## 1nicea2020002

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---

### Executive summary
- Request for Fund support: Total equivalent to 50 percent of quota (SDR 130 million or about US$183 million).
  - Rapid Financing Instrument (RFI): SDR 86.67 million, 33.33 percent of quota.
  - Rapid Credit Facility (RCF): SDR 43.33 million, 16.67 percent of quota.
- Assessment: Emergency support appropriate to address urgent balance of payments needs; Nicaragua assessed to have sustainable debt and adequate capacity to repay the Fund.
- Policy priorities:
  - Strengthen health system; support most affected and vulnerable populations.
  - Preserve fiscal sustainability and rebuild buffers once shock subsides.
  - Maintain accommodative monetary policy and safeguard financial stability.
  - Undertake medium-term structural reforms including governance, transparency, and anti-corruption measures.
- Timing: Discussions took place virtually during July 30–October 16, 2020; Executive Summary dated November 6, 2020.

### Context, recent developments, and outlook
- Macroeconomic contraction and outlook:
  - Real GDP growth preliminarily estimated to fall to -5.5 percent in 2020; cumulative decline of about 14 percent since 2017.
  - Gradual recovery begins in 2021 if pandemic fades; reaching pre-COVID-19 levels will be protracted.
- Sectoral assumptions and projected reductions relative to 2019:
  - Tourism: decline of 65 percent.
  - Remittances: fall by 20 percent.
  - Maquila exports: fall by 22 percent.
  - Net FDI: reduced by 75 percent.
- Financial sector vulnerabilities:
  - Sharp contraction in bank credit since April 2018; weak recovery in deposits and credit halted.
  - Banks vulnerable to deposit outflows and new flows of distressed loans.
  - High degree of dollarization could amplify shock.

### Fiscal impact, measures, and financing needs
- Fiscal measures announced: about 1.6 percent of GDP total (health care 1.3 percent of GDP; targeted social assistance 0.3 percent of GDP).
- Overall fiscal impact estimated to widen the fiscal deficit by 3.5 percent of GDP in 2020.
- IMF support would cover around 46 percent of preliminary estimated large fiscal financing needs; remaining financing from other IFIs and domestic financing.
- Fiscal accounts (percent of GDP, Pre-COVID → Post-COVID; Δ):
  - Revenues: 30.3 → 29.2; Δ -1.2.
    - Taxes: 17.6 → 17.5; Δ -0.1.
    - Payroll contrib.: 6.6 → 6.6; Δ -0.1.
    - Grants: 0.6 → 0.5; Δ -0.1.
    - Other: 5.5 → 4.6; Δ -0.9.
  - Expenditure: 33.1 → 35.4; Δ 2.4.
    - Current primary: 25.3 → 27.0; Δ 1.7.
    - INSS: 0.8 → 1.6; Δ 0.8.
    - Interest payments: 1.6 → 1.6; Δ 0.0.
    - Capital and net lending: 6.2 → 6.9; Δ 0.7.
  - Overall balance: -2.7 → -6.2; Δ -3.5.
  - In U.S. dollars (millions): Pre-COVID -340 → Post-COVID -740; Δ -401.
- Fiscal policy response composition (2020, Cordobas / percent of GDP / US$ million):
  - Total Expenditure: 9,005 Cordobas; 2.2 percent of GDP; US$ 259.1 million.
  - Health spending: 5,181 Cordobas; 1.3 percent of GDP; US$ 149.0 million.
  - Support to food production: 2/637 Cordobas; 0.2 percent of GDP; US$ 18.3 million.
  - Water deferred payments: 3/400 Cordobas; 0.1 percent of GDP; US$ 11.5 million.
  - INSS (historical debt): 2,086 Cordobas; 0.5 percent of GDP; US$ 60.0 million.
  - External debt amortization (IDB and CABEI): 702 Cordobas; 0.2 percent of GDP; US$ 20.2 million.
- Notes:
  - Health spending includes pharmaceutical costs, medical supplies and equipment, management of infectious materials and personal protective equipment.
  - Support to food production implemented with support of the World Food Programme.
  - Water benefits targeted to approximately 662,745 water users.

### Balance of payments and financing scenario
- BOP impacts (millions of U.S. dollars, Pre-COVID → Post-COVID; Δ):
  - Current account: 140 → 63; Δ -77.
  - Trade f.o.b.: -793 → -870; Δ -77.
    - Exports: 3,531 → 3,206; Δ -325.
    - Imports (non-maquila): 4,324 → 4,076; Δ -247.
  - Non-trade: 933 → 933; Δ 1.
    - Tourism: 393 → 181; Δ -212.
    - Remittances: 1,677 → 1,344; Δ -334.
  - Foreign direct investment: 327 → 119; Δ -207.
  - Portfolio investment: -3 → -30.
  - Other (includes capital account): -512 → -511; Δ 1.
  - BOP Financing gap: -48 → -332; Δ -284 (In percent of GDP: -0.4 → -2.8; Δ -2.4).
  - Potential financing: 48 → 332; Δ 284.
    - Potential IMF (RCF/RFI) net use of IMF resources: -7 → 17; Δ 83.
    - Other IFIs: ... → 79; Δ 79.
  - Change in reserves (increase, -): 557 → 621.
- Preliminary estimate: large BOP gap implies sizable decrease in international reserves absent additional international financial support.

### UNOPS and WFP assistance: programs, scope, and targeting
- UNOPS:
  - Duration: six months.
  - Target population: approximately 1.5 million people (stated elsewhere as "More than 1.5 million people (about 23 percent of total population) considered the most vulnerable population").
  - Planned share of RCF/RFI: 40 percent of RCF/RFI, SDR 52 million.
  - Activities: purchase of medicines, lab tests, personal protective equipment, disinfectant and antiseptic solutions; extend medical coverage for most affected areas and priority groups.
- WFP:
  - Target households: 24,640 households (table entry shows "24,260 farmers nationwide"; source contains both figures).
  - Gender targeting: about 40 percent of the package directed to female producers.
  - Planned share of RCF/RFI: 10 percent of RCF/RFI, SDR 13 million.
- Some measures contingent on receiving IMF support.

### Fiscal transparency, SOEs, and anti-corruption measures
- Transparency actions:
  - Ministry of Finance began publishing details of all COVID-19 related spending and all public procurement contracts; monthly details posted since June 2020.
  - Regulations enacted for online publication (within one week of contracting) of all public procurement contracts; publication started and covers operations since September 25, 2020.
  - Published financial statements of five largest SOEs (ENATREL, ENEL, PETRONIC, EPN, ENACAL) covering 2015–19.
- SOE metrics:
  - Combined assets of these companies: about 22 percent of GDP.
  - Average profitability ratios: consistently declining since 2015.
  - IMF SOE Health Check: liquidity and solvency ratios flagged at high risk levels.
- Independent audit:
  - Terms of reference formulated (prior action) for hiring an independent external auditor for all COVID-19 related expenditures.
  - Audit to be conducted within a year of approval of the RCF/RFI disbursement and to cover funds channeled through third parties.
  - Audit results to be published within two weeks of finalization.
- AML/CFT:
  - Nicaragua included in FATF “Jurisdictions under Increased Monitoring” in February 2020.
  - Authorities committed to an AML/CFT action plan with partial progress by early 2021 and full implementation by May 2021 (FATF deadlines may be impacted by COVID-19).

### Monetary and financial sector measures and recommendations
- Central Bank of Nicaragua (CBN) actions:
  - Activated a Risk Committee (CBN, SIBOIF, ASOBAN) to ensure business continuity and liquidity.
  - Reduced reference interest rates by 250 basis points since March 2020.
  - June plan allowing reserve requirement reduction: until June 30, 2022 banks may reduce required reserves in local currency to as low as 4.5 percent (from 15 percent) contingent on private banks expanding credit.
- SIBOIF temporary regulation (June 2020):
  - Effective until December 2020; allows forbearance on loan-loss provisions for loans granted before March 31, 2020.
  - Authorities committed not to extend regulation beyond December 2020 and to publicly disclose quarterly the stock of loans covered.
- Staff recommendations:
  - Ensure adequate valuation of assets and collateral; proper loan classification and timely provisioning.
  - Credit restructuring and forbearance: transparent, time-limited, targeted to solvent borrowers with viable prospects.
  - Consider macroprudential tools to preserve financial stability.
  - Expedite enhancement of insolvency and foreclosure framework.
  - Strengthen contingency planning and coordination for resolution activities.

