## 1nicea2023001 ## Source details **Canonical URL:** [1nicea2023001](https://www.imf.org/-/media/files/publications/cr/2023/english/1nicea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1nicea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1nicea2023001.pdf.json) --- ### Recent developments - Headline CPI inflation: 11.4 percent (November 2022, y-o-y); BCN projects inflation to close 2022 at 11.6 percent. - Food basket (70 percent of basic consumption basket) increased by around 20 percent y-o-y; food inflation: 21 percent year-on-year (September 2022). - Real GDP: grew 10.3 percent in 2021, 5 percent in H1 2022; expected to grow 4 percent in 2022. - Remittances: grew an average 45 percent y-o-y over the first nine months of 2022 (compared to about 10 percent yearly growth over 2017-2021); remittances in 2021 = 15½ percent of GDP; remittances 2022 projected to exceed US$ 3 billion (50 percent higher than 2021 and equivalent to 20.3 percent of GDP). - Gross international reserves (GIR): US$4.3 billion by end-June 2022 (about 6 months of imports, excluding maquila); gross international reserves at end-2021 were US$3.8 billion (6.5 months of imports). - Government preliminary estimate of damage from hurricane Julia (October 2022): about 2½ percent of GDP; December 2020 hurricanes damage estimate: about US$1 billion or 8 percent of GDP. - Consolidated public sector (CPS) deficit: narrowed to 1.4 percent of GDP in 2021; projected to widen to 3.3 percent of GDP in 2022 due to temporary fiscal measures estimated at 1.2 percent of GDP for 2022 (set to expire by end-year). - Concessional financing in 2022: CABEI loan of US$200 million and World Bank pandemic loan of US$116 million. - BCN reference rate increases: cumulative 350 basis points since February 2022; BCN reference rate raised to 7 percent. - Córdoba crawl rate against the U.S. dollar: 2 percent per year. - Bank deposits growth: 12.4 percent y-o-y (September 2022); bank credit growth: 12 percent y-o-y; credit stock remains 25 percent lower than March 2018. - Reported Non-Performing Loans (NPLs): 1.9 percent; distressed assets: 12.1 percent. - Financial system average CAR: 20 percent; Liquidity Coverage Ratio (LCR): 285 percent. ### Outlook and risks - Real GDP projected: 3 percent in 2023; medium-term convergence to 3½ percent. - Inflation projected to moderate to 6 percent in 2023; consumer price inflation (end of period) projections: 2023 6.1; 2024 4.8; 2025 4.0; 2026 4.0; 2027 4.0. - Medium-term real GDP growth projections (Table 2): 2023 3.0; 2024 3.3; 2025 3.5; 2026 3.5; 2027 3.5. - Downside risks include: - More severe global downturn and further external monetary tightening. - Prolongation of Russia’s war in Ukraine. - Lower demand from trading partners and weaker remittances growth. - Further increases in inflation and fiscal slippages. - Fiscal strain from natural disasters. - Business climate deterioration and stricter international sanctions. ### Key statistics and macro balances - Inflation (headline CPI): 11.4 percent (November 2022, y-o-y); BCN projection close 2022: 11.6 percent. - Food basket share of basic consumption basket: 70 percent; basic consumption basket growth: 16 percent y-o-y (September 2022). - Remittances: 2017 US$1,391 million; 2018 US$1,501 million; 2019 US$1,682 million; 2020 US$1,851 million; 2021 US$2,147 million; 2022 US$3,006 million (Table 4 Transfers). - Current account (US$ million): 2017 -987; 2018 -234; 2019 754; 2020 497; 2021 -317; 2022 -271; 2023 -305 (projection). - Gross international reserves (US$ million): 2017 2,593; 2018 2,080; 2019 2,199; 2020 3,003; 2021 3,828; 2022 4,286; 2023 4,344; projection 2027 5,157. - Public sector debt (Percent of GDP): 2017 41.7; 2018 48.3; 2019 50.2; 2020 57.8; 2021 56.9; 2022 58.1; projected end-2027 54.2. - Public debt currently about 57 percent of GDP (staff appraisal). - Selected social indicators: GDP per capita (current US$, 2021) 2,141.0; GNI per capita (Atlas, 2021) 2,010; GINI Index (2014) 46.2; Unemployment (percent of labor force, 2020) 11.1; Poverty rate (national line, 2016) 24.9. ### Fiscal outlook, financing, and debt sustainability - CPS deficit: 1.4 percent of GDP in 2021; projected to widen to 3.3 percent of GDP in 2022 due to temporary measures costing 1.2 percent of GDP in 2022. - Staff baseline includes consolidation at central government level of 2 percent of GDP over 2023-2026 (mostly termination of temporary measures). - Staff include increased targeted social spending of ½ percent of GDP. - To reduce public debt to pre-crisis 45 percent of GDP, staff recommend additional permanent measures of 1¾ percent of GDP comprising: - Streamline VAT exemptions and improve taxation in selected sectors (0.7 percent of GDP). - Reduce current expenditures (primarily on wages and goods and services; 0.8 percent of GDP). - Adjust and improve targeting of long-standing subsidies to reduce imbalances from affected SOEs (0.3 percent of GDP). - Projected unidentified fiscal financing needs: about 3¾ percent of GDP over 2023-27. - Financing mix assumptions: new external financing ~54 percent of total over medium term (declining to 36 percent over long term); concessional financing ~36 percent of total over medium term (22 percent over long term). - Contingent liability shock in tailored scenarios set at 9.2 percent of GDP in 2022. - Debt stress tests: baseline public debt projected peak at 58.1 percent of GDP in 2022, decline to 54.2 percent by 2027; three standardized stress scenarios breach external PPG debt-to-GDP threshold; tailored combined external shocks can reach up to 46 percent short term (2024-26). ### Monetary and exchange rate policy - Exchange rate regime: crawling peg at 2 percent per year depreciation against the U.S. dollar. - BCN has raised reference rate by cumulative 350 basis points since February 2022 (U.S. cumulative increase 425 basis points over same period); BCN reference rate at 7 percent. - Staff recommend continuing to raise the reference rate to maintain the interest differential with the U.S. policy rate consistent with the crawling peg and financial stability. - Central bank FX net sales: remained negative since 2019; reserves accumulation continued into 2022. - Gross international reserves adequacy: current level ~6.5 months of imports (end-2021) and ~6 months by end-June 2022; Fund’s adequacy metric for LICs suggests a recommended range of 5.3 to 8.9 months of non-maquila imports. ### Financial sector performance and vulnerabilities - Bank deposits y-o-y growth: 12.4 percent (September 2022); deposits surpassed pre-crisis aggregate level (in Córdobas). - Bank credit y-o-y growth: 12.0 percent (September 2022, measured in U.S. dollar); stock remains 25.1 percent lower than in March 2018. - NPLs reported: 1.9 percent; total distressed assets: 12.1 percent (fell from 22.6 percent in September 2020). - Provisions relative to NPLs: 272 percent (September 2022); provisions relative to total distressed assets: 43 percent (September 2022; pre-crisis level 86 percent). - Financial system indicators: - Average CAR: 20 percent. - Liquid assets represent 37.9 percent of short-term liabilities (compare 36.7 percent March 2018). - LCR: 285 percent (minimum requirement 100 percent). - Dollarization: more than 90 percent of credit and 70 percent of deposits denominated in U.S. dollar. - Excess reserves: NC and FC at 15.9 percent of applicable deposits in July (vs 15 percent requirement). - Banking sector profitability recovered; but increasing provisions to match pre-crisis provisioning relative to distressed assets would lower average capital ratio by 3 percentage points (from 20 percent to 17 percent), potentially pushing one small-medium bank slightly below minimum capital requirements. ### Financial sector policy recommendations and crisis preparedness - Strengthen provisioning: extend provisioning framework beyond NPLs to restructured loans and other distressed assets. - Enhance crisis preparedness: update resolution framework, align with Financial Stability Board Key Attributes, operationalize recovery and resolution planning, and enhance inter-agency arrangements; consider crisis simulation exercises and a FSC subcommittee. - Expand prudential supervisory perimeter: address data gaps for credit and savings cooperatives; start proportional oversight; finalize capital requirements legislation for microfinance companies. - Consider macroprudential measures: higher risk weights for unsecured lending; maintain recently reactivated countercyclical provisioning. - Monitor FX risk closely given high dollarization. - IMF stands ready to provide technical assistance and implement the 2019 FSSR roadmap. ### External sector assessment and outlook - 2021 external position: moderately stronger than levels implied by fundamentals and desirable policies (CA and REER approaches). - NIIP: improved markedly since 2018; NIIP end-2021 = -109 percent of GDP; projected improve to -102 percent in 2022 and stabilize around -100 percent in medium term. - Current account dynamics: remittances increased from 10.1 percent of GDP in 2017 to 15.7 percent of GDP in 2021 and fully finance the trade balance; trade balance smaller deficit relative to pre-crisis. - Real exchange rate: average value 2021 = 92.8; latest reading 97.3 (4.9 percent above 2021 average); EBA Lite CA model REER undervaluation 4.4 percent; REER model undervaluation 5.8 percent. - Capital flows: 2021 CA deficit of 2.3 percent of GDP more than fully covered by net FDI inflows 8.6 percent of GDP and general government external borrowing 5.8 percent of GDP. - FDI: 80 percent of inflows in equity; FDI inflows 2021 = 8.6 percent of GDP; FDI projected to fall to 5.4 percent of GDP in 2022. - External buffers and recommendation: continue accumulation of reserves given dependence on remittances and FDI; main medium-term risks include lapses in remittances/FDI, worsening trade balance, and heavier sanctions. ### Labor market, productivity, and medium-term growth constraints - Labor force participation: fell to 67.1 percent in 2021 (pre-crisis 74 percent); unemployment declined to 3.7 percent in 2021; emigration increased significantly since mid-2021. - Informality: informality rate end-2021 = 75.5 percent; informal employment acts as a buffer but hinders productivity and adjustment. - Growth accounting: - Investment contraction during 2018-2020: 12½ percent of GDP decline; investment recovered 6¼ percent of GDP by end-2021. - Projection: real GDP growth projected to reach 3½ percent by 2025 (below pre-crisis average 2011-17 of 5.2 percent). - Staff assume zero labor contribution to growth by 2027. - Potential growth estimates: regression and HP-filter suggest potential growth ~3½ percent per year; with labor participation recovery potential could be 4-5 percent. - Policy priorities to raise medium-term growth: - Increase labor force participation and formal job creation. - Tax simplification and measures to support small firm formalization. - Continued investment in infrastructure and connectivity. - Improve business climate: contract enforcement, property rights, insolvency resolution. - Governance and anti-corruption reforms. ### Governance, AML/CFT, fiscal transparency, and statistics - AML/CFT: extensive legal reforms; FATF removed Nicaragua from increased monitoring (Grey list) in October 2022 but expressed concerns about potential misapplication affecting NPO sector. - Identified AML/CFT shortcomings: non-targeted regulation of NPOs, insufficient enforcement including politically exposed persons, low convictions for ML-related offenses. - Beneficial Ownership Registry: appears adequately set up and populated; access not public but used domestically. - Fiscal transparency: publication of pandemic-related spending and procurement contracts; first external audit covering April 1, 2020 to May 31, 2021 published; first fiscal risks report published May 2022; plan to publish annual financial statements in March 2023. - Governance and rule of law shortcomings: asset declaration regime deficiencies, lack of whistleblower protection norms, weak implementation of access to information, training gaps, challenges in ensuring fair and impartial access to courts. - Staff recommendations: strengthen fiscal transparency, publish all audit reports of COVID-19 funds, ensure public access to asset declarations, adopt whistleblower protection norms, and implement Law of Access to Public Information. - Statistics: broadly adequate for surveillance but timeliness and frequency deteriorated since 2018; need to expand data sources and harmonize public sector and external debt data. ### Policy recommendations — summary - Fiscal: - Safeguard fiscal sustainability: build fiscal space, reallocate expenditures to support growth, improve taxation, better target subsidies. - Pursue transparent and concessional lending; consider limited domestic financing while acknowledging higher servicing costs and possible crowding out. - Monetary and exchange rate: - Continue raising reference interest rate to maintain interest differential with U.S. policy rate consistent with crawling peg and financial stability. - Continue reserve accumulation to support exchange rate regime. - Financial sector: - Improve provisioning for distressed assets; expand prudential perimeter; enhance crisis preparedness and resolution framework; monitor FX risk. - Structural and governance: - Maintain adequate policy mix to support medium-term growth; invest in infrastructure; improve business climate; increase labor force participation. - Strengthen fiscal transparency, public financial management, governance, anti-corruption, and AML/CFT frameworks; ensure effective application and publication of audits and asset declarations; guarantee fair and impartial access to courts. - Labor market and inclusion: - Policies to increase formality, strengthen safety nets, improve skills matching, and support small firms and female participation. - Climate and disaster resilience: - Incorporate disaster risk management into medium-term fiscal framework; mobilize climate financing; consider natural disaster clauses in sovereign debt; consider carbon tax to finance National Disaster Fund. - Statistics and TA: - Continue IMF technical assistance and implement FSSR roadmap; next Article IV consultation recommended on 12-month cycle. *Source: NICARAGUA — International Monetary Fund staff report (January 4, 2023).