## 1nicea2025001-print-pdf ## Source details **Canonical URL:** [1nicea2025001-print-pdf](https://www.imf.org/-/media/files/publications/cr/2025/english/1nicea2025001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1nicea2025001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1nicea2025001-print-pdf.pdf.json) --- ### Economic and political context - Resilient and robust growth supported by prudent macroeconomic and financial policies: economy operating above potential with moderate inflation, large twin surpluses, well-capitalized banks, and large buffers. - Shocks withstood: socio-political contraction during 2018-2020, the pandemic, 2020 hurricanes, and the recent global inflationary shock. - Remaining vulnerabilities: - Frequent and severe natural disasters. - Fiscal risks from contingent liabilities, including pension system imbalances driven by adverse long-term demographic trends. - Hysteresis in capital accumulation and a reorientation toward private consumption-led growth rather than exports or private investment. - Institutional and political developments: - About two thirds of the 7,000 NPOs were closed by September 2024. - Citizenship revoked for 357 people, of which for 135 people in September 2024. - Reformed constitution (November 2024) guarantees private property rights but weakens judicial independence. - By November 2024 sanctions on more than 1,750 Nicaraguan officials and on two state-owned entities affiliated with gold mining, the National Police, the Ministry of Telecommunications, and a training center supported by Russia’s Ministry of Internal Affairs. - RENACER Act (U.S., November 2021) instructs U.S. IFI representatives to advocate for increased oversight of assistance to Nicaragua. - By September 2024 the non-financial public sector became a net payer of loans from IFIs. - 2024 loans signed with China, Saudi Arabia, and Belarus amounting to about US$1.03 billion. - Law 1224 (November 2024) declared null the impact of international sanctions domestically and prompted prudential clarifications for AML/CFT compliance and disclosures. ### Recent macroeconomic developments and drivers - Growth and demand: - Real GDP growth: 3.8 percent in 2022; 4.6 percent in 2023; 4.7 percent year-on-year in the first half of 2024. - Private consumption buoyed by record-high remittances growth in 2023 of 44.5 percent, stable employment, and increasing consumer credit. - Net exports subtracted from growth due mostly to lower export volumes, primarily of coffee. - Output gap estimated by staff to have reached ¾ percent. - Revisions to gross capital formation increased real GDP by about 1 percentage point in 2024Q2 compared to 2023Q2. - Inflation: - Headline CPI inflation declined from end-2022 peak to 3.6 percent in October. - Core inflation declined to 4.5 percent in October. - Food inflation more persistent; El Niño-related drought since 2022 contributed to higher food prices and food insecurity. - Public finances: - Consolidated public sector (CPS) surplus increased to 2.8 percent of GDP in 2023 from 0.4 percent of GDP in 2022. - Public debt declined to 49.4 percent of GDP at end-2023 from 53 percent of GDP at end-2022. - CPS recorded a surplus of 2.6 percent of annual GDP in 2024 and government deposits reached 12.9 percent of annual GDP by end-June 2024 (compared to 11 percent of GDP at end-2022). - Fiscal consolidation achieved primarily through a contraction in capital expenditures (1 percent of GDP). - Remittances and external accounts: - Remittances grew by 5½ percent of GDP in 2023, reaching 26.1 percent of GDP. - Current account improved by about 10 percent of GDP to a surplus of 7.7 percent of GDP in 2023. - GIR increased from US$1.1 billion to US$5.2 billion in 2023 (covering 7 months of imports, excluding maquila imports) and further to US$5.7 billion by end-October 2024. - Errors and omissions reached 6.2 percent of GDP in 2023. - EBA-lite indicates a real undervaluation of 25.4 percent (estimation does not capture recent remittances surge). - NIIP improved by 14 percent of GDP in 2023 to -97 percent of GDP; External Sustainability Approach finds NIIP sustainable. ### External flows, trade, FDI, and remittances composition - Trade and private financing: - Main trade partners and sources remain primarily the U.S., regional peers, and the European Union. - Authorities implemented a Free Trade Agreement (FTA) with China in 2024. - Official financing: - Increased lending from alternative partners in 2024 (about US$1.03 billion from China, Saudi Arabia, and Belarus). - Non-financial public sector net payer to IFIs by September 2024; disbursements from previously approved IDB, World Bank, and CABEI projects continued. - Remittances: - Nicaragua’s remittances index (2018Q1 = 100) shows strong increases relative to Northern Triangle countries; remittances were a record driver of domestic demand in 2023. - Regional remittances growth reflects U.S. job market strength and structural lack of income convergence; Nicaragua had an additional country-specific push. - Remittances are highly inelastic to exchange rate changes. ### Monetary and financial sector developments - BCN policy and FX: - BCN maintained a moderately tight stance in 2023–2024 and cut the reference rate in late 2024 from 7 to 6.5 percent in two steps. - Yearly crawling rate reduced from 1 percent to 0 percent in January 2024; BCN announced maintaining 0 percent crawl in 2025. - Net FX sales by BCN remained negative (BCN bought more FX than it sold) due to strong FX inflows. - November 2024: requirement that prices and card payments be denominated in córdobas; bank accounts, loans, and cash payments can continue in U.S. dollars. - Dollarization: more than 90 percent of loans denominated in U.S. dollars. - Liquidity management and quasi-fiscal operations: - BCN issued short-term córdoba-denominated instruments (“letras”, up to 12 months), stock now primarily in córdobas and mainly held by banks, helping to limit monetary base increases. - Despite higher domestic interest rates on letras relative to international rates on assets, BCN increased its positive quasi-fiscal balance due to large reserves. - Monetary base changes (percent of GDP, selected components across periods shown): - External factors: 3.2; 8.0; 3.8 - of which: FX net purchases (private sector) 2.4; 7.2; 4.8 - of which: FX net purchases (public sector) 0.0; 0.0; -1.5 - Other external factors 0.8; 0.8; 0.5 - Domestic factors: -2.1; -7.0; -3.5 - of which: Córdoba-denominated securities 0.0; -3.6; -1.7 - of which: NFPS deposits -2.3; -3.5; -1.5 - of which: Quasi-fiscal deficit 0.2; 0.3; 0.5 - Other domestic factors 0.0; -0.1; -0.9 - Change to the monetary base: 1.1; 1.0; 0.2 - Note: YTD indicates year-to-date. Positive values indicate increases in the monetary base; negative values indicate decreases. ### Banking sector conditions, credit, and dollarization - Capital and liquidity: - Average capital adequacy ratio (CAR) of the financial system: 18.9 percent as of October 2024 (requirement: 10 percent; pre-crisis level: 14 percent). - Liquid assets to total liabilities: 23.7 in September 2024 (from 44.7 percent at end-2021); LCR reportedly comfortably above required minimum. - Credit and deposits: - Bank deposits growth: 12.6 percent year-on-year in October 2024. - Net bank credit to the private sector growth: 19.1 percent year-on-year in October 2024. - Credit-to-GDP ratio: 28 percent in September 2024 compared to 40 percent in 2018Q1; lowest in Central America. - Loan category y-o-y growth (September 2024): Commercial loans 11 percent; Agriculture loans 7 percent; Mortgage loans 5 percent. - Asset quality and profitability: - NPLs (including forborne, restructured, refinanced loans, repossessed assets, and “aliviados”): 1.6 percent of total loans in October 2024. - Distressed assets: 6.5 percent of total loans in October 2024. - NPL uptick in late 2023 linked to collapse of a major coffee exporter; decline in distressed assets leveled off since early 2024. - Profitability plateaued in 2024. - Dollarization and FX risks: - Credit dollarization: 92 percent in September 2024. - Deposits dollarization: 69 percent in September 2024. - Difference between credit and deposits dollarization: 23 percentage points in September 2024. - Only 17 percent of borrowers generate foreign currency on average. - Hedging instruments (futures or swaps) not permitted under domestic law. - Staff recommendations to mitigate FX risks: - Assign higher weight for personal and mortgage loans in foreign currencies in capital requirement computations. - 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 consolidated currency position. ### Outlook, projections, and risks - Real GDP projections: - 4 percent in 2025 - 3.8 percent in 2026 - 3.5 percent in the medium-term - Medium-term growth of 3.5 percent is below historical average of 3.9 percent over 2000-17. - Remittances and reserves: - Remittances expected to remain steady and support private consumption and imports, leading to lower expected current account surpluses. - GIR projected to continue accumulating but at a slower pace. - Public debt: - Public debt projected to decline to 39.7 percent of GDP by end-2029 from 46.9 percent of GDP projected for end-2024. - Risk assessment: - Short-term risks: broadly balanced. - Medium-term risks: on the downside. - Upside risks: stronger domestic demand and remittances growth in the short-term. - Downside risks: lower global growth, deterioration in terms of trade, natural disasters, stricter and wider international sanctions, changes in U.S. immigration policy. ### Fiscal policy, financing, and staff recommendations - Authorities’ stance: - Committed to preserving fiscal sustainability and building fiscal buffers while supporting growth. - Approved 2025 central government budget targets a 0.8 percent of GDP surplus at the central government level. - Financing challenges: - Concessional financing limited; available financing for increased capital spending over 2025-26 mostly non-concessional (from Chinese SOEs). - Net FDI flows projected average 5.3 percent of GDP over 2025-29, lower than historical averages 6.8 percent of GDP (2000-17) and recent years above 8 percent in 2021-22. - Staff recommended additional permanent fiscal measures totaling ¾-1 percent of GDP over the medium-term (relative to baseline): - Streamline VAT exemptions in selected sectors (e.g., digital and mining) and improve compliance through strengthening electronic processes, tax risk management and tax audit procedures; estimated yield: ½ – ¾ percent of GDP. - Improve targeting of long-standing subsidies to create space for investment in infrastructure; estimated yield: 0.3 percent of GDP. - Additional recommendations: - Enhance fiscal transparency and oversight of SOEs. - Ensure long-term sustainability of the pension system (INSS); central government transfers to cover INSS deficits expected about 2½ percent of GDP over the next five years. - Improve resilience to natural disasters and include natural disaster risks in published fiscal risk reports. ### Debt sustainability and realism tools (DSA highlights) - Public sector debt: decreased to 49.4 percent of GDP in 2023 (approximate 4 percent of GDP decline in 2023). - PPG external debt: 39.3 percent of GDP at end-2023; multilaterals hold around 78 percent of external debt (IDB 28 percent; CABEI 27 percent; World Bank 11 percent). - HIPC-related adjustments: expected debt relief amounting to about US$1.2 billion as of December 2023 (BN C debt). - DSA projections and key numbers: - Baseline PPG external debt projected to decline to 29.9 percent of GDP over the medium term. - PV of PPG external debt projected to decline from 23.6 percent to 15.6 percent of GDP over 10 years. - Debt service-to-exports projected to decline from 5.4 percent to 4.9 percent. - Total public sector debt projected to decline to 39.7 percent of GDP by 2029. - Gross international reserves (US$ million) series (selected): 2023: 5,190; 2024: 5,907; 2025: 6,729; 2026: 7,470; 2027: 7,953; 2028: 8,285; 2029: 8,433. - Stress-test outcomes: - Under the most extreme shock, PV of debt-to-GDP breaches its threshold in 2026 at 62 percent before declining to 45 percent in the long term. - Public sector debt distress risk assessed as moderate; extreme lower-growth scenario breaches PV benchmark in 2030 at 74 percent. ### State-Owned Enterprises (SOEs) and INSS - SOEs: - Analysis covers six largest non-financial SOEs publishing financial statements; total assets of these six SOEs were 25 percent of GDP in 2022; total liabilities 21 percent of GDP in 2022. - Fiscal transfers to SOEs minimal (0.5 percent of GDP in 2023); government guaranteed external debt stock of SOEs 0.2 percent of GDP at end-2023. - SOE risks: ENATREL represents very high fiscal risk; ENACAL, ENEL, and PETRONIC represent high fiscal risk. - Policy implication: strengthen transparency and oversight; improve coverage of SOE financial statements and monitor on-lending. - INSS: - Financial position weakened over the past dozen years; central government support increased to ensure viability. - Key drivers: expenditures outpacing revenues since 2013; demographic shifts (fertility rate 4.6 in 1990 to 2.3 in 2022; life expectancy 63 in 1990 to 75 in 2022); reserve fund at -C$5.3 million or 0.9 percent of GDP by end-2022. - Dependency ratio declined from 4.5 employed per retiree in 2013 to 2.6 by 2023; projected to decline to 2.2 by 2028. - Recommended reforms: implement remaining 2019 reform measures, increase affiliates without harming labor markets, increase formal employment, diversify investments to raise financial income, reduce administrative costs, and improve electronic pension distribution. ### Natural disasters, climate risks, and disaster finance - Exposure and impacts: - Nicaragua experienced 84 natural disaster events during 1960-2022 (1.3 disasters per year on average). - 2022 disasters caused damages up to 2.8 percent of GDP. - Disaster financing mechanisms: - Natural Disaster Fund (FND) with contingency item of 1 percent of tax revenues established by law. - IDB contingent loan of US$186 million available for specified disasters. - World Bank CERC permits reallocation of project funds. - CCRIF parametric insurance coverage increased from US$19.1 million in 2015/2016 to US$66.7 million in 2024/2025; total CCRIF disbursements to Nicaragua at end-2022: US$41.2 million. - Financing needs and mitigation: - Nicaragua requires US$7.53 billion to implement NDC goals by 2030 (targets include 65 percent of installed electrical capacity from renewables). - Recommended: strengthen disaster risk management, invest in resilient infrastructure, explore green bonds and natural disaster clauses in debt. ### Data, statistics, and capacity development - Overall data adequacy: "The data provided to the Fund is adequate for surveillance" with sectoral ratings of B for National Accounts, Prices, Government Finance Statistics, External Sector Statistics, Monetary and Financial Statistics, and Inter-sectoral Consistency. - Shortcomings and priorities: - Need to improve source data in real sector (tourism, manufacturing, retail); incorporate household survey results into national accounts; conclude and disseminate new series using 2019 benchmark. - Harmonize public sector debt with external sector debt data; reduce high errors and omissions in BOP. - Scarcity of updated poverty data; latest actual poverty data dates to 2014; authorities working with World Bank to update poverty statistics expecting progress by end-November 2025. - Participation in e-GDDS but not yet disseminating recommended data