### Fiscal stance, consolidation needs, and contingency planning
- Authorities’ commitments:
  - Unwind temporary pandemic-related fiscal measures after shock dissipates.
  - Rebuild fiscal buffers (government deposits) and ensure fiscal sustainability over the medium term.
  - Safeguard spending on critical social programs and strengthen social safety net.
  - Have not officially requested debt service suspension under the G20 bilateral debt moratorium initiative (which would suspend debt service payments of US$10.8 million).
- Staff assessment:
  - Contingency plan recommended to secure resources to protect priority spending.
  - Preliminary baseline estimates point to need for permanent fiscal consolidation measures of at least 3 percent of GDP over 2021–23.
  - Baseline assumes multi-year fiscal consolidation and unwinding temporary COVID-19 programs.
  - Reduction in fiscal deficit during 2021–23 equals 3.6 percent of GDP per baseline.

### Debt sustainability, access, and modalities of IMF support
- Debt sustainability assessment:
  - Risks of external debt distress: Moderate.
  - Overall risk of public debt distress: Moderate.
  - Under baseline, external debt burden indicators remain below thresholds; PV of public debt-to-GDP below threshold under baseline but surpasses threshold under most standardized stress scenarios.
- Requested emergency financing:
  - Aggregate: 50 percent of quota (SDR 130 million or about US$183 million).
  - Allocation: SDR 43.33 million (16.67 percent of quota) under RCF exogenous shock window; SDR 86.67 million (33.33 percent of quota) under RFI.
  - Represents about 1.5 percent of GDP.
- Other gross public external financing in 2020: US$562 million (US$443 million ongoing projects with international institutions; US$40 million bilateral ongoing projects; US$79 million new disbursements in response to COVID-19 — IDB: US$54 million; World Bank: US$13.1 million; CABEI: US$11.7 million).
- Capacity to repay:
  - No external sovereign arrears; current in servicing outstanding IMF obligations amounting to SDR 4.06 million (1.56 percent of quota).
  - Including proposed RFI and RCF, 2024 projected Fund obligations peak at 2.2 percent of gross international reserves and 1.1 percent of exports of goods and services (compared with averages of 3.7 percent of reserves and 2.3 percent of exports for five blending emergency assistance arrangements for COVID-19 approved as of May 2020).
  - Staff concludes proposed access does not impair debt sustainability.
- On-lending and use of funds:
  - RFI purchase and RCF disbursement to BCN to be on-lent to government as budget support.
  - MOU between CBN and Ministry of Finance before Fund disbursement on servicing responsibilities.
  - Authorities intend to transfer half of funds to two 3rd party institutions: 40 percent (SDR 52 million) to UNOPS for emergency health program; 10 percent (SDR 13 million) to WFP for emergency food production program.
  - Authorities committed to undergo a safeguards assessment and provide central bank audit reports.

### Authorities’ views and commitments
- Characterization of shock: COVID-19 compounds a two-year economic contraction, producing a significant and unexpected balance of payments need.
- Policy stance:
  - Determined to protect macroeconomic stability, rebuild buffers, and strengthen resilience after COVID-19 abates.
  - Adopted accommodating fiscal stance and temporary actions to restart bank lending; these will not fully close 2020 financing gaps.
  - Used some international reserves drawdown and seek multilateral support including from IMF.
  - Committed to unwinding temporary programs and preparing contingency plan to protect priority spending.
  - With IMF assistance, committed to safeguard social and poverty reduction expenditures while implementing multi-year fiscal consolidation to bring debt-to-GDP to a firmly declining path.
  - Committed to highest standards for fiscal transparency, including online publication of beneficial owners for all public procurement contracts and hiring an independent firm to audit all COVID-19 related expenditures through July 2021.

### Staff appraisal and risks
- Key judgments:
  - COVID-19 accentuates Nicaragua’s ongoing vulnerabilities; expected third consecutive year of recession.
  - Pandemic leads to large fiscal and external financing needs due to voluntary distancing and global/regional spillovers.
  - Very limited fiscal space and limited external financing constrain authorities’ ability to self-finance the emergency response.
  - Nicaragua faces an urgent balance of payments need that, if unaddressed, could lead to immediate and severe economic disruption.
- Staff support:
  - Supports fiscal measures planned and recommends readiness with a contingency plan to secure resources to protect priority spending and contain COVID-19 impacts on vulnerable populations.

### Real sector, fiscal and external projections (selected indicators)
- GDP growth (percent):
  - 2019: -3.9
  - 2020 (p): -5.5
  - 2021 (p): -0.5
  - 2022 (p): 2.7
  - 2023 (p): 2.0
  - 2024 (p): 1.8
  - 2025 (p): 2.1
- Nominal GDP (US$ million):
  - 2020 (p): 11,850
  - 2021 (p): 11,937
  - 2022 (p): 12,319
  - 2023 (p): 12,627
  - 2024 (p): 12,916
  - 2025 (p): 13,287
- Consolidated public sector overall balance (percent of GDP):
  - 2019: -1.4
  - 2020 (p): -6.2
  - 2021 (p): -4.6
  - 2022 (p): -3.1
  - 2023 (p): -2.6
  - 2024 (p): -3.9
  - 2025 (p): -4.3
- Public sector debt (percent of GDP):
  - 2019: 51.0
  - 2020 (p): 57.4
  - 2021 (p): 60.0
  - 2022 (p): 60.9
  - 2023 (p): 61.8
  - 2024 (p): 64.1
  - 2025 (p): 66.0
- Current account (US$ million / percent of GDP):
  - 2019: 756 US$ million (6.0 percent of GDP)
  - 2020 (p): 63 US$ million (0.5 percent of GDP)
  - 2021 (p): -26 US$ million (-0.2 percent of GDP)
  - 2022 (p): -68 US$ million (-0.6 percent of GDP)
  - 2023 (p): -111 US$ million (-0.9 percent of GDP)
  - 2024 (p): -170 US$ million (-1.3 percent of GDP)
  - 2025 (p): -287 US$ million (-2.2 percent of GDP)
- Gross international reserves (US$ million):
  - 2019: 2,214
  - 2020 (p): 2,138
  - 2021 (p): 2,315
  - 2022 (p): 2,482
  - 2023 (p): 2,654
  - 2024 (p): 2,862
  - 2025 (p): 3,038
- Credit to private sector (percent change y-o-y):
  - 2019: -15.6
  - 2020 (p): -3.6
  - 2021: 3.0
  - 2022: 3.1
  - 2023: 4.2
  - 2024: 4.6
  - 2025: 5.2

### Annex I. Joint Bank-Fund Debt Sustainability Analysis — key findings
- Risk ratings:
  - Risk of external debt distress: Moderate.
  - Overall risk of public debt distress: Moderate.
  - Nicaragua’s Composite Indicator score: 2.94 (based on October 2019 WEO and 2018 CPIA); classification: medium debt-carrying capacity.
- Baseline DSA assumptions:
  - Real GDP: -5.5 percent in 2020.
  - Current account: deterioration of more than 5½ percentage points of GDP in 2020.
  - Baseline assumes multi-year fiscal consolidation with permanent measures of at least 3 percent of GDP and unwinding temporary COVID-19 programs.
- PV of public debt-to-GDP ratio (percent, selected years):
  - 2020: 40.5; 2021: 37.6; 2022: 40.5; 2023: 42.4; 2024: 43.8; 2025: 46.6; 2026: 49.1; 2027: 52.0; 2028: 53.4.
- PV of debt-to-GDP baseline series (2020–2030, percent):
  - 2020: 29; 2021: 31; 2022: 33; 2023: 34; 2024: 35; 2025: 36; 2026: 36; 2027: 35; 2028: 35; 2029: 34; 2030: 33.
- Stress scenarios:
  - PV of public and PPG external debt-to-GDP ratio breaches thresholds under most extreme shocks and contingent liability shocks (notably cooperation with Venezuela).
- Policy implications:
  - Maintain multi-year fiscal consolidation with permanent measures of at least 3 percent of GDP.
  - Secure envisaged external financing (RFI/RCF, WB, IADB) or activate contingency measures.
  - Monitor contingent liabilities and tailor stress testing accordingly.