* ### 11.4 percent in November 2022, mostly due to increases in import prices. The ### NICARAGUA ### Recent Developments - Headline CPI inflation reached 11.4 percent as of November 2022 (y-o-y). - The food basket, which represents 70 percent of the basic consumption basket, increased by around 20 percent y-o-y over the same period. - Remittances grew an average 45 percent year-on-year over the first nine months of 2022 (compared to about 10 percent yearly growth over 2017-2021) and helped support domestic demand. - Real GDP grew by 10.3 percent in 2021 and 5 percent in the first half of 2022; real GDP is expected to grow by 4 percent in 2022. - The government’s preliminary estimate of the damage from hurricane Julia in October 2022 is about 2½ percent of GDP, with a large portion in infrastructure. - Gross international reserves reached US$4.3 billion by end-June 2022 (about 6 months of imports, excluding maquila) and have doubled in U.S. dollars since end-2018. - The consolidated public sector (CPS) deficit narrowed to 1.4 percent of GDP in 2021; CPS fiscal measures adopted in May 2022 to mitigate oil and wheat price increases are estimated at 1.2 percent of GDP for 2022 and set to expire by end-year. - The CPS deficit is projected to widen to 3.3 percent of GDP in 2022 due to these measures. - The Central Bank of Nicaragua (BCN) raised its reference rate by a cumulative 350 basis points since February 2022 (compared to an increase of 425 basis points in the United States); the Córdoba rate of crawl against the U.S. dollar remains at 2 percent per year. - Bank deposits grew 12.4 percent y-o-y, surpassing pre-crisis aggregate level (in Córdobas); bank credit reached 12 percent y-o-y growth but the stock remains 25 percent lower than in March 2018. - Reported Non-Performing Loans (NPLs) have fallen to 1.9 percent, but the level of distressed assets remains significant at 12.1 percent. - Reported capital adequacy ratio (CAR) remains high and banks continue operating with comfortable levels of liquidity, though liquidity has narrowed recently. ### Outlook and Risks - Real GDP is expected to grow by 3 percent in 2023, sustained by the recovery of domestic demand, in turn underpinned by remittances. - Inflation is projected to moderate, with inflation expected to fall gradually to 6 percent in 2023, driven by decelerating food import prices and a decline in global inflation. - Medium-term real GDP growth is expected to converge to 3½ percent, below pre-crisis growth rates, as credit to the private sector and investment cautiously recover. - Downside risks include: - A more severe global downturn and further external monetary tightening than expected. - Prolongation of Russia’s war in Ukraine. - Lower demand from trading partners and weaker remittances growth. - Further increases in inflation and risks of fiscal slippages. - Fiscal strain from natural disasters. - Business climate deterioration and stricter international sanctions posing elevated risks to trade and financing flows. ### Key Statistics and Fiscal Measures - Inflation (headline CPI): 11.4 percent (November 2022, y-o-y). - Food basket share of basic consumption basket: 70 percent. - Food basket change: increased by around 20 percent y-o-y. - Remittances in 2021: 15½ percent of GDP. - Gross international reserves (GIR): US$4.3 billion by end-June 2022 (about 6 months of imports, excluding maquila). - Temporary fiscal measures to mitigate oil and wheat price increases: estimated cost 1.2 percent of GDP for 2022 (set to expire by end-year). - CPS deficit projections: 1.4 percent of GDP in 2021; projected to widen to 3.3 percent of GDP in 2022. - Concessional financing in 2022: CABEI loan of US$200 million and World Bank pandemic loan of US$116 million. - BCN reference rate increases: cumulative 350 basis points since February 2022. - Córdoba crawl rate against U.S. dollar: 2 percent per year. - Bank deposits growth: 12.4 percent y-o-y. - Bank credit growth: 12 percent y-o-y; credit stock 25 percent lower than March 2018. - Reported NPLs: 1.9 percent; distressed assets: 12.1 percent. ### Key Policy Recommendations - Safeguard fiscal sustainability: build fiscal space while reallocating expenditures to support growth, improving taxation and better targeting subsidies. - Continue raising the reference interest rate: maintain the interest rate differential with the U.S. policy interest rate consistent with the exchange rate crawling peg regime and financial stability. - Strengthen financial system resilience: improve provisioning for distressed assets, enhance the crisis preparedness framework, and expand the prudential supervisory perimeter. - Support medium-term growth: maintain an adequate policy mix, continue investment in infrastructure and connectivity, enhance the business climate, and increase labor force participation. - Enhance governance and transparency: - Strengthen fiscal transparency, public financial management, governance, anti-corruption, and Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) frameworks, and align them with international standards. - Ensure proper application and effective implementation of the AML/CFT frameworks, publication of all audit reports of the use of public funds, public access to the asset declaration system, and reviews of the asset declarations of politically exposed persons to improve perceptions of corruption and support growth. - Ensure fair and impartial access to the court system and adequate recourse in all legal proceedings to support property rights, contract enforcement, and investment. *Source: NICARAGUA — International Monetary Fund staff report (January 4, 2023).* ### 12. Risks to the outlook are mostly to the downside, primarily due to global headwinds ### 12. Risks to the outlook are mostly to the downside, primarily due to global headwinds ### Major downside risks and channels - A more severe global downturn than currently incorporated into the baseline scenario could: - Lower exports growth due to a decline in demand from trading partners. - Tighten financial conditions. - Reduce remittances growth. - Further monetary tightening (in the U.S.) or a prolongation of Russia’s war in Ukraine could heighten the above effects. - Continued inflationary pressures could pose risks to food affordability and the fiscal position. - Natural disasters could strain fiscal balances, economic activity, and social outcomes given Nicaragua’s high exposure and economic dependence on climate sensitive sectors. - Deterioration in the business climate and stricter international sanctions pose elevated risks to trade and financing flows, and thereby growth. - Risks could intensify should the quality of financial assets deteriorate; materialization would require adjustment of fiscal and monetary policies, enhancing financial provisions and frameworks, and acceleration of structural reforms. ### Financial system indicators and vulnerabilities - Average CAR of the financial system is 20 percent. - Liquid assets represent 37.9 percent of short-term liabilities compared to 36.7 percent in March 2018. - Liquidity Coverage Ratio (LCR) is 285 percent (minimum requirement 100 percent). - The total stock of distressed assets has fallen from a peak of 22.6 percent as of September 2020 to 12.1 percent; distressed assets remain six times the NPL stock. - As of September 2022: - Provisions relative to NPLs: 272 percent (pre-crisis 226 percent). - Provisions relative to total distressed assets: 43 percent (pre-crisis level 86 percent). - Bank credit year-on-year growth accelerated to 12.0 percent (measured in U.S. dollar) by September 2022; credit has reached all sectors except mortgages. - Dollarization: more than 90 percent of credit and 70 percent of deposits are denominated in U.S. dollar. ### Debt outlook and fiscal risks - Nicaragua is assessed at moderate risk of debt distress (see Debt Sustainability Analysis, DSA). - Medium-term projection: decline in public debt to 54 percent of GDP by end-2027, based on announced medium-term budget plans for 2023-2026 and expiration of various subsidies and social benefits. - Compared to 2020, the debt path and space to absorb shocks have improved, but vulnerabilities to external shocks, natural disasters and contingent liabilities remain elevated. - Projected unidentified fiscal financing needs: about 3¾ percent of GDP over 2023-27. - Pandemic-related aid is waning; new financial assistance from IFIs other than CABEI is projected to be limited over the medium-term, given the RENACER ACT. - Accessing international bond markets will raise debt servicing costs due to expected increases in U.S. Treasury bond interest rates and the risk premium Nicaragua will need to pay above those rates. ### Fiscal policy recommendations and consolidation measures - Staff’s baseline incorporates a consolidation at the central government level of 2 percent of GDP over 2023-2026 (mostly termination of temporary crisis and pandemic-related measures). - Staff projections include increased targeted social spending of ½ percent of GDP to alleviate poverty. - Over the medium term, the overall fiscal deficit in the consolidated public sector will stem mainly from imbalances in INSS and SOEs. - To reduce public debt to its pre-crisis level of 45 percent of GDP, staff recommend additional permanent measures of 1¾ percent of GDP, comprising: - Streamline VAT exemptions and improve taxation in selected sectors (digital and mining), strengthen tax risk management and tax audit procedures to improve voluntary compliance and domestic revenue mobilization (0.7 percent of GDP). - Reduce current expenditures (primarily on wages and goods and services; 0.8 percent of GDP). - Adjust and improve targeting of long-standing subsidies to reduce imbalances from affected SOEs (0.3 percent of GDP). - Staff recommend pursuing transparent and concessional lending, including from bilateral sources and IFIs, to not jeopardize debt sustainability. - There is room to increase domestic financing with Treasury bonds, but this would raise debt servicing costs and could crowd out private sector credit. ### Monetary and exchange rate policy - The central bank has broadly maintained the interest differential with the United States, consistent with the exchange rate crawling peg regime. - Staff recommend increases in the reference interest rate that maintain the interest differential with the U.S. policy rate, consistent with the exchange rate crawling peg and financial stability. - Commercial bank deposits at the central bank have increased, offsetting contraction of currency in circulation due to significant accumulation of government deposits at the central bank. - Central bank foreign exchange net sales have remained negative since 2019, indicating monetary policy rate increases in 2022 were sufficient to maintain the crawling peg amid U.S. monetary tightening. - In the medium term, continued reserve accumulation is needed to support the exchange rate regime; staff expect continuation of reserves accumulation in the medium-term, albeit at lower rate, as reflected in the baseline scenario. - Authorities expect to tighten monetary policy further in view of expected increases in U.S. rates but stress limits to reference rate increases given costs to the economy. Authorities view the crawling peg as a key nominal anchor and assess current gross international reserves as adequate for potential shocks. ### Financial sector stability and crisis preparedness - Concerns and recommended actions: - Low provisioning ratio of distressed assets relative to total distressed assets; authorities should extend provisioning framework beyond NPLs to increase provisions for restructured loans and other distressed assets. - Ensure credit rebound is coupled with sound and prudent lending policies. - Consider additional macroprudential tools if necessary, such as higher risk weights for unsecured lending; countercyclical provisioning was recently reactivated. - Foreign exchange risk warrants attention given high dollarization. - Update the resolution framework and align it with Financial Stability Board Key Attributes; review resolution toolkit and begin recovery and resolution planning. - Enhance arrangements among entities involved in crisis preparedness and management; consider crisis simulation exercises; possibly create a FSC subcommittee for crisis situations. - Expand prudential supervisory perimeter: overcome data gaps for credit and savings cooperatives and start oversight (principle of proportionality); finalize capital requirements legislation for microfinance companies. - Fund stands ready to provide technical assistance and to implement the 2019 FSSR roadmap. - Authorities’ position: - Committed to strengthening financial sector resilience; note high level of provisions relative to NPLs and reactivation of countercyclical provisioning. - Agree to improve provisions relative to other distressed assets and revisit regulation. - Will address data gaps and start oversight of credit and savings cooperatives, prioritizing supervision of the largest institutions. ### Medium-term growth and employment - Growth accounting and projections: - During 2018-2020 the growth contraction was mostly due to investment contraction (12½ percent of GDP), leading to a decline in the capital stock and revision of growth potential. - Investment started recovering in 2020 and by end-2021 had increased 6¼ percent of GDP. - Real GDP growth is projected to increase to 3½ percent by 2025, below the pre-crisis average (2011-17) growth rate of 5.2 percent. - Constraints and policy priorities to raise medium-term growth: - Labor contribution is expected to remain muted; labor force participation fell to 67.1 percent in 2021 while unemployment declined to 3.7 percent. Emigration increased significantly since mid-2021. - Staff assumes zero labor contribution to growth by 2027. - To achieve higher growth, policies needed include increasing labor force participation, tax simplification and other measures to support formal job creation, continued investment in infrastructure and connectivity, and improvements in business climate (contract enforcement, property rights, insolvency resolution). - Additional governance and anti-corruption reforms are needed to strengthen competitiveness. - Authorities’ views: - Authorities broadly agreed with staff on outlook and risks, differing in medium-term growth projection by about ¾ percentage points as they expect higher investment. - Authorities expect trade to continue to be an engine for growth, citing the Memorandum of Understanding to join the Belt and Road Initiative signed in early 2022 with China. - Authorities emphasized commitment to a prudent policy mix to sustain external shocks and did not see risks of food insecurity if inflation rises, given the agricultural sector role, prior food production performance during shocks, and extensive social programs. *Source: IMF staff report (Chapter 12 text).