## 1. Nicaragua’s International Trade Linkages ## Source details **Canonical URL:** [1. Nicaragua’s International Trade Linkages](https://www.imf.org/-/media/files/publications/cr/2024/english/1nicea2024001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1nicea2024001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1nicea2024001.pdf.json) --- ### Economic and political context - Resilience through shocks: - Economy "remained resilient through multiple shocks over the past five years," including the 2018-19 socio-political crisis, the COVID-19 pandemic, the 2020 hurricanes (Eta and Iota), and the period of high global inflation (2021-22). - Policy and buffer factors: "Appropriate fiscal, monetary and financial policies"; "Substantial pre-crisis buffers (primarily government deposits)"; "Multilaterals support". - Social and investment priorities: - "Sustained social transfers for the most vulnerable". - "Public investment to support growth, further combat poverty, and, when needed, for post-natural disasters reconstruction efforts." - Political developments and sanctions: - In 2022-23 authorities closed key business organizations, private universities, and a large share of not-for-profit organizations (NPOs, ¶31), revoked citizenship of about "300 people," transferring property rights to the state. - By November 2023, "more than 1,000 Nicaraguan officials" are under U.S. sanctions (no U.S. visas, and for some frozen assets in the U.S.). Two state-owned mining entities are also under U.S. sanctions. - Trade in goods, services, and foreign exchange flows remained "unaffected by the sanctions" and are conducted primarily with the U.S., the European Union, and regional peers. - Authorities "signed a Free Trade Agreement (FTA) with China" and "held prospective talks to increase cooperation with Russia, Belarus, and Iran." ### Recent economic developments (real, price, fiscal, external, monetary, financial) - Growth and labor: - Real GDP grew by "3.8 percent in 2022". - Growth in the first half of 2023: "3.8 percent." - Unemployment: "2.6 percent in December 2022" rising to "3.5 percent by September 2023." - Inflation: - Headline CPI: about "12.2 percent (year-on-year) in October 2022" to "6 percent in October 2023." - Core inflation: "5.7 percent in October" 2023. - Fiscal developments: - Consolidated public sector (CPS) balance: surplus of "0.1 percent of GDP in 2022" from a deficit of "1.9 percent of GDP in 2021." - Central government balance improved to a surplus of "0.3 percent of GDP" from a deficit of "1.6 percent of GDP in 2021." - Subsidies increased by "about 1 percent of GDP" due to temporary energy and wheat price mitigation. - External sector and reserves: - GIR increased by "about US$350 million" in 2022 supported by FDI and remittances ("5.4 percent of GDP" in 2022). - In 2023, GIR accumulated "by about US$1 billion through end-October, reaching about US$5 billion, or 6 months of non-maquila imports." - Remittances grew "by 52 percent year-to-date as of September 2023." - External position assessment: - REER appreciated by "4.3 percent" in 2022 versus 2021. - EBA-lite: real undervaluation of "8.1 percent" (Current Account model) and "2.5 percent" (REER model). - External Sustainability Approach: NIIP sustainable given liability composition tilted towards FDI. - Monetary policy and exchange rate: - BCN raised its monetary reference rate in tandem with the U.S. Federal Reserve between April and December 2022; held it constant at "7 percent" through November 2023. - BCN decreased the crawling rate from "2 percent" to "1 percent per year in January 2023" and announced it will change the rate of crawl to "0 in 2024." - Net FX sales by the BCN remained negative due to large sustained FX inflows. - Financial sector (end-September 2023): - Capital adequacy ratio (CAR) average: "19.3 percent" (requirement "10 percent"; pre-crisis "14 percent"). - Liquid assets to total liabilities: over "33.6 percent." - Bank deposits growth: "13.1 percent" y-o-y (September 2023, U.S. dollar terms). - Net bank credit to private sector growth: "15.6 percent" y-o-y (September 2023, U.S. dollar terms). - NPLs: "1.2 percent" of total loans. - Distressed assets: "7.9 percent" of total loans (peak over "20 percent" at end-2020). - Profitability: ROE "12.7 percent" and ROA "2.0 percent" in September 2023. - Credit to private sector remains "well below its pre-crisis level of March 2018." ### Outlook and risks - Baseline projections: - Real GDP projected: "4 percent" in 2023; "3.5 percent in 2024 and over the medium term." - Inflation projected to "fall gradually to 6 percent" in 2023 and to "4 percent over the medium term." - Remittances expected to grow on average "3.6 percent annually over 2024-28"; remittances as a share of GDP decline from "about 28 percent of GDP in 2023" to "around 23 percent of GDP by 2028." - Current account expected to reach a surplus from 2023 (a "5½ percent of GDP turnaround since 2022 to a surplus of about 4 percent of GDP"). - Medium-term growth projected to remain below historical average of "3.9 percent (2000-17)." - Key upside risks: - Stronger domestic demand and growth in the hospitality industry. - Higher remittances, especially in the near term. - Key downside risks: - A more severe global downturn than in the baseline. - Deterioration in terms of trade given high export concentration ("coffee, beef, and gold, about 70 percent of goods exports"). - Natural disasters given high exposure and dependence on climate-sensitive sectors. - Political developments leading to stricter and wider international sanctions; potential revision of CAFTA-DR per the RENACER Act. - Macro-financial risks: low provisioning to distressed assets and high loan dollarization with a limited number of borrowers earning foreign currency. - Additional medium-term vulnerabilities: - Gross domestic private investment projected to remain "5 percent of GDP below the 2018 level" over the medium term. - Oil imports represent a large share of the import bill, increasing vulnerability to oil price swings. ### Nicaragua’s international trade linkages (key statistics) - Exports and imports (2022): - Exports: "28.7 percent of GDP" in goods; about half to the U.S., a quarter to CAPDR countries. - Major non-FTZ exports (June 2023 shares of non-FTZ exports): Beef "17.5 percent"; Coffee "18.4 percent"; Gold "23.9 percent". - Imports: "46.5 percent of GDP" in goods; about a fourth from the U.S. and a fourth from CAPDR countries. - Trade evolution: - Total external trade with the U.S., regional peers, and the E.U. has consistently represented close to "50 percent of GDP" over two decades. - External trade with the U.S. doubled in the past decade to "25.6 percent of GDP", with the bulk of the increase ("10 percent of GDP") since 2018. - External trade with China increased from "2.2 percent of GDP in 2006" to "7.7 percent of GDP", primarily due to imports (share of 14 percent of imports and only 1 percent of exports on average between 2014 and 2023). - FTA with China signed in August 2023 and will enter into effect in 2024. --- ### Debt and DSA summary — moderate risk assessment - Overall risk: Nicaragua is assessed at moderate overall risk of external and public debt distress (similar to 2022 DSA). - Public debt trajectory: - Projected public debt: "50.8" projected in 2023; gradual decline to "46.4 percent of GDP by end-2028" under authorities’ medium-term plans. - Public debt at end-2022: "52 percent of GDP." - Increase in public debt over 2020-22: "3 percent of GDP." - Debt composition and creditors: - External debt share of total public debt: "86 percent" (42.5 percent of GDP). - Creditor composition (percent of GDP): IDB about "13 percent"; CABEI about "10.5 percent"; World Bank about "5 percent". - Domestic debt: "9.8 percent of GDP". - Total public debt owed to external creditors: "US$8.1 billion" in 2022 (78 percent NFPS, 22 percent BCN). - DSA indicators and projections (selected): - Real GDP growth: "4.0 (2023)"; "3.5 (2024-2027 Avg)"; "3.5 (2028-2038 Avg)". - Consumer prices (period average): "10.5 (2023)"; "4.3 (2024-2027 Avg)"; "4.0 (2028-2038 Avg)". - Total revenues (including grants): "30.7 percent of GDP (2023)"; "30.5 percent of GDP (2024-2027 Avg)". - Total expenditure: "31.4 percent of GDP (2023)"; "30.8 percent of GDP (2024-2027 Avg)". - Overall balance: "-0.7 percent of GDP (2023)"; "-0.3 percent of GDP (2024-2027 Avg)". - Public sector debt: "50.8 percent of GDP (2023)"; "49.7 percent of GDP (2024)"; "48.7 percent of GDP (2026)"; "46.4 percent of GDP (2028-2038 Avg)". - Current account balance: "4.1 percent of GDP (2023)"; "1.4 percent of GDP (2024-2027 Avg)". - Gross international reserves (US$ million): "4,173 (end-2022)"; "5,153 (2023)"; "5,734 (2024)". - Stress tests and vulnerabilities: - PV of PPG external debt projected to remain below the 40 percent threshold; under a combination of shocks PV breaches the threshold in stress scenarios. - Under the most extreme shock, PV of debt-to-GDP breaches threshold in 2024 at "49.3 percent", peaks at "64.4 percent in 2025", then declines. - Under a growth shock, PV of public debt breaches benchmark in 2026 at "57 percent". - Debt-carrying capacity: medium (Composite Index CI about "3.01" or "3.02" in different sections). - Authorities’ fiscal stance and deposits: - Government deposits: "3.3 percent of GDP (by end-October 2023)." - Authorities project higher medium-term growth ("4 percent") and favor mostly concessional financing and development of the domestic government debt market. ### Policy recommendations from staff (selected) - Fiscal: - Implement additional medium-term fiscal measures totaling "1¼-1¾ percent of GDP": - Streamline VAT exemptions and improve taxation in selected sectors and strengthen tax risk management and tax audit procedures: "½ – ¾ percent of GDP". - Reduce current expenditures (primarily on wages and goods and services): "½ – ¾ percent of GDP". - Improve targeting of long-standing subsidies to reduce imbalances from affected SOEs: "0.3 percent of GDP". - Support and continue multi-year fiscal consolidation plans; prioritize mostly concessional borrowing. - Monetary and exchange rate: - Maintain monetary policy geared to support the exchange rate regime while safeguarding price stability. - Continue adjusting the rate of crawl of the exchange rate as needed and sustain reserve accumulation. - Financial sector resilience: - Increase provisions for distressed assets; staff noted provisions relative to NPLs: "378.4 percent" (end-September 2023) versus pre-crisis "226 percent". - Preserve sound lending practices; activate countercyclical buffers as needed; increase minimum payments for credit cards (recommendation to increase from "2 percent" to "4 percent" of account balance). - Strengthen FX risk mitigation: credit dollarization around "90 percent"; deposit dollarization about "70 percent" by September 2023; staff recommended higher risk weights and currency-specific liquidity coverage. - Update resolution framework to align with Financial Stability Board Key Attributes; expand supervisory perimeter to include cooperatives. - Structural and institutional reforms: - Sustain investment in infrastructure and human capital; policies to raise labor force participation. - Strengthen institutions: contract enforcement, protection of property rights, insolvency resolution, anti-corruption and governance frameworks. - Improve effective application of the AML/CFT