## _cr1634 ## Source details **Canonical URL:** [_cr1634](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1634.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1634.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1634.pdf.json) --- ### Economic performance and inflation - Real GDP growth: "4.7 percent in 2014"; "3.9 percent in the first half of the year." - 2015 projections and dynamics: - Real GDP growth projected at "4 percent in 2015"; "moderate acceleration in growth in 2016." - IMAE decelerated to "3.5 percent (yoy)" in January–September 2015 from "4.9 percent" in the same period of 2014. - Growth drivers and headwinds: - 2014: largest contributions from commerce and agriculture; negative contribution from private investment. - 2015: commerce, services, and construction supported by rapid credit growth; drags from agriculture (drought/irregular rain cycle) and manufacturing (FTZ). - Inflation: - "Declined to 3 percent in October," headline projected at "3.5 percent in 2015." - Core inflation "remained stable at around 6½ percent." - Consumer price inflation (end of period, 2012–2016): "6.6 5.7 6.5 3.5 6.1". ### Fiscal developments and public debt - Consolidated public sector deficit: "widened to 2 percent in 2014 (1.3 percent of GDP in 2013)." - Central government deficit: "widened to 0.9 percent of GDP in 2014 from 0.4 percent in 2013." - Drivers of fiscal deterioration: "largely due to a decline in grants originating from the oil collaboration with Venezuela." - Public debt ratio: - "Declined to about 41 percent of GDP in 2014 from 43 percent in 2013." - Projected path: "public debt ratio is projected to stabilize around 41 percent of GDP by 2020." - DSA baseline: public sector debt series (2012–2016): "41.9 43.0 40.8 42.6 41.9". - Government medium-term plans: "plans to step up spending by over 3 percentage points of GDP over the medium term." - Fiscal aggregates (Consolidated public sector, percent of GDP, 2012–2016): - Revenue: "25.6 25.9 25.8 27.6 28.1" - Expenditure: "28.5 28.9 28.9 31.5 31.8" - Capital: "5.3 6.0 6.0 7.0 7.1" - Overall balance, before grants: "-2.9 -3.0 -3.1 -3.9 -3.7" - Overall balance, after grants: "-0.8 -1.3 -2.0 -2.7 -2.5" - 2015 fiscal position and measures: - Fiscal position through August 2015 "improved relative to the same period in 2014" driven by central government performance. - Government enacted a revised budget in October 2015 to spend additional tax revenues and loan resources. - Policy recommendation: - Build additional buffers through a fiscal effort of "1 percent of GDP in 2017" to reduce debt-to-GDP ratio to "38 percent of GDP by 2020." ### External sector and current account - Current account: - Text: "improved to 7.1 percent of GDP in 2014." - Table (current account, percent of GDP, 2012–2016): "-10.6 -11.1 -7.1 -8.0 -8.2" - Projected to widen to "8½ percent of GDP" in the medium term. - 2015H1: current account deficit widened to "3.7 percent of GDP in 2015H1 from 3.1 percent of GDP in 2014H1." - External balances (selected, percent of GDP, 2012–2016): - Oil imports: "12.0 10.5 9.2 5.5 5.3" - Capital and financial account: "20.2 15.1 13.6 9.3 9.8" - FDI: "6.8 6.5 6.8 6.4 6.2" - Reserves (U.S.$ million, 2012–2016): Gross reserves: "1,778 1,874 2,147 2,273 2,450"; Net international reserves: "1,609 1,723 2,018 2,171 2,377" - Financing and drivers: - 2014 improvement "largely due to a smaller oil bill." - 2015 deterioration due to "less favorable external environment," softening commodity prices, and expiration of a preferential trade agreement with the United States in late 2014. - Outlook for reserves (U.S.$ million, medium-term): "1,874 (2013), 2,147 (2014), 2,273 (2015), 2,450 (2016), 2,610 (2017), 2,770 (2018), 2,960 (2019), 3,145 (2020)." - Reserves coverage (months of imports excl. maquila): "3.5 (2013), 4.1 (2014), 4.1 (2015), 4.2 (2016), 4.3 (2017), 4.3 (2018), 4.4 (2019), 4.4 (2020)." - REER: "broadly in line with fundamentals; 1.2 percent overvaluation as of end-2014." ### Financial sector and credit dynamics - Capital adequacy: "13.3 percent" as of August 2015 (regulatory level "10 percent"). - Non-performing loan ratios: "remained below 3 percent" (NPL often "2.7 percent" in periods). - Private sector credit growth: "has slowed but remains high (20 percent)" and "continues to exceed the growth rate of deposits." - Money and credit (annual percentage change, 2012–2016): - Broad money: "16.3 18.5 15.9 21.5 10.9" - Credit to the private sector: "26.3 20.2 20.5 18.7 11.9" - Net domestic assets of the banking system: "25.4 17.5 6.0 10.9 6.9" - Macrofinancial risks: - Increased credit risks from "rapid credit expansion amid high dollarization." - Dollarization: "More than 70 percent of total banking assets are denominated in dollars, and another 20 percent are dollar-indexed"; "about 90 percent of deposits are in U.S. dollars or dollar-indexed deposits." - "70 percent of the loan portfolio is with agents that do not generate dollars." ### Social indicators and human capital - Poverty (2014 household survey): "29.6 percent of the population lives in poverty (42.5 percent in 2009)." - Extreme poverty: "8.3 percent in extreme poverty (14.6 percent in 2009)." - Per capita consumption: "increased by 33 percent." - Education: primary school completion improved "from 74 percent in 2005 to 80.4 percent in 2010"; labor skills remain a bottleneck. - Gender: "Nicaragua has made inroads in improving gender equality"; National Assembly female representation "doubled in the last five years." ### Outlook, risks, and scenarios - Medium-term growth: "expected to moderately accelerate in 2016" and staff estimates growth will converge to potential of "4 percent" in the medium term. - Medium-term projections (selected): - GDP growth (percent): "5.1 4.5 4.7 4.0 4.2" (2012–2016) - GDP growth projected: 2015: "4.0"; 2016: "4.2"; 2017–2020: "4.0" each year. - Consumer price inflation (e.o.p.): "6.5 (2014); 3.5 (2015); 6.1 (2016); 6.8 (2017); 7.2 (2018); 7.4 (2019); 7.4 (2020)." - Current account (percent of GDP): "2013: -11.1; 2014: -7.1; 2015: -8.0; 2016: -8.2; 2017: -8.6; 2018: -8.4; 2019: -8.4; 2020: -8.4." - Downside risks predominate: - "A deterioration in the financial terms or levels of the Venezuela oil cooperation." - "Structurally weak growth in key advanced and emerging economies and a persistent decline in prices of major export products." - Financial-sector risks from "rapid credit expansion amid high dollarization," "possible currency mismatches, persistent U.S. dollar strength, and the likely increase in U.S. interest rates." - Upside (conditional) risk: potential "construction of the Gran Canal (estimated construction cost noted in source as US$50 billion)" but assessment constrained by limited information. ### Executive Board assessment and policy recommendations - Overall view: Directors "commended the Nicaraguan authorities’ sound policies" but stressed downside risks; "policy mix is broadly appropriate to maintain stability over the near term" while needing fortification for medium-term growth. - Fiscal policy recommendations: - "Build additional fiscal buffers after elections." - "Reducing tax exonerations and exemptions and improving the targeting of fiscal subsidies." - Improve financial viability of the social security institute (INSS) and loss-making SOEs. - Increase institutional coverage of the public sector, "improving the quality of fiscal and public debt statistics, and publishing the public institutions’ financial statements." - Financial sector recommendations: - "Close monitoring of rapid credit expansion and high dollarization." - Use macro-prudential policies; "Strengthen banking supervision and enhance regional financial regulatory cooperation." - "Full implementation of the 2009 Safeguards Assessment’s recommendations" and strengthen AML/CFT frameworks. - Competitiveness and structural reforms: - "Improve infrastructure, enhancing trade networks, investing in human capital, and reducing barriers to entry" to support diversification and reduce informality. - Statistics and transparency: - "Continue improvements in the timeliness, quality, and reliability of statistics" and "follow a consistent communication strategy when methodological changes are introduced." ### Debt sustainability, external financing, and stress scenarios - External gross financing requirements (GFR): "14.6 percent of GDP in 2014" rising to "15.9 percent of GDP in 2015" and projected to stabilize around "17 percent of GDP" in the medium term. - Net international investment position: "2014 net IIP: -116 percent of GDP"; projected to worsen to "about -139 percent of GDP in the medium term." - External public debt (baseline): "increases slightly from 33 percent at end-2014 to 36 percent in 2035." - Private external debt absorption scenario: - Government absorbs "about 60 percent" of private external debt → PV PPG external debt-to-GDP+remittances rises to "38 percent in 2016 (compared to 23 percent in the baseline)." - Nominal additional debt under absorption: "about US$3.2 billion or 25½ percent of GDP." - Assumed concessional terms for absorbed debt: "2 percent interest rate; 2 years grace period; 25 year maturity; 5 percent discount rate." - Public sector debt (selected baseline indicators): - Public sector debt (percent of GDP): "41.9 43.0 40.8 42.6 41.9" (2012–2016) - PV of public sector debt (selected): "30.5; 32.2; 31.5; 31.3; 31.0; 30.2; 29.7; 30.8; 47.7" (series in table) - Gross financing need (percent of GDP): "7.6 (2012); 6.9 (2013); 7.9 (2014); 6.4 (2015); 5.9 (2016); 5.7 (2017); 5.5 (2018); 5.0 (2019); 5.4 (2020)." - DSA risk classification: - Staff: "moderate risk of external debt distress" and "heightened overall risk of debt distress" due to large private external debt and quasi-fiscal nature of some obligations. - Policy implications: - "Continuous monitoring of private external debt," caution on market-rate external borrowing, and "build fiscal buffers beginning in 2017." - Address INSS sustainability to avoid reserve depletion (INSS reserve fund projected to be depleted by "2024" absent further reforms). ### Fiscal consolidation measures: tax reform and electricity subsidies - Tax expenditures: estimated at "7.6 percent of GDP in 2010 (90 percent of which correspond to VAT exonerations and exemptions)." - Recommended tax actions: - "Reduce or eliminate tax exonerations and exemptions, particularly in the VAT." - Link tax relief to "investment expenditure rather than to profits." - Broaden PIT and VAT bases; reinstate reverse-charging on import services. - Electricity subsidies: - Costly "about 1¼ percent of GDP" and consumption-based subsidies amount to "0.8 percent of GDP"; only "10 percent of these costs benefit the lowest consumption category." - Recommendation: phase out subsidies that "do not benefit the poorest households" and introduce "targeted mechanisms," building institutions for better targeting (e.g., conditional cash transfers). - INSS specifics: - 2014 parametric reform calibrated to extend INSS sustainability to "2031." - Reduced pension cost estimated between "⅓ and ½ percent of GDP annually." - Under current trends, INSS projected to run persistent deficits by "2017" and reserve fund depleted by "2024." - Recommendation: "rein in expenditure on health and other goods and services" and consider additional parametric reforms. ### Public enterprises, monetary framework, and macroprudential measures - SOEs: largest SOEs (ENEL, ENATREL, ENACAL) expected to run deficits through "2020"; ENACAL requires central government transfers. - Monetary/central bank issues: - Interbank market "shallow" and interbank rates "volatile"; BCN introduced 7 and 14 day notes. - Authorities encouraged to "proceed with recapitalization of the central bank" and implement IFRS (outstanding from 2009 safeguards). - 2014 external audit of BCN "qualified" due to uncertainty/valuation of government debt. - Macroprudential recommendations: - Review and strengthen macro-prudential toolkit to mitigate risks from high dollarization and rapid credit growth. - "Monitor U.S. dollar lending to corporations and households that do not generate dollar revenue." ### Statistical framework: revisions, shortcomings, and recommendations - Box 2 — Data