through a National Summary Data Page. ### Structural, governance, AML/CFT, and gender recommendations - Structural and governance: - Continue investment in infrastructure and human capital; increase targeted social spending; raise labor force participation, especially female LFP. - Improve business climate, rule of law, judicial independence, and transparency of administrative/judicial proceedings involving property rights. - AML/CFT and supervisory measures: - Authorities preparing an evaluation of AML/CFT framework with focus on effective implementation and risk-based thematic inspections. - Staff recommendations: ensure fair legal recourse for NPOs, prioritize compliance for domestic politically exposed persons, and align Law 1224 practice with international sanctions compliance. - Anti-corruption and asset declarations: - Digitization of asset declaration system and whistleblower protections are advances. - Staff recommend publishing asset declarations of top-level officials, conducting periodic risk-based assessments, preventing conflicts of interest, and aligning illicit enrichment offence with international best practice. - Gender: - Female labor force participation improved from 33 percent in 1991 to 49 percent in 2022; closing gender gaps could yield potential output gains ranging from 13 to 26 percent depending on methodology. - Policy recommendations: childcare provisions, prohibit recruitment discrimination, permit flexible work, and improve gender-disaggregated data. ### Policy priorities and staff operational recommendations (selected) - Continue building international reserves and fiscal buffers; pursue prudent macroeconomic and financial policies. - Adopt additional permanent fiscal measures (¾-1 percent of GDP) to finance higher public investment and social spending. - Enhance fiscal transparency and oversight of SOEs; publish annual financial statements of central government and audits. - Ensure INSS long-term sustainability; central government transfers expected about 2½ percent of GDP over next five years unless reforms implemented. - BCN to remain ready to adjust interest rates and/or rate of crawl to maintain exchange rate regime and price stability; strengthen monetary transmission; pursue financial and capital markets deepening. - Strengthen crisis preparedness and update resolution framework in line with international best practices; expand prudential supervisory perimeter to include credit and savings cooperatives with proportionality. - Promote financial inclusion, strengthen consumer protection, monitor consumer credit growth (personal loans +38 percent y-o-y; credit cards +30 percent y-o-y as of September 2024), and consider countercyclical provisioning and higher minimum credit card payments up to 4 percent of account balances. - Prioritize climate adaptation investments, disaster risk financing, and explore alternative financing (green bonds, disaster clauses). *Source: International Monetary Fund — chapter “1. Sources of Trade, FDI, Remittances, and Financing Flows in Nicaragua” (excerpt).* ### 1. Sources of Trade, FDI, Remittances, and Financing Flows in Nicaragua ________________________ 23 ### 1. Sources of Trade, FDI, Remittances, and Financing Flows in Nicaragua ________________________ 23 ### Economic and political context - Supported by prudent macroeconomic and financial policies, the Nicaraguan economy is experiencing resilient and robust growth, operating above potential with moderate inflation, large twin surpluses, well-capitalized banks, and large buffers. - Multiple shocks withstood: a protracted period of economic contraction during 2018-2020 due to the socio-political crisis, the pandemic, 2020 hurricanes, and the recent global inflationary shock. - Remaining vulnerabilities: - Frequent and severe natural disasters. - Fiscal risks from contingent liabilities, including the pension system facing growing imbalances mostly due to adverse long-term demographic trends. - Hysteresis in capital accumulation since the socio-political crisis and a reorientation toward private consumption-led growth rather than exports or private investment. - Institutional and political developments: - Marked increase in closures of not-for-profit organizations (NPOs) and transfers of private property to the state since late 2022; by September 2024, about two thirds of the 7,000 NPOs were closed. The citizenship of 357 people was revoked, of which for 135 people in September 2024. - The reformed constitution approved in November 2024 guarantees private property rights but weakens judicial independence. - Sanctions context: since 2018 targeted sanctions by the United States, the European Union, the United Kingdom, Canada, and other countries; by November 2024 sanctions were imposed on more than 1,750 Nicaraguan officials, and on two state-owned entities affiliated with gold mining, the National Police, the Ministry of Telecommunications, and a training center supported by Russia’s Ministry of Internal Affairs. - RENACER Act (U.S., November 2021) directs U.S. representatives at IFIs to advocate for increased oversight of any financial or technical assistance for projects in Nicaragua and for loans to be administered through a financially independent entity from the government. - By September 2024, the non-financial public sector became a net payer of loans from IFIs. - In 2024, Nicaragua signed loans with China, Saudi Arabia, and Belarus amounting to about US$1.03 billion. - Law 1224 (November 2024) declared null the impact of international sanctions and mandated that no Nicaraguan individuals or legal entities could deny or stop the provision of goods and services on account of international sanctions, prompting a prudential clarification requiring financial institutions to comply with international AML/CFT principles and additional disclosures. ### Recent macroeconomic developments and drivers - Growth and demand: - Real GDP growth: 3.8 percent in 2022; 4.6 percent in 2023; growth continued with 4.7 percent year-on-year in the first half of 2024. - Private consumption buoyed by record-high remittances growth in 2023 of 44.5 percent, stable employment, and increasing consumer credit. - Net exports subtracted from growth, due mostly to lower export volumes, primarily of coffee. - Output gap estimated by staff to have reached ¾ percent. - Recovery in private investment captured in gross capital formation data (revisions increased real GDP by about 1 percentage point in 2024Q2 compared to 2023Q2). - Inflation: - Headline CPI inflation declined from end-2022 peak to 3.6 percent in October (year not explicitly restated; context through 2024). - Core inflation declined to 4.5 percent in October. - Key contributors that declined: transportation, housing, and hotels and restaurants. Food inflation has displayed higher persistence. - Domestic factors (including El Niño-related drought since 2022) contributed to higher food prices and food insecurity. - Public finances: - Consolidated public sector (CPS) surplus increased to 2.8 percent of GDP in 2023 from 0.4 percent of GDP in 2022, as spending moderated further. - Public debt declined to 49.4 percent of GDP at end-2023 from 53 percent of GDP at end-2022. - Trends continued in 2024 with the CPS recording a surplus of 2.6 percent of annual GDP and government deposits reaching 12.9 percent of annual GDP by end-June 2024 (compared to 11 percent of GDP at end-2022). - Fiscal consolidation achieved primarily through a contraction in capital expenditures (1 percent of GDP). - Remittances and external accounts: - Remittances grew substantially in 2023, by 5½ percent of GDP, reaching 26.1 percent of GDP. - Current account improved by about 10 percent of GDP to a surplus of 7.7 percent of GDP in 2023. - Trade deficit narrowed significantly in 2023. - Net financial account surplus declined significantly in 2023 but contributed to accumulation of gross international reserves (GIR): from US$1.1 billion to US$5.2 billion (covering 7 months of imports, excluding maquila imports). - GIR further increased to US$5.7 billion by end-October 2024. - Errors and omissions in the balance of payments reached 6.2 percent of GDP in 2023. - The External Balance Assessment (EBA)-lite model indicates a real undervaluation of 25.4 percent, but this estimation does not capture the recent large change in remittances. - The External Sustainability Approach finds the net international investment position (NIIP) sustainable; NIIP improved in 2023 by 14 percent of GDP to -97 percent of GDP due to a substantial decline in public and private sector liabilities. - International reserves adequacy: - GIR at US$5.2 billion in 2023 equated to the mid-point of the Fund’s ARA metric range (5.3 and 8.9 months of non-maquila imports) when accounting for Nicaragua as a low-income country with a de jure crawling exchange rate regime. - GIR at US$5.7 billion by end-October 2024. ### External flows, trade, FDI, and remittances composition - Trade and private financing flows remained broadly unaffected until end-November 2024; main trade partners and sources: - The main destination of exports and the origin of imports, remittances, and FDI continue to be primarily the U.S., regional peers, and the European Union. - The authorities implemented a Free Trade Agreement (FTA) with China in 2024. - Official financing: - Size and origin of official financing changed with increased lending from alternative partners in 2024 (loans amounting to about US$1.03 billion from China, Saudi Arabia, and Belarus). - By September 2024 the non-financial public sector became a net payer of loans from IFIs, although disbursements from previously approved projects from the IDB, World Bank, and CABEI continued. - Remittances: - Remittances index shown (2018Q1 = 100) indicates strong increases for Nicaragua relative to Northern Triangle countries; remittances were a record driver of domestic demand in 2023. - Regional remittances growth reflects pull cyclical factors (strong U.S. job market and increased real incomes) and structural components (lack of income convergence with the U.S.). In Nicaragua, remittances growth also reflects a recent push (country-specific) factor. - Remittances are highly inelastic to exchange rate changes. ### Monetary and financial sector developments - Central Bank of Nicaragua (BCN) policy: - BCN maintained a moderately tight policy stance in 2023 and 2024 and started cutting the reference rate in late 2024, reducing it in two steps from 7 to 6.5 percent. - BCN decreased the yearly crawling rate of the exchange rate from 1 percent to 0 percent in January 2024 and announced in November that it would maintain the 0 percent crawling rate in 2025. - With strong FX inflows, net FX sales by the BCN have remained negative (i.e., BCN bought more FX than it sold). - BCN announced in November 2024 that all economic agents must denominate prices in domestic currency (córdoba; C$) and that all payments using cards should be made in córdobas; banking accounts, loans, and cash payments can continue to be in U.S. dollars. - Nicaragua is highly dollarized: more than 90 percent of loans denominated in U.S. dollars. - Liquidity management and quasi-fiscal operations: - BCN continued to mop-up liquidity and further improved its quasi-fiscal balance in 2023–2024 by offering short-term (up to 12-month maturity) córdoba-denominated instruments (“letras”); the stock of securities issued is now primarily in córdobas and mainly held by banks, helping to limit the increase of the monetary base. - Despite higher domestic interest rates offered for letras relative to international interest rates received on assets, the BCN increased its positive quasi-fiscal balance due to its substantial stock of international reserves. - Monetary base changes (percent of GDP, selected components across periods shown): - External factors: 3.2; 8.0; 3.8 - of which: FX net purchases (private sector) 2.4; 7.2; 4.8 - of which: FX net purchases (public sector) 0.0; 0.0; -1.5 - Other external factors 0.8; 0.8; 0.5 - Domestic factors: -2.1; -7.0; -3.5 - of which: Córdoba-denominated securities 0.0; -3.6; -1.7 - of which: NFPS deposits -2.3; -3.5; -1.5 - of which: Quasi-fiscal deficit 0.2; 0.3; 0.5 - Other domestic factors 0.0; -0.1; -0.9 - Change to the monetary base: 1.1; 1.0; 0.2 - Note: YTD indicates year-to-date. Positive values indicate increases in the monetary base (liquidity injection), while negative values indicate decreases (liquidity absorption). "Other" external factors include currency "cordobization". "Other" domestic factors include repos and deposits as well as other non-NFPS deposits. Negative numbers in italics in the source. ### Assessment and implications - External position: in 2023 assessed as stronger than implied by medium-term fundamentals and desired policies, driven by record-high workers’ remittances and large international reserves accumulation. - Sustainability and vulnerabilities: - NIIP improvement and composition of gross liabilities (stable and diversified FDI flows and long-term public debt) limit vulnerabilities. - However, risks remain from frequent natural disasters, pension system imbalances, and potential effects of evolving domestic and international political developments on the cost of doing business and cross-border flows. - Financial sector and correspondent banking: - Authorities report no evidence of challenges to correspondent banking relations as of mid-December 2024, but increased reporting requirements for Nicaraguan banks and future reactions of foreign supervisors or correspondent banks may impact financial flows (see ¶39 in source). *Source: International Monetary Fund — chapter “1. Sources of Trade, FDI, Remittances, and Financing Flows in Nicaragua” (excerpt).