framework in line with FATF recommendations. --- ### Governance, AML/CFT, and transparency - Governance and anti-corruption: - Perception of Corruption Index: score declined from "26 in 2017 (90 percent confidence interval between 24 and 28)" to "19 in 2022 (confidence interval between 17 and 21)." - Staff recommendations: publish declarations of top-level officials; periodic risk-based assessments; whistleblower protection; ensure fair access to courts; consider suspending administrative decisions affecting property rights until final. - AML/CFT and NPOs: - Nicaragua removed from FATF "gray list" in October 2022 after legal framework improvements. - FATF recommendations included reforms to NPO regulation, appeals procedures, digital systems, and training with GAFILAT. - Staff concerns: need for targeted regulation to avoid unintended consequences (e.g., closure of NPOs); recommend outreach and improved collaboration with NPOs. - Fiscal transparency and PFM: - Government actions: publishing pandemic-related spending details and audit reports; audits of three large SOEs for 2021 and 2022; expanded public finance statistics. - Staff urged continued publication of audit reports and annual financial statements, expand SOE financial statements and audits, and standardize consolidation manuals. - BCN safeguards and governance: - 2021 safeguards assessment recommendations remain outstanding: legal amendments for autonomy, medium-term recapitalization strategy, plan to restart transition to IFRS. - BCN has initiated cleaning legacy loans and established an Audit Committee. ### Capacity development (CD) and statistics priorities - CD focus areas: - Central bank operations: develop interbank money market. - Financial stability: operationalize ELA framework; off-site supervision; monitoring systemic risks; improve prudential provisioning guidelines; expand supervisory perimeter. - Safeguards: amend central bank law; recapitalize BCN; transition to IFRS. - Statistics: update national accounts benchmark to 2019; improve GFS and PSDS coverage and timeliness; address large errors and omissions in BoP; no recent poverty data (latest actual poverty data from 2014). - Recent and planned TA missions (selected): - Revenue administration, tax policy, public financial management, monetary and financial sector TA through CAPTAC-DR, FAD, MCM, ICD, and others with missions spanning 2020–2024 (detailed list in source). - Challenges and constraints: - Progress on recommendations was derailed previously by governance and fiscal transparency needs. - New concessional external financing expected to remain limited, reinforcing the need to strengthen policy buffers. ### Remittances and emigration (evidence and implications) - Empirical correlation: - Remittances and U.S. border apprehensions of Nicaraguan migrants show a correlation of "0.8 during January 2021-December 2022." - Recent trends: - About "8.7 percent of the Nicaraguan population emigrated during 2019-22," mostly to the U.S. and Costa Rica. - Emigration surge began in summer 2021. - Push–pull factors: - Domestic: unemployment rise from "3.3 percent in 2017" to "5.9 percent in 2020" then down to "about 3.5 percent"; underemployment estimated at "40 percent"; real wages declined. - External: improved U.S. labor conditions and real wages for lower-education cohorts during 2020-22. - Net joint effects: - Literature (Carare and others, forthcoming): emigration slows growth; remittances partially mitigate; joint effect slightly negative in LAC. Emigration negatively affects labor force participation, especially youth. - Analytical priorities: - Disentangle skill composition of emigrants, propensity to invest remittances, and use methods addressing endogeneity. --- Italic source line: *Source: 1nicea2024001 - 1. Nicaragua’s International Trade Linkages.* ### 1. Nicaragua’s International Trade Linkages ______________________________________________________ 23 ### 1. Nicaragua’s International Trade Linkages ### Economic and political context - The Nicaraguan economy "remained resilient through multiple shocks over the past five years," including the 2018-19 socio-political crisis, the COVID-19 pandemic, the 2020 hurricanes (Eta and Iota), and the period of high global inflation (2021-22). - Policy and buffer factors that supported resilience: - "Appropriate fiscal, monetary and financial policies" - "Substantial pre-crisis buffers (primarily government deposits)" - "Multilaterals support" - Social and investment priorities going forward: - "Sustained social transfers for the most vulnerable" - "Public investment to support growth, further combat poverty, and, when needed, for post-natural disasters reconstruction efforts." - Political developments and sanctions: - In 2022-23 authorities closed key business organizations, private universities, and a large share of not-for-profit organizations (NPOs, ¶31), revoked citizenship of about "300 people," transferring property rights to the state. - By November 2023, "more than 1,000 Nicaraguan officials" are under U.S. sanctions (no U.S. visas, and for some frozen assets in the U.S.). Two state-owned mining entities are also under U.S. sanctions. - Trade in goods, services, and foreign exchange flows remained "unaffected by the sanctions" and are conducted primarily with the U.S., the European Union, and regional peers. - Authorities "signed a Free Trade Agreement (FTA) with China" and "held prospective talks to increase cooperation with Russia, Belarus, and Iran." ### Recent economic developments (real, price, fiscal, external, monetary, financial) - Growth and labor: - Real GDP grew by "3.8 percent in 2022" supported by private consumption and net exports. - Growth in the first half of 2023: "3.8 percent." - Unemployment: bottomed at "2.6 percent in December 2022" and rose to "3.5 percent by September 2023." - Inflation: - Headline CPI inflation declined from "about 12.2 percent (year-on-year) in October 2022" to "6 percent in October 2023." - Core inflation reached "5.7 percent in October" 2023. - Fiscal developments: - Consolidated public sector (CPS) balance swung to a small fiscal surplus of "0.1 percent of GDP in 2022" from a deficit of "1.9 percent of GDP in 2021," primarily due to improvement in the central government balance. - Central government balance improved to a surplus of "0.3 percent of GDP" from a deficit of "1.6 percent of GDP in 2021." - Subsidies increased due to temporary measures mitigating global energy and wheat price increases by "about 1 percent of GDP." - External sector and reserves: - Deterioration in the trade balance in 2022 driven by higher oil import bill and weaker global demand. - Sustained FDI inflows (primarily reinvested earnings) and remittances of "5.4 percent of GDP" in 2022 supported an increase in gross international reserves (GIR) of "about US$350 million." - In 2023, GIR accumulated "by about US$1 billion through end-October, reaching about US$5 billion, or 6 months of non-maquila imports." - Remittances grew "by 52 percent year-to-date as of September 2023." - External position assessment: - Average real effective exchange rate (REER) appreciated by "4.3 percent" in 2022 versus 2021. - EBA-lite assessment: real undervaluation of "8.1 percent" (Current Account model) and "2.5 percent" (REER model). - External Sustainability Approach finds NIIP sustainable given liability composition tilted towards FDI. - Monetary policy and exchange rate: - BCN raised its monetary reference rate in tandem with the U.S. Federal Reserve between April and December 2022. - BCN held the monetary reference rate constant at "7 percent" through November 2023. - BCN decreased the crawling rate from "2 percent" to "1 percent per year in January 2023" and announced it will change the rate of crawl to "0 in 2024." - Net FX sales by the BCN remained negative due to large sustained FX inflows. - Financial sector: - As of end-September 2023, banking sector metrics: - Capital adequacy ratio (CAR) average: "19.3 percent" (requirement of "10 percent"; pre-crisis level "14 percent"). - Liquid assets to total liabilities: remained over "33.6 percent." - Bank deposits growth: "13.1 percent" y-o-y (September 2023, U.S. dollar terms). - Net bank credit to private sector growth: "15.6 percent" y-o-y (September 2023, U.S. dollar terms). - Non-Performing Loans (NPLs) as share of total loans: "1.2 percent" at end-September 2023. - Distressed assets as share of total loans: "7.9 percent" at end-September 2023 (peak over "20 percent" at end-2020). - Profitability: Return on equity (ROE) "12.7 percent" and return on assets (ROA) "2.0 percent" in September 2023. - Credit to the private sector remains "well below its pre-crisis level of March 2018." ### Outlook and risks - Baseline projections: - Real GDP projected to grow by "4 percent" in 2023. - Inflation projected to "fall gradually to 6 percent" in 2023 and to "4 percent over the medium term." - Under baseline policies, real GDP growth expected to be "3.5 percent in 2024 and over the medium term." - Medium-term growth projected to remain below the historical average of "3.9 percent (2000-17)" due to expected lower investment and limited labor contribution given recent emigration. - Remittances expected to grow on average "3.6 percent annually over 2024-28"; remittances as a share of GDP decline from "about 28 percent of GDP in 2023" to "around 23 percent of GDP by 2028." - The current account is expected to reach a surplus from 2023 (a "5½ percent of GDP turnaround since 2022 to a surplus of about 4 percent of GDP"). - Key downside and upside risks: - Upside risks: - Stronger domestic demand and growth in the hospitality industry. - Higher remittances, especially in the near term. - Downside risks: - A more severe global downturn than in the baseline scenario. - Deterioration in the terms of trade (high export concentration: "coffee, beef, and gold, about 70 percent of goods exports"). - Natural disasters given high exposure and dependence on climate-sensitive sectors. - Political developments leading to stricter and wider international sanctions, negatively affecting economic growth; potential revision of CAFTA-DR per the RENACER Act. - Macro-financial risks: low provisioning to distressed assets and high loan dollarization, with a limited number of borrowers earning foreign currency. - Additional medium-term vulnerabilities: - Gross domestic private investment projected to remain "5 percent of GDP below the 2018 level" over the medium term given slow credit recovery. - Oil imports represent a large share of the import bill, increasing vulnerability to oil price swings. *Source: 1nicea2024001 - 1. Nicaragua’s International Trade Linkages.