* ### 29. The authorities concurred with staff that policy solutions are needed to increase the ### 29. The authorities concurred with staff that policy solutions are needed to increase the ### Employment, productivity, and medium-term growth - Authorities and staff agree policy solutions are needed to increase the employment contribution to growth to support higher potential medium-term growth, which the authorities see at 4 percent. - Authorities committed to attract more investment and mitigate the decline in labor force participation to ensure a higher medium-term economic growth. - Informal employment is viewed by authorities as: - a cushion for those who lose their formal jobs; and - a crucial contributor to the dynamism of the economy. - Authorities flagged emigration as a potential explanation for recent declines in labor force participation, linked to the 2018 socio-political event, the pandemic, and a strong U.S. job market, but noted more analysis is needed to understand long-term impact. - Authorities concur on the need to enhance policies to support higher productivity. ### Strengthening AML/CFT framework - Nicaragua enacted extensive legal reforms to improve the AML/CFT framework, aligning with international standards on: - understanding risks; - enhancing international cooperation; - improving supervision of reporting entities; and - implementing measures to prevent misuse of legal entities for criminal purposes. - FATF Plenary of October 2022 welcomed Nicaragua’s progress and removed it from the list of jurisdictions subject to increased monitoring (the Grey list). - FATF expressed strong concern about potential misapplication of FATF standards resulting in suppression and closure of a large part of Nicaragua’s non-profit sector. - Identified shortcomings: - regulation of non-profit organizations is not targeted to prevent unintended consequences; - enforcement efforts, including against politically exposed persons, are not sufficient. - Recommended priorities: - ensure timely access to accurate beneficial ownership information; - further refine risk assessment and AML/CFT risk-based supervision of banks; - guarantee that money laundering offences are investigated and prosecuted in a fair and independent manner, and ill-gotten proceeds are properly confiscated. ### Fiscal transparency and public financial management - Government has published details of pandemic-related spending and procurement contracts on the Finance Ministry’s website, including beneficiary ownership. - The first independent external audit report on all pandemic-related use of funds was published; it covers execution from April 1, 2020 to May 31, 2021, including transfers to UNOPS and WFP of the share of IMF emergency funds. - A first fiscal risks report was published in May 2022. - Recommended further actions: - continue to publish all audit reports regarding the use of pandemic-related funds; - promptly publish the annual financial statements of the central government and their audit reports performed by the Comptroller General Office; - expand publication and coverage in fiscal reports, including all SOEs. ### Governance, anticorruption, and rule of law - Steps taken: - Comptroller General Office introduced a platform to collect asset declarations from all public officials, has undertaken collection efforts, and has sanctioned some non-compliant officials. - A strategic national plan to ensure access to justice has been adopted and implementation has started. - Remaining shortcomings: - asset declarations regime has deficiencies preventing effective detection, oversight, and sanctioning of serious corruption cases; - lack of whistleblower protection norms; - insufficient implementation of access to information provisions; - insufficient training of public officials; - challenges in ensuring fair and impartial access to the court system and recourse in legal proceedings. - Staff recommendations: - Comptroller General Office should take additional measures to ensure public access to asset declarations, digital reporting, and prioritize reviews of declarations of politically exposed persons; - adopt norms on whistleblower protection; - effectively implement access to information provisions; - enhance training of public officials on corruption detection and reporting; - ensure fair and impartial access to the court system to support business climate, growth, property rights, contract enforcement, and investment protection. ### Central Bank (BCN) safeguards and governance - BCN implemented recommendations from the November 2021 safeguards assessment, including: - establishing an Audit Committee to oversee financial reporting and audit mechanisms; - strengthening external auditor selection process. - Work in progress: - legal amendments to strengthen central bank autonomy; - a medium-term recapitalization strategy; - a plan to restart transition to International Financial Reporting Standards (IFRS). ### Authorities’ views on governance and transparency - Authorities agreed with staff recommendations to enhance effectiveness of AML framework application and will work with GAFILAT to avoid unintended consequences for FATF Recommendation 8 concerning Non-Profit Organizations that are compliant. - Authorities expect a second report covering execution of COVID-19 funds during June 1, 2021 to May 31, 2022 to be published in May 2023; UNOPS audit report on execution of the first part of COVID-19 funds by them is expected in November 2023. - Authorities committed to publishing annual financial statements of the central government and their audit reports, and to expand publication and coverage of fiscal reports, including all SOEs. - Authorities agreed on the need to strengthen governance, anticorruption frameworks, effective application, and rule of law; they noted capacity to determine appropriate legal instruments to align frameworks with best international practices. - On safeguards, authorities stressed central bank independence in policy formulation and operations; they view amending law and outlining a recapitalization plan as desirable work in progress and do not consider transitioning to IFRS a priority until capacity is developed. ### Statistics and data - Assessment: - statistics are broadly adequate for surveillance, but timeliness and frequency of certain published reports have deteriorated since 2018; - need to expand data sources (e.g., incorporate household survey results into national accounts) and harmonize public sector debt with external sector debt data. - Despite extensive TA, statistical publication has not returned to a more predictable timetable, though data coverage remains appropriate for surveillance. - Authorities’ actions: - reallocated data publication to relevant agencies (e.g., debt and public finance statistics now published on Ministry of Finance website); - continue to build on IMF TA and work with the Fund’s Statistics department and CAPTAC on implementing TA recommendations. ### Staff appraisal — macroeconomic outlook and policy recommendations - Recent performance and buffers: - After contracting about 9 percent over 2018-20, real GDP grew by 10.3 percent in 2021, and is expected to grow by 4 percent in 2022, sustained by private consumption and exports. - Strong remittances, large FDI projects and the SDR allocation in August 2021 allowed accumulation of gross international reserves to about US$4.3 billion by end-June 2020 (6 months of imports, excluding maquila). - Staff assess the external position is moderately stronger than levels implied by fundamentals and desired policies. - Outlook and risks: - Real GDP growth is expected to moderate to 3 percent in 2023, due to weaker external demand and tighter external financial conditions. - Over the medium term, real GDP growth is projected to converge to its potential of about 3½ percent. - Downside risks: more severe global downturn affecting exports and remittances, further external monetary tightening and higher import prices, natural disasters, deterioration in business climate, stricter international sanctions. - Policy recommendations: - continue prudent monetary, fiscal, and financial policies to build resilience and achieve sustained medium-term growth; - maintain appropriately tight fiscal and monetary policies to strengthen buffers, accumulate reserves, and maintain an interest rate differential with the U.S. consistent with the exchange rate crawling peg; - sustain efforts to improve business climate and implement structural reforms to increase formal employment and help curb emigration and strengthen social security accounts. - Fiscal specifics: - Staff consider planned fiscal policy in 2023 appropriate given global environment; - support improving the consolidated public sector deficit primarily through unwinding crisis-related measures and continued consolidation at the central government level. - Public debt is currently about 57 percent of GDP. - Financial sector recommendations: - increase provisions for distressed assets and ensure sound lending practices as credit rebounds; - align crisis preparedness framework with best international practices; - expand prudential supervisory perimeter; - continue close monitoring of FX risk given high degree of dollarization. - Governance and transparency recommendations reiterated: - continue strengthening AML/CFT framework application and effectiveness; - sustain efforts for greater fiscal transparency, publish all external audit reports on use of all COVID-19 funds; - Comptroller General Office to ensure public access to asset declarations, digital reporting, and prioritize reviews of politically exposed persons; - fully implement Law of Access to Public Information and enact whistleblower protection norms. - Statistics: - staff welcome authorities’ intentions to continue building on TA recommendations to improve quality and consistency of statistics. - Consultation cycle: - staff recommend that the next Article IV consultation takes places on the standard 12 - months cycle. ### Box 1 — Inflation and Food Affordability (key figures) - By September 2022 over half of the Nicaraguan CPI yearly increase was due to the increase in food and non-alcoholic beverages prices. - Tradable goods prices increased by over 14 percent (y/y), above the headline CPI annual change; non-tradable goods prices grew at a slower rate. - Food inflation increased by 21 percent year-on-year in September 2022. - Basic consumption basket grew 16 percent year-on-year over the same period. - Food represents 70 percent of the total basic consumption basket. - Staff estimates the loss in purchasing parity is over 10 percentage points (average wages); loss in purchasing power for minimum wages was about 4 percentage points (minimum wages increased 3 percent in 2021 and 7 percent in 2022). - Nicaragua is a net exporter of food. In 2022, total food trade balance over the first nine months is estimated to have reached about US$360 million, or 2.3 percent of GDP. - Total goods imported from Russia and Ukraine represented less than US$90 million. ### Box 2 — Real GDP Projections (methodology overview) - Staff used a vector autoregressive model (VAR) to estimate response of Nicaraguan economic activity to external developments, primarily the United States. - Domestic variables: Nicaraguan real GDP growth and exports. - External variables: U.S. real GDP growth and policy interest rate, and international gold price. - Frequency and sample: quarterly year-on-year growth rates from 1996Q1 to 2022Q2, using BCN or IMF WEO (October 2022) databases. - Model includes a dummy variable for natural disasters (exogenous), with data from EM-DAT. - Main result: a 1 percentage point increase in the U.S. real GDP growth translates into a significative cumulative response in the Nicaraguan GDP growth of about *Source: 1nicea2023001 - 29.* ### 0.9 percentage points after 3 quarters (text chart). This is ### 1nicea2023001 - 0.9 percentage points after 3 quarters (text chart). This is ### External link with the United States and growth scenarios - The United States is an important trade partner and source of external private financing through remittances, tourism, and FDI. - The U.S. represents about 75 percent of exports, 60 percent of imports, 75 percent of remittances, and ⅓ of FDI sources. - Baseline scenario assumptions: - Projections for the United States real GDP growth as of October 2022 IMF WEO. - US policy rate, international gold price, and demand of Nicaraguan exports proxied by projected imports to the United States until end-2027. - Baseline real GDP growth outcome: - Nicaraguan real GDP growth is estimated to reach 3½ - 3¾ percent over the period, consistent with staff’s growth accounting analysis and macroframework Tables. - Sensitivity to U.S. real GDP in 2023: - If U.S. real GDP is lower by ½ standard-deviation than October WEO projection for 2023, resulting Nicaraguan real GDP growth range would be 2.6 to 3.2 percent. - Around the baseline scenario of about 3 percent growth in 2023 (text chart). ### Real sector — recent performance and drivers - Mining, manufacturing, and retail activity are driving growth. - Aggregate demand recovered; precrisis real GDP level has been surpassed and recovery continued in 2022. - Real GDP (Billions of Córdobas) shows actual values above an extrapolation of the pre-2018 crisis trend in 2022. - Employment and credit: - While formal employment is somewhat recovering, real credit growth and employment remain below pre-crisis levels. - Inflation: - Headline and core CPI inflation (12 month percent change) reached two-digit levels; "two-digit inflation is now the main policy challenge." ### External sector — trade, current account, reserves, and capital flows - Imports surged driven by demand and commodity prices; current account swung into a deficit. - Oil and non-oil current account balances show rising oil imports; higher international fuel prices increased oil import bill. - Main exports performance (H1 2021-H1 2022, percent change): - Coffee, Beef, Gold — Price, Volume, Value changes depicted in source charts. - Capital inflows: - Capital inflows are normalizing; components of financing (Percent of GDP) include Other Investment Inflows, Portfolio Inflows, FDI Inflows. - Public external debt plateaued; international reserves reached historic highs. - Selected figures (Table 4 and related): - Current account (US$ million): 2017 -987; 2018 -234; 2019 754; 2020 497; 2021 -317; 2022 -271; projections through 2027 show deficits (e.g., 2023 -305). - Gross international reserves (US$ million): 2017 2,593; 2018 2,080; 2019 2,199; 2020 3,003; 2021 3,828; 2022 4,286; 2023 4,344; projections rising to 5,157 by 2027. - Net international reserves (US$ million): 2017 1,802; 2018 1,146; 2019 1,374; 2020 1,887; 2021 2,531; 2022 2,792; 2023 2,917; projections to 3,247 by 2027. - Exports f.o.b. (US$ million): 2017 3,305; 2018 3,301; 2019 3,365; 2020 3,561; 2021 4,296; 2022 4,405; projections up to 5,488 by 2027. - Imports f.o.b. (non-maquila) (US$ million): 2017 5,675; 2018 4,905; 2019 4,421; 2020 4,489; 2021 6,172; 2022 7,162; projections up to 9,097 by 2027. - Remittances (US$ million, Table 4 Transfers): 2017 1,391; 2018 1,501; 2019 1,682; 2020 1,851; 2021 2,147; 2022 3,006; projections continued high (e.g., 2023 2,855). ### Fiscal sector — deficits, transfers, public debt, and financing - Fiscal deficit increased due to the pandemic and will further widen amid new subsidies. - Central government transfers to state-owned enterprises increased. - Central government (excluding transfers to INSS) and consolidated public sector show revenue and expenditure dynamics: - Consolidated public sector (overall balance after grants): 2017 -2.2; 2018 -3.8; 2019 -1.2; 2020 -2.6; 2021 -1.4; 2022 -3.3; 2023 -2.6 (Prel. and projections extend to 2027). - Central government overall balance (Percent of GDP): 2017 -17.7; 2018 -18.9; 2019 -0.5; 2020 -2.3; 2021 -1.2; 2022 -1.6; 2023 -0.7. - Pension system (INSS) deficit increased as contributions fell since 2020. - Financing: - While external financing and government deposits covered higher financing needs over the last 2 years, financing is expected to be limited going forward. - Public debt increased as a result of external financing extended to cover the pandemic and hurricane-related expenditures. - Public sector debt (Percent of GDP, Table 2): - 2017 41.7; 2018 48.3; 2019 50.2; 2020 57.8; 2021 56.9; 2022 58.1; projections show slight decline to 54.2 by 2027. - Gross fiscal financing requirements (Table 7 highlights): - Gross financing needs (Millions of U.S. dollars): 2017 796; 2018 870; 2019 650; 2020 808; 2021 710; 2022 1,123; 2023 955; projections up to 1,320 by 2027. - NFPS primary deficit (before grants) (Millions of U.S. dollars): 2017 303; 2018 453; 2019 138; 2020 262; 2021 108; 2022 325; 2023 167. ### Monetary sector and central bank operations - Net international reserves rose rapidly in 2022, matching accumulation of central government deposits and decumulation of ODC foreign assets. - Monetary base and broad money are growing rapidly since late 2020; slowing down slightly in 2022 through July. - Credit to private sector recovering since 2021; in 2022 through July, NFA and NDA offset NFPS deposits. - BCN FX net sales remain negative and muted since 2019, with official rate very close to market rate. - Excess reserves are decreasing rapidly in 2022. In July, NC and FC at 15.9% of applicable deposits (vs 15% req.). - Lending and deposit rates declined since 2018 crisis; remain stable amid tightening global financial conditions. - Selected central bank and financial system indicators (Table 8a): - Net foreign assets (Billions of Córdobas): 2017 42.1; 2018 21.9; 2019 27.9; 2020 52.6; 2021 73.1; 2022 93.5; projections to 143.6 by 2027. - Net international reserves (billions of US$): 2017 1.8; 2018 1.1; 2019 1.4; 2020 1.9; 2021 2.5; 2022 2.8; projections to 3.2 by 2027. - Broad money (Billions of Córdobas): 2017 174.1; 2018 141.6; 2019 150.4; 2020 173.9; 2021 198.0; 2022 227.5; projections to 352.0 by 2027. - Monetary base (Percent change and levels reported in source tables; deposits and currency issue dynamics documented). ### Financial sector — banks, credit, NPLs, and provisioning - Bank deposits recovered strongly, but credit to the private sector is well below pre-crisis levels. - Lower level of credit since mid-2018 accompanied by strengthening of banks' capital. - NPLs have been falling since 2021, but the level of distressed assets remains significant. - Provisioning: - Provisioning seems strong relative to NPLs, but lags behind relative to distressed assets. - Provisions to NPLs and to total distressed assets reported in source charts and tables. - Profitability and liquidity: - The financial system is recovering profitability since the sharp fall in 2018. Banks operate with comfortable liquidity. - Selected financial indicators (Table 10 and related): - Capital Adequacy Ratio (various quarters up to 2022Q3: 20.0 in 2022Q3). - Non-performing loans to total loans (ratio) trend: e.g., 2018 1.0; 2019 2.6; 2020 3.2; 2021 3.7; 2022 2.4 (Table 1 shows "Non-performing loans to total loans (ratio) 1.0 2.6 3.2 3.7 2.4 ......"). - Provisioning ratios and returns on assets/equity series provided in source tables (e.g., ROA 12-month average series; ROE series across quarters). ### Key macroeconomic and social indicators (selected) - GDP per capita (current US$, 2021): 2,141.0 - GNI per capita (Atlas method, current US$, 2021): 2,010 - GINI Index (2014): 46.2 - Income share held by the richest 10 percent (2014): 37.2 - Unemployment (percent of labor force, 2020): 11.1 - Poverty rate (national pov. line, 2016): 24.9 - Population (millions, 2020): 6.5 - Life expectancy at birth in years (2019): 74.7 - Infant mortality rate (per 1,000 live births, 2020): 13.8 ### Medium-term macroframework (selected projections) - Real GDP growth (Table 2 projections): - 2023 3.0; 2024 3.3; 2025 3.5; 2026 3.5; 2027 3.5 - Consumer price inflation (end of period) projections: - 2023 6.1; 2024 4.8; 2025 4.0; 2026 4.0; 2027 4.0 - Consolidated public sector (Revenue and Expenditure as percent of GDP, Table 2): - Revenue (Incl. grants) 2023 29.6; 2024 29.7; 2025 29.7; 2026 29.8; 2027 29.7 - Expenditure 2023 32.2; 2024 31.7; 2025 31.9; 2026 31.9; 2027 31.8 - Current account (Percent of GDP) projections: - 2023 -1.8; 2024 -2.4; 2025 -2.6; 2026 -2.6; 2027 -2.5 *Source: IMF staff calculations and national authorities as presented in the provided IMF PDF content.* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### Overall Assessment - The external position of Nicaragua in 2021 was moderately stronger than the level implied by fundamentals and desirable policies according to the current account (CA) and real effective exchange rate (REER) approaches. - The net international investment position (IIP) has improved markedly since the socio-political crisis of 2018, as well as since the previous report (2020). - According to the external stability (ES) approach, IIP does not require a REER adjustment to be sustainable in the medium term. - The trade balance is entirely covered by remittance inflows, which are at a historic high. - FDI and medium- to long-maturity public sector debt financed the rest of the current account. - Gross international reserves increased rapidly in recent years and continued until June 2022, but remain moderately below the level recommended by the ARA metric. ### Potential Policy Responses - Continued accumulation of international reserves is recommended given dependence on remittance and FDI flows. - Main risks to external sustainability in the medium term: - A lapse in remittance and FDI flows. - Deterioration of the trade balance if the global downturn is worse than projected. - Heavier sanctions by the United States on goods imports from Nicaragua. - Policy recommendation: Nicaragua should continue to build its stock of international reserves. ### Foreign Assets and Liabilities: Position and Trajectory - Background: - NIIP worsened substantially in 2018 due to a sudden stop in capital (a reversal from inflows of about 8½ percent of GDP to outflows of 2½ percent of GDP). - Since 2018 capital inflows, especially FDI, have steadily returned, including in 2022Q1. - NIIP improved twenty percentage points since end-2018, of which 10 percent of GDP in 2021, reaching -109 percent of GDP by year-end 2021. - The dollar value of NIIP remained roughly constant in 2021; the improvement relative to GDP was driven by the recovery of nominal GDP (also as measured in USD). - Significant compositional changes in net IIP: increases in reserve assets, other assets, FDI liabilities, and public debt liabilities; decrease in private debt liabilities. - These changes are almost entirely driven by financial account flows rather than valuation effects. - Assessment: - The ES approach finds the NIIP sustainable. - Increase in public sector external debt has been more than offset by an increase in reserve assets. - The entire debt stock of the central government (50 percent of GDP) is of medium or long maturity and is owed to multilateral or bilateral institutions. - Private sector liabilities are likely stable as the bulk is FDI. - NIIP projections: - Projected to improve further in 2022 to -102 percent of GDP. - Projected to stabilize around -100 percent of GDP in the medium term. - Projection drivers: gradual decline in reserve and other assets (relative to GDP) offset by larger reduction in public and private external debt and other liabilities. - 2021 stock indicators (percent of GDP): - NIIP: -109 - Gross Assets: 55 - Debt Assets: 50 - Gross Liabilities: 165 - Debt Liabilities: 85 ### Current Account - Background: - After the 2018 socio-political crisis, lower import demand led to current account surpluses in 2019 (6 percent of GDP) and 2020 (3.9 percent of GDP). - Pre-crisis current account deficit was 7.2 percent of GDP in 2017. - In 2021 the current account swung to a deficit of 2.3 percent of GDP due to recovery in import demand increasing the trade deficit. - The reversion to a deficit was primarily driven by quantities rather than terms of trade, which deteriorated slightly in 2021. - Relative to pre-crisis, the trade balance exhibits a smaller deficit of 13.4 percent of GDP (17.2 percent pre-crisis). - Remittances increased from 10.1 percent of GDP in 2017 to 15.7 percent of GDP in 2021 and fully finance the trade balance. - Services balance was 1.3 percent of GDP in 2021 versus 3.8 percent pre-crisis, reflecting pandemic and social crisis impacts on tourism. - If trade balance recovered to 2017 level, estimated current account would be about -6.1 percent of GDP, only 1 percent of GDP smaller than in 2017. - Assessment: - The estimated current account gap using the EBA Lite model is 1.5 percent of GDP (in relation to the norm). - Adjustments accounted for: cyclical factors, a COVID-related adjustment for tourism (0.45 percent of GDP) and remittances (-0.24 percent of GDP). - Domestic policy gaps contributed -1.7 percent of GDP to the current account, with largest gaps due to: - Lower than desirable fiscal balance: -1.3 percent of GDP. - Higher than desirable public health spending: -0.8 percent of GDP. - Policy gaps in trading partners contributed net 0.3 percent of GDP to the CA gap, with: - Lower than desirable fiscal balances in trading partners: 1.7 percent of GDP. - Higher than desirable public health spending in trading partners: 0.7 percent of GDP. - Additional contributors to CA gap: - Excessive capital controls in trading partners: 0.3 percent of GDP. - Insufficient credit growth in Nicaragua: 0.2 percent of GDP. - Aggregate policy gaps contributed about 1 percent of GDP to the current account gap; residual about 0.5 percent of GDP. - Conclusion: the 2021 external position is moderately stronger than level implied by fundamentals and desired policies. - With strong increase in remittances and rebound in tourism in the first six months of 2022, the current account for 2022 is estimated to be smaller than in 2021 and the expected current account gap will be lower for 2022. ### Real Exchange Rate - Background: - Average value of the real exchange rate in 2021 was 92.8. - In 2022 the real exchange rate remained below 100 with the normalized value of 2010 level. - Nominal exchange rate policy: crawling peg at 2 percent depreciation against the U.S. dollar. - The real effective exchange rate (RER) appreciates if inflation in Nicaragua exceeds that of the United States by more than 2 percent. - After declining in 2017, RER remained stable until the Covid-19 pandemic, where it first increased and then gradually decreased as inflation picked up in the United States. - By the end of 2021, and continuing into 2022, substantially higher inflation rates in Nicaragua than in the United States contributed to a rapid appreciation of the real exchange rate, by about 5 percent in 2022 alone. - Latest reading: 97.3, 4.9 percent above the average level in 2021. - Assessment: - REER undervaluation estimated by EBA Lite CA model: 4.4 percent (REER model: 5.8 percent). - Both results indicate the REER is moderately undervalued relative to fundamentals and desired policies. - For the REER model the gap is largely driven by a model residual; policy gap contributes only 1.3 percent to the undervaluation. - The REER model residual decreased from 3 percent to roughly -6 percent between 2020 and 2021, possibly reflecting atypical inflation dynamics associated with Covid-19, particularly high inflation in the United States in late 2020 and 2021. - Over 2022 so far, the BCN tightened its monetary stance by a cumulative 350 basis points in line with the US cumulative 425 basis points, and the inflation differential with the US has been relatively stable over the first half of 2022. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - In 2021 the CA deficit of 2.3 percent of GDP was more than fully covered by: - Net FDI inflows of 8.6 percent of GDP. - General government external borrowing of 5.8 percent of GDP. - 80 percent of FDI inflows were in the form of equity securities. - Because financing inflows exceeded the current account deficit, the economy accumulated significant international reserves (5.9 percent of GDP) in 2021. - Trend continued in 2022 but expected to slow by year-end, with FDI inflows expected to fall to 5.4 percent of GDP in 2022. - Assessment: - Financing structure supports external stability with important caveat: continued high level of remittance inflows is critical. - FDI does not fully cover the trade balance, is expected to decrease in 2022, and is cautiously projected to remain lower than 2021 in the medium term. - Aggregate financial and capital account inflows are also not expected to cover the trade balance in the medium term. - Remittances are expected to remain above 16 percent of GDP in the medium term (staff does not expect a reduction in emigration), and staff does not expect a financing gap to significantly reduce the stock of reserves in the medium term. ### FX Intervention and Reserves Level - Background: - Gross international reserves at end-2021 were US$3.8 billion or 6.5 months of imports. - Stock of reserves grew by US$830 million in 2021 (US$1.75 billion since nadir at end-2018), supported by increase in FDI inflows outpacing the growing trade deficit. - Reserves continued to accumulate in 2022, standing at US$4.3 billion and expected to remain stable over the medium-term. - Exchange rate regime: crawling band of 2 percent depreciation against the US dollar, implemented largely by setting the policy rate to target the exchange rate. - In exceptional circumstances (e.g., aftermath of the socio-political crisis of 2018), the central bank uses FX intervention to stabilize the exchange rate without destabilizing the financial sector. - Since the crisis, FX interventions have been symmetric, with slightly positive net purchases of FX, indicating the monetary policy rate has been sufficient to maintain the crawling band. - Assessment: - Level of gross international reserves at 6.5 months of imports is on the lower end of the suggested range of 5.3 to 8.9 months of non-maquila imports estimated using the Fund’s adequacy metric for LICs. *Source: Annex I. External Sector Assessment (Nicaragua).