* ### 13. Banks remain reportedly well capitalized, and credit and deposits continue to grow, ### 1nicea2025001-print-pdf - 13. Banks remain reportedly well capitalized, and credit and deposits continue to grow, ### Banking sector current conditions - Capital adequacy and liquidity ratios for banks remained reportedly well above the regulatory minima as of end-October 2024, despite declining recently. - Average capital adequacy ratio (CAR) of the financial system is 18.9 percent as of October 2024, well above the requirement of 10 percent and the pre-crisis level of 14 percent. - Liquid assets to total liabilities fell to 23.7 in September 2024, from 44.7 percent at end-2021. The liquidity coverage ratio (LCR) remains reportedly comfortably above the required minimum. - Bank deposits and net bank credit to the private sector continued to grow steadily, reaching 12.6 and 19.1 percent year-on-year, respectively, in October 2024. - Non-performing loans (standard NPLs plus forborne, restructured, refinanced loans and repossessed assets, and the special category “aliviados”) and distressed assets as a share of total loans continued to decline since end-2022 to 1.6 and 6.5 percent, respectively, in October 2024. - However, NPLs experienced an uptick in late 2023 (linked to the collapse of a major coffee exporter in late-2023) and the decline in distressed assets has broadly leveled off since early 2024. - Profitability plateaued in 2024. ### Outlook and risks - Real GDP projections: - 4 percent in 2025 - 3.8 percent in 2026 - 3.5 percent in the medium-term - The projected medium-term growth rate of 3.5 percent is below the historical average of 3.9 percent over 2000-17, owing to lower expected private investment and a limited labor contribution to growth given large emigration. - Remittances are expected to remain steady and support private consumption, but also imports’ growth, leading to significantly lower expected current account surpluses. - Gross international reserves are expected to continue accumulating, although at a slower pace than in recent years. - Public debt and fiscal projections: - Public debt is projected to decline to 39.7 percent of GDP by end-2029, from 46.9 percent of GDP projected for end-2024. - Risk assessment: - Short-term risks: broadly balanced. - Medium-term risks: on the downside (Annex II). - Upside risks: stronger domestic demand and remittances growth, especially in the short-term. - Downside risks: lower global growth, deterioration in terms of trade, natural disasters, stricter and wider international sanctions, or changes in U.S. immigration policy given remittances’ importance. ### Fiscal policy, financing, and recommended measures - Authorities’ stance: - Committed to preserving fiscal sustainability and building fiscal buffers while supporting growth. - Budget execution until end-September 2024 and the approved 2025 central government budget show an appropriately tight and countercyclical fiscal policy. - Target surplus in the approved budget is 0.8 percent of GDP at the central government level. - Financing challenges: - Concessional financing remains limited; available financing for increased capital spending over 2025-26 is mostly non-concessional (from Chinese SOEs). - Net FDI flows are projected to be 5.3 percent of GDP on average over 2025-29, lower than historical averages of 6.8 percent of GDP (2000-17) and below levels seen in recent years (above 8 percent in 2021-22). - Staff recommendations (additional permanent fiscal measures totaling ¾-1 percent of GDP over the medium-term, compared to the baseline): - Streamline VAT exemptions in selected sectors (e.g., digital and mining) and improve compliance through strengthening electronic processes, tax risk management and tax audit procedures; estimated yield: ½ – ¾ percent of GDP. - Improve the targeting of long-standing subsidies to create space for investment in infrastructure; estimated yield: 0.3 percent of GDP. - Additional fiscal recommendations: - Enhance fiscal transparency and oversight of SOEs given elevated risks (high debt-to-assets ratio). - Ensure long-term sustainability of the pension system (INSS), noting central government transfers to cover INSS deficits are expected (about 2½ percent of GDP over the next five years). - Improve resilience to natural disasters and climate change and include natural disaster risks in published fiscal risk reports. ### Monetary policy and exchange rate framework - Policy orientation: - Monetary policy should remain geared towards supporting the exchange rate regime, safeguarding price stability, and supporting growth. - The BCN uses the exchange rate as the nominal anchor under a de jure crawling peg regime, reclassified as a de facto stabilized exchange rate regime effective January 1, 2024; the rate of crawl narrowed to 0 by 2024, implying exchange rate stability. - Recent developments: - Substantial foreign exchange inflows and prudent macroeconomic policies are fostering reserve accumulation. - With the start of the easing cycle of the Federal Reserve in September 2024, the recent gradual monetary policy loosening is warranted, but BCN’s path could be slower and in smaller steps; BCN estimates the natural interest rate at around 6 percent. - The current zero rate of crawl supports price stability and implies a real exchange rate appreciation given current inflation differentials with the U.S. - Staff recommendations: - BCN should remain ready to adjust interest rates and/or the rate of crawl to maintain the exchange rate regime and price stability in case of FX flow reversals. - Continue strengthening the monetary transmission mechanism, adopt further market guidance in interest rate determination, and periodically assess whether the economy reached a new equilibrium. - Pursue financial and capital markets deepening to strengthen monetary transmission and increase flexibility in response to shocks. - Policy coordination across fiscal, financial, and monetary authorities should continue as liquidity in córdobas is mopped up and reserves accumulate. ### Financial sector stability and resilience - Systemic risk: - Staff assess systemic risk as contained, but pockets of vulnerability exist. - Distressed assets do not seem to be declining further; recommendation for a more proactive stance monitoring restructured loans and increasing the ratio of provisions to distressed assets beyond NPLs towards pre-crisis levels. - Consumer credit risks: - Rapid expansion of consumer credit warrants close monitoring: personal loans and credit cards increased in September 2024 by 38 and 30 percent y-o-y, respectively. - Staff support measures to mitigate consumer indebtedness vulnerabilities, including increasing the minimum payment on credit cards by 0.5 percent each year up to 4 percent of account balances. - Recommendation to reactivate countercyclical provisioning to address excessive borrowing and increase capital buffers. - Authorities should ensure the rebound in credit is coupled with sound and prudent lending policies. ### Authorities’ views (summarized) - Broad agreement with staff on the economic outlook and risk assessment for 2024-2025; authorities envisage stronger medium-term real GDP growth of 4-4½ percent due to higher expected investment and export performance. - Authorities committed to preserving fiscal sustainability, expanding fiscal space for medium-term inclusive growth, improving tax policy/administration, restraining current expenditures, monitoring SOE balance-sheet risks, and ensuring INSS long-term sustainability. - Authorities agreed on the need to strengthen monetary policy transmission, enhance policy communications, and consider tools to promote local currency use and exchange rate flexibility. *Source: 1nicea2025001-print-pdf - 13. Banks remain reportedly well capitalized, and credit and deposits continue to grow,* ### 29. FX risks continue to warrant close oversight given the high level of dollarization. The ### 1nicea2025001-print-pdf - 29. FX risks continue to warrant close oversight given the high level of dollarization. The ### FX risks and dollarization - The difference between credit and deposits dollarization reached 23 percentage points in September 2024. - Credit dollarization rate reached 92 percent in September 2024, while deposits dollarization fell to 69 percent. - Only 17 percent of borrowers generate foreign currency, on average. - Hedging instruments (such as futures or swaps) are not permitted under domestic law. - During the 2018-19 socio-political crisis, deposits and bank balance sheets contracted by almost a third; FX risk did not represent an issue then. - Staff recommendations to mitigate FX risks: - Assign a higher weight for personal and mortgage loans in foreign currencies in the computation of the capital requirement. - Increase further the risk weights for commercial loans whose debtors do not generate foreign currency. - Ensure that liquidity coverage is done by currencies (foreign and domestic), in addition to the consolidated currency position. ### Financial inclusion, credit, and banking sector depth - Gross credit recently reached pre-crisis levels in nominal terms, but the credit-GDP-ratio remains well below its pre-crisis level: - 28 percent in September 2024 compared to 40 percent in 2018Q1. - The credit-GDP ratio is the lowest in Central America. - Year-on-year growth rates of loan categories as of September 2024: - Commercial loans: 11 percent. - Agriculture loans: 7 percent. - Mortgage loans: 5 percent. - Staff recommendations to advance financial inclusion and deepening: - Improve consumer protection (to increase bank deposits). - Dampen credit portfolio concentration. - Promote financial literacy, inclusion, and competition. - Develop the bond and equity markets. ### Crisis preparedness, supervision, and prudential perimeter - Authorities are urged to finalize and implement crisis preparedness arrangements and to establish a timeline to update the resolution framework in line with best international practices (Financial Stability Board Key Attributes), accounting for the size, structure, and complexity of the financial system. - Additional crisis-preparedness measures recommended: - Enhance existing arrangements between entities involved in crisis preparedness and management. - Review the resolution toolkit. - Conduct crisis simulation exercises. - Start planning of recovery and resolution work. - Staff encourage creation of a subcommittee of the Financial Stability Committee to deal with potential crisis. - Authorities should expand the prudential supervisory perimeter: - Overcome data gaps for credit and savings cooperatives and start their oversight, following a principle of proportionality, prioritizing largest institutions, and finalizing capital requirements legislation for microfinance companies. - The Fund offers technical assistance to support implementation of the 2019 Financial Sector Stability Report (FSSR) roadmap. ### Authorities’ views on financial sector measures - Authorities remain committed to maintaining resilience of the financial sector and will consider deepening financial inclusion and capital markets. - They agreed on the need to update their crisis preparedness framework and the banking law. - They remain committed to curb FX risk, monitor distressed assets, and strengthen mitigating measures if needed. - Practical measures to promote financial inclusion under consideration include improving the payment system and potentially simplifying banking accounts and SME loan requirements. - Authorities affirmed the importance of capital market reforms to catalyze private investment. ### Boosting medium-term growth and employment - Sustained higher medium-term growth would support further gains on poverty reduction and income convergence. - Key measures recommended: - Continued investment in infrastructure and human capital. - Higher targeted social spending. - Increases in the labor force participation rate (LFP), which is expected to decline as the population ages and due to recent rapid emigration. - Fostering female LFP to bring considerable potential output gains. - Poverty indicators and projections: - Poverty rate (headcount ratio under $3.65 a day) declined from 14 percent in 2014 to an estimated 12.5 percent at end-2023. - Authorities’ view: - They concurred with staff that additional reforms are needed to support medium-term growth, which they see above 4 percent annually. - They noted fully financed infrastructure projects and sustained higher private investment could raise growth above staff projections. ### Strengthening economic governance and rule of law - AML/CFT and supervisory measures: - Authorities preparing an evaluation of the AML/CFT framework focused on effective implementation; supervision is shifting to thematic inspections using risk-based tools. - Priority areas include compliance regarding domestic politically exposed persons, investigations and prosecutions, regulation for virtual asset service providers, and remittances-sector AML/CFT reforms. - Fair access to legal recourse for non-profit organizations and consultations on regulatory changes affecting them are needed. - Law 1224 aims to shield Nicaraguans from external sanctions but may raise compliance concerns for financial institutions and could undermine compliance with international sanctions regimes. - Fiscal transparency progress: - Most commitments and recommendations from the RCF/RFI, the 2023 Article IV, and the Fiscal Transparency Evaluation have been implemented. - In 2024, authorities further strengthened fiscal transparency, though timeliness of publication of public finance statistics and reports has occasionally slipped. - Staff recommend expanding SOEs’ financial statements coverage and publishing annual financial statements of the central government and their audit reports. - Anti-corruption and asset declarations: - Digitization of asset declaration system and norms to protect whistleblowers are advances. - Staff recommend: - Ensuring public access to asset declarations of top-level officials, including publication. - Conducting risk-based assessments periodically. - Adopting measures to prevent conflicts of interest in public administration. - Bringing illicit enrichment offence in the penal code in line with international best practice. - Rule of law and judicial independence: - Staff recommend urgent measures to protect judicial independence in line with the Bangalore Principles of Judicial Independence and international covenants ratified by Nicaragua. - Additional recommendations: improve efficiency and modernization of judiciary; strengthen transparency of administrative and judicial proceedings involving property rights; suspend administrative decisions potentially affecting property rights until final; enact regulations for selection and removal of judges and magistrates. ### Central bank safeguards and accounting - Progress on the 2021 safeguards assessment recommendations remains limited. - BCN continues to reconcile legacy assets and liabilities to improve transparency. - Staff recommend: - Legal reforms to strengthen the central bank’s autonomy. - Development of a medium-term recapitalization strategy. - Transition to International Financial Reporting Standards (IFRS). - Authorities plan to continue cleaning up BCN balance sheet from past legacy loans before considering transition to IFRS and are working on changes to central bank and banking laws. ### Statistics and capacity development - Data provided to the Fund has shortcomings but is broadly adequate for surveillance; work needed to improve timeliness, coverage, consistency, and granularity. - Needed improvements: - Expand sources of data for the real and external sector. - Harmonize public sector debt with external sector debt data. - Improve timeliness of key statistics (e.g., poverty rate). - Specific data and capacity development notes: - Incorporating household survey results into national accounts and concluding new series with benchmark year 2019 remains pending. - Latest actual data for poverty dates back to 2014; World Bank estimates used for more recent years. - Authorities are working with the World Bank on updating poverty statistics, expecting progress by end-November 2025. - Nicaragua’s CD priorities include improving fiscal institutions, maintaining monetary and financial stability, and improving statistical capacity; authorities engage with IMF, CAPTAC-DR, and other IFIs. *Source: Excerpt from the provided IMF chapter/section content.