; 2024 proj.: 3.2 - Deposits and Gross International Reserves recorded in figures (millions of US$); FX net sales and domestic currency excess reserves also highlighted in graphical data. ### Financial sector: deposit outflows, NPL rise, liquidity and capital - Up to April 2018, the financial system was expanding in regional importance; post-crisis sharp deposit outflows caused a credit crunch. - Asset quality deterioration: nonperforming loans (NPLs) rose by seven fold in 2018 from historically very low levels. - Despite profitability declines, the financial system maintained adequate liquidity and has so far withstood the downturn. - Capital adequacy ratios increased as reported due to contraction in bank loans. - Selected indicators: - Nonperforming loans to total loans (ratio; historic low then sevenfold increase): reported NPL ratios in figures and tables (e.g., 2015–2018 series showing rise). - Regulatory capital to risk-weighted assets (ratio): 2015: 13.0; 2016: 13.5; 2017: 13.8; 2018: 17.0 (table reports up to 2018). ### Financing, public sector cash flows, and medium-term framework - Budgetary central government cash surplus/deficit (Millions of córdobas): - 2018: -13,529 - 2019 (Prel.): -2,444 - Projections 2020–24 show continued deficits with cash deficits (millions of córdobas) reported annually (e.g., -5,498 in 2020 proj.; -11,317 in 2024 proj.). - Non-financial public sector gross financing needs and identified financing sources (US$ million): - Gross financing needs (c) and financing sources (d) match across projections; financing gap (k) reported as 0 for projection years. - Memo: External disbursements, grants, and domestic bond issuance quantities are reported in Table 4 and Table 3a/3b. - Balance of payments and external financing: - Gross financing needs (US$ million): - 2018: 691 - 2019 (Prel.): 640 - 2020 (Proj.): 700 - 2024 (Proj.): 847 - Identified financing sources cover gross financing needs (financing gap 0). - Saving–investment balance (percent of GDP): - Gross domestic investment: 2018: 22.9; 2019: 22.7; 2020 proj.: 22.6; 2024 proj.: 22.4 - Gross national savings: 2018: 23.6; 2019: 24.2; 2020 proj.: 23.8; 2024 proj.: 21.9 *Sources: National authorities and IMF staff calculations.* ### Annex I. Progress on 2017 Article IV ### Annex I. Progress on 2017 Article IV ### Fiscal Policy: progress and outcomes - IMF 2017 recommendation: fiscal consolidation of 1.6 percent of GDP implemented over two years, primarily via rationalization of subsidies and tax expenditures, particularly VAT exemptions. - Recommendation: reform social security; INSS liquid reserves projected to be depleted in the near future. - Staff assessment of authorities’ response: Broadly Consistent. - Authorities’ actions and outcomes: - Fiscal stance was broadly adequate before the political shock; emerging recession shifted priorities and prevented creation of fiscal buffers. - In 2018 the authorities cut expenditures — mostly in capital outlays — by 1.4 percent of GDP. - In 2019 a tax reform with an estimated yield of 1.5 percent of GDP focused on the elimination of VAT exemptions and increased excises on selected goods. - Authorities also increased the minimum tax and froze public wages (measures not previously discussed). - Authorities implemented a parametric pension reform with a projected yield of 1.5 percent of GDP in 2019 to address financing of the INSS. ### Monetary and exchange rate policy: actions and assessment - IMF 2017 recommendations: - Strengthen liquidity management tools, introduce a short-term policy rate and a corridor to reduce volatility. - Banks should enhance liquidity, capital, and provisioning buffers. - Strengthen external and financial buffers; reach IMF suggested reserve adequacy metrics given the exchange rate framework. - Staff assessment of authorities’ response: Broadly Consistent. - Authorities’ actions and outcomes: - Introduced daily monetary operations, issued new financial instruments, and reduced reserve requirements to improve liquidity management. - Introduced — but later temporarily suspended — an anti-cyclical provision fund. - Established regulations to create an extraordinary capital reserve and conservation of capital to mitigate potential deterioration of banks’ loan portfolio. - Contracted a US$200 million credit line with CABEI to support the exchange rate and gross international reserves. ### Financial sector policy: supervisory perimeter and AML-CFT - IMF 2017 recommendations: - Address gaps in the supervisory perimeter so every deposit-taking and systemically important non-bank entity is subject to effective risk-based supervision and AML-CFT oversight. - Further improve stress test methodology. - Staff assessment of authorities’ response: Partly Consistent. - Authorities’ actions and outcomes: - Supervisory perimeter remained unchanged, leaving systemically important non-bank entities without oversight. - AML-CFT framework improved with regulations issued in July and October 2018 strengthening the Financial Intelligence Unit and addressing several MER shortcomings; however, some significant MER weaknesses remain pending. ### Structural reforms and statistics - IMF 2017 recommendations: - Improve competitiveness, maintain investment in infrastructure, increase human capital development, and address labor skills bottlenecks. - Improve data quality and the scope of macroeconomic statistics. - Staff assessment of authorities’ response: Marginally Consistent. - Authorities’ actions and outcomes: - Business environment deterioration in 2018–19 led to postponement of competitiveness measures. - Authorities agreed with 2018 multisector statistics mission findings and stated intention to step up efforts to improve macroeconomic statistics. ### External Sector Assessment — major findings (2018–2019) - Overall assessment: external position in 2018 and projection for 2019 assessed to be moderately weaker than levels consistent with fundamentals and desirable policy settings; REER assessed to be moderately stronger than warranted by fundamentals (by about 7 percent). - Selected indicators and projections: - Current account improved to a surplus of 0.6 percent of GDP in 2018 (from a deficit of 4.9 percent of GDP in 2017). - Current account surplus increased further to 2.4 percent of GDP in 2019H1. - REER remained broadly unchanged from 2017 level; bilateral appreciation vis-à-vis Eurozone and Mexico since 2014 and 2015, respectively; depreciating bilateral real exchange rate vis-à-vis U.S. due to lower inflation. - Financing structure vulnerabilities: financial account experienced a reversal of about 10.6 percent of GDP (from 8.3 percent of GDP inflows in 2017 to 2.2 percent of GDP outflows in 2018). - FDI inflows and public external financing declined by 2.9 and 1.4 percent of GDP, respectively; other capital flows accounted for outflows of 6.7 percent of GDP (US$900 million). - Gross international reserves decreased by US$512 million; reserves fell from 5.3 months at end-2017 to 4.8 months of non-maquila (retained) imports in 2018. - Net international investment position (IIP) in 2018 was negative at about -128 percent of GDP and projected to remain broadly unchanged in the medium term; Nicaragua’s net IIP is the worst in the region and is lower than the regional average by 55 percent of GDP. ### EBA-Lite and REER assessment details - External Sustainability (ES) approach (EBA-Lite) results: - ES approach estimates REER overvaluation of 7.1 percent over the medium term. - Staff projects the 2024 CA outturn at -0.5 percent of GDP and assumes improvement in net IIP over 10 years from -128 percent in 2018 to -85 percent of GDP. - Projected CA norm in 2024 consistent