### Appendix I. Letter of Intent — selected commitments and prior actions
- Emergency financing request reiterated: IMF emergency financing equivalent to 50 percent of quota (SDR 130 million or about US$183 million).
  - SDR 43.33 million under RCF; SDR 86.67 million under RFI.
- Allocation and disbursement plan:
  - RCF-RFI to fill 55 percent of projected pre-Hurricanes BOP gap; 23 percent by other IFIs; remainder by reserves drawdown.
  - Half of RCF-RFI resources to be allocated to UNOPS (40 percent) and WFP (10 percent); the other half as direct budget support.
  - MOU between CBN and Ministry of Finance prior to disbursement; transfer on receipt to UNOPS and WFP per agreements.
- Transparency and safeguards prior actions (completion dates and verifications):
  - Enacted regulations enabling publication of beneficial owners of public procurement contracts. Completion date: September 24, 2020. Verification: Administrative Circular CA-DGCE – SP-11-2020; publication began October 15, 2020.
  - Published all COVID-19 related public contracts and formulated terms of reference for hiring an independent external auditor. Completion date: October 15, 2020.
  - Published financial statements of five largest SOEs covering 2015–19. Completion date: September 17, 2020.
- Commitments:
  - Hire external independent firm to audit all COVID-19 related expenditures through July 2021 and publish results within two weeks of finalization.
  - Channel externally sourced emergency assistance through a dedicated subaccount of the treasury single account.
  - Undergo safeguards assessment and provide CBN external audit reports; authorize external auditors to hold discussions with IMF staff.
  - Authorize IMF to publish the letter of intent and the staff report.

*Source: 1nicea2020002 - 16.7 percent of quota), and the Rapid Financing Instrument (RFI) equivalent to SDR 86.67*

### 16.7 percent of quota), and the Rapid Financing Instrument (RFI) equivalent to SDR 86.67

### NICARAGUA REQUESTS FOR PURCHASE UNDER THE RAPID FINANCING INSTRUMENT AND DISBURSEMENT UNDER THE RAPID CREDIT FACILITY

### Executive summary
- Context: COVID-19 shock compounds a two-year recession in Nicaragua; very limited fiscal space and constrained external financing.
- Request for Fund support:
  - Total equivalent to 50 percent of quota (SDR 130 million or about US$183 million).
  - Comprising:
    - Rapid Financing Instrument (RFI): SDR 86.67 million, 33.33 percent of quota.
    - Rapid Credit Facility (RCF): SDR 43.33 million, 16.67 percent of quota.
- Assessment: Emergency support appropriate to address urgent balance of payments needs; Nicaragua assessed to have sustainable debt and adequate capacity to repay the Fund.
- Policy priorities: Strengthen health system, support most affected and vulnerable populations, preserve fiscal sustainability and rebuild buffers once shock subsides; maintain accommodative monetary policy and safeguard financial stability; undertake medium-term structural reforms including governance, transparency, and anti-corruption measures.
- Timing: Discussions took place virtually during July 30–October 16, 2020; Executive Summary dated November 6, 2020.

### Context, recent developments, and outlook
- Macroeconomic contraction:
  - Real GDP growth preliminarily estimated to fall to -5.5 percent in 2020, marking the third consecutive year of contraction and implying a cumulative decline of about 14 percent since 2017.
  - If pandemic fades and global activity rebounds, gradual recovery begins in 2021 but reaching pre-COVID-19 levels will be protracted.
- Financial sector vulnerabilities:
  - Accumulated sharp contraction in bank credit and financing flows since April 2018; weak recovery in deposits and credit halted.
  - Banks remain vulnerable to deposit outflows and new flows of distressed loans.
  - High degree of dollarization could amplify shock if liquidity dries up.
- Sectoral and external impacts (assumptions and projected reductions relative to 2019):
  - Tourism: decline of 65 percent.
  - Remittances: fall by 20 percent.
  - Maquila exports: fall by 22 percent.
  - Net FDI: reduced by 75 percent.

### Risks
- Main risk: greater-than-expected severity of the pandemic and its spread in Nicaragua.
- Additional risks:
  - New waves of COVID-19 or continuing sanctions could require additional health and social support.
  - Intensified health security risks could negatively affect investment climate and recovery prospects.
  - Risk of rising social tensions worsening confidence.
- Recommended preparedness: authorities should develop contingency plans and be ready to take further fiscal, monetary, and financial sector policy actions; governance reform to address corruption vulnerabilities is key.

### Authorities’ response to the crisis
- Health response and measures:
  - By October 6: 4,225 confirmed cases and 151 fatalities.
  - Government declared a state of national alert and set protocols for epidemiological surveillance, prevention, diagnosis, and treatment.
  - No mandatory quarantine measures or lockdowns; voluntary distancing disrupting tourism, retail, and maquila sectors.
- Fiscal transparency and execution of emergency spending:
  - Ministry of Finance began publishing details of all COVID-19 related spending and all public procurement contracts on its website.
  - All COVID-19 related spending will be subject to an independent external audit within a year.
  - Government sought assistance of UNOPS and WFP for execution of emergency spending.
  - Authorities committed to transfer one half of emergency funds received from the IMF to both agencies:
    - UNOPS to assist with execution of health care spending.
    - WFP to implement emergency agricultural-support program to ensure adequate food supply.

### Fiscal impact, measures, and financing needs
- Fiscal measures announced:
  - Authorities plan fiscal measures of about 1.6 percent of GDP to cover additional health care expenses (1.3 percent of GDP) and targeted temporary social assistance measures (0.3 percent of GDP), including support to food production and water deferred payments.
- Fiscal deterioration and financing needs:
  - Overall fiscal impact estimated to widen the fiscal deficit by 3.5 percent of GDP in 2020.
  - Main drivers: reduced tax revenues and social security contributions due to contraction in domestic demand and job losses; increased expenditures in health care and social assistance.
  - IMF support would cover around 46 percent of preliminary estimated large fiscal financing needs; remaining to be covered by other IFIs (including ongoing projects) and domestic financing.
- Fiscal accounts (pre- vs post-COVID, change reported):
  - Revenues: Pre-COVID 30.3; Post-COVID 29.2; Δ -1.2 (percent of GDP).
    - Taxes: 17.6 → 17.5; Δ -0.1.
    - Payroll contrib.: 6.6 → 6.6; Δ -0.1.
    - Grants: 0.6 → 0.5; Δ -0.1.
    - Other: 5.5 → 4.6; Δ -0.9.
  - Expenditure: Pre-COVID 33.1 → Post-COVID 35.4; Δ 2.4 (percent of GDP).
    - Current primary: 25.3 → 27.0; Δ 1.7.
    - INSS: 0.8 → 1.6; Δ 0.8.
    - Interest payments: 1.6 → 1.6; Δ 0.0.
    - Capital and net lending: 6.2 → 6.9; Δ 0.7.
  - Overall balance: -2.7 → -6.2; Δ -3.5 (percent of GDP).
  - In millions of U.S. dollars: Pre-COVID -340 → Post-COVID -740; Δ -401.
- Fiscal policy response composition (2020, in Cordobas and US$ million):
  - Total Expenditure: 9,005 Cordobas; 2.2 percent of GDP; US$ 259.1 million.
  - COVID-19 related:
    - Health spending: 5,181 Cordobas; 1.3 percent of GDP; US$ 149.0 million.
    - Support to food production: 2/637 Cordobas; 0.2 percent of GDP; US$ 18.3 million.
    - Water deferred payments: 3/400 Cordobas; 0.1 percent of GDP; US$ 11.5 million.
  - Budget support:
    - INSS (historical debt): 2,086 Cordobas; 0.5 percent of GDP; US$ 60.0 million.
    - External debt amortization (IDB and CABEI): 702 Cordobas; 0.2 percent of GDP; US$ 20.2 million.
  - Notes:
    - 1/ Health spending includes pharmaceutical costs, medical supplies and equipment, management of infectious materials and personal protective equipment.
    - 2/ Implemented with the support of the World Food Programme.
    - 3/ Benefits targeted to approximately 662,745 water users.