* ### 50. Nicaragua’s economic performance remains robust, underpinned by prudent ### Nicaragua’s economic performance remains robust, underpinned by prudent ### Macroeconomic performance and key statistics - Real GDP grew by 4½ percent in 2023 and the first half of 2024. - The estimated poverty ratio continues to decline, but it remains above the regional average. - Banks are reportedly liquid and well capitalized; NPLs increased recently but remain low. - Twin fiscal and external surpluses are leading to a steady decline in the public debt-to-GDP ratio and the accumulation of strong buffers. - The external position in 2023 was assessed as stronger than the level implied by medium-term fundamentals and desired policies, given record-high workers’ remittances. - Inflation is low and stable. ### Outlook and projections - Public investment is expected to support growth of 4 percent in 2025 and 3.8 percent in 2026. - Over the medium term, real GDP growth is expected to moderate to 3.5 percent, given a lower labor contribution due to recent emigration, and cautious private investment decisions. - International reserves are expected to grow at a slower pace than recently, given smaller current account surpluses, but they are projected to remain ample. ### Risks to the outlook - Short-term risks are broadly balanced; medium-term risks are to the downside. - Upside risks: - Stronger domestic demand. - Remittances growth, especially in the short term. - Downside risks: - Lower global growth. - A deterioration in the terms of trade. - Natural disasters. - Stricter and wider international sanctions. - A change in immigration policies in the U.S., given the critical importance of remittances. ### Fiscal policy stance and staff recommendations - Authorities are strengthening fiscal buffers by improving tax administration and expenditure efficiency and aim to increase public investment to support medium-term growth. - Staff recommended: - Adopting additional permanent fiscal measures to finance higher public investment and social spending within the authorities’ medium-term fiscal path. - Further enhancing fiscal transparency and oversight of SOEs to minimize fiscal risks. - Identifying permanent, sustainable, and comprehensive solutions to address imbalances in the INSS. ### Monetary policy and communication - The BCN maintained an adequately moderately tight monetary policy, while fiscal policy has been appropriately tight and countercyclical. - Both policies are moving towards a neutral stance and have supported price stability, growth, and an ample accumulation of international reserves consistent with the current exchange rate regime. - Staff recommended enhanced monetary policy communication to help strengthen the monetary policy transmission. ### Financial sector deepening, inclusion, and stability - The credit-to-GDP ratio remains below the pre-multiple shocks period; staff recommended enhancing financial inclusion and deepening to support inclusive growth. - Staff recommended continuing efforts to maintain financial stability, including: - Enhancing monitoring and provisioning of distressed assets and NPLs. - Aligning the crisis preparedness framework with best international practices. - Continuing to strengthen risk mitigation measures. ### Structural reforms and governance - Staff supported authorities’ initiatives to foster medium-term inclusive growth and recommended additional measures: - Improving the business climate and the rule of law. - Increasing human capital. - Fostering labor force participation for women. - Developing capital markets. - Staff recommended significantly improving the rule of law and safeguarding judicial independence to support investors’ confidence, including: - Ensuring judicial independence as provided by international covenants ratified by Nicaragua. - Strengthening the transparency of administrative and judicial proceedings involving property rights. - Guaranteeing adequate, effective, and fair recourse. - Continuing initiatives to improve the efficiency and modernization of the judiciary. ### Anti-corruption and AML/CFT frameworks - Authorities have taken steps to improve anti-corruption and AML/CFT frameworks; further measures are needed to align them with international best practices and strengthen effective implementation. - Positive steps highlighted: - Digitization efforts of the asset declaration system. - Adoption of norms to protect whistleblowers. - Shifting the supervision of financial institutions to thematic inspections. - Further recommended actions: - Increase capacity to detect and punish corruption, including risk-based audits over asset declarations. - Publish asset declarations of politically exposed persons. - Prioritize compliance with regulations concerning domestic politically exposed persons. - Increase coordination among agencies and with supervised sectors. ### Data and statistical capacity - Data provided to the Fund has some shortcomings but is broadly adequate for surveillance. - Staff welcomed authorities’ efforts, supported by technical assistance, to improve the quality of national accounts. - Further efforts are needed to improve the timeliness of the publication of key statistics and reports. ### External flows, trade, FDI, remittances, and financing (Box 1 and Box 2) - Trade and partners: - Total trade (exports plus imports) increased from 62.5 percent of GDP in 2017 to a peak of 75.5 percent of GDP in 2022. - Two thirds of total trade is conducted with the U.S., Canada, the European Union, and regional peers (CAFTA-DR, plus Panama); 14 percent with other Latin American countries; and 10 percent with China. - Trade with China is almost completely related to imports (94.6 percent through July 2024). - Trade with CAFTA-DR is primarily related to imports (70 percent). - Trade with the U.S., Canada, and the European Union is evenly distributed between imports and exports. - Net FDI: - Net FDI originated in the U.S. represents at least a fifth of total flows (about 3 percent of GDP) in 2021-2022. - Over a quarter of net FDI comes from Panama and Costa Rica; Spain and Mexico are also main partners. - Net FDI from Canada decreased substantially in 2023 after averaging 15.1 percent of total net FDI for 2018-2022. - In 2023, new partner countries like Barbados and Netherlands provided significant FDI flows. - Remittances: - Through July 2024, over 80 percent of total remittances continue to come from the U.S. - Public external financing and debt flows: - Public external debt disbursements from multilaterals are decreasing, and increased repayments are turning net flows negative. - Since 2017, disbursements from the IADB and the WB have declined; in 2023, CABEI announced having reached the country quota exposure. - Disbursements from China have been small compared to other gross financing sources; recently contracted loans with China, Saudi Arabia, and Belarus indicate increased reliance on these bilateral partners moving forward. - Exports and FDI composition (Box 2): - Since 2018, total exports increased by an average of 10 percent annually. - Gold exports recorded an average annual growth of 23.4 percent and comprised 28 percent of total exports in 2023 (compared to 13 percent in 2017). - Gold exports are undertaken by international mining companies (primarily from the U.S. and Canada) and remained broadly unaffected by sanctions; in 2024, Chinese companies received gold mining licenses. - Coffee exports declined significantly in 2023 and the first half of 2024 but remained 15 percent of total exports in 2023, down from prior years due to the international bankruptcy of a major coffee exporter and unfavorable weather conditions (El Niño). ### Institutional and procedural recommendations - Staff recommended enhancing monetary policy communication to strengthen transmission. - Staff recommended adopting additional permanent fiscal measures to finance higher public investment and social spending. - Staff recommended enhancing fiscal transparency, oversight of SOEs, and finding permanent solutions for INSS imbalances. - Staff recommended improving anti-corruption, AML/CFT implementation, and publishing asset declarations for politically exposed persons. - Staff recommended continuing to improve national accounts and the timeliness of key statistics. - Staff recommend that the next Article IV consultation be held on the standard 12-month cycle. *International Monetary Fund — Nicaragua country team assessment and recommendations as presented in the source content.* ### Box 2. Recent Evolution of Exports and FDI in Nicaragua (Concluded) ### Box 2. Recent Evolution of Exports and FDI in Nicaragua (Concluded) ### Recent FDI flows and composition - FDI inflows increased from US$1.8 billion in 2022 to US$2.5 billion in 2023. - FDI inflows have grown on average at a 38.5 percent growth rate over the past years. - Inflows are explained primarily by reinvested earnings. - Despite higher inflows, net FDI "has remained broadly unchanged at around since 2021" and recorded a slight decline in 2023 due to rising outflows as well. - Net FDI declined from 8.1 percent of GDP in 2022 to 6.7 percent in 2023. - Sectoral shift: FDI composition is moving away from mining and manufacturing into retail and services, responding to strong domestic demand. - Net FDI in retail and services increased from US$128 million in 2022 to US$337 million in 2023, accounting for 27 percent of total net FDI. ### Exports and external sector developments - Real exports declined in 2023, while retail and tourism drove growth through real private consumption and investment. - Gold exports continued to increase strongly. - Coffee exports declined. - Beef exports stagnated. - Strong remittances are leading to large current account surpluses. - Net FDI flows, although declining in 2023, remain the main contributor to the financial account surplus. - Official flows (other investment) turned negative in 2023. *Source: BCN. National authorities and IMF staff calculations.* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### Overall Assessment - Nicaragua’s external position in 2023 is assessed as stronger than the level implied by fundamentals and desirable policies. - The estimated current account gap in 2023 is 8.7 percent of GDP, larger than the gap of 2.8 percent of GDP estimated in 2022. - The 2023 improvement reflects a sharp improvement in the current account balance due to a significant increase in remittances, reaching 26.1 percent of GDP. - The net international investment position (NIIP) improved markedly since the social-political crisis of 2018 and relative to end-2022, driven by: - continued significant fiscal consolidation; - a considerable decline in private sector liabilities. - The trade and services balance are entirely covered by remittance inflows at historic highs. - Financing composition in 2023: - FDI and medium-to long-maturity public sector debt financed the rest of transactions; - foreign exchange reserves increased by US$1 billion in 2023 to US$5.2 billion (7-months of imports, in the midpoint of the suggested range). - De jure crawling peg exchange rate regime maintained, with a move to a 0 percent exchange rate since the beginning of 2024. - High remittances and prudent macroeconomic policies have supported external stability. ### Potential Policy Responses - Key vulnerabilities: - External position strength is highly dependent on workers’ remittances; a significant lapse in these flows is the main risk to external sustainability. - Possible drivers of remittance declines: considerable weakening of the U.S. labor market or strengthening of immigration policies (stricter deportations or a non-extension of the Temporary Protected Status of Nicaraguan migrants). - Additional risks: deterioration of the trade balance (worse than expected global growth and/or terms of trade) or deterioration in the financial account due to stricter international sanctions. - Recommended policy actions: - Continue building international reserves and fiscal buffers. - Pursue prudent macroeconomic and financial policies. - Pursue financial and capital markets deepening. - Strengthen the monetary transmission mechanism. - Implement structural reforms to increase the economy’s flexibility to respond to shocks and to strengthen competitiveness. ### Foreign Assets and Liabilities: Position and Trajectory - 2023 positions (Percent of GDP): - NIIP: -97 - Gross Assets: 50 - Debt Assets: 49 - Gross Liab.: 147 - Debt Liab.: 70 - Background and drivers (2023): - NIIP reached -97 percent of GDP, a decline of over 15 percent of GDP compared to end-2022. - Gross assets remained relatively unchanged at 50 percent of GDP. - Gross liabilities contracted by 15.5 percent of GDP driven by declines in private and public debt liabilities and lower net FDI. - Assessment: - The External Sustainability Assessment finds the NIIP sustainable. - NIIP is projected to improve further with expected build up in external assets (growing reserves) and central government fiscal consolidation. - Most external debt is held by the public sector; the largest shares are from official creditors and multilateral institutions, with long maturities. - Remaining liabilities are constituted by stable FDI flows. - With continued fiscal consolidation and a cautious private sector, total external liabilities are projected to decline further in the medium-term. ### Current Account - Background (2022–2023): - CA balance shifted from a deficit of 2.4 percent of GDP in 2022 to a surplus of 7.7 percent of GDP in 2023. - Net remittances increased by 5.8 percentage points of GDP relative to 2022, reaching 26.1 percent of GDP in 2023. - Trade balance deficit narrowed to 15.1 percent of GDP in 2023 (from 17.8 percent in 2022) due to favorable terms of trade (up by 7.1 percent), reflecting higher gold and lower energy prices. - H1 2024: - CA surplus narrowed to 5.9 percent of GDP from 9.8 percent of GDP during the same period in 2023, primarily driven by a widening trade deficit. - Assessment and model results (2023, Percent of GDP): - CA model estimates a CA norm of -1.5 percent of GDP. - Cyclically-adjusted balance (CAB): +7.2 percent of GDP (reflecting a cyclical adjustment of 0.6 percent of GDP due to a positive output gap). - EBA-lite identified relative policy gaps estimated at 1.4 percent of GDP, driven by tighter fiscal policy than in the rest of the world and stronger reserve accumulation in 2023 relative to other countries. - Errors and omissions in the balance of payments represented 6.2 percent of GDP in 2023. - Implied current account gap: 8.7 percent of GDP, representing a real effective exchange rate undervaluation of 25.4 percent. - Policy implication note: large appreciation is not necessarily implied because remittances tend to be highly inelastic to exchange rate movements and emigration has a structural component for Nicaragua. ### Real Exchange Rate - Background: - Since January 2024, the exchange rate crawling rate has been 0, a further 1 percentage point reduction from the 2023 crawling rate. - The Real Effective Exchange Rate (REER) appreciated by 1.7 percent on average in 2023 compared to 2022. - Assessment: - The REER index model finds a CA gap of -1.6 percent of GDP, suggesting a REER overvaluation of 4.7 percent. - Model comparison table (in percent of GDP): - CA-Actual: 7.7 - Cyclical contributions (from model): (-)0.6 - Natural disasters and conflicts: (-)-0.1 - Adjusted CA: 7.2 - CA Norm (from model): -1.5 - Adjusted CA Norm: -1.5 - CA Gap: 8.7 - 1.6 - o/w Relative policy gap: 1.4 - Elasticity: -0.3 - REER Gap (in percent): -25.4 4.7 - Notes: Based on the EBA-lite 3.0 methodology; cyclically adjusted, including multilateral consistency adjustments. ### Capital and Financial Accounts: Flows and Policy Measures - Background (2023): - Net FDI inflows: 6.7 percent of GDP, below the 2021-22 average of 8.3 percent of GDP. - Other investment outflows were 4.0 percent of GDP due to loan amortizations and net asset acquisitions from non-financial corporations and households. - Both the current account and financial account reflected surpluses, leading to significant international reserve accumulation (2.4 percent of GDP). - This reserve accumulation trend continued in the first half of 2024. - Assessment: - Financing structure supports external stability with a key caveat: dependence on continued high remittance inflows. - Remittances are projected to decline relative to GDP to around 21 percent of GDP in the medium term. ### FX Intervention and Reserves Level - Gross international reserves (GIR): - End-2023: US$5.2 