with IIP improvement is 1.9 percent of GDP, implying a CA gap of -2.4 percent of GDP and a REER gap of 7.1 percent. - Elasticity parameters cited: Elasticity of CA -0.33; Elasticity of Exports of Goods and Service -0.44; Elasticity of Imports of Goods and Service 0.29. - CA model in multi-country EBA-Lite: - Produces REER undervaluation of 15.5 percent and implies a CA norm deficit of 5.3 percent of GDP; staff views this as non-viable given limited external financing. - REER Index model in EBA-Lite: - Shows about 4 percent undervaluation; REER norm pushed up by relatively high dependency ratio; estimated policy gap -2.3 percent (i.e., 60 percent of the REER gap). - Staff views the REER Index model as lacking a clear CA norm specific to Nicaragua given its large negative IIP. ### Competitiveness and structural weaknesses - Competitiveness indicators and Doing Business/Global Competitiveness assessments show Nicaragua lags regional comparators. - Sub-indicators where Nicaragua lags include: construction permits, protecting minority investors, registering property, getting credit, and paying taxes. - Conclusion: further improvement in competitiveness and the business environment is desirable. ### Reserve adequacy — measurements and context - Reserve coverage at end-2018: 4.8 months of non-maquila imports. - Gross international reserves (GIR) fell by US$0.5 billion to US$2.1 billion in 2018. - Reserves in 2018 and 2019 projected to be below the Fund’s suggested adequacy metric for LICs of 8.7 months. - Historical context: - Crisis of confidence in April 2018 resulted in loss of US$793 million of net international reserves (NIR); NIR covered 2.7 months of non-maquila imports by end-2018. - NIR had nearly tripled during 2008–17, peaking at US$1.9 billion at end-April 2018 (equivalent to 4 months of non-maquila imports). - Reserve adequacy considerations: - Traditional rules-of-thumb: cover above 3 months of non-maquila imports, more than 20 percent of broad money, and at least 100 percent of short-term external debt. - Past IMF advice emphasizes additional buffers given crawling peg regime, high dollarization, and vulnerability to external shocks. - Appendix outlines a cost–benefit optimality approach maximizing net benefit of holding reserves (NBR) with formula components preserved from source. ### Risk Assessment Matrix — key risks, likelihoods, and policy advice - Overall Level of Concern: medium. - Global shocks: - Weaker-than-expected global growth (U.S. confidence wanes): Relative likelihood medium; Time horizon short to medium term; Impact medium. Policy advice: Strengthen reserve accumulation and fiscal sustainability. - Large swings in energy prices: Relative likelihood medium; Time horizon short to medium term; Impact medium. Policy advice: Phase out fuel and electricity subsidies that do not benefit the poorest and introduce better targeting mechanisms. - Intensification of geopolitical tensions and security risks (e.g., Venezuela): Relative likelihood high; Time horizon short term; Impact low. Policy advice: Undertake policies to absorb new migrants on the labor market without creating social tensions. - Nicaragua-specific shocks: - Financial risks (increasing NPLs, liquidity reduction, pressure on reserves/peg): Relative likelihood high; Time horizon short term; Impact high. Policy advice: Enhance crisis preparedness; strengthen financial safety net; rebuild reserves to defend the peg. - Fiscal risks (lower revenue, unexpected expenditure, contingent liabilities): Relative likelihood high; Time horizon short term; Impact high. Policy advice: Strengthen fiscal sustainability; continue improving SOE governance and fiscal risk management. - Political risks (further deterioration causing socio-economic disruptions): Relative likelihood high; Time horizon short term; Impact high. Policy advice: Strengthen social safety nets to protect the poor and ensure inclusive growth. - External risks (further sanctions; absorption of private debt to Venezuela): Relative likelihood high; Time horizon short term; Impact high. Policy advice: Strengthen reserve accumulation and fiscal sustainability. *Source: Annex I. Progress on 2017 Article IV (excerpt).* ### 3. Nicaragua’s international reserve coverage ### 3. Nicaragua’s international reserve coverage ### Reserve adequacy metric and baseline estimate - Under the IMF’s suggested reserve adequacy metric for LICs applied to Nicaragua, country-specific fundamental variables (fiscal balance, institutional strength as measured by the World Bank’s Country Policy and Institutional Assessment (CPIA) score, and exchange rate regime) are set to the average of the last five years. - Shock variables (external demand, terms of trade, FDI flows, and aid flows) are set equal to the bottom tenth-percentile of their historical observations over the last 5 years. - Assuming a cost of holding reserves equal to 4 percent (the estimated marginal product of capital in LIC peers), the adequate level of reserves is estimated at 8.7 months of non-maquila imports. - Observed gross international reserves (GIR) coverage during 2014–18 was 4.3 months of non-maquila imports. ### Key input values used in the IMF ARA metric (2019–23 averages) - Government balance, % GDP: -1.75 - World Bank CPIA: 3.57 - Exchange rate regime: Fixed - External shock variables set to 10th percentile of 2019–23: - External demand growth: -1.54 - Terms of trade growth: 1.11 - Change in net FDI to GDP: -0.30 - Change in foreign aid to GDP: -10.00 ### Sensitivity analysis and alternative scenarios - Methodology is highly sensitive to: - Country-specific fundamentals (exchange rate regime, fiscal position, sources of financing, etc.) - Probability of external shocks - Opportunity cost of holding reserves (proxied by marginal productivity of capital and of public investment) - Estimated optimal reserves vary with crisis probability: - 0.25 percent likelihood of crisis: 11.4 months (chart indicates) - 0.5 percent (Baseline): 8.7 months - 0.75 percent: 6.7 months - 1.0 percent: 5.1 months - 2.0 percent: 3.5 months (chart indicates) - Estimated optimal reserves vary with cost of holding reserves: - 3 percent: 10.6 months - 4 percent (Baseline): 8.7 months - 5 percent: 6.7 months - 6.2 percent (LIC benchmark): 5.1 months - Using Nicaragua’s published social return on public investments of 8 percent as the opportunity cost, the estimated optimal reserve falls to 3.7 months of non-maquila imports. ### Staff baseline projections (forward-looking) - Using projected variables for 2019–24 and considering several opportunity cost measures, staff’s baseline projections indicate Nicaragua’s optimal level of reserves should range between 5 and 10 months of non-maquila imports. - Projected levels of reserves, 2019–2023 (months of next year imports): charts indicate an optimal level around 8.7 months and average projected level showing variation across years. ### Comparative and historical context (figures referenced) - Observed GIR coverage: 4.3 months during 2014–18 versus optimal (LIC reserve template) shown at 8.7 months. - Historical metrics plotted in source charts include: - Reserves in Percent of Imports for periods 2008, 2013–17, 2014–18 with listed optimal and GIR values: 8.7, 7.2, 4.2, 4.3, 4.6, 3.6 (as presented in chart series). - Reserves to Broad Money and Reserves to Short-Term Debt time series for Nicaragua and regional/group comparators (charts in source). *Source: National authorities and IMF staff calculations as presented in the IMF ARA Metrics and staff report excerpt.