* ### 6. The increasing confidence in the resilience of the financial sector led to a strong ### 6. The increasing confidence in the resilience of the financial sector led to a strong recovery of deposits ### Deposits recovery and dynamics - Recovery started in the third quarter of 2019. - Deposits began to register positive y-o-y growth at the beginning of 2020. - By mid-2020 deposits reached 11 percent y-o-y growth and this rate "has been maintained for over two years." - As of September 2022, deposits y-o-y growth was 12.4 percent. - Deposits surpassed pre-crisis levels (measured in Córdobas). - Deposits from the public held by banks (note definition). ### Bank credit: trough, slow recovery, and rebound - Credit reached its trough at the end of 2019, with a further reduction lasting until September 2020 after the April 2020 pandemic shock. - Bank credit started to register y-o-y growth as of June 2021. - Credit growth picked up from 1.8 percent y-o-y in June 2021 to 12 percent y-o-y in September 2022. - Initial rebound driven by consumer credit; soon followed by commercial and industrial lending. - As of September 2022, consumer, commercial, and industrial sectors had double-digit growth; agricultural loans had single-digit growth; mortgage growth remained subdued. - Stock of bank credit remained below pre-April 2018 level: as of September 2022, the level of credit is 25.1 percent lower than in March 2018. - None of the sectors had recovered to pre-crisis levels as of September 2022. - Some borrowers (e.g., some exporters) found alternative regional funding, complicating banks’ recovery of pre-crisis credit levels. - Recent policy rate hikes "may slow down current credit growth although this has not been the case to date." ### Banks' liquidity, capital, and profitability - Portion of liquid assets rose from 54 percent of the net credit portfolio in March 2018 to consistently more than 90 percent of the net credit portfolio since mid-2020. - Nicaraguan banks have operated with an average capital adequacy ratio above 20 percent (or beyond 18 percent if excluding the development bank “Produzcamos”). - Banks maintained a ratio of liquid assets to total deposits over 40 percent until recently. - Average LCR went from 150 percent at the beginning of 2019 to stay beyond 250 percent since mid-2020. - These liquidity and capital levels are expected to diminish as credit growth continues. - Banks remained profitable despite lower yields on fixed-term securities and higher capital; profitability also reflects a low level of provisioning relative to total distressed assets. - Footnote: As of September 2022, the capital ratio would decrease 3 percentage points on average (17 percent instead of 20 percent) if banks increased provisions to reach the level relative to total distressed assets they had in March 2018 (86 percent). When considered individually, one small-medium bank would fall slightly below the minimum capital requirements to reach this level. ### Policy recommendations and macroprudential considerations - Authorities should ensure that credit institutions do not loosen lending standards during the strong rebound. - Authorities recently reactivated countercyclical provisioning. - Further macroprudential measures may be needed, such as imposing higher risk weights on unsecured lending. ### Risk Assessment Matrix (selected domestic and external risks and policy responses) - External risks and responses: - Commodity price shocks — High Likelihood / Medium Impact - Policy responses: Provide targeted and time-bound fiscal support; strengthen social safety nets; tighten monetary policy if second-round inflation effects materialize; improve supply chain resilience. - Intensifying spillovers from Russia’s war on Ukraine — High Likelihood / Medium Impact - Policy responses: Accelerate structural reforms to increase competitiveness and resilience. - Abrupt global slowdown or recession — Medium Likelihood / High Impact - Policy responses: Provide coordinated monetary and fiscal response; calibrate policy to depth of slowdown and Fed spillovers; accelerate structural reforms to improve market flexibility. - Local Covid-19 outbreaks — Medium Likelihood / Medium Impact - Policy responses: Continue vaccination campaigns; prioritize health spending; monitor pandemic developments; strengthen social safety nets. - Domestic risks and responses: - Deterioration in business climate and intensification of sanctions on Nicaragua — Medium Likelihood / High Impact - Policy responses: Enhance governance framework and implementation; accelerate structural reforms; foster diversification and job creation; adjust fiscal expenditure while protecting social spending. - Natural disasters related to climate change — High Likelihood / Medium Impact - Policy responses: Enhance climate mitigation and adaptation; prioritize infrastructure resilience; strengthen disaster risk management and preparedness. ### Output growth factor analysis — potential GDP, drivers, and projections - Historical shocks and recent outcomes: - Socio-political unrest in 2018-19 led to a severe economic contraction of 7 percent over the two-year period. - Real GDP contracted by 1.8 percent in 2020 due to the pandemic. - Unemployment rate rose by almost a third, to 5 percent on average in 2018-20. - Investment decreased by 12½ percentage of the GDP during 2018-19. - Reassessment after stronger-than-expected rebound: - 2019 staff report (February 2020) projected potential growth declined to 3 percent. - FDI was projected to remain at 2 percent of GDP, 5 percent of GDP below pre-crisis sustained levels. - Investment rebounded 6¼ percent of GDP by end-2021 and continued to grow in 2022. - FDI reached 8.6 percent of GDP in 2021. - Growth accounting framework: - Assumes Cobb-Douglas Y = A_t K_t^α L_t^(1-α). - Analysis uses annual data 1994-2021 and restricted regressions (constant returns to scale). - Three stylized facts: - (i) Contribution of capital positive but trending down since early 2000s. - (ii) Labor contribution (formal and informal) has become negligible or negative including during the recovery. - (iii) Residual (productivity and other factors) was an important factor in the latest contractionary/recovery cycle. - Estimated potential growth and projections: - Regression estimates suggest GDP growth range of 3-4 percent; Hodrick-Prescott filtered data yields a growth mean of 3.5 percent per year in the 20-year lapse prior to the crisis. - This suggests potential growth rate of 3½ percent per year. - GDP growth in 2022 is estimated at 4 percent. - With projected investment reaching about 25 percent of GDP by 2027 (same as historical average 2006-21), the estimated growth rate is most likely to reach the lower part of the range. - If labor participation and contribution recover in the medium run, potential GDP growth could be in the range of 4-5 percent. - Specific numeric projections mentioned in charts/text: - Real and potential GDP growth and output gap chart lists: 2018, -3.4; 2019, -3.8; 2020, -1.8; 2021, 10.3; 2022, 4.0; 2023, 3.0; 2024, 3.3; 2025, 3.5; 2026, 3.5; 2027, 3.5. ### Labor market: characteristics, impact of downturn, and policy implications - Aggregate labor market outcomes: - Nicaragua had a pre-crisis pre-pandemic labor force participation rate of 74 percent (women 64 percent; men 80 percent). - Pre-crisis unemployment rate was 3 percent; underemployment was 40 percent. - By end-2020, informality rate stood above the average of the last 10 years; underemployment and unemployment rose; labor force participation fell by 8 percent for women and 5 percent for men. - By end-2021, informality rate in Nicaragua reached 75.5 percent, over 4 percentage points higher than 2017. - Employment losses and adjustments: - Despite recovery starting in late 2020, Nicaragua still had 120,784 fewer jobs at end-2021 compared to end-2017 as employment fell by 3.3 percent in this period. - Stylized labor dynamics: - Informality is countercyclical and acted as a buffer during crises (GFC, 2018 and 2020). - Formal employment cyclical component is less volatile than output but highly correlated. - Education levels improved but remain low and may hinder transitions within the labor market. - Policy implications to mitigate labor-market impacts (contextual): - Policies should aim to mitigate the impact of downturns on employment, ease adjustments and inequalities, hasten employment recovery, and support growth by improving labor market outcomes and human capital opportunities. *International Monetary Fund — Nicaragua country report excerpt* ### 4. The productive structure of Nicaragua’s economy and the flexibility of the labor ### 4. The productive structure of Nicaragua’s economy and the flexibility of the labor ### Productive structure and informality - Nicaragua’s productive matrix is concentrated in exportable agricultural products with low value-added, allowing persistence of unproductive sectors and low technology adoption. - Micro firms (with at most two employees and with high turnover) are largely prevalent; as degree of formalization increases with firm size, prevalence of small firms pushes workers into informality. - Labor market institutions and regulations have supported the historical high level of informality in Nicaragua. - Selected indicators highlight Nicaragua as among the most flexible labor market regulations in the CAPDR region and with the least active labor market policies. - Informality and development context (figure summary): - Informality rate (percent of total employment) plotted against Real GDP per capita (2011 PPP USD) shows Nicaragua among higher informality rates relative to peers. ### Labor market dynamics and speed of adjustment - Decomposition of unemployment changes shows: - Limited fluctuations in unemployment over business cycle phases. - Larger fluctuations in informality and participation rates. - Supply-side: labor participation rate has been an active margin of adjustment—expanding during good growth years, stopping growth during GDP contraction. - Demand-side: labor formalization has limited movements in unemployment. - Okun’s coefficient comparisons: - WHD, REO (2019) estimated average Okun’s coefficient for advanced economies about -0.3; CAPDR average about -0.16. - Estimated coefficient for Nicaragua is in the range (-1.9, -1.4) depending on lags used. - Small Okun coefficients in CAPDR countries suggest unemployment responds less to output fluctuations due to high informality. - Responsiveness of labor force participation to GDP: - Sensitivity of labor force participation rates to changes in GDP is smallest in Nicaragua relative to regional peers, mostly for women. - Female participation response to GDP changes is on average negative for CAPDR countries (countercyclical behavior in downturns). - Speed of adjustment of employment: - Average estimated speed of adjustment coefficient for the region: -0.46 (implies about 1.1 years to close half the employment gap). - Nicaragua’s estimated speed of adjustment coefficient: -0.16 (implies a half-life of about 3.1 years). - Cross-country labor regulation indicators (Text Table 1 excerpted figures): - Nicaragua: Minimum Wage US$/month = 248.71; Ratio of Minimum Wage to Value Added = 1.00; Premium for Night Work (% of hourly pay) = 100; Premium for Overtime Work (% of hourly pay) = 300; Paid Annual Leave (in working days) = 30; Notice Period for Redundancy Dismissal (in weeks of salary) = 0; Severance Pay for Redundancy Dismissal (in weeks of salary) = 14.9. ### Key statistics and historical shocks - Socio-political crisis in 2018 brought a larger increase in unemployment rate in Nicaragua. - Hurricanes Eta and Iota (November 2020) damages: US$999.3 million, equivalent to 8.3 percent of GDP in Nicaragua. - Natural disaster historical summary (1960-2021): - Total number of natural disaster events in Nicaragua (1960-2021): 82 (average 1.3 natural disasters per year). - Nicaragua registered the highest average damage per event: 2.4 percent of GDP. - Nicaragua recorded the third highest in terms of population affected per event: on average 2.1 percent of total population. - Text Table 1 (disaster events 1960-2021) selected figures: - Storm: Number of Events = 24; Total Deaths = 3,955; Number of People Affected = 2,688,877; Total Damage (million US$) = 2,676 - Flood: Number of Events = 23; Total Deaths = 5; Number of People Affected = 157,10,532; Total Damage (million US$) = 2.1 - Epidemic: Number of Events = 13; Total Deaths = 1,221; Number of People Affected = 15,855; Total Damage (million US$) = 0.007 - Earthquake: Number of Events = 7; Total Deaths = 10,188; Number of People Affected = 748,175; Total Damage (million US$) = 875 - Drought: Number of Events = 6; Total Deaths = n.a.; Number of People Affected = 1,313,000; Total Damage (million US$) = 18 - Volcanic Activity: Number of Events = 5; Total Deaths = 13; Number of People Affected = 21,370; Total Damage (million US$) = 2.7 - Wildfire: Number of Events = 3; Total Deaths = n.a.; Number of People Affected = 16,000; Total Damage (million US$) = 80 - Landslide: Number of Events = 12; Total Deaths = 95; Number of People Affected = 5,769; Total Damage (million US$) = n.a. ### Conclusion: trade-offs and constraints - High informality poses trade-offs: - Acts as a buffer for unemployment to GDP shocks. - Slows speed of adjustment of the economy to shocks, obstructs labor productivity growth and hampers growth. - Nicaragua’s resilience building constrained by financing and limited capacity to protect the financial sector and vulnerable populations. - In 2020, agriculture and tourism together represented 29 percent of GDP, 54 percent of exports and 42 percent of total employment. - About 13 percent of the population is estimated to live under the poverty line of US$3.65/day in 2022. ### Policy recommendations — labor market and structural reforms - Increase formality gains: - Strengthen worker’s safety nets. - Match workers’ skills and vacancies in the labor market. - Decrease barriers for formalization and growth of small