revisions: - March 2015 BCN revised NA and BOP for "2010–13" with methodological refinements: updated trade and producer price indices, new employment matrix, revised agricultural production, and updated maquila firm directory. - Maquila exports (goods and manufacturing services) represented "about 50 percent of total exports of goods and services in 2014." - BOP revisions: "smaller current account deficits and higher errors and omissions." - Statistical shortcomings (as of November 30, 2015): - Institutional coverage gaps in GFS: extra-budgetary institutions and most municipalities not included. - Inconsistencies in recording (cash basis issues); annual financial statements of public enterprises "not audited externally or published." - Monetary statistics: sectorization incomplete; differences between data remitted to STA and BCN website. - External sector: coverage of private sector incomplete; low survey response hampers FDI and primary income estimates. - Staff recommendations: - "(i) introducing regulations to enforce data collection; (ii) establishing procedures to monitor quality; (iii) following more consistently their communication strategy when methodological changes are introduced." - Develop comprehensive surveys for CMT maquila firms and FDI-related import-of-services; investigate sources of increased errors and omissions. ### Tax reform framework (Appendix II) — highlights - Recent reforms: - 2009 Law 712 (LEF) broadened income tax base; revenue increased "more than 2 percent of GDP over 2010–12." - 2012 Law 822 (LCT) effective 2013; revenue increased an estimated "1 percent of GDP over the 2013–15 period." - Administrative difficulties led to rescinding key elements in December 2014 (phase-out of business tax incentives; VAT base extension to import services; planned CIT rate reduction). - Cross-country tax statistics (selected, preserved exactly): - Nicaragua (2012): GDP per Capita (US$) "1,733"; Total Tax Revenue "15.0"; Personal Income Tax "1.4"; Corporate Income Tax "4.1"; Property taxes "0.1"; VAT "6.1"; Excises "2.8". - Policy recommendations: - Address excessive tax incentives/exemptions; broaden PIT and VAT bases; redesign SME regime to promote formality; consider administrative feasibility in future reforms. ### IADB pipeline and financing (selected) - IADB pipeline total: "US$275.7 million" for 2015 (breakdown: two energy ops US$105 million; transport US$90.7 million; US$55 million trade/border integration; US$25 million broadband). - As of October 15, 2015: three operations for "US$120 million" approved. - IADB sovereign guaranteed portfolio (current approved / available amounts, US$ millions) — selected sectors: - Transport "235.7 / 128.2"; Health "196.2 / 131.2"; Energy "128.0 / 62.8"; Trade "55.0 / 55.0"; Total "789.9 / 451.1". - IADB disbursements (Sovereign Guaranteed, 2010–2014, US$ millions): "2010 147.9; 2011 154.8; 2012 168.3; 2013 154.7; 2014 169.7." ### Authorities’ views and staff appraisal - Authorities: - Project growth "4.3 percent or better in 2015" and average "5 percent over the medium term." - Recognize looser fiscal stance and election-related spending needs; open to revenue/expenditure measures and improving targeting of electricity subsidies. - Share concerns on INSS sustainability but expect further reforms before central transfers are needed. - Staff appraisal: - "Policy mix is broadly adequate to maintain macroeconomic stability in the near term" but needs fortification. - Near- and medium-term priorities: build fiscal buffers after elections; strengthen INSS finances; increase fiscal transparency and institutional coverage; monitor credit growth and dollar lending; enhance regional supervisory cooperation; improve competitiveness through infrastructure, human capital, and regulatory reforms. *Source: NICARAGUA — STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION (extracts from the provided document).* ### 4.7 percent in 2014, is expected to moderate ow ing to the effects of a drought and the decline ### NICARAGUA: STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION ### Economic performance and inflation - Real GDP growth: "4.7 percent in 2014"; real GDP grew by "3.9 percent in the first half of the year." - Growth drivers and headwinds: growth "is expected to moderate owing to the effects of a drought and the decline in commodity prices." - Inflation: "declined to 3 percent in October, mainly reflecting declines in food and transportation costs." - Core inflation: "remained stable at around 6½ percent." ### Fiscal developments and public debt - Consolidated public sector deficit: "widened to 2 percent in 2014 (1.3 percent of GDP in 2013)." - Drivers of fiscal deterioration: "largely due to a decline in grants originating from the oil collaboration with Venezuela." - Public debt ratio: "declined to about 41 percent of GDP in 2014 from 43 percent in 2013." - Fiscal position through August 2015: "improved relative to the same period in 2014" driven by "a better performance at the central government level" offsetting deterioration in state-owned enterprises' balances. - Government medium-term fiscal plans: "plans to step up spending by over 3 percentage points of GDP over the medium term." - Projected public debt path: "public debt ratio is projected to stabilize around 41 percent of GDP by 2020." - Consolidated public sector fiscal aggregates (selected, percent of GDP, from table): - Revenue: "25.6 25.9 25.8 27.6 28.1" (2012–2016) - Expenditure: "28.5 28.9 28.9 31.5 31.8" (2012–2016) - Capital: "5.3 6.0 6.0 7.0 7.1" (2012–2016) - Overall balance, before grants: "-2.9 -3.0 -3.1 -3.9 -3.7" (2012–2016) - Overall balance, after grants: "-0.8 -1.3 -2.0 -2.7 -2.5" (2012–2016) ### External sector and current account - Current account: "improved to 7.1 percent of GDP in 2014" (text); table lists current account as "-10.6 -11.1 -7.1 -8.0 -8.2" (2012–2016, percent of GDP). - Oil imports (percent of GDP, table): "12.0 10.5 9.2 5.5 5.3" (2012–2016). - Capital and financial account (percent of GDP, table): "20.2 15.1 13.6 9.3 9.8" (2012–2016). - FDI (percent of GDP, table): "6.8 6.5 6.8 6.4 6.2" (2012–2016). - Gross reserves (U.S.