* ### 2009. The assessment noted continued progress at the BCN in the areas of International Financial ### 1nicea2020001 - 2009. The assessment noted continued progress at the BCN in the areas of International Financial Reporting Standards (IFRS) implementation and reserve management operations. ### Financial reporting, audit, and IFRS implementation - Timely publication of the audited financial statements is in place in accordance with the safeguards policy. - The 2018 financial statements were audited and published on the CBN's website, however, the external audit opinion continues to be qualified due to the uncertainty surrounding the valuation of government debt. - Implementation of IFRS remains in progress. ### MDRI disbursements and financing (SDR Million) - Completion point balance: 60.99 - Additional disbursement of interest income: 7.62 - Total disbursements: 71.16 - Implementation of Multilateral Debt Relief Initiative (MDRI): I. MDRI-eligible debt (SDR Million): 140.48 - Financed by: - MDRI Trust: 91.79 - Remaining HIPC resources: 48.70 - II. Debt Relief by Facility (SDR Million) — Eligible Debt: - Delivery date: January 2006 — GRA: N/A, PRGT: 140.48, Total: 140.48 ### Financial Sector Assessment Program (FSAP) and technical assistance - An FSAP update was completed in October 2009, and the Financial System Stability Assessment report for Nicaragua was issued on April 28, 2010. - Nicaragua has received substantial technical assistance since June 2017. Selected items from the assistance schedule: - Fiscal (CAPTAC): Improve management of declarations — November 2018, 2019 - Fiscal (CAPTAC): Treasury single account — April 2017; March 2019 - Fiscal (CAPTAC): Tax administration and audit — December 2018 - Fiscal (CAPTAC): Strengthening the taxpayer’s registry — June, October 2017; November 2018 - Fiscal (CAPTAC): Treasury cash planning — April 2018 - Fiscal (CAPTAC): Strengthening the VAT control — March 2018 - Fiscal (CAPTAC): Adjust and Monitor the Strategic Plan for Tax Administration — February 2017, 2018 - Fiscal (CAPTAC): Improve audit procedures — January, March 2017; February 2018 - Fiscal (CAPTAC): Fiscal risks and financial programming — October 2017 - Monetary and Financial Sector (CAPTAC): Credit risk supervision — April, May 2019; July, August 2017 - Monetary and Financial Sector (CAPTAC): Securities market supervision — April 2019 - Monetary and Financial Sector (CAPTAC): Supervision of financial instruments — February, April 2018; 2019 - Monetary and Financial Sector (MCM): Financial Sector Stability Review — February 2019 - Monetary and Financial Sector (CAPTAC): Systemic risk indicators and monitoring — May 2018 - Statistics (CAPTAC/STA): Annual and high frequency government finance statistics — June 2019; Annual and high frequency public sector debt statistics — June 2019 - Statistics (CAPTAC): Coverage and sectorization – TA management — April 2019 - Statistics (STA/CAPTAC): Multisector Statistics — December 2018 - Statistics (CAPTAC): Change of reference year — August 2017; March 2018 - Statistics (CAPTAC): Strengthening of capacity development — December 2017 - Statistics (CAPTAC): Implementation strategy of statistics in public finances — November 2017 - Statistics (CAPTAC): Diagnostic mission of statistics in public finances — November 2017 ### Main data websites and statistical dissemination - Central Bank of Nicaragua: https://www.bcn.gob.ni/ — National accounts; Consumer price index; Monthly indicator of economic activity (IMAE); Balance of payments; International reserves; Interest rates; Monetary and financial indicators; Exchange rates - Ministry of Finance: http://www.hacienda.gob.ni/ — Fiscal accounts; Central government budget - National Institute of Development Information: https://www.inide.gob.ni/ — Labor and employment; Household income and expenditure survey; Poverty and inequality - Superintendency of Banks: http://www.siboif.gob.ni/ — Balance sheets and income statements; Financial soundness indicators ### Statistical issues and data adequacy (As of December 31, 2019) - General: - Data provision is broadly adequate for surveillance but there are numerous data shortcomings in national accounts, fiscal, debt, and external sector statistics. - Timeliness in the release of statistical information has deteriorated. - Further efforts are needed to: improve source data in tourism, manufacturing and retail; incorporate the 2017/18 household survey in national accounts; harmonize public sector debt with external sector debt data; monitor assets and liabilities of public enterprises; and improve coverage of FDI statistics. - National Accounts: - The CBN disseminates national accounts (NA) series based on 2006. - Annual accounts by institutional sector for 2005-14 are disseminated in accordance with the System of National Accounts 1993 (1993 SNA) and most relevant recommendations of the 2008 SNA for which source data are available. - In March 2017, while releasing the 2016 NA data, the CBN revised earlier years, specifically the 2010–13 data (updates to trade and producer price indices, revised agricultural production, and addressed discrepancies between NA and BOP trade data in tax-free zones). - Since December 2018, economic surveys for national accounts are collected by INIDE. - Price and Labor Statistics: - CPI uses expenditure weights from a 2006/07 household expenditure survey; covers Managua and eight other cities; published monthly; rural areas excluded. - A Household Income and Expenditure Survey was collected April 2017–March 2018 to update the CPI reference period; this survey covers only urban population. - Producer price index (PPI) (July 2006=100) covers small and medium-size establishments and goods for processing in the maquila sector; scope exists to expand PPI to services. - Since September 2018, price quotations and compilation of CPI and PPI moved from the CBN to INIDE; technical validation and dissemination remain CBN responsibilities. - Labor market statistics are scarce and unemployment figures are available irregularly. - Government Finance Statistics (GFS): - Institutional coverage is not in line with international standards: consolidated public sector excludes central government extrabudgetary units, 152 out of 153 municipalities, and 5 out of 10 public nonfinancial corporations. - Transactions are recorded mostly on a cash basis but with inconsistencies (e.g., checks recorded when issued rather than when cashed). - MHCP compiles monthly fiscal statistics and submits them to the CBN for inclusion in the CBN’s quarterly reports, usually published with about a 5-week lag; MHCP also produces its own quarterly report on budget execution. - Annual financial statements of public enterprises are produced but are not externally audited or published. - Monitoring of fiscal performance is complicated by idiosyncrasies in classifying/netting expenditure items and needs significant improvement on the financing side. - Need to strengthen MHCP–CBN collaboration to derive more accurate and timely estimates of external and domestic financing of the nonfinancial public sector, including monitoring domestic public debt transactions and stock positions beyond the budgetary central government. - Positive steps taken towards compiling statistics on domestic debt of state-owned enterprises. - Monetary and Financial Statistics: - CBN reports monthly monetary statistics for the central bank, other depository corporations, and other financial corporations based on standardized report forms consistent with MFSM 2000 concepts and definitions. - Lack of proper sectorization hinders accurate compilation of net credit to central government and the rest of the nonfinancial public sector. - Institutional coverage of other depository corporations excludes the largest microfinance institution, Caja Rural Nacional (CARUNA), and saving and loans cooperatives. - CBN reports the 12 core FSIs and seven encouraged FSIs for deposit takers quarterly. - CBN reports some Financial Access Survey (FAS) series, including commercial bank branches per 100,000 adults and ATMs per 100,000 adults (UN SDG Target 8.10 indicators). - External Sector Statistics: - Since September 2013, BOP statistics follow BPM6 concepts within limits of available sources. - Resident institutional units are defined in conformity with BPM6. - Coverage of the private sector is incomplete for current and financial accounts. - November 2019 TA mission: CBN is revising transactions and positions of FDI and reinvested earnings from private financial and non-financial companies; manufacturing services series being revised historically with a new methodology. - Inclusion of these revisions into ESS may take longer than anticipated; target date late 2020. - Central bank needs to cross check enterprise-by-enterprise trade flows, FDI and external debt to assess discrepancies between merchandise trade and associated financial flows. - Preliminary November 2019 TA mission estimate: if revisions are made to the historic series, the average decrease of errors and omissions in the BOP during 2012-2018 could be around 25 percent of the current errors and omissions average of the same period. - Data Dissemination and Quality: - Nicaragua participates in the enhanced General Data Dissemination System (e-GDDS) but has not yet launched a National Summary Data Page (NSDP). - Data ROSC was published in December 2005. ### Table of Common Indicators Required for Surveillance (As of December 31, 2019) — selected entries - Exchange Rates: Date of Latest Observation 08/31/2019; Date Received 09/20/2019; Frequency of Data M; Frequency of Reporting M; Frequency of Publication D - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of Latest Observation 10/31/2019; Date Received 11/26/2019; Frequency M/M/M - Reserve/Base Money: Date of Latest Observation 10/31/2019; Date Received 11/26/2019; Frequency M/M/M - Broad Money: Date of Latest Observation 09/30/2019; Date Received 11/27/2019; Frequency M/M/M; Memo Items: Data Quality-Methodological Soundness O, LO, LO, LO; Data Quality – Accuracy and Reliability LO, O, LO, LO, LO - Central Bank Balance Sheet: Date of Latest Observation 10/31/2019; Date Received 11/26/2019; Frequency M/M/M - Consolidated Balance Sheet of the Banking System: Date of Latest Observation 09/30/2019; Date Received 11/27/2019; Frequency M/M/M - Interest Rates: Date of Latest Observation 8/31/2019; Date Received 11/20/2019; Frequency M/M/M - Consumer Price Index: Date of Latest Observation Feb. 2019; Date Received 3/29/2019; Frequency M/M/M; Memo Items: Data Quality-Methodological Soundness O, LO, LO, LO; Data Quality – Accuracy and Reliability LO, LO, LO, O, LO - Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of Latest Observation Dec. 2016; Date Received 3/8/2017; Frequency M/M/M; Memo Items: Data Quality-Methodological Soundness LO, LNO, LNO, LO; Data Quality – Accuracy and Reliability LO, LO, LO, LO - GDP/GNP: Date of Latest Observation 2018; Date Received 12/31/2019; Frequency A/A/Q; Memo Items: Data Quality-Methodological Soundness O, O, O, LO; Data Quality – Accuracy and Reliability LO, O, LO, O, LNO ### Debt sustainability assessment — key findings and scenario results - Under the updated LIC debt sustainability assessment framework: - Nicaragua’s risk of external debt distress is assessed as Moderate with limited space to absorb shocks. - Over the 10-year projection horizon, all external debt burden indicators under the baseline scenario remain below the threshold. - The present value (PV) of public and publicly guaranteed (PPG) external debt-to-GDP ratio breaches the threshold under three standardized stress scenarios: an export contraction shock, a depreciation shock and a combination of external shocks. - A contingent liability tailored shock related to external cooperation with Venezuela could also lead to breach of the PV PPG external debt-to-GDP threshold. - The overall risk of public debt distress is assessed as Moderate. - The PV of public debt-to-GDP ratio is projected to be below the threshold under the baseline scenario but is projected to surpass the threshold under most standardized stress scenarios, notably lower GDP growth, and realization of contingent liability shocks. - Strengthening both external and fiscal buffers is highly desirable. - Administrative and approval details: - Approved By Aasim M. Husain and Maria Gonzalez (IMF) and Marcelo Estevão (World Bank) - Prepared by staff of the International Monetary Fund and the World Bank. - Nicaragua: Joint Bank-Fund Debt Sustainability Analysis — Risk of external debt distress: Moderate; Overall risk of debt distress: Moderate; Granularity in the risk rating: Limited space to absorb shocks; Application of judgment: No - Date: January 30, 2020 ### Public debt coverage and background on debt - Public debt coverage: - Nicaragua’s debt statistics are reported at the consolidated public sector (CPS) level. - The public debt definition used in this DSA covers the consolidated debt of the budgetary central government, decentralized entities, the state-owned enterprises guaranteed debt, and the Central Bank of Nicaragua (CBN). - This DSA assumes delivery of expected Heavily Indebted Poor Countries (HIPC) debt relief by Non-Paris club creditors that have yet to deliver it. - Residency treatment: - The DSA is conducted on a residency basis. - Pursuant to LIC DSF Guidance Note, foreign holdings of local currency debt issued domestically are treated as external debt; in Nicaragua there are no foreign holdings of local currency debt issued domestically as in the 2017 DSA. - Background on debt dynamics: - The deterioration in the economic outlook compared to the 2017 DSA resulted in an increase in the debt trajectory. - The stock of public debt increased by 3.6 percentage points in 2018, to 47.8 percent of GDP. - Social unrest in 2018 caused a sharp contraction in real GDP that widened the fiscal primary deficit and resulted in higher debt-to-GDP ratio. - Notes and assumptions: - The CBN holds non-Paris Club official external debt which amounts to around US$350 million as of December 2018. - There is no non-guaranteed state-owned-enterprises’ (SOE) debt recorded in Nicaragua. - For 2016 the dataset includes partial data on the domestic debt of SOEs, the Municipality of Managua, and other municipalities for which debt data is available. Estimates for 2017 onwards are based on the 2016 amortization schedule and an assumption of new domestic financing by domestic suppliers. - Debt data on extra budgetary funds, non-guaranteed SOEs, and debt of all state and local governments is not available; therefore these contingent liability components are set at the LIC-DSF default values. - In the tailored shock scenarios, contingent liability shock is set as 8.6 percent of GDP in 2020. ### Public sector subsectors and default contingency settings (percent of GDP where noted) - Sub-sectors covered in the public debt definition used for analysis: - Central government: X - State and local government: (coverage noted as incomplete) - Other elements in the general government: (limited coverage) - Social security fund: X - Extra budgetary funds (EBFs): (not fully covered) - Guarantees (to other entities in the public and private sector, including to SOEs): X - Central bank (borrowed on behalf of the government): X - Non-guaranteed SOE debt: (not captured) - Default shock add-ons used where coverage is incomplete (percent of GDP): - Other elements of the general government not captured: 1.0 percent of GDP - SoE's debt (guaranteed and not guaranteed by the government): default 2.0 percent of GDP (note: 1/ The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country's public debt definition) - PPP stock (35 percent of PPP stock): 1.6 (percent of PPP stock converted to percent of GDP context provided) - Financial market (default minimum value): 5 percent of GDP - Total (2+3+4+5) (in percent of GDP): 8.6 ### Debt ownership and composition (selected figures) - About 80 percent of public debt is owed to external creditors (US$4.9 billion), of which 85 percent is owed by the Non-Financial Public Sector (NFPS), and 15 percent by the CBN. - Domestic PPG debt amounts to (figure truncated in source). *Source: IMF/World Bank staff report and statistical annex as provided in the source content.