### Balance of payments and financing scenario
- Balance of Payments: COVID-19 impact (In millions of U.S. dollars, 2020)
  - Current account: Pre-COVID 140 → Post-COVID 63; Δ -77.
  - Trade f.o.b.: -793 → -870; Δ -77.
    - Exports: 3,531 → 3,206; Δ -325.
    - Imports (non-maquila): 4,324 → 4,076; Δ -247.
  - Non-trade: 933 → 933; Δ 1.
    - Tourism: 393 → 181; Δ -212.
    - Remittances: 1,677 → 1,344; Δ -334.
  - Foreign direct investment: 327 → 119; Δ -207.
  - Portfolio investment: -3 → -30.
  - Other (includes capital account): -512 → -511; Δ 1.
  - BOP Financing gap: -48 → -332; Δ -284 (In percent of GDP: -0.4 → -2.8; Δ -2.4).
  - Potential financing: 48 → 332; Δ 284.
    - Potential IMF (RCF/RFI) net use of IMF resources: -7 → 17; Δ 83.
    - Other IFIs: ... → 79; Δ 79.
  - Change in reserves (increase, -): 557 → 621.
  - Unidentified financing: ... → 00.
- Preliminary estimate: large balance of payments gap would imply sizable decrease in international reserves absent additional international financial support.

### Policy recommendations and conditionalities noted by staff and Executive Board statement
- Immediate priorities:
  - Provide adequate resources to strengthen the health system and support the population most affected and vulnerable.
  - Scale up public health expenditure and social assistance to alleviate impact on the most vulnerable.
- Medium-term priorities (once crisis abates):
  - Implement fiscal measures to ensure debt sustainability, resume fiscal consolidation, rebuild buffers, and strengthen resilience.
  - Implement structural reforms to promote inclusive growth, strengthen governance and transparency, and tackle corruption.
  - Strengthen anti–money laundering/combating the financing of terrorism (AML/CFT) frameworks.
- Monetary and financial sector stance:
  - Maintain accommodative monetary policy stance and safeguard stability of the financial system.
  - Preserve adequate levels of liquidity in the system.
- Transparency and governance:
  - Continue enhancing fiscal transparency, especially related to emergency fiscal spending.
  - All COVID-19 related spending to be externally audited within a year.
- Catalytic role of IMF financing:
  - RCF/RFI financing intended to address urgent balance of payments needs, strengthen the health system, support the population most affected, preserve fiscal space, and catalyze other concessional financing.

*Source: 1nicea2020002 - 16.7 percent of quota), and the Rapid Financing Instrument (RFI) equivalent to SDR 86.67*

### 8.      The government has sought the assistance of the United Nations Office for Project

### 1nicea2020002 - 8.      The government has sought the assistance of the United Nations Office for Project

### UNOPS and WFP assistance: programs, scope, and targeting
- UNOPS will assist with the execution of a large share of health care spending, including the purchase of medicines, lab tests, and personal protective equipment.
- UNOPS program:
  - Duration: six months.
  - Target: extend medical coverage for geographical areas most affected by the pandemic and priority groups.
  - Target population: approximately 1.5 million people (stated elsewhere as "More than 1.5 million people (about 23 percent of total population) considered the most vulnerable population: persons over 60 years, children under 2 years, pregnant women and population with pre-existing conditions").
  - Planned share of RCF/RFI: 40 percent of RCF/RFI, SDR 52 million.
  - Activities: Provision of medical supplies, medicines, desinfectant and antiseptic solutions.
- WFP will implement an emergency agricultural-support program to ensure continuity of adequate food supply.
  - Target definition: package defined according to the potential production profile reported in the national agriculture census.
  - Target households: 24,640 households (table entry shows "24,260 farmers nationwide"; source text contains both figures).
  - Gender targeting: about 40 percent of the package directed to female producers.
  - Planned share of RCF/RFI: 10 percent of RCF/RFI, SDR 13 million.
- Some of these measures are contingent on receiving IMF support.
- Source for program table: National authorities.

### Fiscal transparency, SOEs, and anti-corruption measures
- Authorities began publishing financial statements of the five largest state-owned enterprises: ENATREL, ENEL, PETRONIC, EPN, and ENACAL, covering the period 2015–19.
  - Combined assets of these companies: about 22 percent of GDP.
  - Average profitability ratios: consistently declining since 2015.
  - IMF SOE Health Check preliminary analysis: liquidity and solvency ratios flagged at high risk levels compared to predetermined benchmarks.
- Transparency and procurement reforms (prior actions):
  - Regulations for online publication, within one week of contracting, of all public procurement contracts; publication started and covers operations since September 25, 2020.
  - Online publication contents: contract amounts, nature of goods/services and price per unit (where applicable), names of awarded entities and their beneficial owner(s), names of public officials awarding the contracts.
  - Ministry of Finance: monthly details of all COVID-19 related spending and basic information on all COVID-19 related contracts signed since June 2020 posted on its website.
- Independent audit of COVID-19 expenditures:
  - Terms of reference formulated (prior action) for hiring an independent external auditor for all COVID-19 related expenditures.
  - Audit scope: to be conducted within a year of approval of the RCF/RFI disbursement and to cover funds channeled through third parties.
  - Publication: audit results to be published within two weeks of finalization.
- AML/CFT actions:
  - Nicaragua included in FATF “Jurisdictions under Increased Monitoring” in February 2020.
  - Authorities committed to an action plan covering: (1) identification/understanding of ML/TF risks; (2) proactive international cooperation for ML investigations; (3) supervision of AML/CFT requirements by reporting entities; (4) measures to prevent misuse of legal persons and arrangements and timely availability of basic and beneficial ownership information.
  - Implementation timing: progress on some portions by early 2021 and full implementation by May 2021 (FATF deadlines may be impacted by COVID-19).

### Monetary and financial sector measures and recommendations
- Central Bank of Nicaragua (CBN) actions:
  - Activated a Risk Committee (CBN, SIBOIF, ASOBAN) to ensure business continuity, liquidity, payment system functioning, and critical supply chains.
  - Since March 2020, reduced reference interest rates by 250 basis points.
  - June plan to reduce reserve requirements contingent on private banks expanding credit: until June 30, 2022 banks may reduce required reserves in local currency to as low as 4.5 percent (from 15 percent).
- SIBOIF temporary regulation (June 2020):
  - Effective until December 2020.
  - Allows forbearance on loan-loss provisions by banks for loans granted before March 31, 2020.
  - Authorities committed to not extend the regulation beyond December 2020 and to publicly disclose quarterly the stock of loans covered.
- Staff recommendations for monetary/financial policies:
  - Target banks’ adequate valuation of assets and collateral; ensure proper loan classification and timely provisioning of distressed assets.
  - Ensure credit restructuring and extraordinary forbearance: subject to transparency requirements, limited in time, and targeted only to solvent borrowers with viable prospects under normal conditions.
  - Consider macroprudential tools to preserve financial stability.
  - Expedite enhancement of insolvency and foreclosure framework to allow reorganization of viable enterprises and quick liquidation of non-viable enterprises.
  - Enhance crisis preparedness through contingency planning and strengthened coordination among official agencies for resolution activities.