* ### 12. Nicaragua is assessed at moderate overall risk of external and public debt distress ### 12. Nicaragua is assessed at moderate overall risk of external and public debt distress ### Overview and risk assessment - Nicaragua is assessed at moderate overall risk of external and public debt distress, a similar risk rating assessment to the DSA conducted in 2022. - Public debt trajectory: - 50.8 projected in 2023. - Gradual decline to 46.4 percent of GDP by end-2028 under authorities’ announced medium-term budget plans for 2024-2027 and moderation in current expenditures. - Vulnerabilities remain elevated due to external shocks, natural disasters, and contingent liabilities; new external concessional financing is expected to remain limited. - Highly concessional borrowing context: - Nicaragua secured about 7 percent of GDP in external disbursements at concessional terms in 2020-21. - Over 2024-2025, new concessional financial assistance from multilaterals is projected to be limited; pandemic loans will be repaid. - Remittances and external flows: - Remittances projected to reach US$4.9 billion or 28 percent of GDP in 2023. - Remittances exceeded the goods trade deficit in 2023, were 4½ times higher than net FDI, and 10 times higher than official government flows. ### Authorities’ views (general) - Authorities broadly agreed with staff’s assessment on the outlook and risks and reiterated strong commitment to prudent policies to safeguard macroeconomic and financial stability. - Authorities project higher medium-term growth (4 percent) supported by public and private investment. - Authorities agree on the need for continued prudent fiscal and monetary policies to increase buffers. ### Policy discussions — A. Enhancing Fiscal Buffers - 2024 budget and fiscal stance: - 2024 budget expects to maintain a fiscal surplus at the central government level of about ¾ percent of GDP. - CPS overall fiscal position over 2023-28 is expected to change from a small surplus in 2023 to a small deficit by 2028. - Main fiscal challenges: - Addressing the growing deficit in the social security system (INSS). - Achieving adequate levels of social spending to reduce poverty and capital spending to support long-term growth while building buffers. - Projections and composition: - Capital spending in SOEs expected to increase to sustain investment in infrastructure (water delivery and electrification). - Expenditures in the social security system projected to increase over the medium term as the dependency ratio declines. - Financing plans and risks: - Government plans to finance gross fiscal requirements with government deposits, planned multilateral disbursements from older loans and new debt (external and, if needed, commercial). - Increased domestic and external bond financing would raise debt servicing costs, especially for external bonds, given Nicaragua’s risk premium. - Staff recommended additional medium-term fiscal measures totaling 1¼-1¾ percent of GDP: - Streamline VAT exemptions and improve taxation in selected sectors and strengthen tax risk management and tax audit procedures: ½ – ¾ percent of GDP. - Reduce current expenditures (primarily on wages and goods and services): ½ – ¾ percent of GDP. - Improve targeting of long-standing subsidies to reduce imbalances from affected SOEs and create space for investment in infrastructure: 0.3 percent of GDP. - Authorities’ reaffirmed priorities: - Maintain fiscal discipline, further lower public debt, and ensure financial sustainability of INSS. ### Policy discussions — B. Maintaining Exchange Rate Stability - Monetary policy stance and exchange rate regime: - Monetary policy should remain geared towards supporting the exchange rate regime while safeguarding price stability. - Monetary reference rate unchanged since December 2022 despite Federal Reserve tightening. - Staff supported maintaining the crawling peg regime and recommended monitoring FX flows and readiness to adjust interest rates and/or the rate of crawl. - Reserve accumulation and drivers: - Continued reserve accumulation necessary to support the exchange rate regime. - Fiscal consolidation and strong remittances flows expected to contribute to external stability and reserves accumulation. - Monetary and liquidity tools: - Authorities introduced new instruments in domestic currency with longer maturities (up to one year) to better manage liquidity. - BCN issues shorter-term securities of up to 1 year; central government issues longer maturities. - Exchange rate and dollarization context: - Exchange rate flows primarily driven by remittances. - Exports concentrated in beef, gold, and coffee; trading primarily with the U.S.; high financial de facto dollarization and a large informal sector. - The current and planned crawling peg rate remains below the inflation differential with the U.S. for 2023 and the medium term. - Authorities’ views: - Authorities agree with staff on the need to gear monetary policy to maintain the exchange rate regime, strengthen liquidity management and monetary policy transmission, and deepen capital markets. - Authorities consider their record high foreign currency reserves adequate and attribute accumulation to fiscal consolidation and tight monetary policy stance. ### Policy discussions — C. Fostering Financial Sector Stability and Resilience - Provisioning and distressed assets: - Staff recommended increasing provisions for distressed assets beyond NPLs toward pre-crisis levels. - As of end-September 2023: - Provisions relative to NPLs: 378.4 percent (much higher than pre-crisis 226 percent). - Distressed assets: 7.9 percent of total loans and provisioned about 56 percent (pre-2018 distressed assets <3 percent and provisioned about 86 percent). - Credit rebound and oversight: - Credit growth y-o-y: personal loans 32 percent, credit cards 23 percent, commercial loans 18 percent. - Credit-to-GDP ratio: 27 percent in September 2023 vs. 38 percent in March 2018. - Staff supported borrower-based measures: increasing minimum payment on credit cards from 2 percent to 4 percent of account balance and reactivating countercyclical provisioning. - FX risk and dollarization: - Credit dollarization around 90 percent of total credit; deposit dollarization about 70 percent by September 2023 (down from about 75 percent in 2017). - On average, only 15 percent of borrowers generate foreign currency; hedging instruments are not permitted under domestic law. - Staff recommended FX risk mitigation measures: - Assign a higher weight for personal and mortgage loans in foreign currencies in capital requirement computation. - Increase risk weights for commercial loans whose debtors do not generate foreign currency. - Ensure liquidity coverage is done by currencies (foreign and domestic) in addition to the consolidated currency position. - Crisis preparedness and supervision perimeter: - Update the resolution framework aligned with Financial Stability Board Key Attributes; review resolution toolkit and start recovery and resolution planning. - Consider crisis simulation exercises and a subcommittee of the Financial Stability Committee. - Expand prudential supervisory perimeter to include credit and savings cooperatives and address data gaps. - Fund stands ready to provide technical assistance, including support for implementing the 2019 Financial Sector Stability Report roadmap. - Authorities’ views: - Authorities committed to strengthening financial sector resilience, monitoring credit growth, updating crisis preparedness (requiring legal amendments), and potentially expanding oversight to cooperatives when conditions are met. Authorities do not perceive immediate FX risks but will monitor unhedged FX borrowing. ### Policy discussions — D. Boosting Medium-Term Growth and Employment - Growth and poverty reduction priorities: - Sustained higher medium-term growth supports poverty reduction and income convergence. - Continued investment needed in infrastructure and human capital and raising the labor force participation rate. - Labor force and migration: - Labor force participation hovered around 66.5-67.5 percent in 2022-23, below 72 percent pre-crisis. - Labor contribution to growth expected to be lower in medium term due to recent rapid emigration. - Policy measures to boost private investment and job creation: - Strengthen institutions and frameworks: contract enforcement, protection of property rights, resolution of insolvencies. - Reinforce dialogue with the business community before policy changes affecting them. - Strengthen anti-corruption and governance frameworks, including the rule of law. - Promote formal job creation through measures like tax simplification. - Link to fiscal space: - Fiscal policy recommendations to create space for social spending would support poverty alleviation and medium-term growth. - Adequate spending on human capital is needed given recent transfer to the government of non-profit functions in education and health. *NICARAGUA INTERNATIONAL MONETARY FUND* ### 30. The authorities concur that there is a need to enhance policies to support potential ### The authorities concur that there is a need to enhance policies to support potential ### Growth outlook and macroeconomic policy - Authorities see potential growth above 4 percent and view the existing macroeconomic policy mix as conducive to growth and job creation. - Authorities are working to secure financing to increase public investment and affirmed that capital market reforms are needed to catalyze private investment. - The 2024 Budget and medium-term fiscal plans include funding to support human capital enhancement, including expenditures in education and health. - Authorities do not see migration as a major drag on long-term growth, expecting labor market adjustment given high underemployment (underemployment is estimated at 40 percent). - In the medium term, authorities view China’s Free Trade Agreement as an opportunity for export growth and foreign direct investment. ### Governance, corruption perception, and rule of law - The Perception of Corruption Index (Transparency International) has deteriorated from a score of 26 in 2017 (90 percent confidence interval between 24 and 28) to a score of 19 in 2022 (confidence interval between 17 and 21). The drop is considerably larger than in most regional peers. - Staff recommendations: - Ensure public access to declarations of top-level officials, including through publication. - Conduct periodic risk-based assessments and adopt measures to prevent conflicts of interest in public administration. - Enact whistleblower protection regulations and provide adequate and effective judicial recourse for access-to-information decisions. - Ensure fair and impartial access to the court system and recourse in legal and administrative proceedings; consider reforms that suspend administrative decisions potentially affecting property rights until administrative acts are final. ### AML/CFT framework, NPOs, and financial intelligence - Nicaragua was removed from the FATF "gray list" in October 2022 after strengthening its AML/CFT legal framework and following up on GAFILAT recommendations (updated National Risk Assessment; new regulations detailing graduation of penalties on NPOs; improved supervisory activities and outreach). - Staff concerns and recommendations: - Stronger efforts are needed to ensure effective and proper application of the AML/CFT framework. - Regulate the sector in a more targeted way, aligned with the risk assessment, to avoid unintended consequences (e.g., closure of a large part of the NPO sector). - Conduct outreach on the amended NPOs Regulation and maintain constructive discussions with NPOs to ensure fair and proportionate penalties. - Strengthen collaboration between the Judiciary and the Financial Intelligence Unit (UAF) to increase effectiveness of prosecutions using financial intelligence. - Foster dialogue with entities from the informal sector and pursue certification efforts for their compliance officers, given the AML/CFT challenges posed by the size of the informal economy. ### Fiscal transparency and public financial management - Government actions to improve fiscal transparency: - Publishing details of pandemic-related