* ### 9.7 percent of GDP, of which 75 percent is owed by the NFPS. ### 9.7 percent of GDP, of which 75 percent is owed by the NFPS. ### Public and private debt structure and composition - Public sector debt: - Public sector debt: 41.7, 44.2, 47.8 (2016, 2017, 2018) percent of GDP (table context). - Public sector external debt (incl. guarantees): 32.2, 34.8, 38.1 (2016, 2017, 2018) percent of GDP. - Public sector domestic debt: 9.5, 9.4, 9.7 (2016, 2017, 2018) percent of GDP. - On maturity terms, 83 percent of public domestic debt is in medium and long term, and 17 percent is in short term. - On composition, the NFPS debt accounts for 75 percent of public domestic debt, and the CBN debt accounts for 25 percent. - Public domestic debt stood at 9.7 percent of GDP in 2018. - External public debt: - External PPG debt reached 38.1 percent of GDP in 2018. - All PPG external debt is placed in medium and long-term instruments. - About 70 percent of PPG external debt is held by multilaterals, with the largest being the Inter-American Development Bank (IaDB), followed by the Central American Bank for Economic Integration (CABEI). - IaDB funding composition: 25 percent of new funding is on a highly concessional basis and 75 percent carries a low but market-linked adjustable rate. - Private sector debt: - Private sector debt: 45.2, 43.4, 43.9 (2016, 2017, 2018) percent of GDP. - Private external debt reached 43.9 percent of GDP in 2018. - Private external debt rose by about 8 percent of GDP between 2010 and 2013 due to flows from the oil-cooperation agreement with Venezuela (debt held by private company ALBANISA). - Since 2013 private external debt declined gradually to 43.4 percent of GDP in 2017 and rebounded slightly to 43.9 percent of GDP in 2018 due to the sharp contraction in real GDP. - Debt to non-Paris Club creditors: - A large stock of debt to non-Paris Club creditors is pending debt relief under the HIPC Initiative (Decision Point and Completion Point reached in December 2000 and January 2004). - The debt stock has been adjusted downwards in this report to incorporate total expected debt relief amounts to about US$740 million as of December 2018. This debt corresponds to debt of the CBN. - All five non-Paris Club creditors have held negotiations with the authorities; negotiations incomplete due to delays in the debt-reconciliation process. ### Macroeconomic assumptions and outlook - Real GDP and growth: - Real GDP contracted by -3.8 percent in 2018 and is projected to decline by -5.7 percent in 2019. - Long term growth is estimated to have declined to 3 percent from a previous level of 4.5 percent (estimated in mid-2017). - Growth projections over medium and long term: gradual increase to 1.7 percent over the medium term and further to 3 percent over the long term. - Long-term growth projection is based on a neoclassical production function with labor share of 72 percent, assuming growth rates: labor 1.3 percent, capital 1.8 percent, and TFP growth of zero percent. - Inflation and exchange rate: - Inflation—GDP deflator in US dollar terms—subdued to around -1.5 percent in 2018 and assumed to remain between 0.5 and 1.4 percent over the medium term and recover to 2.3 percent over the long term. - Baseline assumes maintenance of the current crawling peg exchange rate regime. - Selected macro projections (table excerpts, percent or levels preserved exactly where given): - GDP growth: 4.7, -3.8, -5.7, -1.2, 0.0, 0.8, 1.4, 1.7 (2017, 2018, 2019, 2020, 2021, 2022, 2023, 2024). - Consumer price inflation (e.o.p.): 5.7, 3.9, 6.4, 5.0, 4.4, 3.9, 3.5, 3.6 (2017–2024). - Non-financial public sector revenue: 29.2, 27.6, 30.6, 30.0, 30.3, 30.4, 30.4, 30.4 (2017–2024). - Non-financial public sector expenditure: 31.4, 31.7, 32.7, 32.5, 33.4, 33.6, 33.7, 33.5 (2017–2024). - Overall balance, after grants: -2.2, -4.1, -2.0, -2.6, -3.1, -3.2, -3.3, -3.1 (2017–2024). - Public sector debt: 44.2, 47.8, 51.0, 52.5, 55.0, 57.8, 60.9, 63.7 (2017–2024). - Current account (% of GDP): -4.9, 0.6, 1.5, 1.1, 0.8, 0.3, 0.0, -0.5 (2017–2024). - Gross reserves (US$ million): 2,593, 2,080, 2,071, 2,016, 2,047, 2,108, 2,161, 2,272 (2017–2024). - In months of non-maquila imports: 5.3, 4.8, 4.9, 4.8, 4.7, 4.8, 4.7, 4.7 (2017–2024). - NIR (US$ million): 1,802, 1,146, 1,321, 1,377, 1,450, 1,539, 1,620, 1,722 (2017–2024). ### External position, financing, and risks - External position: - External financing projected to remain below historical levels. - Current account in surplus until 2023; external financing more than required to finance the small current account deficit in 2024. - Economic contraction resulted in a current account surplus in 2018 and 2019 (from a deficit of 4.9 percent of GDP in 2017), due to import compression, sharp contraction in tourism receipts, and steady remittances. - Over the medium term current account projected to deteriorate gradually to -0.5 percent of GDP due to recovery of non-maquila imports. - Capital flows: - FDI inflows contracted to 2.2 percent of GDP in 2018 and projected at 2.5 percent of GDP in 2019; projected to increase slightly to 2.8 percent of GDP over the medium term. - Gross external borrowing by the public sector declined to 1.9 percent of GDP in 2018 and is assumed to stay low at 2.4 percent of GDP in 2019. Over the medium term gross external borrowing assumed subdued at 2.0–2 .3 percent of GDP (text contains spacing error retained). - Constraints and sanctions: - International sanctions enacted in 2018–2019 have limited the amount of new multilateral external financing available. - Baseline projects new external financing share about 51 percent over the medium term but declining to about 36 percent over the long term. - Concessional financing projected to account for about 14 percent of total financing over the medium term and 11 percent over the long term. - Possibility authorities could access non-concessional financing sources under current conditions. ### Fiscal developments, reforms, and financing mix - Fiscal changes and reforms: - Fiscal primary deficit widened in 2018; fiscal policy reform package implemented in March 2019 projected to yield about 4.2 percentage points of GDP. - Tax package details (projected yields, percent of GDP): Tax Policy Mar-2019 total 2.7 with components: Increased min. corporate income tax From 1% to either 2% or 3% of gross sales — 1.5; Eliminated VAT exemptions on selected consumption goods — 0.4; Increased excises — 0.8 (table excerpts preserved). - Pension Reform Mar-2019 total 1.5 (components include increased pension contributions by employers and employees; increased gov. health contrib. By 1.5 ppts.; reduced replacement rate to 70% from 80%; other measures listed). - Financing: - Net external financing of the NFPS declined by 1.3 percentage points of GDP in 2018 (to 1.9 percent of GDP) but projected to improve to 2.4 percent of GDP in 2019 (driven by an increase in financing