### Fiscal stance, consolidation needs, and contingency planning
- Authorities’ commitments:
  - Unwind temporary pandemic-related fiscal measures after the shock dissipates.
  - Adopt corrective actions to rebuild fiscal buffers (government deposits) and ensure fiscal sustainability over the medium term.
  - Safeguard spending on critical social programs and create fiscal space to strengthen the social safety net.
  - Have not officially requested debt service suspension under the G20 bilateral debt moratorium initiative (which would suspend debt service payments of US$10.8 million) and are discussing with the World Bank whether participation would constrain other non-concessional financing.
- Staff assessment and recommendation:
  - Given large downside risks, authorities should have a contingency plan to secure adequate resources to protect priority spending and contain COVID-19 effects on vulnerable populations.
  - Fiscal priority once shock subsides: preserve fiscal sustainability, rebuild buffers, and strengthen resilience.
  - Preliminary baseline estimates point to the need to adopt a fiscal consolidation plan with permanent measures of at least 3 percent of GDP over 2021–23 to avoid an additional financing gap in 2021 and 2022.
  - Baseline assumes government adopts multi-year fiscal consolidation with permanent measures of at least 3 percent of GDP and unwinds temporary COVID-19 programs.
  - The reduction in the fiscal deficit during 2021–23 equals 3.6 percent of GDP, which staff deems feasible to cover a projected fiscal gap and bring debt on a firmly declining path by 2025.

### Debt sustainability, access, and modalities of IMF support
- Debt sustainability assessment:
  - Risks of external debt distress and overall debt distress: both assessed as moderate.
  - Under the updated low-income country DSA, Nicaragua’s external debt distress risk assessed as moderate with limited space to absorb shocks.
  - Over the 10-year projection horizon, all external debt burden indicators under the baseline remain below thresholds, but PV of PPG external debt-to-GDP ratio breaches thresholds under standardized stress scenarios.
  - PV of public debt-to-GDP ratio: projected below threshold under baseline but surpasses threshold under most standardized stress scenarios (notably lower GDP growth and contingent liability shocks).
- Requested emergency financing assistance:
  - Aggregate: 50 percent of quota (SDR 130 million or about US$183 million).
  - Composition: purchase under the RFI and disbursement under the RCF; ratio of RCF:RFI = 1:2.
  - Allocation: SDR 43.33 million (16.67 percent of quota) under the RCF “exogenous shock” window; SDR 86.67 million (33.33 percent of quota) under the RFI.
  - Represents about 1.5 percent of GDP.
  - Eligibility rationale: per capita income above IDA cutoff and DSA risk moderate; urgent BOP need caused primarily by sudden exogenous shocks.
  - Other gross public external financing in 2020: US$562 million, including US$443 million to ongoing projects with international institutions, US$40 million bilateral ongoing projects, and US$79 million new disbursements in response to COVID-19 (Inter-American Development Bank: US$54 million; World Bank: US$13.1 million; Central American Bank for Economic Integration: US$11.7 million).
- Capacity to repay Fund:
  - Nicaragua has no external sovereign arrears to official or private creditors and is current in servicing remaining outstanding IMF obligations amounting to SDR 4.06 million (equivalent to 1.56 percent of quota).
  - Including proposed RFI purchase and RCF disbursement, in 2024 projected Fund obligations would peak at 2.2 percent of gross international reserves and 1.1 percent of exports of goods and services (compared with averages of 3.7 percent of gross international reserves and 2.3 percent of exports for five blending emergency assistance arrangements for COVID-19 approved as of May 2020).
  - Staff concludes proposed access does not impair debt sustainability.
- On-lending and use of funds:
  - Authorities plan RFI purchase and RCF disbursement to BCN to be on-lent to government as budget support.
  - MOU to be established before Fund disbursement between CBN and Ministry of Finance on responsibilities for servicing financial obligations to the Fund.
  - Authorities intend to promptly transfer half of the funds to two 3rd party institutions to assist transparent execution and enhanced targeting of public expenditure.
  - MOU specifies intended direction of RCF/RFI emergency assistance: 40 percent (SDR 52 million) to UNOPS for emergency health care program; 10 percent (SDR 13 million) to WFP for emergency food production program.
  - Authorities committed to undergo a safeguards assessment (last update completed in January 2009) before Executive Board approval of any subsequent arrangement to which safeguards policy applies.
  - Authorities agree to provide Fund staff with central bank audit reports and authorize external auditors of the CBN to hold discussions with staff.
  - Authorities resumed periodic online publication of economic information required to evaluate the economic situation.

### Authorities’ views and commitments
- Authorities’ characterization of shock:
  - COVID-19 crisis compounds a two-year economic contraction, testing resilience of strong fundamentals and buffers accumulated over the past decade.
  - Limited external financing and diminished buffers; COVID-19 shock produces a significant and unexpected balance of payments need.
- Policy stance and commitments:
  - Determined to protect macroeconomic stability, rebuild adequate buffers, and strengthen resilience after COVID-19 abates.
  - Adopted accommodating fiscal stance and temporary actions to restart bank lending; these efforts will not fully close external and fiscal financing gaps in 2020.
  - Used some international reserves drawdown and seek multilateral support including from IMF.
  - Committed to unwinding temporary programs implemented in response to the pandemic and preparing a contingency plan to protect priority spending.
  - With IMF assistance, committed to safeguard social and poverty reduction expenditures while implementing multi-year fiscal consolidation to bring debt-to-GDP to a firmly declining path.
  - Welcome staff advice on financial sector policies and have begun implementing suggested measures related to transparency.
  - Committed to highest standards for fiscal transparency, including online publication of beneficial owners for all public procurement contracts and hiring an independent firm to audit all COVID-19 related expenditures through July 2021.

### Staff appraisal and risks
- Key staff judgments:
  - COVID-19 pandemic accentuates Nicaragua’s ongoing economic vulnerabilities.
  - Pandemic expected to produce the third consecutive year of recession and lead to large fiscal and external financing needs due to voluntary distancing measures and global/regional spillovers.
  - Very limited fiscal space and limited external financing constrain authorities’ ability to self-finance the emergency response.
  - Nicaragua faces an urgent balance of payments need that, if unaddressed, could lead to immediate and severe economic disruption.
- Staff support:
  - Supports fiscal measures planned and taken to confront the pandemic.
  - Recommends readiness with a contingency plan to secure adequate resources to protect priority spending and contain COVID-19 impacts on vulnerable populations.

*Source: National authorities and IMF staff (content unit: 1nicea2020002 - 8. The government has sought the assistance of the United Nations Office for Project).*

### 23.      The planned easing of the fiscal position in 2020 in response to the pandemic is

### The planned easing of the fiscal position in 2020 in response to the pandemic is appropriate

### Fiscal policy response and medium-term debt dynamics
- The planned easing of the fiscal position in 2020 in response to the pandemic is appropriate.
- Once the crisis subsides, the focus needs to shift to rebuilding buffers and strengthening resilience.
- Staff is encouraged by the authorities’ commitment to:
  - allow the temporary-pandemic-related fiscal measures to lapse, and
  - adopt corrective actions to ensure a firmly declining path of the public debt-to-GDP ratio over the medium-term.
- Staff also encourages the adoption of a fiscal responsibility law consistent with macroeconomic stability in the medium-term.

### Public spending efficiency, transparency, and governance
- Improving the efficiency and transparency of public spending is crucial to building public confidence.
- Staff welcome the authorities’ recent actions and further commitment to establishing mechanisms to:
  - carefully track, record, and publish all expenditures related to the emergency response, and
  - more broadly improve state-owned enterprises’ oversight and advance governance and anti-corruption reforms.
- These measures would help strengthen public financial management transparency and accountability while contributing to building the government’s social spending and emergency response capacity.

### Financial sector stability, provisioning, and AML/CFT
- Efforts to ensure adequate levels of provisions, capital, and liquidity in the financial system are important to preserve financial stability.
- Staff encourages the authorities to continue maintaining financial stability and to closely monitor:
  - the banks’ timely identification and provisioning of distressed assets, and
  - the levels of capital and liquidity in the financial system amid the existing vulnerabilities exacerbated by the COVID-19 pandemic.
- Staff welcomes the publication of aggregated data on the extraordinary bank forbearance measures.
- Staff also welcomes the authorities’ commitment to addressing identified weaknesses in the AML/CFT framework in the coming months.