spending and procurement contracts (including beneficiary ownership), and independent external audit reports on pandemic-related use of public funds. - Audit of financial statements of three of the largest SOEs for 2021 and 2022. - Expanded coverage and improved frequency/timeliness of public finance statistics and reports. - Broadened scope of the public debt report to include local government debt and two fiscal risks reports. - Staff recommendations: - Continue publishing all audit reports regarding the use of pandemic-related funds. - Promptly publish annual financial statements of the central government and their audit reports by the Comptroller General Office. - Expand publication of SOEs’ financial statements and audits; implement a standardized manual for consolidation of financial statements and audits across central government, decentralized institutions, and public companies. - Provide capacity development (CD) to facilitate compilation in accordance with international accounting standards. ### BCN safeguards and central bank governance - BCN has initiated steps to resolve legacy assets and liabilities, but priority recommendations from the 2021 safeguards assessment remain outstanding: - Legal amendments to strengthen central bank autonomy. - A medium-term recapitalization strategy. - A plan to restart the transition to International Financial Reporting Standards (IFRS). - Authorities have started cleaning up the balance sheet from past legacy loans; consideration of moving to IFRS will be addressed later. ### Statistics and capacity development - Statistics are broadly adequate for surveillance but data quality work is needed: - Improve data sources in the real sector (incorporate household survey into national accounts and disseminate new series with benchmark year 2019). - Harmonize public sector debt with external sector debt data. - Address increasing errors and omissions in the Balance of Payments; no recent poverty data available (latest actual data for poverty dates back to 2014; World Bank estimates used for more recent years). - Capacity Development priorities include improving fiscal institutions, maintaining monetary and financial stability, and improving statistical capacity. Authorities are working with STA and CAPTAC-DR on TA recommendations. ### Staff appraisal: recent performance and key statistics - Nicaragua’s economy remained resilient after multiple shocks, supported by appropriate macro policies, substantial buffers, and multilateral support. - Recent and end-2023 indicators and assessments: - Growth: about 4 percent in 2023. - Remittances doubled since end-2021 and are reaching about 28 percent of GDP at end-2023. - Gross international reserves: US$5 billion by end-October (or about 6 months of imports, excluding maquila). - External position at end-2022 assessed as stronger than level implied by medium-term fundamentals and desired policies. - Nicaragua is assessed at moderate overall risk of external and public debt distress. - Near-term and medium-term projection: - Real GDP projected to grow by about 3½ percent in 2024 and over the medium term, supported primarily by private consumption; below historical averages (2000-17) of 3.9 percent. ### Risks and scenarios - Upside risks: - More sustained recovery in domestic demand and investment. - Stronger remittances than projected, especially near term. - Downside risks: - Deterioration of terms of trade or a more severe global downturn reducing exports and remittances. - Vulnerability to natural disasters given high exposure and dependence on climate-sensitive sectors. - Stricter and wider international sanctions could negatively affect the outlook. ### Policy recommendations (staff) - Fiscal policy: - Support and continue multi-year fiscal consolidation plans. - Implement more ambitious fiscal efforts to entrench sustainability, build buffers, and create space for higher social and capital spending to reduce poverty and support growth via tax administration measures, better targeting subsidies, and reallocating current expenditures. - Monetary and exchange rate policy: - Maintain monetary policy geared to supporting the exchange rate regime while safeguarding price stability. - Continue adjusting the rate of crawl of the exchange rate as needed and sustain reserve accumulation over the medium term. - Financial sector resilience: - Increase provisions for distressed assets. - Preserve sound lending practices by activating countercyclical buffers as needed and increase minimum payments for credit cards. - Align crisis preparedness with best international practices, obtain complete data for credit and savings cooperatives, and expand oversight if needed. - Continue monitoring FX risks and strengthen FX risk mitigation measures. - Structural and institutional reforms: - Sustain investment in infrastructure and human capital; implement policies to raise labor force participation. - Enhance the business climate by strengthening government institutions and frameworks in contract enforcement, protection of property rights, and insolvency resolution. - Improve effective application of the AML/CFT framework in line with FATF recommendations to ensure continued positive evaluation outcomes. ### Authorities’ views (summarized) - Agreed on the need to continue strengthening AML/CFT effectiveness; asserted that the framework was implemented properly and that NPO closures were based on prudential criteria (e.g., failure to present financial statements). Authorities will continue to work with GAFILAT and stated that no NPO has been closed due to money laundering or terrorism financing allegations. - Committed to increasing fiscal transparency, preparing annual financial statements and audits of the central government, and expanding publication and coverage of fiscal reports. - Agreed on the need to strengthen anticorruption efforts and ensure access to adequate and fair legal recourse; preferred enhancing public access to asset declarations of politically exposed persons rather than publishing these asset declarations. - Strengthening BCN safeguards: authorities have begun cleaning legacy loans from the balance sheet; consideration of moving to IFRS will be taken later. *Source: Excerpt from IMF staff report content (Nicaragua).* ### 50. The authorities have taken steps to enhance governance and anti-corruption ### The authorities have taken steps to enhance governance and anti-corruption frameworks ### Governance and anti-corruption: findings and staff recommendations - Findings: - Authorities have taken steps to enhance governance and anti-corruption frameworks, yet major efforts are needed to strengthen these frameworks and their effective application, especially the rule of law. - Recent progress includes implementation of the Law of Access to public Information and collecting asset declarations of politically exposed persons through the digital platform. - Staff recommended: - Publishing the asset declarations of politically exposed persons. - Implementing risk-based assessments of these declarations. - Enacting whistleblower protection regulations. - Strengthening the rule of law by guaranteeing adequate, effective, and fair administrative and judicial recourse to legal proceedings, especially those which have consequences for property rights, to ensure that anti-corruption and governance frameworks are effective and that property rights, contract enforcement, and investments are properly protected. ### Fiscal transparency - Staff commended the authorities’ efforts to improve fiscal transparency. - Staff urged sustaining these efforts by: - Continuing publication of all audit reports regarding the use of pandemic-related funds. - Promptly publishing the annual financial statements of the central government and their audit reports. - Expanding the publication of SOEs financial statements. ### Data quality and institutional capacity - Staff recommended continuing to improve data quality. - Staff recommended working further to enhance institutional capacity in fiscal, monetary, financial, and statistical issues. ### Article IV timing - Staff recommended that the next Article IV consultation takes places on the standard 12-months cycle. ### Nicaragua’s international trade linkages (Box 1): key statistics and observations - As of 2022, Nicaragua exported 28.7 percent of GDP in goods, of which about half were sent to the U.S. and a quarter to CAPDR countries. - Exports are concentrated in manufacturing, agricultural products, and mining, but the majority of non-FTZ exports (ab out 60 percent, as of June 2023) come from just three products: - Beef: 17.5 percent - Coffee: 18.4 percent - Gold: 23.9 percent - Nicaragua imported 46.5 percent of GDP in goods, with about a fourth coming from the U.S. and another fourth from CAPDR countries. - Over the past two decades: - Total external trade with the U.S., regional peers, and the E.U. has consistently represented close to 50 percent of GDP. - External trade with the U.S. has doubled in the past decade, to 25.6 percent of GDP, with the bulk of the increase (10 percent of GDP) since 2018. - External trade with China increased from 2.2 percent of GDP in 2006 to 7.7 percent of GDP, primarily due to imports (with a share of 14 percent of imports and only 1 percent of exports on average between 2014 and 2023). - Even though external trade with these countries increased, the total external trade by June 2023 was roughly the same as in 2012. - Increased trade with the U.S., regional peers, and China has been accompanied by a significant decline in trade with Venezuela, and a slight decrease in trade with E.U. - Additional note: - The FTA between China and Nicaragua was signed in August 2023 and will enter into effect in 2024. ### Evolution of FDI to Nicaragua (Box 2): key statistics and observations - Net FDI remains resilient despite the socio-political crisis that started in 2018 and sanctions. - Net FDI stood at an average of -8.4 percent of GDP in 2021-2022, compared to an average of -6.7 percent of GDP over 2006-17. - Net FDI inflows have been the main driver of this increase and Nicaragua continued to receive higher FDI inflows in percent of GDP compared to other countries in the region (CADR) in 2021-22, similar to the 2006-17 period. - Reinvested earnings are the main driving force behind FDI inflows: - Since 2020, reinvested earnings accounted for nearly two-thirds of the net FDI inflows to Nicaragua, as established foreign companies consolidated their investments. - During this time, gold prices have also been high. - Previously, capital investment was the principal driver of FDI inflows. - Reinvested earnings have also been the main component of FDI in most other CADR countries. - Technical note: - Net direct investment is a balance of payments concept. A negative number means that net inflows (net direct investment by nonresidents in Nicaragua) is higher than net outflows (direct investment by Nicaragua residents outside of the country). *Source: IMF staff report content provided.