billion or 7.0 months of imports (excluding maquila). - Reserves grew by US$1.0 bn in 2023, supported by prudent fiscal policy and sustained remittance inflows. - End-October 2024: GIR stood at US$5.7 billion. - GIR are expected to continue growing over the medium-term under the baseline scenario, albeit at a slower pace. - Assessment: - In 2023, GIR at 7.0 months of imports was adequate, on the mid-point of the suggested range of 5.3 to 8.9 months of non-maquila imports estimated using the Fund’s adequacy metric for LICs, with a range of reserves holding opportunity costs. ### Risks (selected from the Risk Assessment Matrix) - External risks and policy responses: - Social discontent: High Likelihood / High Impact. - Policy response: Accelerate structural reforms, foster diversification, facilitate job creation, adjust fiscal expenditure while protecting social spending and public investment. - Deepening geoeconomic fragmentation: High Likelihood / Medium Impact. - Policy response: Accelerate structural reforms, strengthen business climate, maintain flexibility of the de jure crawling exchange rate regime. - Commodity price volatility: High Likelihood / Medium Impact. - Policy response: Strengthen social safety nets, provide targeted fiscal support, adjust monetary policy, improve supply chain resilience. - Intensification of regional conflicts: High Likelihood / Low/Medium Impact. - Policy response: Accelerate structural reforms to increase competitiveness and resilience. - Global growth slowdown: Medium Likelihood / High Impact. - Policy response: Coordinate monetary and fiscal policy, use buffers (government deposits and international reserves), provide fiscal support for the vulnerable, finance through concessional borrowing where possible, and accelerate structural reforms. - Domestic risks and policy responses: - Domestic political developments and potential intensification of sanctions: Medium Likelihood / High Impact. - Policy response: Strengthen rule of law, enhance governance and anti-corruption frameworks, accelerate structural reforms, protect social spending, use fiscal buffers, and adopt careful banking regulations and international standards. - Natural disasters related to climate change: High Likelihood / Medium Impact. - Policy response: Prioritize infrastructure resilience, strengthen disaster risk management and preparedness. ### State-Owned Enterprises: Performance and Fiscal Risks (Annex III highlights) - Coverage and role: - Analysis covers the six largest non-financial SOEs that publish financial statements online; these SOEs operate in strategic sectors: energy, transportation, and water. - In 2022, total assets of these six SOEs publishing financial statements were 25 percent of GDP. - Total liabilities of these six SOEs amounted to 21 percent of GDP in 2022. - Selected SOEs and sectors: - ENATREL — Transmission of electrical energy — Energy - ENEL — Electric Power Generation — Energy - PETRONIC — Exploration, exploitation, and commercialization of hydrocarbons — Energy - EPN — Port and shipping services — Transport - EAAI — Airport management — Transport - ENACAL — Water supply and sewage — Water - Fiscal support and contingent liabilities: - Transfers to SOEs are minimal (0.5 percent of GDP in 2023), driven by capital transfers, primarily to ENACAL. - Government guaranteed external debt stock of SOEs was 0.2 percent of GDP at end-2023, owed mainly to multilateral (IADB) and bilateral (China and South Korea) creditors, presenting limited fiscal risk. - On-lending is not published; central government domestic debt stock was 10 percent of GDP at end-2023, and some proceeds could have been on-lent to SOEs. Therefore, explicit contingent liabilities (debt guarantees and on-lending) could be larger than reported. - SOE financial health (2015–2022, IMF SOE Health Check Tool): - The HCT assesses profitability, liquidity, and solvency using financial ratios and assigns risk ratings from very low to very high. - Findings: - Profitability: assessed at moderate to low risk due to SOE surpluses in 2023 and adequate returns on assets and equity for most SOEs. - Elevated risks: weak short-term liquidity and high debt compared to earnings and debt compared to assets. - Aggregate fiscal risk: ENATREL represents very high fiscal risk; ENACAL, ENEL, and PETRONIC represent high fiscal risk. All these SOEs are concentrated in the energy and water sectors. - Policy implication: Although budget support is limited, these SOEs entail risks that warrant close monitoring; strengthening transparency and oversight to monitor and mitigate fiscal risks is needed. *Source: Annex I. External Sector Assessment (selected sections) from the provided IMF content unit.* ### 5. These findings indicate the need to continue closely monitoring the performance of ### 5. These findings indicate the need to continue closely monitoring the performance of ### State-Owned Enterprises (SOEs): monitoring, reporting, and fiscal risks - Findings: - There is currently no aggregate reporting on the SOEs sector debt except for government guaranteed debt reported in the annual debt report and summary SOE financial positions reported. - The largest liabilities are held by SOEs in the energy and water sectors (mainly ENATREL, 8 percent of GDP in 2022 and ENACAL). - Implications: - Enhancing the coverage of debt of SOEs and greater transparency on transactions between the central government and SOEs will help identify potential fiscal risk exposures. - Monitoring should be extended to include entities that are recipients of on-lending from the central government. - Timely and regular publication of audited financial statements of SOEs could increase transparency. - Improving profitability of SOEs would reduce fiscal pressures. - Data points and indicators (preserved as reported): - Composite indicator of overall risk is estimated for each company using a 1–5 scale where 1 = very low risk and 5 = very high risk. - Debt coverage ratio measured as ratio of earnings to debt is low when EBITDA (earnings before interest, tax, depreciation, and amortization) is low. ### Nicaraguan Social Security Institute (INSS): financial position and drivers - Overall finding: - The financial position of the INSS has weakened over the past dozen years due to a confluence of factors; central government fiscal support increased to ensure viability. - Key drivers of weakening: - Since 2013, INSS expenditures are outpacing revenues. - Long-term demographic trends: fertility rate declined from 4.6 births per woman in 1990 to 2.3 births in 2022; life expectancy increased from 63 in 1990 to 75 years in 2022. - Protracted economic contraction during 2018-2020 and slow recovery in formal employment reduced contribution growth. - Shift in investment strategy from government securities to real assets resulted in lower financial income and depletion of reserve fund. - Fiscal and balance-sheet figures: - Dependency ratio declined from 4.5 employed people supporting a retiree in 2013 to 2.6 by 2023. - Reserve fund stood at -C$5.3 million or 0.9 percent of GDP by end-2022. - Central government historical arrears for outstanding contributions during 1956-2013 totaled US$500 million (or 3.9 percent of GDP); agreed to pay over 50 years in 2014, later accelerated to be fully paid by 2022. - Transfers from the central government reached 1 percent of GDP in 2020 (regular transfer + payment of historical debt). In 2024, ad-hoc donations were made in addition to regular transfers. - Membership and coverage: - Share of economically active population (EAP) contributing to social security: grew from 21 percent in 2013 to 27 percent by 2017, then declined to 24 percent of EAP by end-2022. - Among total insured at end-2022, 56.2 percent were males and 43.8 percent were females (INSS, 2022 Annual Statistics). ### Pension reforms implemented and remaining challenges - Reforms implemented: - 2013 reforms: employer contribution rates rose from 7 to 10 percent of monthly earnings; minimum pensions adjusted in line with average wage growth instead of minimum wage; maximum pensionable salary was increased; a reduced pension was introduced for those with 5–14 years of contributions. - 2019 reforms: employee contributions rose from 4 to 4.75 monthly pay; employers’ contributions increased from 10 to 12.5 percent (or 13.5 percent for those with more than 50 employees); maximum monthly old-age pension reduced to 70 percent of the insured’s average monthly earnings (previously 80 percent); replacement rate reduced. - Some measures announced in 2019 were not implemented (increasing minimum number of contributions required to receive a reduced pension; reduction on the minimum pension). - Remaining vulnerabilities: - INSS exhausted its liquid reserves; lower investment earnings projected to continue weighing on financial position. - Worker-to-beneficiary ratio projected to decline to 2.2 by 2028. - System continues to accumulate unfunded liabilities; central government likely to continue covering INSS deficits absent further reforms. - Recommended reform directions (preserved as presented): - Combine parametric reforms and other changes, including implementing measures from the 2019 reform that were not implemented. - Ensure reforms do not create distortions in the economy or labor market. - Secure population and business community buy-in via transparency, gradual implementation, and consensus. - Potential measures could include: - Increasing the number of affiliates contributing to the pension system without adversely affecting labor costs, participation rates, and competitiveness. - Increasing formal employment. - Pursuing policies to increase labor force participation rates and lower disparities. - Diversifying the investment portfolio to raise financial income and deepen the domestic capital market. - Reducing administrative costs, including increasing financial inclusion by distributing pensions electronically, and reducing ad-hoc donations. ### Resilience to natural disasters and climate-related fiscal risks - Macro-critical nature: - Climate change remains macro-critical for Nicaragua; implementing resilient investments and integrating climate risks into policymaking is essential to lower fiscal risks and ensure fiscal sustainability. - Exposure and historical impacts: - Nicaragua experienced 84 natural disaster events during 1960-2022, an average of 1.3 disasters per year. - Recent disasters in 2022 caused damages of up to 2.8 percent of GDP. - Disaster events by type and damage (selected figures as reported): Storms total damage US$2,856 million; Flood total damage US$2.1 million (table in source). - Budgetary and insurance mechanisms: - Natural Disaster Fund (FND) receives a budget allocation; each budget includes a contingency item of one percent of tax revenues established by law. - Nicaragua qualifies for an IDB loan of US$186 million in case of a tropical cyclone, earthquake, or excess rainfall. - Contingent emergency response component (CERC) of the World Bank permits reallocation of existing project funds. - Nicaragua has parametric insurance coverage from the Caribbean Catastrophe Risk Insurance Facility (CCRIF); coverage increased from US$19.1 million in 2015/2016 to US$66.7 million in 2024/2025. - Total CCRIF disbursements to Nicaragua at end-2022 amounted to US$41.2 million following activation of six insurance policies since 2015. - Ongoing policy and financing efforts: - Physical adaptation measures include agricultural diversification, reforestation, and promotion of renewable and clean energy. - Updated Nationally Determined Contribution (NDC) published in 2020; national climate change policy approved in 2022; First Transparency Report (BTR) to be submitted by end-2024; a new NDC to be presented in 2025. - Nicaragua requires US$7.53 billion to implement the NDC goals (by 2030: 65 percent of electrical matrix installed capacity from renewables; reduce national CO2 emissions from gross deforestation by 25 percent; reduce fluorinated gas consumption). - Environmental taxes rose to 1.4 percent of GDP in 2021, up from 1.3 percent in 2020 (energy taxes including transport fuel make up 99 percent of this total). - Medium-term plans include acquiring parametric insurance policies, exploring enhanced CCRIF coverage for droughts, and safeguarding fishing and energy sectors. - Need for additional financing to invest in resilient infrastructure, strengthen disaster risk management and preparedness, and consider alternative financing options (green bonds, natural disaster clauses in debt, carbon tax). *Source: IMF staff analysis and data as presented in the supplied content.* ### Annex VI. Remittances and Real Exchange Rate Appreciation ### Annex VI. Remittances and Real Exchange Rate Appreciation ### Overview and recent trends - Since 2010, several Latin America and Caribbean (LAC) countries, including Nicaragua, have experienced a notable increase in remittances. - In Nicaragua, remittances rose from 15.2 percent of GDP in 2021 to 26.1 percent of GDP in 2023. - By end-2023: - Nicaragua became the highest remittances-receiver country in LAC—relative to the size of the economy—and the fourth largest in the world. - Remittances exceeded other inflows such as official financing, official development assistance and FDI. - Remittances more than offset the trade balance deficit and, together with prudent macrofinancial policies, led to record high gross international reserves. ### Theoretical channels - Theoretical models conclude that remittance inflows increase domestic household income, boosting spending and prices—particularly of non-tradable goods and services. - Because tradable prices are set in international markets while non-tradable supply is constrained, excess demand raises the relative price of non-tradables versus tradables. - Consequences: - Non-tradables production increases, resources shift from tradables to non-tradables. - The real exchange rate (REER) appreciates, reducing competitiveness of the traded goods sector. ### Empirical approach - Staff conducted a cross-country empirical analysis to assess the impact of remittances on REER following a 1 percent increase in the remittances-to-GDP ratio. - Methodology and data: - Blundell and Bond estimator used to identify causal effects. - Impulse response functions derived from a dynamic panel model to capture dynamic effects. - Controls: GDP per capita, foreign reserves, terms of trade, central bank interest rate, non-remittances current account balances, financial openness, government expenditure. - Annual data from 90 countries over 1990-2022. - Exchange rate regime classification: fixed exchange rate regimes include countries classified in AREAER as fixed exchange rate regimes, crawling pegs, and crawling bands. - Definitions of remittance size: large remittances = countries receiving remittances above the 80th percentile of global remittances; low remittances = below the 20th percentile. ### Key empirical findings - REER response: - The REER appreciates in response to increased remittance flows, regardless of the exchange rate regime. - A real exchange rate appreciation is observed both in countries with fixed and flexible exchange rate regimes. - Timing and magnitude by regime: - Under a flexible exchange rate regime, the REER appreciates more and within the first year. - Under a fixed exchange rate regime, the appreciation is more modest and peaks in the second year. - In both regimes, the impact dissipates after the short-term. - Effect of remittance size: - The real exchange rate appreciation is much stronger in countries with large remittances. ### Policy implications and recommendations - Maintain and monitor exchange rate regime: - Staff support the authorities’ decision to maintain the de jure crawling peg regime given structural characteristics of the economy. - Authorities should monitor remittances exchange flows and be ready to adjust interest rates and/or the rate of crawl to maintain the exchange rate regime and price stability. - Competitiveness and non-price policies: - Policies supporting non-price factors—such as increasing productivity, reducing costs of doing business, and improving the business climate—are important to support competitiveness in the face of expected REER appreciation. - Encourage allocation of remittances towards investment rather than consumption to support medium-term growth. - Monetary and financial flexibility: - Strengthening the monetary transmission mechanism and increasing some exchange rate flexibility (as related to the BCN commission rate), coupled with financial and capital markets deepening, would increase the economy’s flexibility in response to shocks. - The BCN should periodically assess whether the economy has reached a new equilibrium and adapt monetary and exchange rate policies as needed. - Medium-term outlook: - Over the medium-term the current account surpluses are expected to narrow significantly, abating the REER undervaluation. - Policies to support medium-term growth through human capital accumulation and investment in infrastructure would also support competitiveness. *Prepared by Juan Pablo Celis and Yasumasa Morito, with support from Alejandro Fiorito. Metodij Hadzi-Vaskov supported Alina Carare in the guidance of the larger analytical project.