firms (e.g., simplified taxes). - Implement structural reforms to address structural factors behind informality: - Improve education to raise human capital. - Facilitate small producers’ cooperatives and support the agency for agricultural technology research to spur productivity in the countryside. - Create programs of micro-credit to small firms and start-ups to encourage growth. - Ensure a leveled playing field for female labor force participation. - Costing and prioritization: measures need to be costed and prioritized given available financing. ### Building resilience to natural disasters and climate change (Annex VI) - Macrocriticality: - High exposure and sensitivity make climate change risks macro-critical for Nicaragua. - Nicaragua ranked 35 in the 2021 Global Climate Risk Index (extreme weather events 2000-2019). - Nicaragua’s AFOLU (agriculture, forest and land use) sector projected to face large potential impacts; recommended investment in locally suitable AFOLU adaptations. - Ongoing measures and plans: - Nationally Determined Contribution (NDC) updated in 2020; Presidential Decrees: No. 07-2019 (National Policy on Mitigation and Adaptation) and No. 06-2021 (creation of SNGCC and Secretary for Climate Change). - Renewable energy share increased by 8 percent over 2016-19, reaching 58 percent in 2019. - Nicaragua is CCRIF member since 2015; has received five payments totaling US$32.25 million. - Target in 2020 NDC: renewable energy in total energy generation of at least 65 percent in 2030. - Financing and fiscal recommendations to build disaster resilience: - Reform taxation: consider a carbon tax; proceeds could finance the National Disaster Fund; regular assessments of exemptions for equitability. - Incorporate disaster risk management into a comprehensive medium-term fiscal framework; Ministry of Finance included disaster risks in its first fiscal risks report (May 2022). - Adopt countercyclical fiscal policy to set aside surpluses in strong growth years to fund rebuilding after disasters. - Mobilize climate financing by enhancing project preparation, donor dialogue and transparency. - Introduce natural disaster clauses in sovereign debt contracts to allow automatic extension of debt service after defined large natural disasters. - Access climate financing via green bonds or debt-for-nature swaps (guided by Belize 2021 and Barbados 2022 experiences), noting requirement for a strong PFM system. *Source: IMF staff report excerpt — "4. The productive structure of Nicaragua’s economy and the flexibility of the labor" (text provided).* ### 10. Allowing energy price to reflect its environmental impact, including reforms of ### 10. Allowing energy price to reflect its environmental impact, including reforms of ### Climate-related financial resilience - Financial resilience measures recommended in parallel: - Increasing resilience of financial institutions to climate change risks by including climate change risk in bank stress tests and consequent provisioning for climate risk. - Further strengthening the regulatory and supervisory framework of the financial sector by adopting actual regulations to require financial institutions to provision against climate risks and by having financial supervisors assess the risks of credit portfolios to climate risks. - Layering strategy for disaster risk financing using a combination of contingent credit lines on concessional interest rates, natural disaster insurance, and funds allocated from international reserves to minimize the costs of hedging natural disasters. ### Fiscal transparency (Annex VII.A) - FAD conducted a Fiscal Transparency Evaluation (FTE) in March 2022. Authorities took extensive steps to improve the country's transparency score: - Expanded publication of documents and fiscal analyses on the Ministry of Finance’s website; tax expenditures are included in the medium-term projections; policy guidelines for the 2023 budget formulation were published in September 2022; losses and damages from natural disasters are reported under the fiscal risks reports; debt sustainability analyses and the quarterly evaluation of public debt are now also published. - Established a plan to publish annual financial statements of the central government in March 2023; recommendation that the authorities plan to audit them by the Supreme Audit Institution (SAI) and strengthen the independence of the SAI. - Planned to expand annual reporting of financial statements in June 2023 to include one more state-owned enterprise (SOE) to the five already published; authorities should aim at including all SOEs and the audit reports of those statements conducted by the Comptroller General Office. - Improved coverage of stocks and flows in published fiscal reports and internal consistency of fiscal data, especially regarding reconciliation of above and below the line in fiscal balance calculations; debt and fiscal statistics publication delays have been reduced. - Published the first fiscal risks report in May 2022 and will continue to improve reporting of macroeconomic risks, including from SOEs, and publish them annually. ### Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) (Annex VII.B) - National Risk Assessment (NRA) is comprehensive but faces implementation challenges: - Low compliance from specific sectors in implementing preventive measures to detect and report suspicious transactions, including microfinance sector, real estate, virtual asset service providers. - Identified risks include payments in support of drug trafficking, contraband and tax fraud, public corruption, and donations to finance terrorist activities employing misused Non-Profit Organizations (NPOs). - Beneficial Ownership (BO) Registry: - BO Registry appears adequately set up and populated and is being used by relevant parties; most obligated legal entities have provided necessary BO information. - Access is not public, but domestic authorities and financial institutions appear to be accessing it; no foreign entities have requested BO information of entities established in Nicaragua so far. - Enforcement weaknesses: - Financial Intelligence Unit forwards intelligence reports to law enforcement agencies (LEAs) that are not resulting in successful enforcement and confiscation of ill-gotten proceeds. - Overall number of ML-related convictions has decreased since 2020; no politically exposed persons have been convicted in the last five years and only one obligated subject was convicted for money laundering offenses. - Coordination and exchange of information between FIU, LEAs and the Judiciary should be enhanced; allocate additional resources to specialized prosecutors and judges. - NPO sector monitoring: - NRA identified some NPO activities as potential TF risks, but only a small percentage of NPOs were deemed high risk. - Authorities are not appropriately monitoring the sector based on risk and are using excessive interventions and sanctions to close NPOs beyond AML/CFT rationale. - No indication of terrorism financing activities linked to NPOs during the timeframe used for the NPO Sectorial Report; closures of NPOs appear inappropriate and not commensurate with the risk. - Recommendation: Enhance understanding of risks and apply appropriate monitoring of the NPO sector to prevent misuse while recognizing its role in channeling support to the community. ### Governance, Anti-Corruption and Rule of Law (Annex VII.C) - Progress since the 2019 Article IV Consultation: - Comptroller General Office implemented a platform for collection and management of asset declarations, applied sanctions for lack of compliance, and published audit reports over some state agencies and SOEs. - Effective prosecution of petty corruption cases reported by the Prosecutor General. - Training in ethics of public officials conducted by the Procuraduría General de la República. - Remaining weaknesses and recommendations: - Asset declaration regime and implementation need improvement; capacity to detect corruption at all levels must be bolstered; access to the court system and adequate recourse must be ensured to protect property rights, contract enforcement, and investment. - Strengthen asset declaration regime in line with international good practice: - Improve legal framework by expanding categories of information requested to cover interests and assets beneficially owned and ensure online publication of declarations of politically exposed persons obligated under the Law of Public Ethics (Ley de Ética Publica). - Improve implementation and monitoring by ensuring complete migration to electronic submission and oversight and by adopting risk-based approach monitoring. - Develop increased efforts to improve capacity to detect and prosecute corruption at all levels by adopting and implementing needed legal instruments. - Law of Access to Public Information requires additional implementation efforts; active transparency mandates under article 20 remain weak in most sectors. - Enforceability of the law needs strengthening by assigning oversight to one specific agency. - Nicaragua lacks regulation on whistleblower protection; adopting whistleblower protection regulation would align with international anticorruption conventions and help detect corruption. - Additional training needed to ensure all public officials in high-risk positions receive prevention and detection of corruption training and that effectiveness is assessed; training for key private sector actors is also needed. - Guarantee fair and impartial access to the court system and adequate recourse in all legal proceedings; additional steps needed in line with priorities identified under the Development Plans of the Judicial Power. ### Past Fund Policy Advice (Annex VIII) — Recommendations and Current Status - Fiscal Policy - Recommendation: Ensure fiscal sustainability by reviewing expenditures while safeguarding social spending and promoting growth. - Current status: Expenditures have been prioritized through budgetary reallocation to mitigate social impact of external shocks; fiscal sustainability hinges on ability to control contingent liabilities and build buffers for external shocks. - Recommendation: Improve operating efficiency and sustainability of INSS and SOEs. - Current status: March 2019 pension system reforms reduced INSS deficit and associated transfers from central government; some announced measures still need implementation (change of minimum number of contributions required to receive a reduced pension and reduction on the minimum pension). - Recommendation: Achieve greater transparency of fiscal accounts to assess and manage fiscal risks better and enhance fiscal governance. - Current status: A fiscal risk unit has been created at the Ministry of Finance and the first fiscal risks report was published in May 2022; efforts to publish financial reports and include all operations of SOEs, decentralized entities and municipalities need to be pursued. - Monetary and Financial Policy - Recommendation: Increase provisions of distressed loans. - Current status: Level of provisions relative to total distressed assets marginally increased since 2019 but remains far from pre-crisis level: "36.4 percent in June 2022 vs. 85.9 percent in March 2018." - Recommendation: Develop contingency plans and enhance bank resolution framework to increase resilience and protect against downside risks. - Current status: Actions could include aligning resolution framework with best international practices and operationalizing emergency liquidity assistance facilities established in June 2018. - Recommendation: Expand scope of loan-inspections and require semi-annual independent asset quality and collateral valuation reviews. - Current status: Supervisory inspections were reportedly intensified but later challenged by movement restrictions related to the COVID-19 pandemic. No independent reviews were reported. - Recommendation: Enforce regular financial reporting by rural credit and savings cooperatives. - Current status: No progress reported. - Recommendation: Adopt FATF recommendations to protect integrity of financial transactions and mitigate exposure to illicit flows. - Current status: See Annex VII. - Recommendation: Strengthen external position to maintain resilience of the crawling peg exchange rate regime. - Current status: Gross international reserves reached a historical high of "US$4.3 billion by end-June 2022" due to strong remittances inflows, SDR allocation in August 2021 and recovery of FDI; accumulation of reserves needs to continue. - Structural Policy - Recommendation: Improve competitiveness by strengthening government institutions in contract enforcement, legal efficiency, protection of property rights, investor protection, registering property, and resolving insolvencies. - Current status: Progress in strengthening property and land registries; contract enforcement and protection of property rights still face challenges. - Recommendation: Address supply-side bottlenecks by improving infrastructure, investing in human capital, addressing labor skills bottlenecks, and upgrading technological readiness. - Current status: Authorities engaged in large capital expenditure projects in road infrastructure, water sanitation, and hospital buildings; further investment growth could be supported by enhancing business climate, strengthening labor market, and implementing policies to retain migrants. - Recommendation: Strengthen existing asset declaration regime for high-level public officials and politically exposed persons by finalizing migration to electronic submission; expanding categories of information to cover interests and assets beneficially-owned; and streamline public access so relevant information is accessible on-line. - Current status: Measures to be implemented as listed. - Recommendation: Strengthen anti-corruption measures. - Current status: See Annex VII. - Statistics and Capacity Development - Recommendation: Improve data coverage by expanding sources in the real sector, incorporate household survey results 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. - Current status: Efforts needed; statistical publication has not yet returned to a more predictable timetable despite extensive TA. - Recommendation: Adhere to multi-year roadmap of financial sector related TA under the Financial Sector Stability Review. - Current status: Follow up on 2019 FSSR recommended TAs have been derailed by need to prioritize governance weaknesses and fiscal transparency. *NICARAGUA — INTERNATIONAL MONETARY FUND* ### Annex IX. Status of Commitments under ### Annex IX. Status of Commitments under the RCF/RFI (November 2020) ### Implementation summary - Major progress has been made in implementing measures to promote good governance and