* ### Box 2. Evolution of FDI to Nicaragua (Concluded) ### Box 2. Evolution of FDI to Nicaragua (Concluded) ### Key findings on FDI stock and returns - The overall stock of FDI has stabilized just below 80 percent of GDP in the last few years. - The implicit rate of return on FDI increased significantly, to 9.2 percent in 2022, exceeding historical rates (average of 4.5 percent in 2006-17). - These recent higher rates of return have been in line with other CAPDR countries. - Note on calculation: "The implicit rate of return is calculated dividing the FDI income flow by the previous year's FDI stock." ### Composition and sources of FDI inflows - Sector concentration (recent years): - Energy, mining, and manufacturing. - Commerce and services most recently. - Geographic sources (principal): - The U.S. has been the principal source country, followed by Canada, Mexico, and Panama. - Recent timing: - "These trends continued broadly the same in the first half of 2023." ### Risks and considerations - Political developments could lead to stricter and wider international sanctions, thereby negatively affecting FDI and economic growth. *Sources: BCN, INIDE, SECMCA, and IMF staff calculations.* ### Annex I. Fiscal Performance During Multiple Recent Shocks ### Annex I. Fiscal Performance During Multiple Recent Shocks ### Overview - Despite multiple consecutive shocks over 2018-2022 (2018 socio-political crisis, COVID-19 pandemic, 2020 hurricanes, and the increase in global prices, especially for energy and fertilizers), Nicaragua’s public debt remains one of the lowest in CAPDR due to prudent fiscal policy. - Over the past decade Nicaragua sustained increasing capital and social expenditures, while on average in CAPDR countries these expenditures declined. - The increase in selected public spending was accompanied by contained spending in other categories and was financed mostly through increasing tax revenues. ### Public debt dynamics and drivers - At end-2022 public debt in Nicaragua stood at 52 percent of GDP. - Public debt increased by 3 percent of GDP over 2020-22, compared to a higher increase in the region’s average. - The moderate debt increase over 2020-22 was due to: - A much lower increase in public debt in 2020 due to the COVID-19 pandemic (7.6 percent of GDP) compared to the CAPDR average (12 percent of GDP). - The public debt decline that started in 2021 due to the strong GDP growth rebound and a considerable reduction in the primary deficit. - Exception: during 2018-19 public debt in Nicaragua increased more rapidly than in CAPDR, driven by an increase in the primary deficit and a contraction in real GDP. - Debt composition and terms: - External debt accounts for the largest share of total public debt, 86 percent, or 42.5 percent of GDP, owed primarily to multilateral creditors: the Inter-American Development Bank (IDB about 13 percent of GDP), Central American Bank for Economic Integration (CABEI, about 10.5 percent of GDP) and the World Bank, about 5 percent of GDP. - Domestic debt reached 9.8 percent of GDP. - Interest payments were much lower in Nicaragua than the CAPDR average over the past decade and increased less than the regional average, reflecting lower public debt stock and prudent debt management (increase in public debt was primarily external, at concessional terms). ### Public spending composition and trends - Over the past decade Nicaragua sustained increases in capital expenditure and social benefits, while on average in CAPDR these expenditures declined. - Nicaragua increased public investment and social benefits (figures referenced in source). - Regional averages of public investment and social benefits declined despite starting at similar levels with Nicaragua in 2012. - Other public spending was contained in Nicaragua: - Over the past decade Nicaragua had one of the lowest wages and goods and services expenditures in the region, and overall the share in the budget was contained. - Following the consecutive shocks that started in 2018, consolidation in expenditures consisted primarily in a reduction of compensation of employees and public investment; the latter reduction is more pronounced for Nicaragua in 2018-19 and 2022. ### Financing and revenues - Nicaragua financed the sustained increase in public investment and social benefits primarily through raising tax revenues. - The sustained increase in public investment and social benefits was accompanied by a steady rise in revenues. - The revenue increase was due mostly to increases in tax revenues and was particularly pronounced in 2019 due to an increase in buoyancy (following the implementation of a tax reform). - During the same time tax revenues in CAPDR and Latin American Countries (LAC) mostly stagnated. - Additional fiscal context: - Nicaragua has the highest revenue share in the region (CAPDR and LAC). - Following the HIPC completion point in end-2003, Nicaragua also benefitted from debt relief. ### Key statistics and specific figures (as reported) - Public debt at end-2022: 52 percent of GDP. - Increase in public debt over 2020-22: 3 percent of GDP. - COVID-19 related increase in public debt in 2020 for Nicaragua: 7.6 percent of GDP. - COVID-19 related increase in public debt in 2020 for CAPDR average: 12 percent of GDP. - External debt share of total public debt: 86 percent (42.5 percent of GDP). - Creditor composition (percent of GDP): IDB about 13 percent, CABEI about 10.5 percent, World Bank about 5 percent. - Domestic debt: 9.8 percent of GDP. *Annex I. Fiscal Performance During Multiple Recent Shocks* ### 4. Remittances flows from the U.S. are highly correlated with the increased emigration. ### 4. Remittances flows from the U.S. are highly correlated with the increased emigration. ### Evidence and correlation between remittances and emigration - Literature evidence links increases in remittances, particularly the number of transactions, to an increase in the number of people remitting rather than higher remitting frequency per person, because the cost of transferring remittances is declining much slower than the increase in the number of transactions (Babii and others, 2022; Carare and others, 2022). - Recent emigrants tend to remit regularly more than older migrants, given Latin and Central American migrants’ propensity to remit (Bidawi and others, 2022). - The number of migrant apprehensions at the U.S. border helps explain the stock of undocumented migrants into the U.S. from these countries (Carare and others, 2023). - For Central American countries, the share of undocumented migrants in the U.S. stock of migrants is higher than fifty percent, and over time the stock of undocumented migrants rises much faster than the stock of documented migrants. - Empirical correlation: remittances and U.S. border apprehensions of Nicaraguan migrants show a correlation of 0.8 during January 2021-December 2022. ### Recent emigration trends and push–pull drivers (Nicaragua context) - About 8.7 percent of the Nicaraguan population emigrated during 2019-22, mostly to the U.S. and Costa Rica. - Emigration surge timing: rapidly increasing emigration from Nicaragua is a relatively recent phenomenon starting in the summer of 2021. - Domestic push factors: - Unemployment rate rose from 3.3 percent in 2017 to 5.9 percent in 2020, then declined to about 3.5 percent (underemployment remains high). - Real wages declined steadily from their pre-2018 peak and remain well below historical levels. - Natural disasters and climate change (e.g., temperature increases affecting coffee producers and rural agricultural employment) are strong push factors (Carare and others, 2023; Beaton and others, 2017; Beltran Saavedra and Hadzi-Vaskov, forthcoming). - External pull factors: - U.S. conditions matter: unemployment rate for Hispanics in the U.S. and real wages in the U.S., notably real wages in the bottom quartiles associated with lower educational levels, improved during 2020-22 relative to historical and pre-pandemic levels. - Empirical finding in the literature for LAC and Northern Triangle: economic conditions—particularly incomes and job opportunities at home and in the U.S.—are the strongest push and pull factors of undocumented emigration, with the unemployment rate at home having the highest explanatory coefficient in a panel regression (Carare and others, 2023). ### Net joint impact of emigration and remittances on growth and labor markets - Estimating the net joint effect of emigration and remittances on real GDP growth is challenging due to endogeneity and depends on at least three country-specific factors: - (i) the skill of the migrants; - (ii) the impact of emigration on productivity and thereby wages of the remaining workers at home; - (iii) the propensity to invest income received from remittances. - Carare and others (forthcoming) estimate the joint net effect using data from 31 LAC countries over three decades up to 2019 with a novel instrumental variable approach to address endogeneity. - Main findings: emigration slows down economic growth, although remittances provide some mitigating effects, with the joint effect appearing slightly negative in LAC. - Emigration negatively affects labor force participation, especially of youth. - Individual country effects differ: larger remittances in some countries help mitigate the adverse impact of emigration. - Supporting literature: - Beaton and others (2017) and Aditya (2018) find that for countries with large remittances, such inflows can alleviate adverse effects of emigration because remittances serve as macroeconomic stabilizers (e.g., allowing consumption smoothing, important when real wages have fallen). ### Implications and analytical priorities - Further understanding is important to evaluate the medium- and long-term macroeconomic implications of the recent emigration surge in Nicaragua, given remittances’ dual role as household support and potential macro stabilizer versus the growth and labor-market effects of labor loss. - Key analytical priorities: - Disentangle composition effects (skill mix) of emigrants and how that affects productivity and wages at home. - Assess the propensity to invest remittance income versus consume, and how this varies across recipient households and over time. - Continue using methods that address endogeneity (e.g., instrumental variable approaches) to identify causal net joint effects on growth and labor force participation. *Prepared by Wenzhang Zhang, Metodij Hadzi-Vaskov, and Alejandro Fiorito, with Jessie Kilembe.