$ million, table): "1,778 1,874 2,147 2,273 2,450" (2012–2016). - Net international reserves (U.S.$ million, table): "1,609 1,723 2,018 2,171 2,377" (2012–2016). - Drivers: current account improvement in 2014 "largely due to a smaller oil bill"; deterioration in first half of 2015 "as the country faced a less favorable external environment" and weakened export performance due to "softening of commodities prices and the expiration of the preferential trade agreement with the United States in late 2014." - Outlook: "The current account deficit is expected to widen to 8½ percent of GDP as terms of trade are projected to deteriorate." (medium-term projection) ### Financial sector and credit dynamics - Capital adequacy ratio as of August 2015: "13.3 percent" (above the "10 percent regulatory level"). - Non-performing loan ratios, including restructured loans: "remained below 3 percent." - Private sector credit growth: "has slowed but remains high (20 percent)," particularly in consumer and commercial credit, and "continues to exceed the growth rate of deposits." - Money and credit (annual percentage change, table): - Broad money: "16.3 18.5 15.9 21.5 10.9" (2012–2016) - Credit to the private sector: "26.3 20.2 20.5 18.7 11.9" (2012–2016) - Net domestic assets of the banking system: "25.4 17.5 6.0 10.9 6.9" (2012–2016) ### Social indicators and human capital - Poverty (2014 household survey): "29.6 percent of the population lives in poverty (42.5 percent in 2009)." - Extreme poverty: "8.3 percent in extreme poverty (14.6 percent in 2009)." - Per capita consumption: "increased by 33 percent," aided by "a fall in the average household size and a rise in per capita remittances." - Education: primary school completion improved "from 74 percent in 2005 to 80.4 percent in 2010," but "labor skills remain a bottleneck to growth." - Gender: "Nicaragua has made inroads in improving gender equality." ### Outlook and risks - Medium-term growth: "expected to moderately accelerate in 2016, owing to the projected recovery in foreign demand and an increase in election-related spending" and "in the medium term, staff estimates that growth will converge to its potential of 4 percent." - Short-term projection: moderate deceleration in real growth in 2015 followed by a small pickup in 2016. - Risks: "tilted to the downside, particularly due to external factors." Specific risks include: - "A deterioration in the financial terms or levels of the Venezuela oil cooperation" which "could increase pressures to absorb quasi-fiscal spending into the budget." - "Structurally weak growth in key advanced and emerging economies and a persistent decline in prices of major export products." - Financial-sector risks from "rapid credit expansion amid high dollarization" including "possible currency mismatches, persistent U.S. dollar strength, and the likely increase in U.S. interest rates." ### Executive Board assessment and policy recommendations - Overall view: Directors "commended the Nicaraguan authorities’ sound policies" but noted downside risks; "while the policy mix is broadly appropriate to maintain stability over the near term, the country needs to fortify its policy framework to sustain strong growth over the medium term." - Fiscal policy recommendations: - Build additional fiscal buffers after elections. - "Reducing tax exonerations and exemptions and improving the targeting of fiscal subsidies" to strengthen efficiency and equity of public finances. - Improve the financial viability of the social security institute and loss-making state-owned enterprises. - Increase institutional coverage of the public sector, "improving the quality of fiscal and public debt statistics, and publishing the public institutions’ financial statements to enhance transparency." - Financial sector recommendations: - Close monitoring of rapid credit expansion and high dollarization. - Use macro-prudential policies to mitigate risks. - "Strengthen banking supervision and enhance regional financial regulatory cooperation." - "Full implementation of the 2009 Safeguards Assessment’s recommendations" and strengthen anti-money laundering and combating the financing of terrorism frameworks. - Competitiveness and structural reforms: - "Improve infrastructure, enhancing trade networks, investing in human capital, and reducing barriers to entry" to support diversification and structural transformation, and to reduce the informal economy, unemployment, and poverty. - Statistics and transparency: - "Continue improvements in the timeliness, quality, and reliability of statistics" and "follow a consistent communication strategy when methodological changes are introduced." ### Selected numeric indicators (highlights from table) - GDP growth (percent): "5.1 4.5 4.7 4.0 4.2" (2012–2016) - GDP (nominal, U.S.$ million): "10,460 10,851 11,806 12,102 12,754" (2012–2016) - Consumer price inflation (end of period): "6.6 5.7 6.5 3.5 6.1" (2012–2016) - Exchange rate (period average, Córdobas per U.S.$): "23.5 24.7 26.0 ... ..." (2012–2016) - Public sector debt (percent of GDP): "41.9 43.0 40.8 42.6 41.9" (2012–2016) - Private sector external debt (percent of GDP): "44.8 48.1 46.1 47.9 48.8" (2012–2016) *Source: NICARAGUA — STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION (extracts from the provided document).