* ### 9. Given the increased appetite for córdoba-denominated assets, additional measures to ### 9–Annexes: Monetary Policy, Credit Growth, Capital Markets, and Gender Gaps ### Monetary policy transmission and FX risk mitigation - Given the increased appetite for córdoba-denominated assets, additional measures to mitigate FX risks and improve monetary policy transmission could be considered, including: - Increasing market guidance of interest rate determination by introducing FX auctions. - Employing differentiated reserve requirements and/or provisioning for dollar and córdoba assets. - Further developing domestic markets (Annex IX). - The BCN should continue to monitor external developments and their impact on its quasi-fiscal balance, given increased interest expenses over the medium-term. - Potential crowding out to monitor: - Central government debt issuance with longer maturities. - Private credit. ### Credit Growth — summary findings (Annex VIII) - Stylized facts and sectoral developments: - No banks failed during the 2018 socio-political crisis; banks contracted balance sheets on both asset and liability sides amid substantial deposit withdrawals in 2018-19. - Significant contraction in credit in 2018-20 and an increase in non-performing loans (NPLs) and distressed assets (much larger than during the pandemic). - Gross credit only reached its pre-crisis peak by end-March 2024, six years after the onset of the crisis. - Resurgence in credit driven largely by credit cards, commercial loans, and personal consumption. - Credit-to-GDP dynamics: - Peak of 40 percent in the first quarter of 2018. - Stabilized at around 28 percent by end-2023 and throughout the first half of 2024. - By end-2023, Nicaragua had the lowest credit-to-GDP ratio within the Central American region. - Deposits and concentration: - Total deposits reached 216 billion córdobas, surpassing the pre-crisis peak of 171 billion córdobas, but deposits-to-GDP ratio has not regained its pre-crisis level of 40 percent, remaining around 33 percent over the past three years. - Banking sector portfolio concentration increased, with higher allocations to personal consumption and commercial and industrial loans; agricultural, mortgage, and livestock sectors have lower allocations. - Herfindahl-Hirschman Index (HHI) concentration has trended upward since 2007, peaking in 2023. ### Econometric analysis of credit-to-GDP (ARDL results) - Model context: - Analysis covers 2008-2023; model selected after optimal lag selection, cointegration, bounds and diagnostic tests. - Number of observations-192. R-square=0.5. Standard errors in parentheses. **,*** denotes significance at 5% and 1%, respectively. - Long-term relationship and adjustment coefficient (ARDL model; Dependent Variable: Credit-to-GDP ratio): - Adjustment coefficient: -0.026***(0.005) - GDP-per-capita (log): 18.188***(4.459) - Deposit-to-GDP (%): 0.827**(0.414) - Inflation (%): -0.577***(0.207) - Non-performing loans (%): -5.108***(1.189) - Sectoral concentration ratio (hhi/1000): -0.063***(0.016) - Interpretation: - Positive changes in the credit-to-GDP ratio are explained mostly by increases in GDP per capita and deposits-to-GDP ratio, and decreases in NPLs, inflation, and the sectoral concentration ratio. - Small correction coefficient implies a sluggish adjustment back to equilibrium, consistent with the observed slow recovery. ### Policy recommendations to boost credit-to-GDP - Prioritize policies that bolster bank deposits and financial inclusion: - Strengthen consumer protection. - Promote financial inclusion and literacy, including simplification of some banking accounts and improvement of payment systems. - Monitor and address credit portfolio concentration trends. - Simplify requirements for small and medium enterprise (SME) loans. - Maintain sound monetary and macroeconomic policies to curb inflation. - Strengthen regulatory and supervisory practices: - Improve credit risk assessment. - Implement more robust loan monitoring practices. ### Developing the bond and capital markets (Annex IX) — key facts and actions - Current structure and activity: - Bond and capital markets remain underdeveloped; dominated by securities issued by the government and the central bank. - Government securities: predominantly dollar-denominated or dollar-indexed, maturities 3 to 5 years, used for residual financing; US$79 million (0.4 percent of GDP) issued last year. - BCN securities: for liquidity management, maturities 1 day to 1 year, recent increase in córdoba-denominated instruments (letras) due to increased demand for córdobas and central government stock of deposits and attractive rates. - Activity in the Bolsa de Valores de Nicaragua (BVDN): average daily trading volume of US$4 million in 2024. - As of end-November 2024, a total of US$1 billion has been traded on the capital market in Nicaragua in 2024, with 93 percent of the activity coming from public securities. There are only 6 traded private companies. - Regional context: - Within CAPDR, El Salvador, Honduras, and Nicaragua exhibit lower capitalization and smaller trading volumes. - Panama and Costa Rica are the most sophisticated and developed bond and capital markets in the region. - Example: Bolsa Nacional de Valores (BNV) of Costa Rica had trading volume US$164 million, as of September 2024. - Nicaragua authorities focused efforts on integrating listings with El Salvador and Panama, with a first stage of completion expected in 2025. - Recommended multipronged approach: - Capacity development and strengthening regulatory framework. - Modernizing market infrastructure and developing secondary markets. - Develop a strategy for a dynamic domestic public debt market to promote liquidity and facilitate a "risk-free yield curve" as a benchmark. - Coordinate between central bank and treasury. - Gradually diversify investment options: encourage corporate listings (bonds then equities) and introduce innovative financial instruments. - Foster institutional investment and enhance transparency and disclosure standards to attract broader investors. ### Gender gaps (Annex X) — labor market participation and output gains - Female labor force participation (FLFP) levels and gap: - FLFP improved from 33 percent in 1991 to 49 percent in 2022. - FLFP stagnated at 49 percent since pre-crisis. - A significant gender gap remains (about 33 percent). - Ratio of men to women in labor force participation rates: 1.68, above the LAC regional average of 1.35 in 2022; remains above the 90th percentile relative to LIDC and LAC peers. - Potential output gains from closing gender gaps: - Eliminating gender gaps in labor force participation could enhance productivity, with sizeable potential output gains ranging from 13 to 26 percent. - Three methodologies cited: - Ostry et al. (2018): completely closing the gender gap would yield GDP gains of 26.3 percent. - IMF equity gains toolkit (based on 2012 statistics): gains estimated at 12.7 percent. - Reducing early marriage (Mitra et al. 2020): reducing early marriage to the average level in LAC would lead to gains in real GDP per capita of 0.5 percent; completely eradicating child marriage would lead to gains in real GDP per capita of 1.41 percent. - Early marriage prevalence: - 10 percent of women (aged 20-24) were married before the age of 15. - 35 percent of women (aged 20-24) were married before the age of 18. - Comparative magnitude: - Gains from closing the labor force participation gap in Nicaragua are higher than the median gain for LIDC and LAC regional peers by 10 and 17 percentage points, respectively, and are among the largest gains observed for CAPDR countries. *Prepared by IMF staff; annexes prepared by Mohamed Diaby and Jessie Kilembe, and IMF staff calculations cited.* ### 4. This analysis suggests that continuing to raise female labor force participation would ### 4. This analysis suggests that continuing to raise female labor force participation would ### Impacts on GDP, labor supply, and growth - Continuing to raise female labor force participation (FLFP) would support higher medium-term GDP growth. - Increasing the FLFP could help mitigate the negative effects on the labor supply and long-term growth due to emigration and demographics. - Reducing barriers to women’s participation in the labor market could allow Nicaragua to tap into a larger pool of talent and skills, leading to increased productivity and economic growth. ### Policy recommendations on women’s economic empowerment and data - Staff recommend continual efforts to enhance women’s economic empowerment and improve gender disaggregated data collection to help identify and address gaps in labor market outcomes and inform policy development. - Policies to consider include: - Legal provisions on childcare. - Forbidding discrimination in recruitment based on age, marital, or parental status, and child marriage. - Permitting flexible work. ### Legal framework and comparative score - World Bank’s Women Business and the Law report (2024) publishes legal framework scores based on rights enshrined in legislation. - Nicaragua’s average legal framework score is 67.5 (out of 100), which is lower than the regional average for Latin America and the Caribbean. ### Selected macro-critical gender-related indicators (as reported) - Female Human Capital Index (HCI): 0.53 (2020); aggregate comparators: 0.53, 0.63, 0.60, 0.59. - Gender Development Index (GDI): 0.94, 0.95, 0.95, 0.95, 0.95 (latest year available 2022); comparators: 0.97, 1.01, 0.99, 0.99. - Gender Inequality Index (GII): 0.41, 0.41, 0.41, 0.40, 0.40 (latest year available 2022); comparators: 0.29, 0.42, 0.37, 0.36. - Global Gender Gap Index: 0.81, …, 0.80, 0.80, 0.81 (latest year available 2022); comparators: 0.71, 0.76, 0.74, 0.74. - Women Business and the Law Index (WBL): 86.25 (2018–2023 series shown), latest year available 2023; comparators: 75.00, 88.75, 83.13, 81.89. - Labor and Income — Gender Gap (F-M) in Employment-to-Population Ratio, Modeled ILO Estimate (15+ yrs): -32.40, -32.91, -32.30, -31.22, -31.68, -31.71 (2023); comparators: -20.16, -20.04, -22.06, -18.62. - Gender Gap (F-M) in Labor Force Participation Rate, Modeled ILO Estimate (15+ yrs): -34.11, -34.79, -34.62, -33.41, -33.24, -33.14 (2023); comparators: -23.77, -17.87, -23.64, -18.91. - Gender Gap (F-M) in Unemployment Rate, Modeled ILO Estimate (15+ yrs): 0.10, 0.05, -0.20, -0.12, 0.19, 0.22 (2023); comparators: 1.17, 2.24, 2.54, 1.15. - Proportion of Seats Held By Women in National Parliaments: 45.65, 44.57, 47.25, 50.55, 51.65, 51.65 (2023); comparators: 22.52, 37.06, 28.72, 29.81. - Prevalence of Intimate Partner Violence among Ever-partnered Women (in percent): 23.00 (2018); comparators: 21.00, 28.00, 24.00, 25.23. - Maternal Mortality Ratio per 100,000 Live Births, Modeled Estimate (15-49 yrs): 74.00, 75.00, 78.00 (series shown, latest year 2020); comparators: 33.00, 96.00, 70.00, 78.69. - Total Fertility Rate (Births Per Woman): 2.40, 2.38, 2.35, 2.32, 2.28 (latest year available 2022); comparators: 1.54, 2.28, 1.79, 1.77. ### Notes and methodological points (as provided) - The Women, Business, and the Law Index is reported on a scale of 0-100, with a higher score corresponding to better outcomes for women. - The Gender Wage Gap is the difference between average earnings of men and average earnings of women expressed as a percentage of average earnings of men (as calculated by the International Labor Organization). The gap listed here is for Occupation = "Total" under the ICSO 08 Classification. - The adult mortality rate refers to the probability that those who have reached age 15 will die before reaching age 60 (shown per 1,000 persons). Example interpretation provided in the source. - Group aggregates are calculated where data are available for at least 50 percent of countries for a given indicator, and for weighted averages, where the relevant weights are also available. Data are reported for the latest year for which aggregates are available. *Source: IMF GenderDataHub.