*Source: 1nicea2020002 - 23.      The planned easing of the fiscal position in 2020 in response to the pandemic is*

### 26.      Staff supports the proposed purchase under the RFI and disbursement under the

### 1nicea2020002 - 26.      Staff supports the proposed purchase under the RFI and disbursement under the

### IMF staff recommendation and immediate program design
- Staff supports the proposed purchase under the RFI and disbursement under the RCF.
- The request for a disbursement of 50 percent of quota is justified by the scale of the COVID-19 shock on Nicaragua, creating an urgent balance of payments need.
- It is not feasible to design an upper-credit-tranche-quality Fund-supported program given:
  - the urgency of the balance of payments need, and
  - the high degree of uncertainty regarding the duration and scale of the COVID-19 impact.
- RCF/RFI financing modalities:
  - Financing will be disbursed to the central bank and will be on-lent to the government to provide financing for virus-related spending to mitigate the social and humanitarian impact of the pandemic.
  - Staff welcomes the authorities’ initiative to invite the UNOPS and the WFP to ensure a sound targeting mechanism for health care spending and to implement and execute the emergency food production program.
- Policy conditionality and commitments:
  - The authorities’ commitment to prudent policies, including the resumption of sustained fiscal adjustment once the crisis abates, will help ensure debt sustainability.
  - The authorities have provided all the information requested for an assessment of the impact of COVID-19 and the policies taken and planned in response to the pandemic and have reiterated their commitment to continue providing the information required to conduct surveillance.
- Repayment capacity assessment:
  - Staff assesses Nicaragua’s capacity to repay the Fund as adequate.

### Real sector and macro outlook (selected indicators and projections)
- Recent trajectory and COVID-19 impact:
  - After a 2-year recession, recent indicators showed signs of a tepid recovery by end 2019.
  - COVID-19 will deepen the contraction relative to pre-crisis forecast and exacerbate unemployment and informality.
- GDP growth (Table 9 / Table 10):
  - 2019: -3.9
  - 2020 (p): -5.5
  - 2021 (p): -0.5
  - 2022 (p): 2.7
  - 2023 (p): 2.0
  - 2024 (p): 1.8
  - 2025 (p): 2.1
- Nominal GDP (US$ million, Table 10 / Table 9):
  - 2020 (p): 11,850
  - 2021 (p): 11,937
  - 2022 (p): 12,319
  - 2023 (p): 12,627
  - 2024 (p): 12,916
  - 2025 (p): 13,287
- Prices and inflation:
  - GDP deflator (2020): 3.9
  - Consumer price inflation (period average, 2020): 3.9
  - Consumer price inflation (end of period, 2020): 3.7
- External sector contribution:
  - Exports of goods and services (US$ mn, Table 12 memorandum): 2020: 4,830; 2021: 5,096; 2022: 5,453; 2023: 5,747; 2024: 5,987; 2025: 6,265

### Fiscal developments and public finances
- IMF staff notes:
  - A fiscal reform reduced the fiscal deficit in 2019, but the deficit will increase in 2020 because of the COVID-19 pandemic.
  - Central government’s tax collections dropped significantly through the second quarter of 2020.
  - Increasing pension system (INSS) expenses will be financed by central government transfers.
  - Central government revenues will fall sharply in 2020 while higher health care costs and mitigation measures will increase public expenditures.
- Consolidated public sector overall balance (percent of GDP, Table 9 / Table 3b):
  - 2019: -1.4
  - 2020 (p): -6.2
  - 2021 (p): -4.6
  - 2022 (p): -3.1
  - 2023 (p): -2.6
  - 2024 (p): -3.9
  - 2025 (p): -4.3
- Revenue and expenditure (percent of GDP, Table 9):
  - Revenue (2020 p): 29.2 percent of GDP
  - Expenditure (2020 p): 35.4 percent of GDP
- Central Government overall balance (percent of GDP, Table 1 / Table 2b):
  - 2019: -0.6
  - 2020 (p): -4.2
  - Central government revenue (2020 p): 18.4 percent of GDP
  - Central government expenditure (2020 p): 22.6 percent of GDP
- Public sector debt dynamics (Table 10 / Table 1):
  - Public sector debt (percent of GDP):
    - 2019: 51.0
    - 2020 (p): 57.4
    - 2021 (p): 60.0
    - 2022 (p): 60.9
    - 2023 (p): 61.8
    - 2024 (p): 64.1
    - 2025 (p): 66.0

### External sector, reserves, and financing
- Current account (US$ million / percent of GDP, Table 9 / Table 7):
  - 2019: surplus of 756 US$ million (6.0 percent of GDP)
  - 2020 (p): 63 US$ million (0.5 percent of GDP)
  - 2021 (p): -26 US$ million (-0.2 percent of GDP)
  - 2022 (p): -68 US$ million (-0.6 percent of GDP)
  - 2023 (p): -111 US$ million (-0.9 percent of GDP)
  - 2024 (p): -170 US$ million (-1.3 percent of GDP)
  - 2025 (p): -287 US$ million (-2.2 percent of GDP)
- Gross international reserves (US$ million, Table 9 / Table 5a):
  - 2019: 2,214
  - 2020 (p): 2,138
  - 2021 (p): 2,315
  - 2022 (p): 2,482
  - 2023 (p): 2,654
  - 2024 (p): 2,862
  - 2025 (p): 3,038
- Net international reserves (US$ million, Table 9 / Table 5a):
  - 2019: 1,374
  - 2020 (p): 1,388
  - 2021 (p): 1,502
  - 2022 (p): 1,674
  - 2023 (p): 1,846
  - 2024 (p): 2,004
  - 2025 (p): 2,153
- External public debt (percent of GDP, Table 1 / Table 7 / Table 10):
  - 2019: 42.1
  - 2020 (p): 48.9
  - 2021 (p): 51.2
  - 2022 (p): 51.8
  - 2023 (p): 52.5
  - 2024 (p): 53.0
  - 2025 (p): 53.2
- External financing and gross financing needs (Table 8):
  - Gross financing needs (percent of GDP):
    - 2019: 0.5
    - 2020 (p): 6.6
    - 2021 (p): 7.6
    - 2022 (p): 7.9
    - 2023 (p): 8.1
    - 2024 (p): 8.0
    - 2025 (p): 8.9
  - Key financing sources include capital account flows, FDI, public sector borrowing, and changes in reserves.

### Monetary and financial sector developments
- Monetary aggregates and credit (selected, Table 5a / Table 5b):
  - Credit to the private sector (percent change y-o-y, Table 5a / Table 5b):
    - 2019: -15.6 (Table 1 / Table 5a context)
    - 2020 (p): -3.6 (Table 1)
    - Projections show recovery: 2021: 3.0; 2022: 3.1; 2023: 4.2; 2024: 4.6; 2025: 5.2
  - Broad money (percent change y-o-y):
    - 2019: -18.7 (Table 5a context)
    - 2020 (p): 6.2
    - 2021 (p): -0.6
    - 2022 (p): 7.7
    - 2023 (p): 6.3
    - 2024 (p): 6.4
    - 2025 (p): 7.8
- Financial sector health (Figure 5 highlights and Table data):
  - Asset quality deteriorated sharply from historically very low levels of NPLs.
  - The financial system maintained adequate levels of liquidity and capital adequacy (excluding forborne loans remains above minimum requirement).
  - As a result of the economic downturn, profitability declined sharply.
- Central bank quasi-fiscal position (Table 6):
  - Quasi-fiscal balance (millions of Cordobas): 2019: 516; 2020 (p): -974; 2021 (p): -1,133; 2022 (p): -1,626; 2023 (p): -1,919; 2024 (p): -2,224; 2025 (p): -1,303
  - Quasi-fiscal balance (percent of GDP): 2019: 0.1; 2020 (p): -0.2; 2021 (p): -0.3; 2022 (p): -0.4; 2023 (p): -0.4; 2024 (p): -0.4; 2025 (p): -0.2

### Social and other key indicators (selected)
- Capacity and social context (Table 1 / Table 11):
  - GDP per capita (current US$, 2018): 2,022
  - GNI per capita (Atlas method, current US$, 2017): 2,090
  - GINI Index (2014): 46.2
  - Unemployment (percent of labor force, 2018): 5.5
  - Poverty rate (national pov. line, in percent, 2016): 24.9
  - Life expectancy at birth in years (2017): 74.1
  - Infant mortality rate (per 1,000 live births, 2017): 14.8

### Policy implications emphasized by staff
- Immediate use of RCF/RFI resources to finance virus-related spending and emergency food production, with implementation support from UNOPS and WFP to improve targeting and execution.
- Maintain prudent macroeconomic policies and resume sustained fiscal adjustment after the crisis to ensure debt sustainability.
- Continued provision of information by the authorities to enable IMF surveillance and monitoring.