* ### 5. Economic activity accelerated to 4.7 percent in 2014 from 4.5 percent in 2013 owing to ### _cr1634 - 5. Economic activity accelerated to 4.7 percent in 2014 from 4.5 percent in 2013 owing to ### Recent macroeconomic developments - Real GDP growth: - 2014: 4.7 percent (accelerated from 4.5 percent in 2013). - 2015 (projection): Real GDP growth projected at 4 percent in 2015; staff expects a moderate acceleration in growth in 2016. - Real GDP grew by 3.9 percent in the first half of 2015. - IMAE decelerated to 3.5 percent (yoy) in January-September 2015 compared with 4.9 percent during the same period in 2014. - Growth drivers and drags: - Largest contributions in 2014 from commerce and agriculture; broad-based supply-side growth. - Strong expansion of credit to the private sector facilitated growth. - Negative contribution from private investment in 2014. - 2015 contributors: commerce, services, and construction supported by rapid credit growth. - 2015 drags: agriculture (drought/irregular rain cycle) and manufacturing (particularly from FTZ). - Labor market: - Unemployment rate increased to 6.8 percent in 2014 from 5.7 percent in 2013, partly due to a decline in employment in free trade zones (FTZ). - Inflation: - 2014: inflation pressures subdued despite a small and positive output gap. - October 2015: inflation declined to 3 percent (yoy), almost 4 percentage points below inflation a year ago. - Core inflation around 6½ percent (yoy). - Headline inflation projected at 3.5 percent in 2015. ### Public finances and fiscal stance - Central government and consolidated public sector balances: - Central government deficit: widened to 0.9 percent of GDP in 2014 from 0.4 percent in 2013. - Consolidated public sector deficit: widened from 1.3 percent in 2013 to 2 percent in 2014. - Deterioration driven by decline in grants (oil collaboration with Venezuela) and worse operating balance at INSS and the central bank. - Public debt: - Public debt ratio declined to about 41 percent of GDP in 2014 from 43 percent in 2013. - Debt-to-GDP ratio expected to rise to 42.6 percent of GDP in 2015. - Projected to stabilize at around 41 percent of GDP by 2020 under staff projections. - 2015 fiscal performance and measures: - Fiscal position through August 2015 improved relative to same period in 2014 due to better central government performance, with revenue growing faster than expenditure and transfer of some electricity-related savings onto the budget. - Government enacted a revised budget in October 2015 to spend additional tax revenues and loan resources. - Consolidated public sector projected overall balance after grants: -2.7 percent (2015), then -2.5, -2.7, -2.7, -2.5, -2.7 (2016–2020 respectively) in the medium-term framework table. - Policy recommendation on buffers: - Fund staff recommends building additional buffers through a fiscal effort of 1 percent of GDP in 2017 (post-elections), projected to reduce the debt-to-GDP ratio to 38 percent of GDP by 2020. ### External sector and reserves - Current account: - 2014: current account deficit estimated at 7.1 percent of GDP, 4 percent of GDP lower than in 2013. - Improvement explained by increased exports and a smaller oil bill. - 2015H1: current account deficit widened to 3.7 percent of GDP in 2015H1 from 3.1 percent of GDP in 2014H1. - Projected current account deficit: 8.0 percent of GDP in 2015; expected to widen to 8½ percent of GDP in the medium term. - Financing and reserves: - Deficit financed by FDI and other investment, particularly from Venezuela. - Gross international reserves: US$2.1 billion at end-2014, with coverage reaching 4.1 months of non-maquila imports. - Medium-term projections for gross reserves (U.S.$ million): 1,874 (2013), 2,147 (2014), 2,273 (2015), 2,450 (2016), 2,610 (2017), 2,770 (2018), 2,960 (2019), 3,145 (2020). - Reserves coverage in months of imports excl. maquila: 3.5 (2013), 4.1 (2014), 4.1 (2015), 4.2 (2016), 4.3 (2017), 4.3 (2018), 4.4 (2019), 4.4 (2020). - Real effective exchange rate (REER): - REER broadly in line with fundamentals; 1.2 percent overvaluation as of end-2014. - Current account in 2014 closed the gap with estimated current account norm (-6.9 percent of GDP). ### Financial sector and macrofinancial risks - Financial soundness and credit: - As of August 2015, capital adequacy ratios: 13.3 percent (above 10 percent regulatory level). - NPL ratios, including restructured and reprogrammed loans, remained below 3 percent; NPL ratio shown at 2.7 percent in several periods. - Private sector credit growth: remained high at 20 percent (as of August 2015), particularly consumer and commercial credit, and continues to exceed deposit growth. - Credit-to-GDP indicators and credit cycle metrics presented in financial soundness maps; rapid credit expansion increased credit risks. - Macro-financial risk assessment: - Overall macroeconomic risks decreased somewhat at end-2014 compared with end-2013, driven by improved external position. - Credit risks increased due to household financial conditions (higher unemployment), rapid credit growth, and higher share of foreign exchange liabilities in total liabilities. - Inward spillover risks decreased due to improved reserve coverage; portfolio investment and FDI to GDP remained stable. - Risk factors noted: high dollarization, persistent dollar strength, potential U.S. interest rate hikes, and exposure of dollar borrowers without dollar revenues. - Risk Assessment Matrix highlights and policy advice: - Deterioration in financial conditions or Venezuela financing: - Relative likelihood: High. Impact if realized: High. - Policy advice: Sustain fiscal discipline to keep public debt ratio falling, and build buffers. - Tighter or more volatile global financial conditions: - Relative likelihood: High. Impact if realized: Low. - Policy advice: Monitor bank credit to the private sector closely. - Increased volatility in energy prices: - Relative likelihood: Medium. Impact if realized: High. - Note: Electricity subsidies estimated at about 1¼ percent of GDP. - Policy advice: Phase out subsidies that do not benefit the poorest households and introduce targeted mechanisms. - Structurally weak growth in key advanced and emerging economies: - Relative likelihood: High. Impact if realized: High. - Policy advice: Improve investment environment, promote competition, and strengthen rule of law. - Decline in non-oil commodity prices: - Relative likelihood: Medium. Impact if realized: High. - Policy advice: Improve export quality for major categories: food/live animals and miscellaneous manufactured articles. ### Social indicators and human capital - Poverty and consumption: - 2014 household survey: 29.6 percent of the population live in poverty (42.5 percent in 2009). - 2014: 8.3 percent in extreme poverty (14.6 percent in 2009). - Per capita consumption increased by 33 percent, aided by a fall in average household size