* ### Annex XIV. Data Issues ### Annex XIV. Data Issues ### Data Adequacy Assessment for Surveillance - Overall assessment: "The data provided to the Fund is adequate for surveillance." - Heatmap/median rating summary (as presented): - National Accounts: B - Prices: B - Government Finance Statistics: B - External Sector Statistics: B - Monetary and Financial Statistics: B - Inter-sectoral Consistency: B - Median Rating presented as a block: BBBBBBB - Questionnaire-based assessments: - "The overall questionnaire assessment and the assessments for individual sectors reported in the heatmap are based on a standardized questionnaire and scoring system (see IMF Review of the Framework for Data Adequacy Assessment for Surveillance, January 2024, Appendix I)." - Granularity notes: - Government Finance Statistics: top cell = staff's assessment of granularity of reported government operations data; bottom cell = granularity of public debt statistics. - Monetary and Financial Statistics: top cell = granularity of Monetary and Financial Statistics data; bottom cell = granularity of Financial Soundness indicators. ### Key Data Quality Findings and Rationale - Rationale for staff assessment: - "Data provision is broadly adequate for surveillance, but data quality can be improved in national accounts, fiscal, monetary, and external sector statistics." - Specific shortcomings listed: - Need to improve source data in the real sector, particularly for tourism, manufacturing, and retail. - Incorporate the results of the 2017/18 household survey in the national accounts. - "Conclude and disseminate new series using 2019 as a benchmark." - Harmonize public sector debt with external sector debt data. - Improve timeliness of fiscal data. - Enhance the breakdown of financial assets and liabilities. - Reduce high errors and omissions in the balance of payments. - Monitor assets and liabilities of public enterprises. - Improve coverage of FDI statistics. - "Revisions to the national accounts may impact the team's baseline projections and authorities should continue efforts to improve data provision and consistency by informing about methodological changes (especially regarding recent national accounts revisions in 2024H1)." ### Data Gaps and Usage of Alternative Sources - Use of alternative sources: - "Staff uses World Bank's Macro Poverty Outlook statistics to estimate poverty given lack of national data since 2014." - Significant data gaps: - "Gender and climate data gaps are significant and the last available Census data is from 2005." - "Recent delays in the latest census highlight further data limitations and capacity constraints." - Impact on surveillance: - "The data provided to the Fund has some shortcomings that somewhat hamper surveillance." - "The data provided to the Fund has serious shortcomings that significantly hamper surveillance." (presented as rating scale descriptors) ### Changes since the Last Article IV Consultation - Overall assessment: "While the overall assessment is unchanged from the one done at the time of the 2023 Article IV consultation, there have been slippages..." - Specific changes in 2024: - "Slippages in the timeliness of public finance statistics (three months) and reports publication (four months) in 2024" - "Revisions to gross capital formation and GDP official data." - "The provision of IFS and FSI data to the Fund has also been less timely." ### Corrective Actions and Capacity Development Priorities - Priority actions identified: - Expand data sources in the real sector, including "incorporating information from household surveys into the national account" and "completening and disseminating new series with the 2019 year as a benchmark." - Improve statistical methodologies and compilation, particularly to address "high errors and omissions in the BOP." - Address scarcity of poverty data. - Continue capacity development work to address census delays, gender and climate data gaps, and other capacity constraints. - Participation in data standards initiatives: - "Nicaragua participates in the Enhanced General Data Dissemination System (e-GDDS) and first posted its metadata in February 2005 but is yet to disseminate the data recommended under the e-GDDS through a National Summary Data Page." ### Table of Common Indicators Required for Surveillance (summary observations) - The Table of Common Indicators Required for Surveillance is provided and indicates for a range of indicators: - Dates of latest observation and dates received mostly in October–November 2024 (examples shown: "10/31/2024 11/7/2024", "Oct-24 11/7/2024", "Sep-24 11/7/2024", "2024Q2 8/30/2024", "2024Q2 10/17/2024", "2024Q2 10/4/2024", "2024Q2 Sep-24"). - Frequency and timeliness codes used follow IMF conventions: (“D”), (“W”), (“M”), (“Q”), (“A”), ("SA"), ("I"), ("NA"), and ("NLT"). - Examples of indicators covered include Exchange Rates; International Reserve Assets and Reserve Liabilities of the Monetary Authorities; Reserve/Base Money; Broad Money; Central Bank Balance Sheet; Consolidated Balance Sheet of the Banking System; Interest Rates; Consumer Price Index; Revenue, Expenditure, Balance and Composition of Financing – General Government and Central Government; International Investment Position; Stocks of Central Government and Central Government-Guaranteed Debt; External Current Account Balance; Exports and Imports of Goods and Services; GDP/GNP; Gross External Debt. - Footnote on reserve assets: "Includes reserve assets pledged or otherwise encumbered, as well as net derivative positions." - Footnote on interest rates: "Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds." - Footnote on financing: "Foreign, domestic bank, and domestic nonbank financing." - Footnote on general government: "The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments." *Source: Annex XIV. Data Issues (Nicaragua) — staff report content as provided in the supplied PDF excerpt.* ### 1. Nicaragua’s public debt statistics are reported at the consolidated public sector (CPS) level ### Nicaragua’s public debt statistics are reported at the consolidated public sector (CPS) level ### Coverage and methodology - Public debt coverage in this DSA: - Consolidated debt of the budgetary central government, local government, the state-owned enterprises (SOEs) guaranteed debt, and the Central Bank of Nicaragua (BCN) (Text Table 1). - No non-guaranteed state-owned-enterprises’ debt is recorded in Nicaragua. - Extra budgetary funds and non-guaranteed SOE data are not included (the former due to lack of data and the latter because there is no non-guaranteed SOE debt recorded). - Debt data from the social security system (INSS) is excluded, as the INSS does not borrow directly, and the central government debt to the INSS has been paid in full by end-2022. - Residency basis DSA assumptions: - No foreign holdings of local currency debt issued domestically. - Assumes delivery of expected Heavily Indebted Poor Countries (HIPC) debt relief by Non-Paris Club creditors that have yet to deliver it (consistent with previous DSAs since 2013). - Contingent liabilities / stress testing: - A stress test on contingency liabilities is detailed in ¶17. - Public debt coverage and the magnitude of the contingent liability tailored stress test (as shown in Text Table 1): - The country's coverage of public debt: Used for the analysis Reasons for deviations from the default settings - Other elements of the general government not captured in 1.0 percent of GDP0.5 - SoE's debt (guaranteed and not guaranteed by the government) 1/2 percent of GDP2 - PPP35percent of PPP stock2.24 - Financial market (the default value of 5 percent of GDP is the minimum value)5 percent of GDP5 - Total (2+3+4+5) (in percent of GDP)9.7 - Note on the 2% default shock: “The default shock of 2% of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country's public debt definition (1.). If it is already included in the government debt (1.) and risks associated with SoE's debt not guaranteed by the government is assessed to be negligible, a country team may reduce this to 0%.” ### Recent debt levels and composition (key statistics) - Public sector debt: - Stock of public debt decreased by about 4 percent of GDP in 2023, to 49.4 percent of GDP (compared with 50.8 percent of GDP in the 2023 DSA). - Text Table 2 (selected entries, in percent of GDP): - Public sector debt 2023: 49.4 - Public sector debt 2024 (projection in table): 46.8 (table includes multiple years; see source for full series) - External public and publicly guaranteed (PPG) debt: - PPG external debt reached 39.3 percent of GDP at end-2023. - All PPG external debt is in medium and long-term maturity instruments. - Creditor composition at end-2023 (shares of external debt stock): - Multilaterals hold around 78 percent of external debt. - Largest external creditors: IDB (28 percent), CABEI (27 percent), World Bank (11 percent). - Remaining 22 percent held mostly by bilateral creditors (primarily Japan, South Korea, Germany, India, Kuwait, and Costa Rica). - HIPC-related adjustments: - Debt stock adjusted down to incorporate total expected debt relief amounting to about US$1.2 billion as of December 2023 (this debt corresponds to debt of the BCN; negotiations with five Non-Paris Club creditors ongoing). - Public domestic debt: - Public domestic debt at end-2023: 10.1 percent of GDP (or 20.5 percent of total public debt). - Composition and maturity: mainly medium- and long-term instruments (mostly 3 and 5 years). - NFPS debt share: 40.8 percent (most of which is held in government bonds “Bonos de la República”). - BCN debt share: 59.2 percent. ### Macroeconomic background and key assumptions - 2023 outcomes: - Real GDP growth 2023: 4.6 percent (from 3.8 percent in 2022). - Inflation (end-2023): 5.6 percent (from 11.6 percent in 2022). - Remittances increased by about 5½ percent of GDP to 26.1 percent of GDP. - Current account balance 2023: surplus of 7.7 percent of GDP (from a deficit of 2.4 percent of GDP in 2022). - Gross international reserves (GIR) in 2023: increased by about US$1.1 billion to reach US$ 5.2 billion (7 months of imports, excluding maquila imports). - 2024 developments: - Real GDP grew by 4.7 percent in the first half of 2024. - Inflation by October 2024: 3.6 percent. - GIR increased to US$5.7 billion (by October 2024). - CPS recorded a surplus of 2.6 percent of annual GDP and government deposits reached 12.9 percent of annual GDP by end-June 2024. - Fiscal outcomes and fiscal buffers: - Consolidated public sector (CPS) surplus in 2023: 2.8 percent of GDP (from 0.4 percent of GDP in 2022), driven by contraction in capital expenditure (1 percent of GDP) and other current expenditures. - Government deposits at end-December 2023: 12.6 percent of GDP (increase of 1½ percent of GDP since end-2022). - Policy rates and exchange rate policy: - BCN cut the policy rate from 7 to 6.5 percent late 2024 (two steps). - BCN decreased the yearly crawling rate of the exchange rate from 1 percent to 0 percent in January 2024 and announced in November 2024 it would maintain the 0 percent crawling rate in 2025. - BCN net FX sales remained negative given sustained FX inflows. - BCN announced in November 2024 that all economic agents must denominate prices in córdobas, and card payments should occur in córdobas; banking accounts, loans, and payments can still be maintained in U.S. dollars. - Banking sector indicators (as of October 2024 / September 2024): - Average capital adequacy ratio (CAR) as of October 2024: 18.9 (requirement: 10 percent; pre-crisis level: 14 percent). - Liquid assets to total liabilities: 23.7 in September 2024 (from 44.7 percent at end-2021). - Bank deposits growth (year-on-year) by October 2024: 12.6 percent. - Net bank credit to the private sector growth by October 2024: 19.1 percent year-on-year. - NPLs as share of total loans as of end-October 2024: 1.6 percent. - Distressed assets as share of total loans as of end-October 2024: 6.5 percent. - Medium-term macro assumptions and projections (Text Table 4 and Text Table 5 extracts): - Real GDP growth projections: 2025: 4.0; 2026: 3.8; medium term: 3.5 percent. - Consumer price inflation (medium term): 4.0 percent. - Consolidated public sector revenue (percent of GDP) Current DSA: 2025: 33.2; 2026: 33.1; later years around 33.2/33.1/32.0 (see source tables for full series). - Consolidated public sector expenditure (percent of GDP) Current DSA: 2025: 32.0; 2026: 31.9; later years: 32.4, 32.4, 32.5, 31.3 (see source tables). - Overall balance (Current DSA, percent of GDP): 2025: 1.1; 2026: 1.2; medium-term around 0.7–0.6. - Current account balance (Current DSA, percent of GDP): 2025: 6.4; 2026: 4.2; 2027: 2.8; thereafter declines toward balance. - Gross international reserves (US$ million) series: 2023: 5,190; 2024: 5,907; 2025: 6,729; 2026: 7,470; 2027: 7,953; 2028: 8,285; 2029: 8,433 (see source for full series and context). - Key assumptions underpinning projections: - Medium-term growth below historical average (3.5 percent vs historical 3.9 percent over 2000-17), reflecting lower expected private investment and limited labor contribution due to emigration. - Remittances projections are conservative and aligned with projected real U.S. GDP growth. - Net FDI flows projected average over 2025-29: 5.3 percent of GDP (lower than historical average 6.8 percent of GDP over 2000-17 and recent years above 8 percent). ### Risks, financing, and policy recommendations - Risks and vulnerabilities: - Large stock of external debt to Non-Paris Club creditors pending HIPC relief; negotiation and reconciliation ongoing. - Concessional financing constraints: concessional borrowing from international financial institutions expected to be limited; CABEI reached quota of exposure. - Increasing reliance on non-concessional commercial loans could raise debt servicing costs and have opaque terms. - Governance concerns and associated risk premium could imply high spreads for potential Eurobond issuance. - Financing strategy and recommendations: - Planned gross financing needs in 2024 and over the medium term expected to be covered with planned multilateral disbursements from existing loans, new external debt (including commercial if needed), and use of government deposits. - Staff recommend pursuing prudent debt management and financing policies: - Prioritize obtaining external debt on concessional terms to the extent possible. - Open up to new sources of financing while promoting lengthening of average maturity and ensuring fixed-rate debt is greater than variable-rate debt. - Develop local bond and capital markets to increase financing options and support medium-term growth. - Authorities highlighted the need to prioritize concessional financing and to lengthen maturities and promote fixed-rate debt over variable-rate debt. *Source: IMF staff DSA chapter on Nicaragua (Text and tables as provided in the content unit).* ### 15. Realism tools indicate that the baseline assumptions are broadly consistent with cross- ### 1nicea2025001-print-pdf - 15. Realism tools indicate that the baseline assumptions are broadly consistent with cross- ### Realism tools and baseline consistency - Drivers of debt dynamics - External PPG debt increased until 2020 due to several large shocks (including the economic contraction in 2018-20, the pandemic, and two hurricanes in 2020), has started to decline in recent years, and is expected to decline further (as in previous DSAs). - The unexplained residual in Figure 3 remains significant in the absence of arrears or debt restructuring, as in previous DSAs; this could be due to discrepancies in fiscal accounting. - 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. - Consistency between fiscal adjustment and growth - Over the medium-term GDP growth is expected to converge to 3.5 percent due to sustained domestic demand. - The real GDP growth rate remains below pre-crisis and historical average rates, due to limited labor contribution to growth from large emigration outflows and demographics. - Consistency between investment and growth - The contribution of public investment to growth in the current DSA reflects the assumption of expected increases in capital spending financed with the recently announced and other expected bilateral loans. - The private investment contribution is expected to continue to increase. ### Country classification and stress test setup - Debt carrying capacity classification - Nicaragua’s current debt carrying capacity is classified as strong. - Classification based on the Composite Indicator (CI) calculated using the October 2024 WEO with the 2023 World Bank CPIA of 3.08. - The CI Score is 3.08 and CI rating: Strong. - Applicable indicative thresholds for the strong category (public and publicly guaranteed external debt) - PV of debt-to-GDP ratio: 55 percent - PV of debt-to-exports ratio: 240 percent - Debt service-to-exports ratio: 21 percent - Debt service-to-revenue ratio: 23 percent - Benchmark for the PV of total public debt under strong capacity: 70 percent - Tailored stress tests to account for specific risks - Contingent liability tailored stress test: 9.7 percent of GDP - Other entities of general government (INSS): 0.5 percent of GDP - SOE debt: maintained at the LIC-DSF default value (due to lack of data) - PPP shock to proxy potential fiscal costs from PPP distress: 2.2 percent of GDP representing 35 percent of Nicaragua’s PPP capital stock - Financial sector contingent liability shock: 5 percent ### A. External Debt Sustainability Analysis — key projections and stress outcomes - Baseline projections and indicators - PPG external debt is anticipated to gradually decline to 29.9 percent of GDP over the medium term. - The present value (PV) of PPG external debt is projected to remain below the threshold of 55 percent, declining from 23.6 percent to 15.6 percent of GDP over the 10-year projection period. - PV external debt-to-exports is projected to decline from 54.8 percent to 41.8 percent. - Debt service-to-exports ratio is projected to decline from 5.4 percent to 4.9 percent. - Debt service-to-revenue ratio is projected to decline from 7.1 percent to 5.8 percent. - Private external debt is projected to decline as the debt owed to Venezuela is paid down. - Stress-test outcomes - Standardized tests show 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 2026 at 62 percent and remains above the threshold before gradually declining to reach 45 percent in the long term. ### B. Public Sector Debt Sustainability Analysis — key projections and stress outcomes - Baseline projections and indicators - Overall risk of debt distress projected to remain moderate. - Public debt projected to remain below the 70 percent of GDP benchmark over the forecast period. - Total public sector debt projected to decrease to 46.9 percent of GDP in 2024 and further decline to 39.7 percent of GDP by 2029. - Domestic public debt projected to reach 9.8 percent of GDP by 2034. - PV of debt-to-revenues will decline to 84.1percent by 2034. - Liquidity indicator (debt service to revenue) projected to increase, reaching 14.7 percent by 2034. - Stress-test outcomes - Under the most extreme scenario of lower growth, the PV of public debt breaches the benchmark in 2030 at 74 percent and remains above the benchmark through the projection horizon. - Domestic debt comparators - Domestic-public-debt-to-GDP ratio is projected to remain below the average among countries using the LIC-DSF (17 percent of GDP). - Domestic debt service to GDP is projected to remain below the average of countries using LIC-DSA until 2034. ### Risk rating, vulnerabilities, and policy implications - Risk assessment - Risks to the outlook are broadly balanced in the short-term and to the downside in the medium-term. - Nicaragua remains at moderate risk of external and overall debt distress, unchanged from the previous DSA. - Within the moderate external risk rating, the granularity assessment indicates substantial space to absorb additional shocks (an improvement from the previous DSA). - Upside and downside risks - Upside risks: stronger domestic demand and remittances growth, especially in the short-term. - Downside risks: lower global growth, deterioration in the terms of trade, natural disasters, stricter and wider international sanctions, or a change in immigration policies in the US. - Policy implication - Sustaining prudent policies would continue to support growth and reinforce Nicaragua’s capacity to respond to shocks. *Source: IMF staff calculations and national authorities as presented in the DSA text.* ### 23. Nicaragua’s high exposure to natural disaster risks and economic reliance on climate ### 23. Nicaragua’s high exposure to natural disaster risks and economic reliance on climate sensitive sectors, in particular agriculture, intensifies the negative effects of natural disasters and climate change on the economy. ### Exposure and vulnerability - Nicaragua has "high exposure to natural disaster risks and economic reliance on climate sensitive sectors, in particular agriculture," which "intensifies the negative effects of natural disasters and climate change on the economy." - Natural disaster risks are explicitly included in the authorities’ published fiscal risks reports. - Using the IMF Fiscal Risk Assessment Tool (FRAT), authorities evaluate the impact on public finances as "moderate," owing to "the availability of risk mitigation and transfer mechanisms that help reduce vulnerability." ### Adaptation and mitigation progress - "Progress continues with national strategic plans to reduce greenhouse gas emissions." - Nicaragua’s Nationally Determined Contribution (NDC) on plans to reduce greenhouse gas emissions and adapt to climate change is published. - Efforts towards adaptation cited include: - agricultural diversification and resilience, - reforestation, - promotion of renewable energy. ### Disaster financing and fiscal risk mitigation - Insurance coverage from the Caribbean Catastrophe Risk Facility (CCRIF) "provides financial assurance in event of excessive rainfall, tropical cyclones, and earthquakes." - Fostering greater disaster resilience and ensuring "adequate resources to cover costs would also help contain fiscal risks and support medium-term growth." - The text emphasizes the role of risk mitigation and transfer mechanisms in reducing fiscal vulnerability. ### Authorities’ views and fiscal management - The authorities agreed with staff’s assessment that "Nicaragua’s debt remains sustainable, with overall and external risk of debt distress remaining moderate, with improved capacity to support debt." - Given vulnerabilities, authorities commit to: - prudent fiscal policy and public debt management, - prioritizing concessional financing whenever possible, - pursuing new financing sources and developing the domestic debt market, - continuing consolidation at the central government level, - finding permanent measures to address INSS’s projected medium and long-term deficits, - reorienting expenditures "to increase fiscal buffers and fiscal space for social and public capital spending to support medium-term growth while bolstering fiscal sustainability," - enhancing tax administration and revenue collection. ### Stress tests and debt indicators (high-level) - Natural disaster shocks are included among tailored stress tests reported in the chapter (e.g., "Natural disaster" appears as a tailored stress test in Figures and Tables). - Using the Public and Publicly Guaranteed (PPG) external debt framework and public debt sustainability analyses, the report presents multiple scenario and sensitivity tables and figures including: - "Most extreme shock" identification rules and presentation conventions for stress tests, - Indicators shown for "Debt Service-to-Revenue Ratio," "PV of Debt-to-Exports Ratio," "PV of Debt-to-GDP Ratio," and "Debt Service-to-Exports Ratio" under baseline and most extreme shocks, - Tailored tests explicitly listing "Natural disaster" alongside "Combined contingent liabilities," "Commodity price," and other tests in sensitivity analyses (Tables show natural disaster scenarios in sensitivity rows). - The document reports that authorities find the availability of mitigation and transfer mechanisms contributes to a "moderate" evaluation of public finance impacts from disasters. *Source: Nicaragua — chapter on natural disaster and climate vulnerability issues (excerpts).* ### 1. On behalf of our Nicaraguan authorities, we thank staff for the fruitful and ### On behalf of our Nicaraguan authorities, we thank staff for the fruitful and candid discussions during the 2024 Article IV mission, held in Managua last November. ### Macroeconomic outlook - Nicaragua is described as a small, open, market-oriented economy with a long track record of sound policy implementation underpinned by macroeconomic stability, fiscal discipline, and social inclusion. - Vulnerabilities and external risks: - Highly vulnerable to external shocks and natural disasters, including earthquakes, landslides, droughts, hurricanes, and tropical storms. - Observed lack of IFI support raises grave concerns regarding availability of financial resources to mitigate weather-related shocks. - Net flows with IFIs have turned negative. - As any member in good standing, Nicaragua expects evenhanded treatment should it seek emergency or BOP financing from the IMF. - Recent shocks and recovery: - Shocks between 2018 and 2020 (sociopolitical crisis, two consecutive hurricanes, COVID) produced a three-year recession with a cumulative GDP contraction of about 8 percent. - Nicaragua received RCF-RSF emergency financing from the IMF in November 2020, with disbursements amounting to only 50 percent of quota. - The economy and financial system have since fully recovered; recovery would have been stronger and less costly with more timely and adequate external assistance. - Current performance and outlook: - Unemployment is low with high underemployment. - Inflation has been steadily declining. - Fiscal surpluses for three consecutive years; current account surpluses for two consecutive years. - Debt-to-GDP ratio has been declining steadily since its 10-year peak in 2020. - External accounts robust: steady exports and FDI, record high foreign exchange reserves, and remittances. - Financial system well capitalized and profitable, with adequate liquidity and low NPLs. - Authorities estimate potential growth at 4 percent over the medium term, supported by solid export performance, strong public investment, private sector investment recovery, steady FDI, and continued remittance inflows. - Authorities remain vigilant to risks to migration, remittances, global trade, and possible US policy uncertainties; climate change-induced extreme weather events are identified as the most tangible risk, exacerbated by prospect of lacking emergency external financing. ### Fiscal policy and sustainable development - Authorities actively preserve fiscal sustainability to expand fiscal space for social and development spending. - 2024 fiscal measures: - Implemented measures to improve revenue collection, strictly target subsidies, and rationalize spending, including eliminating long-standing fiscal rigidities. - Resulting buffers have allowed stronger fiscal position and space for social spending in public health, education, and infrastructure. - Authorities expect the fiscal outturn in 2024 to exceed projections made during the mission last November, albeit the consolidated public sector surplus to remain somewhat lower than the 2.8 percent of GDP achieved in 2023. - Pension system (INSS): - Long-term sustainability of INSS is the main fiscal concern and is comprehensively addressed in the staff report. - Authorities acknowledge need for reform and appreciate staff willingness to continue technical discussions and provide technical assistance if requested. - Social and infrastructure progress: - Coverage of the national electricity grid reached 99 percent of households. - Major urban, intercity, and rural transportation arteries built, including two highways integrating the main Caribbean city with central and Pacific regions for the first time in the country’s history. - World Economic Forum's 2024 Global Gender Gap Report ranked Nicaragua 6th in the gender gap index; except for 2015, the country has been in the top ten for the past decade. - Homicide rates are currently among the lowest in Latin America, according to UN and World Bank data. - Poverty reduction programs resumed after the COVID crisis with encouraging results. - Authorities remain committed to protecting the poor and vulnerable. ### Monetary policy - Inflation dynamics: - Headline inflation rose from 7.2 percent in 2021 to 11.5 percent in November 2022. - Inflation has since steadily declined; BCN recently reported inflation will end 2024 just below 3 percent, slightly lower than the authorities' projection. - Over the medium term, the BCN expects headline inflation to remain stable, between 3 and 4 percent. - Policy actions: - BCN lowered its policy rate for the third time at its board meeting on January 9. - BCN will continue to contain price increases, support a stable crawling peg exchange rate, appropriately manage monetary base liquidity, and promote credit mobilization and economic activity. - The crawling peg exchange rate of the Cordoba (C$) against the US dollar has been set at zero percent per annum, with the exchange rate operating within a de facto crawling peg band. - Measures to promote use of the local currency were implemented and took effect on January 1, 2025. - Authorities regularly review policy rate appropriateness to prevent capital flow reversals given partner economies’ rate adjustments. ### External sustainability and financial supervision - Reserves and remittances: - In 2024, BCN increased foreign exchange reserves by US$658 million, reaching gross international reserves of US$6.105 billion (three times the level in 2018), equivalent to 31.7 percent of GDP and 8 months of imports. - Remittances reached an all-time high in 2024 and are projected to exceed US$5.2 billion, almost 12 percent higher than last year, and equivalent to 27 percent of GDP. - Staff noted that increased imports from remittance-driven consumption will tend to narrow the current account surplus and lower the pace of reserve accumulation. - Financial supervision reforms: - Authorities are updating legal supervision and resolution frameworks following international best practices. - Adopted legislation integrating the BCN and the Superintendency of Banks and Other Financial Institutions (SIBOIF) into a single body with a unified, systemic, macroprudential approach while preserving administrative autonomy. - Legislation establishes a single board for monetary and financial regulation, strengthens BCN's lender-of-last-resort role, authorizes BCN to develop and regulate electronic payment systems, and to supervise relevant non-bank institutions and banking conglomerates. - Banking system soundness: - Banking system remains well capitalized, liquid, and profitable. - Capital adequacy is well above regional levels; nonperforming and distressed assets are low and have declined from post-crisis peaks. - NPLs experienced a slight uptick recently, but loans and bank deposits continue to grow at a healthy and sustainable pace under prudent credit policies. - Remaining pockets of vulnerability are being closely monitored by a better-endowed, post-update SIBOIF. ### Governance issues - Authorities welcome staff advice and have high response rate to IMF policy advice. - Progress and scope: - Significant progress made on at least 12 of the 16 issues identified in previous Fund policy advice. - Authorities welcomed advice on transparency and oversight of state-owned enterprises as consistent with expenditure rationalization and containment of fiscal contingent liabilities. - Scope and authority of the BCN are limited in some areas of governance and the rule of law; many staff recommendations target independent agencies and state authorities (Attorney General's Office, Comptroller's Office, legislative and judicial branches). - All agencies and branches of government are making progress on improving governance and the anti-corruption framework. - AML/CFT: - Authorities welcomed discussions and staff advice on the AML/CFT framework. - Financial Analysis Unit (UAF) preparing for upcoming evaluation and updating its regulatory framework. - Regarding Law 1224 (reaffirms that external sanctions have no jurisdiction within the country’s territory), there has been thus far no report of AML/CFT compliance issues concerning financial institutions. - UAF remains committed to addressing all issues of concern in a thorough and timely manner. ### Conclusion and policy priorities - Authorities remain committed to implementing coherent macroeconomic and development policies. - Continue to count on the Fund’s support through policy advice and capacity building tailored to Nicaragua’s specific needs and circumstances. *Authorities’ statement responding to the IMF staff report for the 2024 Article IV mission* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1nicea2025001-print-pdf.pdf_