from CABEI). - Staff projects a gradual deterioration of the fiscal position over 2020-24 driven by: - A projected decline in tax revenues in 2020 due to the economic contraction and weaker corporate profits; modest revenue increase projected for 2021-24. - Higher expenditures to finance persistent deficits of the Nicaraguan Institute of Social Security (INSS), assumed to receive less contributions because of modest growth in formal employment. - Authorities’ commitment to maintain fiscal prudence implies a reduction in expenditures over 2025-27 equivalent to about 2 percentage points cumulative over three years (assumed to take the form of reduced current expenditures). ### Debt sustainability, stress tests, and scenarios - Country classification: - Composite Indicator (CI) rating: 2.94, assessed as medium (unchanged from the 2017 DSA). - 2018 CPIA score: 3.5 (lowered from 2017), contributes substantially to the CI score. - Indicative thresholds for medium category: PV of debt-to-GDP ratio 40 percent; PV of debt-to-exports ratio 180 percent; debt service-to-exports ratio 15 percent; debt service-to-revenue ratio 18 percent. Benchmark for PV of total public debt under medium capacity: 55 percent. - Baseline sustainability outcomes: - PPG external debt expected to increase gradually to 47 percent of GDP over the medium term and be stable over the long term to around 40.4 percent of GDP in 2039. - PV of PPG external debt will rise from 27 percent to 34 percent of GDP over the 10-year projection term and remain under the threshold of 40 percent. - Other indicators: PV of external debt-to-exports from 67 percent; debt service-to-exports and debt service-to-revenue from 5 percent and 7 percent, respectively (figure context). - In the baseline public debt projected to increase to 59.2 percent of GDP by 2039. - Domestic public debt projected to decline in 2019 as legacy debt is paid down, then rise due to issuance to cover pension and healthcare obligations of INSS; domestic public debt projected to increase by 19 percent of GDP over the long run. - Under the baseline there is no breach of the PV of public debt benchmark of 55 percent of GDP while PV of public debt is gradually approaching the benchmark. - PV of debt-to-revenues and debt service-to-revenue projected to reach 165 percent and 19 percent, respectively. - Stress tests and scenario findings: - Three standardized stress scenarios exhibit a continuous breach of the threshold for PV of external PPG debt-to-GDP ratio: one-time decline in exports (baseline minus one standard deviation), depreciation, or a combination of external shocks in 2019. - Tailored scenarios: contingent liability and natural disaster shocks cause breaches (contingent liability and natural disaster shock scenarios show breach per footnote). - ALBANISA contingent liability scenario: assumes absorption of private debt to Venezuela by end-2021 equivalent to increase in public debt of 22.2 percentage points of GDP (US$2.5 billion), with 50 percent financed externally and 50 percent domestically. Under this scenario PV of external PPG debt-to-GDP ratio increased from 29 percent in 2020 to 38 percent in 2021, marginally breaching the PV external public debt threshold over the medium term. - Standardized shocks and tailored shocks relevant given contraction in FDI, continued decline in exports, and higher capital outflows. ### Key statistics and projections (selected exact figures) - Public domestic debt: 9.7 percent of GDP in 2018. - Composition of public domestic debt: NFPS 75 percent; CBN 25 percent. - Public sector external debt (incl. guarantees) in 2018: 38.1 percent of GDP. - External PPG debt in 2018: 38.1 percent of GDP. - External PPG debt holders: about 70 percent multilaterals. - Expected debt relief to non-Paris Club creditors (adjusted in report): about US$740 million as of December 2018. - Private external debt in 2018: 43.9 percent of GDP. - Real GDP growth: -3.8 percent in 2018; -5.7 percent projected in 2019. - Long-term growth estimate: 3 percent. - Projected medium-term GDP growth recovery: 1.7 percent. - Inflation (GDP deflator, US$ terms): -1.5 percent in 2018; 0.5–1.4 percent over medium term; 2.3 percent long term. - Gross external borrowing by public sector: 1.9 percent of GDP in 2018; 2.4 percent projected in 2019; assumed 2.0–2 .3 percent of GDP over medium term. - Net external financing of NFPS: declined by 1.3 percentage points of GDP in 2018 to 1.9 percent of GDP; projected 2.4 percent of GDP in 2019. - Fiscal reform yield: about 4.2 percentage points of GDP (tax and pension reforms). - Projected public debt by 2039: 59.2 percent of GDP. - Projected PV of PPG external debt: from 27 percent to 34 percent of GDP over 10-year projection. - PV of public debt benchmark (medium capacity): 55 percent of GDP. - CI score: 2.94. *Source: Nicaragua DSA material in the provided IMF chapter/section PDF.* ### 18. The standardized shock scenarios demonstrate the sensitivity of public debt to shocks in real ### 1nicea2020001 - 18. The standardized shock scenarios demonstrate the sensitivity of public debt to shocks in real ### Standardized shock scenarios and public debt sensitivity - The standardized shock scenarios demonstrate the sensitivity of public debt to shocks in real GDP growth (Table 4 and Figure 2). - Threshold breaches occur under most standardized shock scenarios. - The shock scenario with largest impact on debt-to-GDP ratios by 2029 is a contraction of GDP by 4.9 and 3.7 percent in 2020 and 2021, respectively (Table 4). - The primary balance scenario demonstrates that the public debt path is sensitive to possible deviations from the baseline assumptions. ### ALBANISA contingent liability scenario - The ALBANISA contingent liability scenario described in the discussion of external debt is also applied to the public DSA. - An absorption of ALBANISA’s debt to Venezuela would increase the public debt-to-GDP ratio from 52.8 percent in 2020 to 76.1 percent in 2021 and breach the PV public debt benchmark over the medium term. ### Risk rating and vulnerabilities - Nicaragua remains at a moderate risk of external debt distress with limited space to absorb shocks (no judgement was applied). - Under the baseline scenario, all external debt burden indicators remain below the threshold over the 10-year projection horizon. - Under the stress scenario of export shocks, the PV of PPG external debt-to-GDP ratio threshold is breached continuously over the projection horizon. - Under the ALBANISA contingent liability scenario, the PV of PPG external debt-to-GDP ratio threshold is breached marginally. - These results highlight the vulnerability of external PPG debt to: - external shocks, - contingent liability risk of the private debt from Venezuela, - and call for the need to strengthen external buffers. - Public debt is also assessed to be at a moderate risk of debt distress. - Under the baseline, PV of public debt-to-GDP ratio is projected to remain below the threshold over the 10-year projection horizon. - Under the stress scenario of growth shocks in 2020–21—in addition to projected GDP contraction of 5.7 percent in 2019 in the baseline—the PV of public debt-to-GDP ratio is projected to be on an upward trajectory and above the threshold over the projection horizon. - Under the ALBANISA contingent liability scenario, the PV of public debt-to-GDP ratio is projected to be above the threshold over the projection horizon. ### Authorities’ views - The authorities broadly agreed with the debt sustainability analysis and the assessment. - On external debt, the authorities agreed that external debt is vulnerable to external shocks and contingent liability shocks. - On public debt, the authorities project lower domestic debt accumulation over the long term, but concurred on the vulnerability of public debt to: - growth shocks, and - contingent liability shocks. - The authorities are of the view that strengthening both external and fiscal buffers is desirable over the long term. *Source: IMF staff calculations and national authorities as presented in the content unit.