and a rise in per capita remittances. - Note: A private think-tank estimates more modest poverty declines (44.7 percent in 2009 to 40.5 percent in 2013); extreme poverty among rural households less affected. - Gender and education: - Progress in gender equality: proportion of seats held by women in the National Assembly doubled in the last five years. - Education: primary school completion improved from 74 percent in 2005 to 80.4 percent in 2010, but labor skills remain a significant bottleneck to growth per private firm surveys. ### Medium-term outlook and scenarios - Medium-term projections (selected): - GDP growth: 2013: 4.5; 2014: 4.7; 2015: 4.0; 2016: 4.2; 2017–2020: 4.0 each year. - Consumer price inflation (e.o.p.): 2013: 5.7; 2014: 6.5; 2015: 3.5; 2016: 6.1; 2017: 6.8; 2018: 7.2; 2019: 7.4; 2020: 7.4. - Public sector revenue (percent of GDP): 2013: 25.9; 2014: 25.8; 2015: 27.6; 2016: 28.1; 2017: 28.2; 2018: 28.5; 2019: 28.6; 2020: 28.7. - Public sector expenditure (percent of GDP): 2013: 28.9; 2014: 28.9; 2015: 31.5; 2016: 31.8; 2017: 32.0; 2018: 32.1; 2019: 32.1; 2020: 32.4. - Consolidated public sector overall balance, after grants (percent of GDP): -1.3 (2013), -2.0 (2014), -2.7 (2015), then -2.5, -2.7, -2.7, -2.5, -2.7 (2016–2020). - Public sector debt (percent of GDP): 2013: 43.0; 2014: 40.8; 2015: 42.6; 2016: 41.9; 2017: 41.8; 2018: 41.5; 2019: 41.0; 2020: 40.8. - Current account (percent of GDP): 2013: -11.1; 2014: -7.1; 2015: -8.0; 2016: -8.2; 2017: -8.6; 2018: -8.4; 2019: -8.4; 2020: -8.4. - Risks to baseline: - Downside risks predominate: deterioration in financial conditions or Venezuela financing; credit expansion in a highly dollarized economy; persistent declines in commodity prices; weak external growth. - Upside risk: potential construction of the Gran Canal (estimated construction cost noted in source as US$50 billion), but assessment constrained by limited information on financing, timelines, and enclave features; ESIA finalized in June 2015 recommended additional studies. ### Key policy issues and recommendations - Overall assessment: - Current policy mix broadly adequate to maintain macroeconomic stability, but needs strengthening to address risks, promote sustained and more equitable growth, and enhance fiscal transparency. - Priority to build fiscal buffers and improve transparency of fiscal operations. - Specific recommendations: - Build additional fiscal buffers through a fiscal effort of 1 percent of GDP in 2017 to reduce debt-to-GDP ratio to 38 percent by 2020 or to confront downside risks if materialized. - Sustain fiscal discipline to keep public debt ratio falling and build buffers for external and fiscal vulnerabilities. - Monitor bank credit to the private sector closely given credit expansion and dollarization. - Phase out electricity subsidies that do not benefit the poorest households and introduce targeting mechanisms. - Implement measures to improve the investment environment, promote competition, and strengthen the rule of law to support robust and sustainable growth. - Improve export quality, particularly for food/live animals and miscellaneous manufactured articles. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 17. Such fiscal consolidation could be achieved by re-introducing key elements of ### 17. Such fiscal consolidation could be achieved by re-introducing key elements of ### Fiscal consolidation: tax reform and electricity subsidies - Reduce or eliminate tax exonerations and exemptions, particularly in the VAT, to increase revenue, improve tax efficiency and equity, and allow space for reducing the headline corporate tax rate. - Electricity subsidies: - The current system is complex, costly (about 1¼ percent of GDP), and tends to disproportionately benefit non-vulnerable groups. - Consumption-based electricity subsidies amount to about ⅔ of the total cost of electricity subsidies and benefit households in three consumption categories (0–50 kWh, 50–100 kWh, and 100–150 kWh) for a total cost of 0.8 percent of GDP; only 10 percent of these costs benefit the lowest consumption category where there is a higher concentration of poor households. - Political economy constraints make complete elimination difficult in the near term; initial steps should focus on eliminating subsidies that generate the biggest distortions and largest fiscal costs (e.g., excessively generous consumption-based subsidies). - Over time, build institutions that can better target the poor (e.g., conditional cash transfer programs or other means testing mechanisms); once these are in place, eliminate remaining distortions in the existing system of electricity subsidies. - Tax expenditures in Nicaragua were estimated at 7.6 percent of GDP in 2010 (90 percent of which correspond to VAT exonerations and exemptions), one of the highest in the Central American region. ### INSS (social security) finances and sustainability - The 2014 parametric reform included a phased-in increase in employer contributions and linking pension increases to increases in the average wage; it was calibrated to extend INSS sustainability to 2031. - Despite improved revenue, INSS expenditures increased due to: - Introduction of the “reduced pension” in 2013 and a legislated increase in these pensions in 2015. - Higher than budgeted expenditures on health services, capital goods, and administration. - Low investment returns of the reserve fund. - The reduced pension was granted to INSS members with 250–749 weeks of contributions (previously eligibility required at least 750 weeks). The current cost of the reduced pension is estimated at between ⅓ and ½ percent of GDP annually. - Projections and recommendations: - On current trends, the INSS is projected to start running persistent deficits by 2017, and the reserve fund is expected to be depleted by 2024. - Staff recommends reining in expenditure on health and other goods and services to extend the life of the INSS reserve fund. - Over the medium term, the authorities need to consider additional parametric reforms to strengthen the system’s finances. ### State-owned enterprises (SOEs) and water utility