* ### Annex VII. Anti-Money Laundering and Combatting Terrorist ### Annex VII. Anti-Money Laundering and Combatting Terrorist Financing ### FATF recommendations and follow-up - The FATF recommendations on increasing the effectiveness of the AML/CFT framework followed the removal of Nicaragua from the “grey list” in 2022. - In October 2022, Nicaragua accepted the voluntary process to analyze potential unintended consequences related to implementation of Recommendation 8 (related to NPOs). - The FATF report established four recommendations: - (i) carry out a reform or issue a regulation of the NPO law to establish graduation criteria for the application of sanctions; - (ii) regulate the procedure for filing administrative and judicial appeals against decisions adopted by the regulatory agency; - (iii) strengthen the computer system through which entities can present documentation digitally; and - (iv) agree with GAFILAT to develop training on international standards and risk-based approach. ### Non-Profit Organizations (NPOs) — risk reporting, consultation, and regulation - The sectorial risk report for NPOs was to be published on a biannual basis; after its publication in 2021, it is expected to be published in the first quarter of 2024. - New legal changes in the framework would have benefitted from updated sectoral risk reports and consultation with the regulated sector. - The amendment of NPO regulation was prepared with inputs from the National Assembly, MIGOB, and the Ministry of Finance, but did not benefit from inputs from the NPO sector itself, potentially hampering collaboration and up-to-date knowledge from entities in the sector. - The latest update of the National Risk Assessment does not update on this topic. - Footnote: The Regulation to the Law 1115 on NPO was amended in 2023, now including the graduation criteria and setting in the law mechanisms for the presentation of digital information. ### Virtual assets and supervisory arrangements - Supervision of virtual assets and related service providers has been entrusted to the BCN. - Although the competencies are set in law, further operative regulations still need to be enacted. - Nicaragua’s fintech sector is mainly driven through financial institutions, which usually have enough capabilities and technical resources. Activities are so far low, and Nicaragua should use this period to bring up to date regulations. - Recommendation: The BCN is recommended to operationalize its mandate through the emission of necessary regulations. ### Suspicious Transaction Reporting and the informal sector - The quantity of received Suspicious Transactions Reported (STRs) has increased from 2022 to 2023. - Most filings arise from the banking sector. - Nicaragua has a significant informal economy sector, which is usually more suited for Designated Non-Financial Businesses and Professions (DNFBPs) to operate. - Recommendation: Nicaragua should avoid focusing solely on the banking sector and ensure that other DNFBPs file quality information. *Source: Annex VII. Anti-Money Laundering and Combatting Terrorist Financing, 1nicea2024001 - Annex VII. Anti-Money Laundering and Combatting Terrorist Financing* ### 9. CD will aim to achieve progress in various key topics to maintain monetary and ### 9. CD will aim to achieve progress in various key topics to maintain monetary and financial stability and address financial vulnerabilities ### Central bank operations - CD focus area: development of an active and efficient interbank money market to facilitate monetary policy transmission. - Responsible CD providers listed: CAPTAC-DR/MCM. ### Financial stability - CD focus areas: - Operationalization of the Emergency Liquidity Assistance facilities framework established in 2018. - Conducting off-site supervision. - Monitoring systemic risks in the financial system. - Improving accounting and prudential provisioning regulatory guidelines. - Enhancing the crisis preparedness framework to align with international best practices. - Expanding the prudential supervisory perimeter. - Responsible CD providers listed: CAPTAC-DR/MCM. ### Safeguards - Authorities could benefit from CD arising from the 2021 Safeguards Assessment to implement recommendations, which include: - Amending the central bank law. - Recapitalizing the central bank. - Transitioning to International Financial Reporting Standards (IFRS). ### Statistics (Section D) - Data assessment: - Data is broadly adequate for surveillance but has weaknesses that hamper a deeper assessment. - Data quality can improve especially on timeliness and periodicity. - Strengthening compilation, timely reporting, and publication of high-quality data and improvements in real and fiscal sector statistics are necessary. - Completing and disseminating new series with reference year 2019 is important to provide more consistent and accurate data for surveillance purposes. - Fund CD priorities: - Address shortcomings on national accounts, government finance, and public debt statistics. - Continue assistance to enhance the quality, consistency, and timeliness of fiscal and debt statistics. - Improve capacity of the Ministry of Finance through delivery of customized training. - On government finance statistics (GFS), outstanding tasks include advancing the data harmonization process, and improving timeliness, high-frequency data, and public sector coverage. ### Governance, Anti-Corruption, and AML/CFT (Section E) - Findings: - The authorities have made efforts towards enhancing governance, anticorruption, and AML/CFT frameworks to align them with international standards. - Sustained further efforts are needed to address shortcomings within these frameworks and strengthen effective implementation. - On fiscal transparency the authorities benefited from CD and are implementing the recommendations received under a fiscal transparency evaluation. ### Modeling (Section F) - Objective: - Stronger analytical skills and better macroeconomic forecasting and policy analysis will enhance economic policymaking at the ministry and the central bank and support consistent analysis of fiscal, monetary, and external policy. - Macroeconomic framework TA: - CD provider: ICD. - CD will continue to assist efforts to build macroeconomic analysis and forecasting capacity at the Ministry of Finance. - Demand for CD remains high from both the BCN and the Ministry of Finance. - Support has been reduced due to limited funding and the absence of a macroeconomic frameworks' advisor in CAPTAC-DR. - The presence of an advisor could strengthen the consistency of the fiscal and monetary policy frameworks and support the macro analysis and forecasting function through development of specific models for both monetary and fiscal institutions. - Forecasting models TA: - CD provider: MCM. - CD will continue to assist efforts to improve analytical capacity and monetary policy decisions through enhanced modelling and forecasting tools. - The BCN needs to update its semi-structural model to support analysis presented to central bank authorities. ### Challenges and Mitigating Factors (Section G) - (Section header present; no detailed content provided in the supplied text.) *Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1nicea2024001.pdf* ### 14. Efforts to achieve the identified CD priorities may encounter challenges. Safeguarding ### 14. Efforts to achieve the identified CD priorities may encounter challenges. Safeguarding ### Capacity development (CD) challenges and policy implications - Safeguarding fiscal sustainability will be determined by the capacity to manage contingent liabilities and strengthen policy buffers to mitigate external shocks. - Authorities’ progress on the recommendations of financial sector related TA from the 2019 FSSR was previously derailed by the necessity to tackle governance weaknesses and fiscal transparency issues. - Progress on improving statistics and providing timely, high-quality data has been slow despite extensive TA. - Downside risks to macro-fiscal stability cited: vulnerability to external shocks and natural disasters. - Policy implication: Strengthening policy buffers will be necessary as new concessional external financing is expected to remain limited which could exert fiscal pressures and adversely affect debt sustainability. ### IMF capacity development (TA/training) since 2020 — selected activities and timing - Revenue administration (CAPTAC-DR/FAD): - Tax Administration: August 2022 - Tax Audit: March 2022 - Strengthen Tax Audit Procedures: September 2022 - Compliance Risk Management: July, 2023 - Strengthen Tax Audit Procedures (Planned) 2023 - Post Clearance Audit (Planned) 2023 - Tax policy (FAD): - Taxation of the Mining Sector, Taxation of the Digital Economy, and Minimum Taxes: January/February 2023 - Public financial management: - Risk Management (CAPTAC-DR): January, April, November 2020 - Fiscal Transparency, Control Of COVID-19 Spending and Supervision of State-Owned Enterprises (FAD): November 2020 - Fiscal Risks Related to State-Owned Enterprises (FAD): April-June 2021 - Macroeconomic Fiscal Risks, FRAT Tool (CAPTAC-DR): November 2021 - Fiscal Transparency Evaluation (FAD): March 2022 - Strengthen Risk Management (Planned) CAPTAC-DR 2023 - Fiscal Risks (Planned) CAPTAC-DR 2023 - Budget Preparation (Planned) CAPTAC-DR 2023 - Monetary and financial sector: - External Auditor’s Support to Credit Risk Supervision (CAPTAC-DR): February-March 2021 - Monetary Operations Scoping Mission (CAPTAC-DR/MCM): August 2021 - Liquidity Forecasting and Management (CAPTAC-DR): November 2021 - Central Bank’s Foreign Exchange Operations (CAPTAC-DR): October 2022 - International Financial Reporting Standards (IFRS) Selected Issues Training (CAPTAC-DR): February 2023 - Semi Structural Model Update (CAPTAC-DR): February 2023 - Securities Investor Protection (CAPTAC-DR): June 2023 - Medium-term Debt Management Strategy (joint w/WB) (MCM): November 2023 - Interbank Money Market Development (Planned) CAPTAC-DR 2024 - Operationalization of ELA Framework (Planned) CAPTAC-DR 2024 - Expected credit loss – IFRS training and roadmap (Planned) CAPTAC-DR 2024 - Monitoring systemic risks in the financial system (Planned) MCM 2024 - Improving accounting and prudential provisioning regulatory guidelines (Planned) CAPTAC-DR 2024 - Statistics (CAPTAC-DR and others) — selected missions and plans: - National Accounts Statistics: June, October 2020; June-July 2021; April 2022; November 2022; November 2023 - Producer Price Index: August 2020, March 2022; planned February 2024 - Quarterly NAD And Seasonal Adjustment: August 2021 - Quarterly Supply and Use Table: February 2022 - Benchmark revision 2019 of national accounts for 2019, valuation components: November 2023 - Benchmark revision 2019 of national accounts for 2019, Matrix of taxes and subsidies and GDP by the production approach (Planned) CAPTAC-DR January 2024 - Taxes Matrix and Gross Capital Formation (planned) February 2024 (planned and to be confirmed) - Government Finance Statistics (GFS) and Public Sector Debt Statistics (PSDS) missions: July, August, December 2021; September-October 2021; February, August 2022; August 2023; Government Finance Statistics (Planned) 2023; Public Debt Statistics (Planned) CAPTAC-DR 2023; Compilation and consolidation of nonfinancial public sector debt CAPTAC-DR January 2024 - External Sector Statistics: April 2020 - Macroeconomic framework TA (ICD): February 2021 ### Safeguards assessment of Banco Central de Nicaragua (BCN) - An update safeguard assessment completed in November 2021 found that progress in implementing safeguards recommendations has been limited since the previous assessment in 2009. - Persisting vulnerabilities: legal safeguards for the BCN’s autonomy and transparency and accountability practices. - Financial reporting and internal audit continue to deviate from international standards. - Reforms implemented: - BCN established an Audit Committee in line with safeguards recommendation to provide oversight of audit and control processes. - External audit mechanism enhanced through formalization of a Board-approved auditor selection and rotation policy. ### Statistical issues — data adequacy and key metadata (as of December 1, 2023) - General: Data provision is broadly adequate for surveillance, but data quality can be improved in national accounts, fiscal, debt, and external sector statistics. - National accounts: - BCN disseminates national accounts in current values and chained volume indices with previous year weights based on 2006. - Annual accounts by institutional sector for 2005-18 are disseminated in accordance with 1993 SNA and most relevant recommendations of 2008 SNA. - BCN is finishing a project to update the national accounts benchmark to 2019, including implementing main recommendations of the 2008 