* ### 2.5 percentage points of GDP in ### 1nicea2020001 - 2.5 percentage points of GDP in ### Key fiscal and external debt indicators (historical and projected) - External debt (nominal) 2016–39 (in percent of GDP): 77.5, 78.1, 81.9, 86.5, 88.1, 88.3, 88.2, 88.0, 87.6, 77.5, 57.7, 55.2, 85.3 - Public and publicly guaranteed (PPG) external debt (in percent of GDP): 32.2, 34.8, 38.1, 41.8, 43.1, 44.3, 45.2, 46.1, 47.0, 45.8, 40.4, 33.3, 45.6 - Change in external debt (in percent of GDP): 0.8, 0.6, 3.8, 4.5, 1.6, 0.2, -0.1, -0.2, -0.4, -2.5, -1.9 - Identified net debt-creating flows (in percent of GDP): -2.8, -3.4, 1.5, 0.9, -2.7, -3.5, -3.7, -3.9, -3.8, -3.8, -1.6, -1.3, -3.3 - Non-interest current account deficit (in percent of GDP): 4.8, 2.9, -2.8, -4.3, -4.4, -3.6, -4.2, -4.0, -3.4, -1.8, 1.0, 6.1, -3.2 - Net current transfers (negative = inflow, in percent of GDP): -12.1, -11.3, -12.3, -13.4, -10.8, -9.7, -10.3, -10.7, -11.2, -11.5, -11.5, -12.4, -11.4 - Net FDI (negative = inflow, in percent of GDP): -6.3, -5.1, -2.2, -2.6, -2.6, -2.7, -2.7, -2.8, -2.8, -3.0, -3.3, -6.1, -2.8 - Endogenous debt dynamics (in percent of GDP): -1.3, -1.1, 6.5, 7.8, 4.3, 2.9, 3.2, 2.9, 2.3, 1.0, 0.7 - Contribution from nominal interest rate (in percent of GDP): 1.7, 2.0, 2.1, 2.8, 3.3, 2.9, 3.9, 4.0, 3.8, 3.3, 2.4 - Contribution from real GDP growth (in percent of GDP): -3.4, -3.5, 3.1, 5.0, 1.0, 0.0, -0.7, -1.2, -1.5, -2.2, -1.7 - Residual (includes exceptional financing and valuation adjustments, in percent of GDP): 3.6, 4.0, 2.3, 3.6, 4.3, 3.7, 3.6, 3.8, 3.4, 1.2, -0.2, 4.1, 2.9 - Gross external financing need (Million of U.S. dollars): 1,175.8; 1,439.9; 1,036.7; 889.7; 841.2; 973.1; 1,038.6; 1,065.3; 1,090.4; 1,200.2; 1,717.1 ### Projections and key macroeconomic assumptions - Real GDP growth (in percent): 4.6, 4.7, -3.8, -5.7, -1.2, 0.0, 0.8, 1.4, 1.7, 2.9, 3.0, 3.4, 0.9 - GDP deflator in US dollar terms (change in percent): -0.4, -0.5, -1.5, 0.5, 1.1, 1.4, 0.8, 0.5, 0.5, 2.3, 2.3, 1.1, 1.2 - Effective interest rate (percent): 2.4, 2.7, 2.6, 3.2, 3.8, 3.3, 4.5, 4.7, 4.5, 4.3, 4.2, 2.5, 4.1 - Growth of exports of G&S (US dollar terms, in percent): 1.0, 10.3, -3.3, -8.4, 6.8, 3.0, 2.9, 3.3, 3.9, 4.2, 4.7, 7.0, 3.2 - Growth of imports of G&S (US dollar terms, in percent): -1.8, 3.9, -11.2, -10.9, -0.3, 0.8, 2.3, 3.0, 3.5, 4.6, 4.5, 3.1, 1.8 - Grant element of new public sector borrowing (in percent): 23.9, 25.3, 22.9, 23.9, 21.8, 24.9, 24.6, 20.8, ...24.1 - Government revenues (excluding grants, in percent of GDP): 27.8, 28.2, 27.4, 30.6, 29.7, 29.8, 29.9, 29.9, 30.0, 29.7, 29.7, 25.8, 29.9 - Aid flows (in Million of US dollars): 124.1, 142.7, 79.4, 186.2, 188.7, 212.4, 220.8, 217.1, 247.4, 310.0, 469.5 - Grant-equivalent financing (in percent of GDP): .........1.4, 1.4, 1.6, 1.6, 1.6, 1.7, 1.7, 1.6, ...1.6 - Nominal GDP (Million of US dollars): 13,286; 13,844; 13,118; 12,431; 12,416; 12,587; 12,793; 13,027; 13,326; 16,423; 27,588 - Nominal dollar GDP growth (in percent): 4.1, 4.2, -5.2, -5.2, -0.1, 1.4, 1.6, 1.8, 2.3, 5.3, 5.3, 4.5, 2.1 ### Sustainability indicators and thresholds (selected) - PV of PPG external debt-to-GDP ratio (projections, in percent): 24.3, 27.4, 29.0, 30.4, 31.6, 32.7, 33.7, 34.3, 32.4 - PV of PPG external debt-to-exports ratio (projections, in percent): 57.8, 67.4, 66.8, 68.9, 70.9, 72.2, 73.2, 73.2, 73.9 - PPG debt service-to-exports ratio (projections, in percent): 14.0, 14.5, 1.7, 5.1, 4.9, 5.0, 5.3, 5.8, 5.5, 6.0, 7.3 - PPG debt service-to-revenue ratio (projections, in percent): 19.6, 21.2, 2.5, 6.7, 7.2, 7.4, 7.9, 8.8, 8.4, 9.4, 10.8 - PV of external debt (memorandum, in percent of GDP): ......68.1, 72.0, 73.9, 74.4, 74.6, 74.6, 74.3, 66.0, 49.7 - PV of external debt (in percent of exports, memorandum): ......162.2, 177.3, 170.4, 168.7, 167.1, 164.7, 161.5, 140.9, 113.5 - Total external debt service-to-exports ratio (memorandum, in percent): 26.5, 30.7, 30.5, 34.7, 31.9, 31.9, 33.8, 33.0, 31.2, 25.9, 19.5 - PV of PPG external debt (in Million of US dollars, memorandum): 3,186.7; 3,400.2; 3,598.9; 3,827.4; 4,047.7; 4,261.4; 4,484.3; 5,634.7; 8,934.8; 9,34.8 (note: table lists many values) ### Public sector debt and fiscal dynamics (baseline) - Public sector debt (in percent of GDP): 41.7, 44.2, 47.8, 51.0, 52.4, 54.9, 57.7, 60.8, 63.6, 63.7, 59.2, 43.7, 60.4 - Change in public sector debt (in percent of GDP): 1.0, 2.5, 3.6, 3.2, 1.4, 2.6, 2.8, 3.1, 2.8, -0.7, -0.4 - Identified debt-creating flows (in percent of GDP): 0.4, 0.1, 3.6, 3.9, 1.1, 2.9, 3.3, 2.9, 2.7, -2.0, -2.0, -0.7, 1.0 - Primary deficit (in percent of GDP): 1.3, 1.0, 2.5, 0.2, 1.2, 1.8, 1.9, 1.8, 1.6, -0.5, -0.7, 0.7, 0.7 - Revenue and grants (in percent of GDP): 28.7, 29.2, 28.0, 31.2, 30.3, 30.6, 30.7, 30.7, 30.8, 30.6, 30.5, 27.4, 30.7 - Primary (noninterest) expenditure (in percent of GDP): 30.0, 30.2, 30.6, 31.4, 31.5, 32.4, 32.6, 32.6, 32.4, 30.0, 29.8, 28.0, 31.4 - Automatic debt dynamics (in percent of GDP): -0.9, -0.9, 3.4, 3.4, 0.6, 0.2, 0.2, 0.4, 0.2, -1.5, -1.3 - Contribution from interest rate/growth differential (in percent of GDP): -1.5, -1.5, 2.0, 3.0, 0.7, 0.0, -0.4, -0.5, -0.7, -1.3, -1.1 - Contribution from average real interest rate (in percent of GDP): 0.2, 0.4, 0.2, 0.1, 0.1, 0.0, 0.0, 0.3, 0.3, 0.5, 0.6 - Contribution from real GDP growth (in percent of GDP): -1.8, -1.9, 1.8, 2.9, 0.6, 0.0, -0.4, -0.8, -1.0, -1.8, -1.7 - PV of public debt-to-GDP ratio (projections, in percent): ......34.6, 37.2, 38.7, 41.5, 44.6, 47.9, 50.7, 52.4, 51.4 - PV of public debt-to-revenue and grants ratio (projections, in percent): ......123.5, 119.1, 127.5, 135.5, 145.3, 155.7, 164.7, 171.6, 168.1 - Debt service-to-revenue and grants ratio (projections, in percent): 6.8, 9.7, 8.2, 14.5, 14.4, 14.6, 15.9, 18.2, 19.0, 30.8, 21.7 - Gross financing need (in percent of GDP): 3.3, 3.8, 4.9, 4.8, 5.5, 7.2, 8.1, 8.1, 8.4, 8.9, 5.9 ### Sensitivity and stress tests (selected outcomes) - External DSA tail and bound tests indicate multiple scenarios with projected indicator values and thresholds; bold values in tables indicate breaches of thresholds (table 3 and table 4 show full scenario matrices). - Public debt projections under alternative scenarios (selected entries from Table 4): - Baseline PV of Debt-to-Revenue Ratio and Debt Service-to-Revenue Ratio examples: baseline values shown (e.g., PV of Debt-to-Revenue Ratio: 119, 128, 136, 145, 156, 165, 171, 173, 173, 172, 172 across projection years). - Under scenario A1 (historical averages) and A2 (ALBA debt contingent liability), PV and debt service ratios increase substantially in some years (A2 example entries: 119, 129, 205, 213, 223, 230, 236, 237, 237, 236, 236). - Bound test B1 (Real GDP growth shock) and tailored tests C1–C3 (combined contingent liabilities, natural disaster, commodity price) produce elevated debt and PV measures, with several years shown exceeding public debt benchmarks (benchmarks: 55 for public debt, 15 for debt service-to-revenue ratio, 18 for PV of Debt-to-GDP Ratio in table headers). - Debt service-to-exports, debt service-to-revenue, PV of debt-to-exports, and PV of debt-to-GDP ratios are tracked across 2019–2029 with thresholds (40 for several external thresholds, 180 for some external measures, and internal public benchmarks of 55 and 15). ### Observations from the DSA presentation - Multiple indicators show elevated vulnerability under adverse scenarios: PV of external debt relative to exports and PPG debt service ratios display large increases under some stress cases (see A2 and tailored tests). - Baseline projections show a declining trend in some external debt measures over the near term (e.g., change in external debt turning negative toward projections) but persistent high gross external financing needs in dollar terms (e.g., 1,200.2; 1,717.1 Million of U.S. dollars in projection years). - Fiscal dynamics reflect persistent primary deficits in historical years and modest deficits in projections, with automatic debt dynamics and residuals contributing materially to debt paths. *Sources: National authorities and IMF staff calculations.