issues - The three largest SOEs (ENEL, ENATREL, and ENACAL) have large public investment programs and are expected to run deficits through 2020. - ENACAL requires transfers from the central government to cover current expenditure. - Needed actions: - Address ENACAL’s structural problems such as large technical and non-technical losses. - Consider increasing water tariffs, as these are heavily subsidized. ### Public sector accounting, monitoring, and fiscal transparency - Priorities: - Increase institutional coverage of public sector information in line with international standards. - Increase quality of information through consistent application of cash and accrual principles. - Improve transparency by publishing the central government’s and other institutions’ financial statements. - Over the longer term, reduce budget rigidities (i.e., earmarking) to enhance transparency, efficiency, and effectiveness of public spending and strengthen the budget design process. ### Strengthening monetary framework and financial stability - Interbank market and liquidity: - The interbank market remains shallow and interbank rates volatile. - Banks hold reserves at the central bank far in excess of regulatory requirements, internalizing liquidity risks; large positions could lead to rapid credit growth, higher inflation, or international reserves losses. - The central bank has introduced 7 and 14 day notes to improve short-term liquidity management. - Authorities are encouraged to proceed with recapitalization of the central bank as a condition for strengthening its financial autonomy. - The external audit report for the 2014 audited financial statements of the BCN is qualified due to uncertainty and valuation surrounding government debt and its impact on the BCN’s financial position. - Implementation of International Financial Reporting Standards (IFRS), a key recommendation of the Fund’s 2009 safeguards assessment, remains outstanding. - Financial conglomerates and regional supervision: - The supranational structure and cross-border activities of financial conglomerates warrant strengthening regional cooperation in prudential supervision. - The Central American Council of Bank Supervisors is facilitating exchange of financial data across countries. - The largest three banks belonging to regional conglomerates represent about 80 percent of assets, loans, and deposits in the Nicaraguan banking sector. - Authorities are encouraged to: (i) monitor potential risks at the group level given regional interconnectedness; (ii) improve harmonization of financial data; and (iii) make further efforts to ensure quick response and collaboration from the principal supervisor. ### Credit growth, dollarization, and macroprudential considerations - Dollarization and deposits: - More than 70 percent of total banking assets are denominated in dollars, and another 20 percent are dollar-indexed. - About 90 percent of deposits are in U.S. dollars or dollar-indexed deposits. - Credit risk profile: - Expansion of credit to the private sector, combined with high dollarization, persistent dollar strength, and potential hikes in U.S. interest rates, could pose risks. - U.S. dollar lending to corporations and households that do not generate dollar revenue (or income) must be monitored—70 percent of the loan portfolio is with agents that do not generate dollars. - Limited exposure by local banks to foreign financing helps contain risks. - A review of macro-prudential tools could strengthen mitigation of risks associated with high dollarization. - February 2015 milestone: - Nicaragua exited the FATF gray list of jurisdictions with strategic deficiencies in their AML/CFT regime due to establishment of a legal and regulatory framework. - A full assessment is scheduled in 2017 under revised FATF standards emphasizing identification, assessment, and understanding of ML/TF risks. - Continued efforts are encouraged to combat organized crime and corruption (e.g., enhancing measures for politically exposed persons and the suspicious transaction reporting system). ### External competitiveness, vulnerabilities, and external debt dynamics - Competitiveness and export quality: - Nicaragua’s export quality is below the CAPDR average in all categories except crude materials. - The country underperforms in quality of manufactured goods relative to comparators (e.g., Vietnam), though food and live animal export quality is generally superior. - Policy priorities to improve competitiveness: improve infrastructure and trade networks, invest in human capital (from primary education outcomes to training programs addressing labor skills bottlenecks), and reduce barriers to entry to promote diversification and structural transformation and reduce informality. - Private external debt and gross financing needs: - Gross financing needs are projected to increase to 15.9 percent of GDP in 2015, owing to large private sector debt service obligations reflected in a large negative net investment position (-116 percent of GDP in 2014). - The private sector was a net creditor in 2006 with a positive net financial position of 3 percent of GDP and became a net debtor of about 32 percent of GDP; two-thirds of this correspond to Venezuela oil-financing collaboration administered by ALBANISA and CARUNA. ### Statistical framework: shortcomings and recommended actions - Assessment: - Data provision is broadly adequate for surveillance but numerous shortcomings exist in national accounts, fiscal, debt, and external sector statistics. - The central bank has made efforts to enhance intra- and inter-government coordination in statistics elaboration. - Recommended actions: - Data quality: introduce regulations to enforce data collection; facilitate exchange of information across units and institutions; establish policies to facilitate personnel rotation within institutions to strengthen cross-fertilization in use of methodologies; establish procedures to monitor data quality. - Communication: establish a predictable timeline for data revisions, observe the advance release calendar, and strengthen communication with users including when