transparency in pandemic-related spending; further efforts are needed to complete the commitments under the authorities Letter of Intent (LOI). - Implementation status categories in the annex: Done, Partially implemented, In progress. ### Publication of COVID-related procurement contracts - Commitment: Publish procurement contracts of crisis mitigation spending, including beneficial ownership information of companies awarded procurement contracts. - Current status: Done. - Details: - Publication of all COVID-related public procurement contracts (under bidding and tender processes) commenced on October 15, 2020. - Publications contain contract amounts, the specific nature of the goods or services procured and their price per unit (where applicable), the names of the awarded entities and their beneficial owner(s), and the names of the public officials awarding the contracts. - As of January 31, 2022, 155 contracts have been published. - Total published amounts: C$595,208,660.84 and US$179,664,831.58. - Status of contracts: 100 percent are completed. ### Tracking and reporting of externally sourced emergency assistance - Commitment: Facilitate the tracking and reporting of the use of COVID-19 related resources by channeling externally sourced emergency assistance through a dedicated subaccount of the treasury single account. - Current status: Done. - Details: - Authorities opened current accounts in dollars at the central bank and book-entry accounts in Córdobas to track and report on the use of RCF/RFI-sourced emergency assistance. - These accounts will be audited in the context of the external audits of all COVID-related expenditures. ### External and independent audits of COVID-19 expenditures - Commitment: Conduct an external and independent audit for all COVID-19 related expenditures, including funds channeled through the UNOPS and the WFP. - Current status: Partially implemented. - Details: - A first external audit covering all COVID-19-related expenditures from April 1, 2020, through May 31, 2021, has been published on the government’s website. - A second audit is planned to cover the period June 1, 2021, to May 31, 2022 and be published in May 2023. ### Publication of SOE financial statements and audits - Commitment: Publish the financial statements of all state-owned enterprises (SOEs), including audit reports from the Comptroller General. - Current status: Partially implemented. - Details: - The five largest state-owned enterprises—ENATREL, ENEL, PETRONIC, EPN, and ENACAL—publish online the financial statements covering the period 2015–20, including the external and independent audit reports, as well as the certification of the control body of the Republic, for ENATREL, ENEL and ENACAL. - Authorities still need to expand publications to other SOEs. ### Strengthening the AML/CFT framework - Commitment: Strengthen the effectiveness of anti-money laundering/combating the financing of terrorism (AML/CFT) framework in accordance with the action plan already agreed with the Financial Action Task Force. - Current status: In progress. - Details: - Authorities have developed a more comprehensive and robust AML/CFT risk-identification and understanding that includes and covers all relevant stakeholders and sectors. - Expanded obligatory objects to include lawyers, public notaries, public accountants, exchange houses, and remittance companies. - In 2021, the National AML/CFT/CFP Commission approved the National Risk Strategy, which resulted in the formulation of an Action Plan for the period 2021-25. - The FATF found that the Action Plan has aligned the AML/CFT framework with international standards. - Work is needed to properly and effectively implement it (and fully implement the Plan). *Source: Annex IX. Status of Commitments under the RCF/RFI (November 2020).* ### 1. Nicaragua’s public debt statistics are reported at the Consolidated Public Sector (CPS) level. ### 1. Nicaragua’s public debt statistics are reported at the Consolidated Public Sector (CPS) level. ### Coverage and methodology - Public debt definition used in this Debt Sustainability Analysis (DSA) covers the consolidated debt of the budgetary central government, decentralized entities, the state-owned enterprises guaranteed debt, and the Central Bank of Nicaragua (BCN) (Text Table 1). - The DSA is conducted on a residency basis. - Consistent with previous DSAs since 2013, this DSA assumes the delivery of expected Heavily Indebted Poor Countries (HIPC) debt relief by Non-Paris Club creditors that have yet to deliver it. - Debt data limitations and contingent liabilities treatment: - There is no non-guaranteed state-owned-enterprises’ debt recorded in Nicaragua. - Debt data on extra budgetary funds, non-guaranteed state-owned enterprises, and debt of all state and local governments is not available; therefore these components of the contingent liabilities are at the LIC-DSF default values. - In the tailored shock scenarios, contingent liability shock is set as 9.2 percent of GDP in 2022. - Sub-sectors covered (as indicated): Central Government, Social Security Fund, Guarantees to other entities, Central Bank (borrowed on behalf of the government). - Other elements included in the default shock calculation (percent of GDP): SOE's Debt (guaranteed and not guaranteed) 2.0, PPP 2.2 (35 percent of PPP stock), Financial Market 5.0 (default 5 percent of GDP). Total (2+3+4+5) = 9.2. ### Background on debt — key findings and composition - Public sector debt trajectory and levels: - Public sector debt decreased to 56.9 percent of GDP in 2021 (from 57.8 percent in 2020 DSA) and is expected to reach about 58 percent in 2022 (compared with 61 percent in the 2020 DSA). - About 85 percent of total public debt is owed to external creditors (US$7.8 billion). - Of external public debt, 76 percent is owed by the Non-Financial Public Sector (NFPS), and 24 percent by the BCN. - Domestic PPG debt amounts to 20.4 percent of total public debt. - External PPG debt and creditors: - External PPG debt reached 45.3 percent of GDP in 2021. - All PPG external debt is placed in medium and long-term instruments. - Composition: 83 percent of PPG external debt is held by multilaterals (largest: CABEI, followed by IDB); remaining 17 percent mostly held by Japan, South Korea, Germany, India, and Kuwait. - HIPC and non‑Paris Club creditors: - A large stock of debt to non-Paris Club creditors is still pending debt relief under the HIPC Initiative. - Debt stock has been adjusted downward in this report to incorporate total expected debt relief amounts of about US$790 million as of December 2021 (corresponds to debt of the BCN). - Public domestic and private external debt: - Public domestic debt stood at 11.6 percent of GDP in 2021. - Maturity: 63.9 percent of public domestic debt is in medium- and long-term instruments; 36.1 percent in short term. - Composition: NFPS debt accounts for 54 percent (most held in “Bonos de la República”); BCN debt accounts for 46 percent. - Private external debt reached 40.1 percent of GDP in 2021. - Private external debt increased by 0.5 percent in nominal terms compared to 2020, but the ratio decreased by 4.3 percentage points compared to 2020 due to sharp real GDP growth in 2021. ### Macroeconomic assumptions and outlook - Growth and inflation: - Real GDP growth: 10.3 percent in 2021; projected 4 percent in 2022; long-term growth up to 3.5 percent (reassessment from previous 3 percent). - Consumer price inflation: 7.2 percent in 2021; assumed to average 6.9 percent over the medium term and decline to 4.0 percent over the long term. - External sector and reserves: - Current account: swung into a deficit in 2021 (from a surplus of 3.9 percent of GDP in 2020). - Remittances: strong, at 15½ percent of GDP in 2021. - By end-June 2022 gross international reserves doubled to over US$4.3 billion; about 6 months of imports (excluding maquila). - Using the Fund’s adequacy metric for a low-income country with a crawling exchange rate, Nicaragua’s recommended GIR level ranges from 5.3 to 8.9 months of non-maquila imports. - Banking and financial sector: - Banking system remains well capitalized and liquid. - Bank deposits and credit: grew 12.4 and 12.0 percent y-o-y, respectively, as of September 2022. - Total distressed assets fell from 22.6 percent in September 2020 to 12.1 percent in September 2022. - Exchange rate regime: - Baseline assumes the current crawling peg exchange rate regime is maintained. ### Fiscal outlook, measures, and financing mix - Fiscal performance and recent measures: - Fiscal deficit narrowed to 1.4 percent of GDP in 2021. - Government introduced temporary subsidies in May 2022 estimated to cost 1.2 percent of GDP (measures include electricity rate subsidy, water rate subsidy, gasoline and diesel subsidy, liquified gas subsidy, collective transport subsidy, wheat reserves imports). Total estimated cost for 2022: C$6,870.2 million / US$190.1 million / 1.2 percent of GDP. - These temporary subsidies are the key factor behind the projected widening of the CPS deficit to 3.3 percent of GDP in 2022. - Net external financing of the CPS increased by 1 percentage point of GDP in 2021 (to 5.7 percent of GDP) but is projected to fall to 4.0 percent of GDP in 2022. - Medium-term fiscal projections and assumptions: - Staff projects amelioration of the fiscal position over 2023-27 driven by: - A projected decline in tax revenues in 2022 and 2023 responding to economic deceleration, reverting to a modest increase for 2024-27. - Baseline assumes a reduction in expenditures over 2022-25 equivalent to about 1½ percentage points cumulative over four years, primarily reduced current expenditures while maintaining social spending; includes expiration of crisis and pandemic related temporary measures. - Ongoing imbalances from the Social Security System (INSS) and state-owned enterprises, particularly energy and transportation agencies; INSS assumed to continue receiving transfers from the government. - Financing mix: - New external financing projected to account for about 54 percent over the medium term and decline to about 36 percent over the long term. - Concessional financing projected to account for about 36 percent of total financing over the medium term and 22 percent over the long term. - Limited new external financing from international financial institutions other than CABEI is assumed because Nicaragua faces international sanctions since 2018; RENACER Act by the United States enacted on November 10, 2021. - Increasing domestic financing with Treasury bonds is possible but would raise debt servicing costs as interest rates are expected to continue to rise. - Authorities exploring other financing sources; any new sources should be on concessional and transparent terms to maintain fiscal sustainability. ### Realism checks, classification, and stress testing - Realism tools and drivers of debt dynamics: - The realism tools show significant deviations from recent LIC experience and Nicaragua’s historical experience due to the three-year contraction (2018-2020). - Crisis period increased external PPG debt as Nicaragua benefited from external aid for the pandemic and two hurricanes; projected external financing is expected to decline. - The unexplained residual in debt dynamics remains significant in absence of arrears or debt restructuring. - Baseline projected fiscal adjustment of 1 percent of GDP over three years is below the top quartile for LICs. - Climate change-related natural disasters are not taken into account and could dampen growth and pressure the fiscal path. - Debt-carrying capacity and thresholds: - CI rating: 3.01; assessed as medium (unchanged from the 2020 DSA). - WB CPIA score: 3.3 (decreased from 2020 DSA); contributes a large portion of CI score. - Indicative thresholds for medium capacity: - PV of debt-to-GDP ratio: 40 percent (external PPG debt), benchmark for PV of total public debt: 55 percent. - PV of debt-to-exports ratio: 180 percent. - Debt service-to-exports ratio: 15 percent. - Debt service-to-revenue ratio: 18 percent. ### Debt sustainability outcomes and projections - External debt dynamics in the baseline: - PPG external debt is relatively stable and expected to decrease gradually to 45.1 percent of GDP over the medium term and to around 31.6 percent of GDP in 2042. - Present value (PV) of PPG external debt projected to decline from 31.6 percent to 26.6 percent of GDP over the 10-year projection term and remain well under the threshold of 40 percent. - Other indicators projected to decline modestly: PV of external debt-to-exports from 63.2 to 54.5 percent; debt service-to-exports from 5.2 to 5.0 percent; debt service-to-revenue from 8.7 to 8.4 percent. - Dynamics driven by consistent recovery in GDP growth over the medium term. - Private external debt projected to decline as the debt owed to Venezuela is paid down. *Source: 1nicea2023001 - 1. Nicaragua’s public debt statistics are reported at the Consolidated Public Sector (CPS) level.