* ### 1. Headline inflation reached 6 percent (year-on-year) in December 2019. ### 1. Headline inflation reached 6 percent (year-on-year) in December 2019. ### Inflation developments - Headline inflation reached 6 percent (year-on-year) in December 2019. - Consumer Price Index picked up during the last quarter of 2019, reflecting upward adjustments in energy prices. - Headline inflation closed 2019 at 6.1 percent (noted elsewhere in the text as slightly higher than the previous year but slightly lower than anticipated). - To further anchor inflation, in November 2019 the BCN reduced the pace of the exchange rate crawl from 5 percent to 3 percent per year. - The tax reform of March 2019 widened the coverage of products subject to VAT. ### Monetary aggregates and external reserves - Net international reserves reached US$1.4 billion (US$229 million annual increase) in December 2019. - This corresponded to a gross international reserve coverage of 5.2 months of non-maquila imports. - The accumulation of reserves reflected higher external disbursements and lower pressures in the FX market. - Monetary base and broad money increased by 21 and 4 percent, respectively (compared with - 20 and -19 percent in 2018). - BCN foreign exchange interventions amounted to USD 920 million between May 2018 and March 2019. - Gross International Reserves (GIR) recovered from a post-shock low of USD 2,090 million to reach USD 2,430 million as of February 1st, 2020 (coverage of 6.3 months of non-maquila imports). ### Banking sector, credit, and liquidity measures - Bank credit to the private sector contracted by 18 percent annually during 2019 (from US$4.3 billion in December 2018 to US$3.5 billion in December 2019), but the rate of contraction has significantly diminished since last September. - Bank deposits dropped by nearly a third from March 2018 to June 2019. - Credit contracted by 9 percent and 15 percent in 2018 and 2019, respectively. - By the beginning of 2019, bank outflows had decelerated and by mid-year deposit flows turned positive; the increase in NPLs appeared to be contained. - The BCN reduced bank reserve requirements, introduced repos, increased interest rates to reduce outflows, provided direct liquidity at various stages, and activated a precautionary liquidity line from CABEI. - In December, the central bank reduced the reference rate by 50 bps to 4.75 percent. - The banking system remains well capitalized and liquid; capitalization and liquidity ratios have remained significantly higher than regional levels. - SIBOIF strengthened supervision, promoted increased loan-loss provisions, excluded further regulatory forbearance concerning loan-loss provisioning, and welcomed staff advice on the banks’ resolution framework and financial safety net. ### Fiscal policy, budget, and public spending - The proposed budget for 2020 was approved by the National Assembly in December 2019 with no revisions. - In response to the shock and absence of external financing, the authorities adopted a tax package and proceeded with a parametric reform of the social security system (INSS), both effective in February 2019. - The authorities curtailed expenditures—including freezing wages through 2019—and streamlined energy subsidies while safeguarding the social safety net and preserving investment. - Public spending continued to support improvements in health, education, road infrastructure, and access to water and electricity. - Access to electricity has reached 92 percent of the population (from 56 percent in 2006) and geographical coverage is now at 97 percent. - Education enrollment in 2020 is at a historic high. - Staff recommendations welcomed by authorities included improving financial accounting management of SOEs and municipalities and establishing a fiscal risk unit to reinforce the budget framework. ### Labor, wages, and living standards - Minimum wages raised by 2.6 percent starting on March 1, 2020. - Free-zone industrial sector wages increased by 8.2 percent in January 2020 via a separate process. - The wage increase is estimated to reach at least one-hundred-thousand workers (about 14 percent of total formal employment) for which minimum wages are binding. - With projected inflation of 4 percent for 2020, minimum wages in real-terms are expected to fall for a second consecutive year. ### Economic activity, outlook, and key macro indicators - The Nicaraguan economy’s average growth rate between 2010-2017 reached 5.1 percent. - Real GDP contracted by 3.8 percent in 2018 and in 2019 the contraction deepened to an estimated 4½ percent (authorities estimated GDP contracted by 4.5 percent in 2019). - The socio-political unrest began mid-April 2018 and economic activity reached its trough in June 2018; activity has since stabilized but remains significantly below pre-crisis levels. - Exports in 2019 increased by 5.6 percent. - Unemployment descended from a post-shock peak of 6.2 percent to 5.4 percent by the third quarter of 2019. - Current account rebalanced from a deficit of 4.9 percent of GDP in 2017 to a surplus of 0.6 percent of GDP in 2018. - The authorities project growth to move towards positive territory by the end of 2020 and project a 1.6 percent expansion by 2021. - Signs of improved confidence include recovery of international reserves and bank deposits, rebalancing of the current account, normalization of credit activity—particularly to the export sector—and resumption of some mortgage financing. ### Authorities’ response and policy recommendations - The authorities thanked IMF staff for advice and indicated a commitment to restore growth under challenging circumstances. - Authorities maintained fiscal discipline while preserving social spending and investment. - BCN measures aimed at preserving liquidity and stabilizing the exchange rate and international reserves were highlighted as decisive. - Authorities welcomed staff advice on overcoming expenditure rigidities in the 2020 budget, medium-term fiscal sustainability, fiscal transparency, improving SOE and municipal financial accounting, and establishing a fiscal risk unit. - Authorities noted limited access to external financing remains a constraint on recovery and the ability to protect the social safety net. - Authorities welcomed discussions and advice on competitiveness, governance, and AML/CFT framework; legal upgrades were made and the UAF remains committed to addressing issues of concern. - The Financial Stability Committee was created in 2018 to facilitate coordination of financial policy and monitoring of the financial system. - The authorities remain committed to coherent macroeconomic and development policies and to continued engagement with the Fund for policy advice and capacity building. *Source: 1nicea2020001 - 1. Headline inflation reached 6 percent (year-on-year) in December 2019.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1nicea2020001.pdf_