SNA. - Price statistics: - CPI uses expenditure weights derived from a 2006/07 household expenditure survey. - CPI covers Managua and eight other cities and is published monthly. Expenditures (weights) and prices in rural areas are excluded. - Producer Price Index (PPI) base: July 2006=100. - Since September 2018, price quotations and compilation of CPI and PPI moved from the BCN to INIDE; technical validation remains BCN responsibility. - As of December 2023, the CPI and the PPI are published by INIDE. - Government finance statistics (GFS) and public sector debt (PSDS): - MHCP reports annual GFS to STA with institutional coverage of the budgetary central government (BCG) and social security funds; MHCP compiles and disseminates fiscal statistics monthly on its website with more comprehensive data coverage. - Shortcomings: lack of financing data (below the line), statistical discrepancy with nonfinancial data (above the line) for the BCG, and limited institutional data coverage for extrabudgetary units (EBUs), local governments, and nonfinancial public corporations (NFPCs). - PSDS reporting to the joint WB/IMF Quarterly Public Sector Debt Statistics database covers central government with instrument coverage of debt securities and loans; improvements needed in instrument and institutional coverage, valuation, and residency criteria. - MHCP expected to publish annual BCG GFS and PSDS data on the SECMCA website in the short term in line with the Central American GFS/PSDS regional harmonization implementation plan. - Monetary and financial statistics: - BCN reports monthly monetary statistics consistent with MFSMCG 2016 but lack of proper sectorization affects net credit compilation to central government and rest of nonfinancial public sector. - Institutional coverage excludes most microfinance institutions and saving and loans cooperatives from other depository corporations. - BCN reports 13 core FSIs and seven encouraged FSIs for deposit takers quarterly; SIBOIF reports additional bank-level statistics. - BCN reports some Financial Access Survey indicators; BCN does not report gender disaggregated data. - External sector statistics: - Balance of payments and international investment statistics follow BPM6 concepts within source data limits; data available since 2005. - Residents in free trade zones considered residents and included in goods and services. - Coverage of private sector incomplete for current and financial accounts; difficulties obtaining detailed information on nonfinancial private debt and other assets and liabilities with nonresidents. - Direct investment stocks are estimated accumulating transactions; some standard components of the direct investment position are incompletely recorded. - Large errors and omissions in the balance of payments persist; persistent negative sign suggests credit entries have been overstated or debit entries understated or omitted. - STA mission (November 2019) identified data compilation hindered by lack of sanctions to companies that do not provide data or provide erroneous or incomplete information; enhancing IT systems and cross-sectoral collaboration recommended. - Data dissemination and quality: - Nicaragua participates in the enhanced General Data Dissemination System (e-GDDS) but has not yet launched a National Summary Data Page (NSDP). - Data ROSC was published in December 2005. ### Fund financial position and projected payments to the Fund - Quota: 260.00 (SDR Million; Percent of Quota 100.00). - Fund holdings of currency (Exchange Rate): 314.18 (SDR Million; 120.84 percent of Quota). - Reserve Tranche Position: 32.50 (SDR Million; 12.50 percent of Quota). - SDR Department: - Net cumulative allocation: 373.74 (SDR Million; 100.00 percent of Allocation). - Holdings: 278.60 (SDR Million; 74.54 percent of Allocation). - Outstanding Purchases and Loans: - RFI Emergency Assistance: 86.67 (SDR Million; 33.33 percent of Quota). - RCF Loans: 43.33 (SDR Million; 16.67 percent of Quota). - Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs): - Principal: -- 43.34 43.34 8.67 8.67 - Charges/Interest: 0 7.79 5.59 4.03 3.98 - Total: 0 51.13 48.92 12.70 12.64 ### Debt sustainability analysis (selected findings) - Risk assessment: Nicaragua remains at moderate risk of external and overall debt distress with some space to absorb shocks. - Baseline: Under the baseline scenario, external debt burden indicators remain below the threshold reflecting the high concessional nature of Nicaragua’s external debt. - Shocks: The present value (PV) of external debt-to-GDP ratio breaches the threshold under a combination of shocks. - Public debt: Under the baseline scenario, the PV of the public debt-to-GDP ratio is projected to remain below the threshold; however, the PV of the public debt-to-GDP ratio is susceptible to growth shocks and breaches the benchmark under the most extreme scenario. - Debt-carrying capacity: Nicaragua’s debt-carrying capacity remains assessed as medium. The Composite Index (CI) is estimated at 3.02 and is based on the 2022 World Bank’s CPIA and the October 2023 WEO. - Concluding policy note: Strengthening policy buffers will be necessary given limited prospects for new concessional external financing and downside risks from external shocks and natural disasters. *Source: IMF staff report and informational annex for the 2023 Article IV Consultation (as presented in the provided content).* ### 1. Nicaragua’s public debt statistics are reported at the Consolidated Public Sector (CPS) ### 1. Nicaragua’s public debt statistics are reported at the Consolidated Public Sector (CPS) level, excluding the social security system (INSS). ### Public debt coverage and methodology - Coverage used in this Debt Sustainability Analysis (DSA): - Consolidated debt of the budgetary central government, local government, state-owned enterprises guaranteed debt, and the Central Bank of Nicaragua (BCN). - INSS debt is excluded at the consolidated public sector level because central government covers any deficits. - There is no non-guaranteed state-owned-enterprises’ debt recorded in Nicaragua. - DSA conducted on a residency basis; no foreign holdings of local currency debt issued domestically in this DSA. - Debt data excluded: all state and local governments, extra budgetary funds and non-guaranteed state-owned enterprises are not included in the baseline DSA coverage. - Technical assistance and support: - Authorities are receiving IMF technical assistance and World Bank SDFP support to strengthen debt transparency and widen coverage of debt reporting and monitoring. - Assumptions: - Consistent with previous DSAs since 2013, this DSA assumes delivery of expected Heavily Indebted Poor Countries (HIPC) debt relief by Non-Paris Club creditors that have yet to deliver it. - Contingent liability stress test applied is set at 9.2 percent of GDP. - PPP shock set at 2.2 percent of GDP representing 35 percent of Nicaragua’s PPP capital stock. - Default financial sector contingent liability shock set at 5 percent of GDP. ### Debt trajectory, composition, and creditor structure - Public debt trajectory and levels: - Public debt decreased by about 3 percent of GDP in 2022 to 52 percent of GDP. - Expected to reach about 50.8 percent of GDP at end-2023 (compared with 56.1 percent of GDP in the 2022 DSA). - Composition: - Domestic Public and Publicly Guaranteed (PPG) debt amounts to 18.2 percent of total public debt (or 9.5 percent of GDP). - Public domestic debt stood at 9.5 percent of GDP at end-2022. - NFPS debt accounts for 53.6 percent of public domestic debt (most held in “Bonos de la República”). - BCN debt accounts for 46.4 percent of public domestic debt. - Public sector domestic debt maturity: mainly medium- and long-term instruments (mostly 3 and 5 years). - External PPG debt: - External PPG debt reached 42.5 percent of GDP at end-2022. - All PPG external debt is medium and long-term. - 86 percent of PPG external debt held by multilaterals. - Largest external creditors (shares of external debt stock at end-2022): - Inter-American Development Bank (IDB): 29 percent - Central American Bank for Economic Integration (CABEI): 24 percent - World Bank: 11 percent - Remaining 14 percent mostly held by Japan, South Korea, Germany, India, and Kuwait; other creditors include Costa Rica. - External private and total external debt: - Total public debt owed to external creditors amounted to US$8.1 billion in 2022, of which 78 percent is owed by the Non-Financial Public Sector (NFPS), and 22 percent by the BCN. - At end-2022, private external debt declined by 4.1 percent of GDP to 35.6 percent of GDP compared to end-2021. ### HIPC debt relief and adjustments - A large stock of external debt to non-Paris Club creditors is still pending debt relief under the HIPC Initiative. - DSA already adjusted the debt stock downward by about US$790 million as of December 2021 to incorporate total expected debt relief (this debt corresponds to debt of the BCN). - Negotiation and reconciliation with all five non-Paris Club creditors is ongoing. ### Macroeconomic assumptions and medium-term projections - Growth and inflation: - Real GDP growth: 3.8 percent in 2022; projected 4 percent in 2023; medium-term convergence to 3.5 percent. - Consumer price inflation projected to gradually decline to 6 percent in 2023 and to 4 percent in the medium term. - Zero rate of crawl of the exchange rate from 2024 onwards is assumed. - Resilience and shocks: - Economy recovered despite 2018-19 socio-political crisis, COVID-19 pandemic, 2020 hurricanes, and high global inflation (2021-22). - Recovery supported by appropriate fiscal, monetary, and financial policies, substantial pre-crisis buffers (primarily government deposits), and multilaterals support. - Balance of payments and reserves: - Current account expected to reach a surplus starting with 2023. - Gross international reserves grew by about US$350 million to about US$4.2 billion by end-2022, representing 5.5 months of non-maquila imports. - Remittances grew by 5.4 percent of GDP to 20.6 percent of GDP in 2022; projected to reach US$4.9 billion or 28 percent of GDP in 2023. - Free Trade Agreement with China signed in 2023, to enter into effect in 2024. - Monetary policy: - BCN raised the monetary reference rate between April and December 2022; held the rate constant at 7 percent through November 2023. - BCN decreased crawling rate from 2 percent to 1 percent per year in January 2023 and announced change to 0 in 2024. - Financial sector: - Banking system remains well capitalized and liquid. - NPLs 1.2 percent and total distressed assets 7.9 percent at end-September 2023. - Net bank credit to the private sector grew by 15.6 percent (in U.S. dollars) by September 2023 compared to 2022. ### Fiscal performance, risks, and medium-term outlook - Fiscal outcomes: - Consolidated public sector (CPS) balance swung from a deficit of 1.9 percent of GDP in 2021 to a surplus of 0.1 percent of GDP in 2022. - Central government balance improved to a surplus of 0.7 percent of GDP in 2022. - Subsidies increased by about 1 percent of GDP in 2022 due to temporary measures on global energy and wheat prices. - Trends in 2023: continued growth in tax revenues and prudence in spending; central government recorded a primary surplus of 0.9 percent of annual GDP in the first half of 2023. - Fiscal position projected to achieve a small deficit in 2023 at the CPS level. - Medium-term fiscal drivers: - Revenues