* ### 16. Three of the standardized stress scenarios breach the threshold for external PPG debt-to-GDP ### 16. Three of the standardized stress scenarios breach the threshold for external PPG debt-to-GDP ratio ### External PPG debt stress scenarios — standardized and tailored shocks - Three of the standardized stress scenarios breach the threshold for external PPG debt-to-GDP ratio (Table 3 and Figure 1). - Simulations include standardized tailored shock scenarios — contingent liability, natural disaster, and commodity price shocks (Table 3). - The scenario with combination of external shocks in 2022: - Reaches up to 46 percent in the short term over 2024-26. - Decreases below the threshold of 40 percent to around 37 percent of GDP in the long term (Table 3). - Scenarios of shocks to exports and capital flows: - Slightly breach the threshold over 2024-2028. - Revert to about 35 percent in the long run. - Contingent liability scenario: - Does not show a breach of the threshold for external PPG debt-to-GDP ratio. - External PPG debt-to-GDP ratio increased from 32 percent in 2022 to 38 percent in 2024, and then gradually returns to 31 percent over the long term. - Only the alternative scenario in which key variables are considered at their historical averages shows: - A breach of the threshold for external PPG debt-to-GDP ratio and an increased trajectory. ### B. Public Sector Debt Sustainability Analysis — baseline projections and indicators - Baseline scenario: - Public debt is projected to peak at 58.1 percent of GDP in 2022. - Remain around 55 percent of GDP over the forecast period (Table 2). - Public debt projected to decrease in 2023 to 56.1 percent of GDP. - Expected to reach 54.2 percent of GDP by 2027. - External PPG debt: - Projected to decline from around 45.3 percent of GDP in 2021 to 31.6 percent of GDP by 2042. - Domestic public debt: - Projected to increase by 9 percentage points and climb to 21 percent of GDP by 2042. - Increase driven by rising primary deficit and elevated average real interest rate on domestic debt. - PV of public debt benchmark: - Under the baseline scenario 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. - Solvency and liquidity indicators: - Solvency indicator (PV of debt-to-revenues) remains above 130 percent over the projection period. - Liquidity indicator (debt service to revenue) shows a gradual increase over the long term, reaching 30.7 percent. - Increase in debt service-to-revenue driven by an increase in public domestic and external interest payments. - Drivers of increasing interest costs: - Shift to domestic debt issuance, which has a market-determined rate of interest. - Gradual decline in concessional resources. ### Standardized shock scenarios for public debt - Standardized shock scenarios demonstrate relative strength of public debt sustainability to deviations in baseline assumptions (Table 4 and Figure 2). - Threshold breaches occur under only a shock to GDP growth; debt-to-GDP remains below the threshold under all other standard scenarios. - The shock scenario with largest impact on debt-to-GDP ratios: - A contraction of GDP by 1.6 and 1.3 percent in 2023 and 2024, respectively (Table 4). - Primary balance scenario: - Demonstrates that the public debt path is not sensitive to plausible deviations from the fiscal consolidation plans. - Tailored shocks to natural disasters and commodity prices: - Breach the 55 percent threshold, indicating risk from other external shocks despite insensitivity to standard shocks. ### Risk rating and vulnerabilities - Overall risks to the outlook are mostly to the downside, primarily due to global headwinds. - Potential shock channels and consequences listed: - More severe global downturn, further U.S. monetary tightening, or prolongation of Russia’s war in Ukraine → lower growth, tighter financial conditions. - Continued inflationary pressures → risks to food affordability and fiscal position. - Natural disasters → strain fiscal balances, economic activity, and social outcomes given high exposure and dependence on climate sensitive sectors. - Deterioration in the business climate and stricter international sanctions → elevated risks to trade and financing flows, and thereby growth. - Policy responses if risks materialize: - Adjustment of fiscal and monetary policies, including through targeted and time-bound fiscal support measures and tighter monetary stance. - Acceleration of structural reforms to enhance competitiveness, facilitate job creation, strengthen economic resilience, and support the most vulnerable. ### External debt distress assessment and public debt risk - External debt distress: - Nicaragua’s risk of external debt distress is assessed to be moderate with space to absorb shocks under the updated LIC DSA. - 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. - The breach also occurs under the stress scenario of export shocks and under the ALBANISA contingent liability scenario. - Nicaragua retains vulnerability of external PPG debt to external shocks and contingent liability risk of the private debt from Venezuela, calling for the need to strengthen external buffers. - Public debt risk: - Public debt remains 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 2022–23—even considering the projected 4.0 percent GDP growth in the baseline scenario—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 close to the threshold over the projection horizon. *Source: IMF country chapter content provided in the supplied document.* ### 22. The authorities broadly agreed with staff’s assessment that Nicaragua’s debt is sustainable as ### 1nicea2023001 - 22. The authorities broadly agreed with staff’s assessment that Nicaragua’s debt is sustainable as ### Debt sustainability assessment and risks - Authorities and staff: overall and external debt distress risk rating remain moderate. - Authorities concurred on: - vulnerability of external debt to external shocks; - vulnerability of public debt to growth and contingent liability shocks. - Policy stance: authorities remain committed to seeking mostly concessional financing and to developing the domestic government debt market. ### Stress tests, scenarios, and diagnostic findings - Stress-test framework: multiple tailored and bound tests reported, including scenarios for growth, exports, depreciation, natural disaster, combined contingent liabilities, and commodity price shocks. - Most extreme stress test definition: "The most extreme stress test is the test that yields the highest ratio in or before 2032." - Notes on assumptions: - All additional financing needs generated by shocks under the stress tests are assumed to be covered by PPG external MLT debt in the external DSA. - Default terms of marginal debt are based on baseline 10-year projections. - For the public DSA, domestic financing is allowed to cover additional financing needs generated by shocks; default terms of marginal debt are based on baseline 10-year projections. ### Key macroeconomic outcomes and projections (selected) - Real GDP growth: - 2021: real GDP growth rebounded by 10.3 percent. - First half of 2022: growth cooled to 5 percent. - Projected yearly real growth in 2022: 4 percent (projected by authorities, consistent with staff). - Authorities expect growth to exceed 3 percent in 2023. - Drivers of the recovery: exports, remittances, and FDI; weaker performance in tourism, hospitality, and construction. - Inflation and prices: - Authorities note headline inflation in 2022 rose significantly above Nicaragua’s long-term trend for the first time in more than a decade. - Inflation went from 7.2 percent in 2021 (text indicates a subsequent rise in 2022). - External balance and financing: - Gross external financing need (Million of U.S. dollars) listed for projection years, examples include: 918.9; 1125.4; 2761.8; 3101.0; 2804.0; 2999.1; 3156.5; 3246.7; 3353.4; 3417.7; 6123.1 (as reported in the external DSA table). - Debt composition highlights (from external/public sector tables): - External debt (nominal) row includes values such as: 85.5; 91.0; 85.4; 80.5; 76.3; 74.9; 73.6; 72.2; 70.0; 58.8; 41.6; 80.6; 69.4 (table entries). - Share of public and publicly guaranteed (PPG) external debt examples: 41.6; 46.6; 45.3; 45.2; 44.3; 44.9; 45.4; 45.8; 45.1; 40.5; 31.6; 36.7; 43.8 (as shown in the external DSA). - PV of PPG external debt-to-GDP ratio examples recorded: 31.1; 31.6; 31.1; 31.5; 31.7; 32.0; 31.3; 26.6; 19.9 (table entries). - PV of public debt-to-GDP ratio (public DSA) entries: 11.2; 43.0; 44.8; 43.2; 42.1; 41.1; 40.8; 40.8; 42.1; 40.8 (as given in the public sector DSA). - Fiscal indicators (selected): - Government revenues (excluding grants, in percent of GDP): examples include 30.5; 30.2; 32.3; 29.9; 29.4; 29.4; 29.5; 29.6; 29.5; 29.2; 28.8; 27.9; 29.5 (table entries). - Primary deficit (public DSA): examples include -0.3; 1.1; 0.0; 1.8; 0.9; 0.8; 0.5; 0.6; 0.6; 1.3; 3.3; 0.8; 0.9 (table entries). - Gross financing needs (public DSA) examples: 1.4; 2.2; 1.7; 7.1; 5.5; 5.6; 5.4; 4.6; 4.9; 6.4; 12.2 (table entries). ### Social outcomes, vulnerabilities, and policy priorities - Social and infrastructure progress noted by authorities: - Coverage of the national electricity grid reached 99 percent of households early last year. - Major urban, inter-city, and rural transportation arteries built, including a highway connecting the main Caribbean city with center and pacific regions. - Gender equality and citizen security: Nicaragua ranked 7th in the World Economic Forum Global Gender Gap Report (as noted by the authorities); World Bank data cited homicides among the lowest in Latin America. - Labor market and migration: - Recovery uneven across sectors; labor-intensive sectors such as construction and hospitality have not fully recovered. - Unemployment has reached its lowest since its five-year peak in 2019, with some unemployed absorbed into the informal sector and others emigrating. - Authorities note a significant increase in emigration and call for more analysis of long-term economic and labor market impacts. - Authorities’ policy priority: protecting the poor and vulnerable remains a core principle guiding Nicaragua’s policies. ### Authorities’ engagement with the IMF - Statement by Mr. Afonso Bevilaqua, Mr. Bruno Saraiva, and Mr. Manuel Coronel on behalf of Nicaragua dated January 23, 2023. - Authorities thanked IMF staff for the 2022 Article IV mission discussions and the staff report; emphasized continued cooperation on policy dialogue and technical assistance. - Authorities judged macroeconomic management as "nimble" and credited it with supporting recovery from the sequence of shocks; they noted that recovery would have been stronger with timely and adequate external financial assistance. - Authorities expressed slight optimism relative to staff for 2023 growth prospects, citing accession to China’s Belt and Road Initiative in early 2022 as a tailwind. *Source: IMF staff report and Nicaragua authorities’ statement (2022 Article IV mission; statement dated January 23, 2023).* ### 11.5 percent as of November 2022. The BCN projects inflation to close 2022 at 11.6 percent, ### 1nicea2023001 - 11.5 percent as of November 2022. The BCN projects inflation to close 2022 at 11.6 percent, ### Inflation and monetary policy - Inflation recorded at 11.5 percent as of November 2022. - The BCN projects inflation to close 2022 at 11.6 percent. - The BCN has gradually increased the reference rate to 7 percent to: - restrain price increases, - support the crawling peg, - avoid being excessively detrimental to economic activity. - Authorities are considering embedding more flexibility within the exchange-rate regime, in line with regional peers, while having relied on the crawling peg as a key nominal anchor for more than two decades. ### Public finances and fiscal outlook - Public sector deficit widened from 1.4 (percent of GDP) in 2021 to a projected 3.3 percent of GDP in 2023, to accommodate temporary spending measures addressing the social impact of higher prices. - Medium-term budget plans for 2023-26 point towards a gradual narrowing of the deficit. - Public debt projected to decline to 54 percent of GDP by end-2027. - Nicaragua did not rely on significant debt-financing during the multiple shocks, contributing to a recovery on sounder footing with improved resilience and debt sustainability. ### External sector performance - Remittances in 2022 projected to exceed US$ 3 billion, which is 50 percent higher than 2021 and equivalent to 20.3 percent of GDP. - Exports in 2022 reached US$ 7.3 billion, an increase of 15.5 percent in value and 5 percent in volume with respect to 2021. - Central Bank reserves reached US$ 4.4 billion (almost twice their 2018 level), having increased by a yearly average of 23 percent since 2020. - Authorities expect these external trends to continue supported by a prudent policy mix. ### Credit ratings - Fitch: B- and stable perspective. - Moody’s: B3 and stable perspective. - S&P: upgraded from B - to B, with stable perspective. ### Banking system and financial sector stability - The banking system has stabilized and remains well capitalized, highly liquid, and profitable. - NPLs fell to 1.9 percent. - Credit stock is growing moderately but has not reached pre-crisis levels; bank deposits have already surpassed pre-crisis credit stock. - The Bank’s Superintendency (SIBOIF) welcomed staff advice on: - enhancing the resolution framework, - increasing provisions for distressed assets, - preserving sound lending practices as credit growth rebounds. ### External financial support and pandemic/hurricane response - Between 2020 and 2021: - The World Bank provided various programs totaling US$216 million to strengthen the pandemic response and mitigate the impact of hurricanes Eta and Iota. - CABEI and the IDB contributed emergency financing. - The IMF approved an RCF/RFI of 50 percent of quota in November 2020; half was disbursed through third party agencies and did not help fill the BOP gap. - The first independent external audit report on all pandemic-related use of funds has been published. - Details of pandemic-related spending and procurement contracts, including beneficiary ownership, have been published on the Finance Ministry’s website. - Execution of external finance by third party agencies proved time-costly and underperformed government implementation capacity and accountability procedures. - Authorities stressed that additional multilateral financial support to tackle climate-change related natural disasters would have strengthened recovery and prevented diversion of critical resources. - Hurricanes and estimated damages: - December 2020: two consecutive hurricanes caused damage of about US$ 1 billion, or 8 percent of GDP. - October (last year): hurricane Julia preliminary estimate points to damage of about 2½ percent of GDP. - Given difficulties in obtaining additional financing, Nicaragua drew scarce budgetary resources to support those most severely affected by natural disasters, complementing financing obtained from IFIs. - IMF financing in those circumstances would have been very impactful, especially for the most vulnerable population. ### Governance, AML/CFT, and IMF engagement - Authorities have a high response rate to IMF policy recommendations and made good efforts during the present Article IV cycle. - Significant progress made on at least 12 of the 17 items as per past Fund policy advice. - Staff provided inputs on governance and transparency; the Central Bank’s scope in these matters is limited. - Many recommendations are directed to independent agencies and/or powers of the state (attorney general’s office, comptroller’s office, legislative and judicial powers). - All agencies and state powers are making progress towards improving governance and anticorruption frameworks. - FATF Plenary of October 2022 recognized Nicaragua’s progress on AML/CFT and removed it from the list of jurisdictions subject to increased monitoring (the so-called “Grey list”). - Nicaragua’s financial intelligence unit (UAF) remains committed to addressing all issues of concern in a thorough and timely manner. - Authorities remain committed to implementing coherent macroeconomic and development policies and continue to count on the Fund’s support through policy advice and capacity building tailored to Nicaragua’s needs and circumstances. *Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1nicea2023001.pdf* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1nicea2023001.pdf_