*Source: IMF staff report excerpt and accompanying tables and figures contained in the supplied content unit.*

### Annex I. Joint Bank-Fund Debt Sustainability Analysis

### Annex I. Joint Bank-Fund Debt Sustainability Analysis

### Risk assessment and overarching findings
- Risk of external debt distress: Moderate.
- Overall risk of public debt distress: Moderate.
- Granularity in the risk rating: Limited space to absorb shocks.
- Application of judgment: No.
- Nicaragua’s Composite Indicator score: 2.94 (based on October 2019 WEO and 2018 CPIA); classification of debt-carrying capacity: medium.
- In response to COVID-19, the World Bank emergency health loan on humanitarian grounds: US$13.1 million (due for Board review in November 2020).
- Baseline assumes: a multi-year fiscal consolidation plan with permanent measures of at least 3 percent of GDP and unwinding of temporary programs implemented in response to COVID-19.
- Authorities’ contingency stance: Were external financing envisaged under the baseline not to materialize in the near and/or medium term, the authorities would be prepared to implement contingency measures to ensure debt sustainability.

### Baseline macroeconomic projections and financing
- Real GDP: -5.5 percent in 2020.
- Current account: deterioration of more than 5½ percentage points of GDP in 2020 due to reduced exports, tourism, remittances, and FDI.
- Projection: protracted negative effects in activity, exports, remittances and inflows.
- Fiscal consolidation effect: reduction in the fiscal deficit over 2021–23 equals 3.6 percent of GDP that allows lowering the debt level over those years.
- Financing strategy: Same as previous DSA with additional financing needs filled by RFI/RCF and other multilateral institutions (i.e., WB and IADB).
- Realism tools flagged: None.
- Mechanical risk ratings: External DSA = Moderate; Public DSA = Moderate.

### Debt sustainability outcomes under baseline and stress scenarios
- Under the baseline scenario:
  - External debt burden indicators remain below the threshold.
  - PV of public debt-to-GDP ratio is projected to be below the threshold.
- Under extreme shock scenarios:
  - The PV of public and PPG external debt-to-GDP ratio breaches the threshold over an extended period under the most extreme shock scenario and under a contingent liability tailored shock related to external cooperation with Venezuela.
  - The PV of public debt-to-GDP ratio surpasses the threshold under the most extreme shock scenario, notably lower GDP growth, and realization of contingent liability shock.
- Tailored and specific tests noted:
  - Most extreme shock for external PPG MLT debt: Exports (Figure AI.1).
  - Tailored tests include combined contingent liabilities, natural disasters, commodity price shocks, and ALBA debt contingent liability scenario.

### Key baseline indicator series (projections and sensitivity)
- Baseline PV of debt-to-GDP ratio (2020–2030), from Table AI.3 / Table AI.4 (percent):
  - 2020: 29
  - 2021: 31
  - 2022: 33
  - 2023: 34
  - 2024: 35
  - 2025: 36
  - 2026: 36
  - 2027: 35
  - 2028: 35
  - 2029: 34
  - 2030: 33
- Selected sensitivity outcomes (PV of debt-to-GDP and related metrics):
  - Alternative scenario (historical averages 2020–2030) PV of debt-to-GDP: 29 33 36 38 40 42 43 44 44 45 46 (2020–2030).
  - ALBA debt contingent liability scenario PV of debt-to-GDP: 29 31 42 43 45 45 45 44 43 42 40 (2020–2030).
  - Tailored test — Combined contingent liabilities PV of debt-to-GDP: 29 34 35 37 38 38 39 40 39 38 37 (2020–2030).
- Threshold definitions noted for PV and debt-service metrics:
  - For the PV debt/GDP and PV debt/exports thresholds, x is 20 percent and y is 40 percent.
  - For debt service/Exports and debt service/revenue thresholds, x is 12 percent and y is 35 percent.

### Selected quantitative baseline values and drivers (from DSA tables)
- External debt (nominal) (selected years, percent of GDP or series as reported in table): 2017: 78.5; 2018: 82.3; 2019: 86.4; 2020: 95.7; 2021: 97.3; 2022: 96.1; 2023: 95.4; 2024: 94.7; 2025: 93.4; 2030: 76.9; 2040: 50.1.
- Of which: public and publicly guaranteed (PPG) external (selected years): 2017: 34.9; 2018: 38.2; 2019: 42.1; 2020: 48.9; 2021: 51.2; 2022: 51.8; 2023: 52.5; 2024: 53.0; 2025: 53.2; 2030: 46.6; 2040: 35.4.
- Gross external financing need (Million of U.S. dollars) (selected years): 2017: 1488.4; 2018: 883.9; 2019: 2.7; 2020: 1140.6; 2021: 1272.4; 2022: 1328.1; 2023: 1346.7; 2024: 1329.9; 2025: 1332.0; 2030: 1436.8; 2040: 1826.5.
- Real GDP growth (in percent) (selected years): 2017: 4.6; 2018: -4.0; 2019: -3.9; 2020: -5.5; 2021: -0.5; 2022: 2.7; 2023: 2.0; 2024: 1.8; 2025: 2.1; 2030: 3.0; 2040: 1.6.
- PV of PPG external debt-to-GDP ratio (selected years): 2020: 32.7; 2021: 34.0; 2022: 35.0; 2023: 35.8; 2024: 33.2; 2025: 27.7 (series as reported in Table AI.1).
- PV of public debt-to-GDP ratio (selected years, Table AI.2): 2020: 40.5; 2021: 37.6; 2022: 40.5; 2023: 42.4; 2024: 43.8; 2025: 46.6; 2026: 49.1; 2027: 52.0; 2028: 53.4.
- Government revenues (excluding grants, in percent of GDP) (selected years): 2017: 28.3; 2018: 27.7; 2019: 30.5; 2020: 28.6; 2021: 29.5; 2022: 30.2; 2023: 30.4; 2024: 30.2; 2025: 30.6; 2030: 31.2; 2040: 32.5.
- Primary deficit (public DSA, percent of GDP) (selected years): 2017: 0.9; 2018: 2.5; 2019: -0.2; 2020: 4.7; 2021: 3.4; 2022: 1.9; 2023: 0.9; 2024: 2.2; 2025: 2.3; 2030: 1.0; 2040: 0.6.
- Grant-equivalent financing (in percent of GDP) (selected projections): 2021: 1.7; 2022: 1.1; 2023: 1.1; 2024: 1.1; 2025: 1.1; 2026: 1.2; 2027: 1.0; 2028: 0.7.
- Memo: PV of external debt (in percent of GDP series): 67.4; 75.5; 77.5; 77.4; 77.1; 76.9; 76.7; 76.0; 63.5; 44.2 (as reported under "Memorandum items").

### Stress tests, breaches and notable scenario outcomes
- The most extreme stress test definition: the test that yields the highest ratio in or before 2030; one-off breaches are presented but deemed away for mechanical signals unless the stress test with a one-off breach remains the most extreme even after disregarding the one-off breach.
- Sensitivity analysis (Table AI.3 / AI.4) highlights scenarios where thresholds are breached:
  - Debt service-to-exports, debt service-to-revenue, PV of debt-to-exports, and PV of debt-to-GDP show notable increases under Alternative Scenarios (historical averages), ALBA contingent liability scenario, and combinations of shocks (real GDP growth shock, primary balance shock, exports shock).
  - Examples of alternate scenario magnitudes (selected): PV of debt-to-exports under baseline and alternative scenarios exhibits large increases, with baseline path and alternative paths reaching and exceeding thresholds for several years under adversarial shocks.