projected to remain steady; domestic revenue mobilization supported by economic activity, rationalization of tax expenditures, and structural tax administration reforms. - Baseline assumes a reduction in expenditures over the medium term aligned with available financing and announced medium-term budget plans. - Imbalances in INSS finances and state-owned enterprises (particularly energy and transportation agencies) could adversely impact the fiscal position. - INSS assumed to continue receiving transfers from the government as ongoing discussions have not yielded agreed measures to reduce the INSS deficit. - Projections and key fiscal/macro assumptions (selected figures from Text Table 3 and Text Table 4): - Real GDP growth: 4.0 (2023); 3.5 (2024-2027 Avg); 3.5 (2028-2038 Avg). - Consumer prices (period average): 10.5 (2023); 4.3 (2024-2027 Avg); 4.0 (2028-2038 Avg). - Total revenues (including grants): 30.7 percent of GDP (2023); 30.5 percent of GDP (2024-2027 Avg); 30.3 percent of GDP (2028-2038 Avg). - Total expenditure: 31.4 percent of GDP (2023); 30.8 percent of GDP (2024-2027 Avg); 30.6 percent of GDP (2028-2038 Avg). - Overall balance: -0.7 percent of GDP (2023); -0.3 percent of GDP (2024-2027 Avg); -0.3 percent of GDP (2028-2038 Avg). - Public sector debt: 50.8 percent of GDP (2023); 49.7 percent of GDP (2024); 48.7 percent of GDP (2026); 46.4 percent of GDP (2028-2038 Avg). - Current account balance: 4.1 percent of GDP (2023); 1.4 percent of GDP (2024-2027 Avg); -0.3 percent of GDP (2028-2038 Avg). - Gross international reserves (US$ million): 4,173 (end-2022); 5,153 (2023); 5,734 (2024). - Risks and constraints: - Prospects for new external financing projected to be limited; largest source of external financing is official sources and highly concessional borrowing is expected to decline. - RENACER Act enactment on November 10, 2021 constrains access to some external financing; limited new external financing from international financial institutions other than CABEI is assumed. - Some room to increase financing with domestic and external bonds exists but would raise debt servicing costs, especially for external bonds given Nicaragua’s risk premium. - Main fiscal policy challenge: maintain adequate levels of social spending and capital spending while building buffers and preserving fiscal sustainability. *Source: IMF staff report content provided in the supplied DSA excerpt.* ### 14. The baseline assumptions are credible. ### 14. The baseline assumptions are credible. ### Drivers of debt dynamics - External PPG debt increased as Nicaragua weathered multiple shocks from the pandemic and two hurricanes, but the evolution of external and public debt to GDP ratios suggests that debt is projected to decline compared to previous DSAs. - The unexplained residual in Figure 3 remains significant in the absence of arrears or debt restructuring. - External financing over the next few years includes planned disbursements to already contracted loans, primarily with CABEI. - Fitch maintained the long-term credit rating of the sovereign at B- but revised Nicaragua’s outlook from stable to positive in June 2023, noting prudent policies and stronger fiscal and external buffers while flagging downside risks related to political developments, including tighter international sanctions and political tensions. ### Realism of projected fiscal adjustment - The baseline projected fiscal adjustment lies below the top quartile of the distribution of past fiscal adjustments of the primary fiscal deficit for LICs. - The impact of climate change-related natural disasters has not yet been considered; given Nicaragua’s vulnerability to natural disaster shocks, this may dampen growth and adversely impact the fiscal adjustment path. - Projections assume that central government will continue to transfer resources to the INSS needed to close the pension system deficit as discussions on various proposals are ongoing. ### Consistency between fiscal adjustment and growth - The baseline projected growth path aligns with the possible growth paths under different fiscal multipliers. - Over the medium-term GDP growth is expected to converge to potential (3.5 percent) due to sustained domestic demand. - The real GDP growth rate remains below pre-crisis and historical average rates, as capital accumulation is expected to slow down with lower projected official financing, and limited labor contribution to growth due to large emigration outflows. - Private investment contribution is cautiously recovering; contribution of public investment to growth reflects assumption of limited prospects for new official external financing to support capital spending. ### Country classification and stress tests - Nicaragua’s current debt carrying capacity is classified as medium. - The Composite Indicator (CI) calculated based on the April 2023 WEO and the World Bank CPIA is 3.01, unchanged from the 2022 DSA. - Relevant indicative thresholds for the medium category (applicable to public and publicly guaranteed external debt): - PV of debt-to-GDP ratio: 40 percent - PV of debt-to-exports ratio: 180 percent - Debt service-to-exports ratio: 15 percent - Debt service-to-revenue ratio: 18 percent - Benchmark for the PV of total public debt under medium capacity: 55 percent - To account for specific risks, the natural disaster and commodity price shock tailored stress test are applied for Nicaragua. ### External Debt Sustainability Analysis (A) - External risk of debt distress is projected to remain moderate. - Under the baseline scenario: - PPG external debt is anticipated to gradually decline to 27.3 percent of GDP over the medium term. - The present value (PV) of PPG external debt is projected to remain below the threshold of 40 percent, declining from 26.3 percent to 20.7 percent of GDP over the 10-year projection period. - PV of external debt-to-exports is projected to decline from 57.5 to 49.1 percent. - Debt service-to-exports ratio is projected to decline from 5.5 to 5.3 percent. - Debt service-to-revenue ratio is projected to decline from 8.3 to 7.4 percent. - Private external debt is projected to decline as the debt owed to Venezuela is paid down. - Standardized tests: - A combination of shocks has the largest negative impact on the debt trajectory. - Under the most extreme shock, the PV of debt-to-GDP ratio breaches its threshold in 2024 at 49.3 percent, peaks to 64.4 percent in 2025, and remains above the threshold before gradually declining to reach 41 percent in the long term. ### Public Sector Debt Sustainability Analysis (B) - Overall risk of debt distress is projected to remain moderate. - Under the baseline scenario: - Public debt is projected to remain below the 55 percent of GDP benchmark over the forecast period. - Public debt is projected to decrease to 50.8 percent of GDP in 2023 and expected to reach 39.2 percent of GDP by 2028. - Domestic public debt is projected to increase to 12 percent of GDP by 2033. - PV of debt-to-revenues will decline to 107.5 percent by 2033. - Liquidity indicator (debt service to revenue) shows a gradual decline reaching 12.5 percent by 2033. - Under the most extreme scenario of lower growth, the PV of public debt breaches the benchmark in 2026 at 57 percent and remains above it over the projection horizon. ### Risk rating and vulnerabilities - There are balanced risks to the outlook. - Upside risks: - Higher than projected real GDP growth due to sustained recovery in domestic demand and hospitality industry. - Stronger remittances than in the baseline, especially in the near-term. - Downside risks: - Deterioration in terms of trade or a more severe global downturn could result in lower exports and lower remittances. - Natural disasters pose persistent risk given Nicaragua’s elevated exposure and economic dependence on climate-sensitive sectors. - Political developments could lead to stricter and wider international sanctions, curtailing trade and financing flows and negatively affecting growth. - If downside risks materialize: - Larger gross financing needs and higher debt levels would require adjustment of fiscal and monetary policies, including targeted and time-bound fiscal support measures and tighter monetary stance. - Acceleration of structural reforms would be needed to enhance competitiveness, facilitate job creation, strengthen economic resilience, and support the most vulnerable. - Current risk assessment: - Nicaragua remains at moderate risk of external and overall debt distress, unchanged from the previous DSA. - Under the baseline, all external debt burden indicators remain well below thresholds over the 10-year projection horizon. - Under a stress scenario of a combination of shocks, the PV of PPG external debt-to-GDP ratio breaches the threshold continuously over the forecast horizon. - Under a stress scenario of growth shocks, the PV of public debt-to-GDP ratio breaches its threshold in 2026 and is projected to remain above it throughout the projection horizon. - Policy emphasis: - Sustained revenue mobilization efforts and prudent borrowing on concessional terms are important to mitigate risks and maintain sustainability. *Source: 14. The baseline assumptions are credible.* ### 20. The authorities broadly agreed with staff’s assessment that Nicaragua’s debt is ### 1nicea2024001 - 20. The authorities broadly agreed with staff’s assessment that Nicaragua’s debt is ### Authorities' assessment and fiscal stance - The authorities broadly agreed with staff’s assessment that Nicaragua’s debt is sustainable, and that overall and external debt distress risk of debt distress remain moderate. - Given Nicaragua’s vulnerabilities, the authorities remain committed to prudent debt management seeking mostly concessional financing, while they continue to develop the domestic government debt market. - The authorities noted the substantial fiscal buffers so far: government deposits of 3.3 percent of GDP by end-October 2023. - The authorities emphasized they will continue to strengthen prudent macroeconomic policies, to maintain resilience and a clear and predictable economic management, while supporting medium-term growth. ### Policy actions and priorities - Continue consolidation at the central government level. - Find permanent solutions to cover the INSS projected medium and long-term deficits. - Reorient expenditures to increase fiscal buffers and fiscal space to cover social and public capital spending to support medium-term growth while bolstering fiscal sustainability. - Prioritize mostly concessional financing and development of the domestic government debt market. ### Selected sustainability indicators and stress-test context - Staff and authorities used the external and public DSA frameworks and a suite of stress tests (including the “most extreme shock” definition and one-off breach considerations) to qualify the moderate risk category. - The authorities and staff consider the risk category as moderate based on indicators and stress-test outcomes presented in the DSA figures and tables. ### Key statistics (as reported in the DSA tables and figures) - Government deposits: 3.3 percent of GDP (by end-October 2023). - PV of PPG external debt-to-GDP ratio (table entry): 26.8 (series reported in Table 1). - PV of public debt-to-GDP ratio (table entry): 36.6 (series reported in Table 2). *Source: Country authorities; and staff estimates and projections.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1nicea2024001.pdf_