### Drivers of debt dynamics (baseline)
- Drivers shown in Figure AI.3 include contributions from:
  - Real GDP growth (negative contribution to debt dynamics when positive growth), nominal interest rate, price and exchange rate changes, current account and FDI, and residual/unexpected changes.
- Residuals include exceptional financing, changes in arrears and debt relief, valuation adjustments, and changes in gross foreign assets.

### Policy implications and recommendations (implicit in DSA)
- Maintain and implement the multi-year fiscal consolidation plan with permanent measures of at least 3 percent of GDP to ensure baseline convergence of debt indicators.
- Unwind temporary COVID-19 programs as assumed in the baseline to achieve the projected 3.6 percent of GDP reduction in the fiscal deficit over 2021–23.
- Secure envisaged external financing (RFI/RCF, WB, IADB); otherwise, activate prepared contingency measures to preserve debt sustainability.
- Monitor contingent liabilities—particularly those related to external cooperation with Venezuela—and assess their fiscal implications through tailored contingent-liability stress testing.

*Source: Annex I. Joint Bank-Fund Debt Sustainability Analysis (IMF staff calculations and national authorities).*

### Appendix I. Letter of Intent

### Appendix I. Letter of Intent

### COVID-19 response and health situation
- National Inter-institutional Commission for the Early Detection, Care and Prevention of COVID-19 created in January.
- State of national alert declared; protocols for epidemiological surveillance, prevention, diagnosis, and treatment set per international recommendations.
- Reported COVID-19 cases and fatalities:
  - As of October 6: 4,225 cases and 151 deaths.
  - As of November 16: 5,661 cases and 158 fatalities.
- Emergency health measures include building up medical services capacity and collaborating with UNOPS to target health-care spending.

### Economic impact and projections
- Pre-existing context: two-year economic contraction preceding the pandemic that diminished fiscal, external, and financial buffers.
- Preliminary projection for 2020: real GDP will contract by 4.5 percent, marking the third consecutive year of negative growth.
- Central Bank (BCN) revised projection for 2020: contraction of 4.5 percent; projection for 2021: recovery of 0.5 percent.
- Q2 2020: 7.9 percent year-on-year contraction.
- Balance of payments and external financing:
  - COVID-19 shock generated a significant and unexpected balance of payments need.
  - Balance of payments financing gap in 2020 estimated at US$332 million (2.9 percent of GDP) (pre-Hurricanes Eta and Iota).
- Impact on key sectors: sudden reduction in tourism, maquila exports, and foreign direct investment; remittances performed better than expected and provided support.
- Hurricanes:
  - Hurricane Eta preliminary damages: about US$178.4 million, of which US$36.4 million needed for urgent emergency assistance.
  - Damage from Hurricane Iota still being assessed.

### Fiscal stance, measures, and commitments
- Accommodative fiscal stance in 2020:
  - Overall fiscal impact of the pandemic in 2020 estimated to widen the fiscal deficit by 4.7 percentage points of GDP relative to 2019.
  - Fiscal expenditure plan amounting to 1.6 percent of GDP focused on healthcare capacity, emergency food security, and water services affordability for vulnerable households.
- Revenue administration measures to limit revenue losses:
  - Strengthen and implement business continuity plan.
  - Continue implementing remote work policies.
  - Enhance communication and remote support for taxpayers.
- Multi-year fiscal consolidation commitment:
  - Implement a multi-year fiscal consolidation of at least 3 percent of GDP in permanent measures over 2021–23 to bring the debt-to-GDP ratio to a firmly declining path and improve fiscal policy planning.
  - Requested IMF Fiscal Affairs Department technical assistance and a fiscal transparency assessment.

### Monetary and financial measures
- Central Bank actions since March:
  - Reduced reference interest rates by 250 basis points.
  - Activated a business continuity plan to ensure financial services and maintain adequate liquidity.
  - Announced in June 2020 a plan (valid until June 30, 2022) to allow banks to reduce temporarily the ratio of required reserves in local currency to as low as 4.5 percent (from 15 percent) contingent on private banks’ actions to expand credit.
- Superintendency of Banks actions:
  - In June 2020 introduced a temporary financial regulation, effective until December 2020, allowing forbearance on loan-loss provisions by banks on loans granted before March 31, 2020.
  - Commitment not to extend the temporary regulation beyond December 2020 and to publicly disclose on a quarterly basis the stock of loans covered under these provisions.

### Emergency financing request and use of funds
- Government requests emergency financing from the IMF equivalent to 50 percent of quota (SDR 130 million or about US$183 million).
  - SDR 43.33 million (16.67 percent of quota) under the "exogenous shock" window of the Rapid Credit Facility (RCF).
  - SDR 86.67 million (33.33 percent of quota) under the Rapid Financing Instrument (RFI).
- Expected allocation and financing mix:
  - The RCF-RFI would fill 55 percent of the country’s projected pre-Hurricanes balance of payments gap; 23 percent of the gap to be filled by other IFIs and the remainder by a drawdown in international reserves.
  - Half of the RCF-RFI resources will be allocated to health and food-security efforts implemented with WFP and UNOPS; the other half will be channeled as direct budget support for other crisis-related expenditures.
- Disbursement and on-lending arrangements:
  - Upon Board approval and subsequent approval by the National Assembly, a memorandum of understanding will be established between the Central Bank of Nicaragua and the Ministry of Finance on responsibilities for servicing IMF financial obligations.
  - Upon receipt of RCF/RFI funds, transfer the US dollar equivalent to 40 percent of SDR 130 million to UNOPS and 10 percent of SDR 130 million to WFP according to agreements to be subscribed.

### Transparency, governance, and safeguards
- Prior and ongoing transparency measures and prior actions:
  - Enacted regulations enabling online publication of beneficial owner(s) of all public procurement contracts (prior action). Publication began October 15, 2020.
  - Began publishing all COVID-19 related public contracts; formulated terms of reference for hiring an independent external auditor for COVID-19 related expenditures (prior action).
  - Published financial statements of five largest state-owned enterprises—ENATREL, ENEL, PETRONIC, EPN, and ENACAL—covering the period 2015–19 and committed to gradual expansion of annual reporting to all SOEs including Comptroller General audit reports (prior action).
- Specific transparency and accountability commitments:
  - Hire an external, independent firm to audit all COVID-19 related expenditures through July 2021 and publish audit results on the government’s website within two weeks of finalization.
  - Adhere to best practices in procuring and awarding contracts.
  - Channel externally sourced emergency assistance through a dedicated subaccount of the treasury single account to facilitate tracking and reporting.
  - Request IMF technical assistance for a fiscal transparency assessment exercise.
- Safeguards and IMF engagement:
  - Commit to undergoing a safeguards assessment in connection with IMF emergency support and to provide the Central Bank’s most recently completed external audit reports and authorize external auditors to hold discussions with IMF staff.
  - Government authorizes IMF to publish the letter of intent and the staff report for the request.

### Prior actions (selected verification indicators and dates)
- Enacted regulations enabling publication of beneficial owners of public procurement contracts.
  - Completion date: September 24, 2020.
  - Verification: Administrative Circular CA-DGCE – SP-11-2020 published on DGCE website; publication of beneficial ownership for new public procurement contracts began October 15, 2020.
- Published all COVID-19 related public contracts and formulated terms of reference for hiring an independent external auditor.
  - Completion date: October 15, 2020.
  - Verification: Publication began at designated government procurement website.
- Published financial statements of five largest SOEs covering 2015–19 and committed to expand reporting to all SOEs.
  - Completion date: September 17, 2020.
  - Verification: Financial statements published on respective SOE websites.

*Source: Appendix I. Letter of Intent (Managua, Nicaragua), November 6, 2020, and accompanying statement (November 20, 2020).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1nicea2020002.pdf_