introducing methodological changes. ### Authorities’ views (summary) - Economic outlook and growth: - Authorities agreed with staff’s assessment of the economic outlook and risks; they project growth at 4.3 percent or better in 2015 and believe their policy framework can support growth rates averaging 5 percent over the medium term. - Fiscal stance: - Authorities recognize the fiscal stance is looser than in the last consultation and see a need for increases in spending to confront election costs in 2016–17 and support activity amid a weak global economy. - They remain committed to sustaining macroeconomic stability and a stable level of public debt and are willing to consider revenue and expenditure measures if necessary. - They shared staff’s view that measures could include reductions in tax exonerations and exemptions and improved targeting of electricity subsidies. - INSS and external vulnerabilities: - The authorities share staff’s concern with INSS financial sustainability but note staff’s baseline may not reflect future measures they might implement; they intend to assess need for policy measures once full effects of parametric pension reform are known. - They recognized external vulnerabilities but saw no significant real exchange rate misalignment and noted international reserves exceed standard benchmarks; they view risks to oil collaboration with Venezuela as limited and beneficial to social spending and growth. - Structural reforms and statistics: - Authorities acknowledged bottlenecks to growth and committed to improve infrastructure, strengthen education, reduce informality, simplify tax filing, and improve transport logistics and business climate. - They agreed more can be done to strengthen the statistical framework and welcomed Fund support to improve statistics and communication. ### Staff appraisal: policy recommendations and priorities - Overall assessment: - The policy mix is broadly adequate to maintain macroeconomic stability in the near term, but Nicaragua needs to fortify its policy framework. - The moderately expansionary 2016 fiscal stance is consistent with stabilization of the debt ratio by 2020. - Recommended near- and medium-term actions: - After the November 2016 elections, build additional fiscal buffers to insure against downside risks by reducing tax exonerations and exemptions and improving targeting of fiscal subsidies to strengthen efficiency and equity of public finances. - Identify economic measures to strengthen financial viability of the social security institute. - Support authorities’ interest in strengthening fiscal monitoring: increase institutional coverage of public sector information in line with international standards; apply cash and accrual principles consistently; publish financial statements of central government and other public institutions. - Reduce earmarking over the longer term to lessen budget rigidity and strengthen the budget design process. - Continue monitoring rapid credit growth, strengthen banking supervision, and promote financial stability; monitor U.S. dollar lending to borrowers without dollar revenue given persistent dollar strength and likely increase in U.S. interest rates. - Enhance regional financial regulatory cooperation and follow up on the Fund’s 2009 safeguards assessment recommendations. - Improve competitiveness by addressing infrastructure, trade networks, human capital, and barriers to entry to reduce vulnerability to external shocks and spur structural transformation; progress in these areas could reduce informality and strengthen poverty-reduction efforts. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 37. The authorities need to continue improving the statistical framework. In particular, ### _cr1634 - 37. The authorities need to continue improving the statistical framework. In particular, ### Statistical framework: findings and staff recommendations - Findings: - Greater efforts are needed in improving the timeliness, quality, and reliability of statistics to enhance economic decision-making and transparency. - Staff recommendations: - (i) introducing regulations to enforce data collection; - (ii) establishing procedures to monitor quality; - (iii) following more consistently their communication strategy when methodological changes are introduced. - Institutional timing: - It is proposed that the next Article IV consultation with Nicaragua be held on the standard 12-month cycle. ### Export diversification and structural transformation (Box 1) - Findings on diversification: - Nicaragua is one of the least diversified countries in the CAPDR region. - In the late 1970s, Nicaragua was the third most diversified economy in CAPDR. By 2005–10, most of the region had diversified at a faster pace, and Nicaragua ranked 6th in terms of export diversification. - The composition of Nicaragua’s exports shifted from agriculture to manufacturing between 1975–80 and 2005–10. - The majority of Nicaragua’s exports in 1975–80 were concentrated in food and live animals. - By 2005–10, Nicaragua, like most of CAPDR and Vietnam, had diversified into sectors such as manufactured articles and machinery/transport, though food and live animals exports continued to represent a large share of Nicaragua’s exports. - Findings on export quality: - There is room for improvement in Nicaragua’s export quality, particularly for its main export categories. - While at par with LMICs in most categories, Nicaragua’s export quality is considerably below the CAPDR average in all categories except crude materials. - For major exports: - Nicaragua performs well in the quality of food and live animal exports compared to the rest of the world. - Nicaragua is underperforming in the quality of manufactured articles. - Vietnam edges out Nicaragua in export quality of travel goods and handbags, clothing, and footwear. ### Policy implications and recommended priorities for diversification and quality upgrading - Structural policies and investments identified as effective in promoting diversification and structural transformation (IMF staff analysis, 2014): - improvements in infrastructure and trade networks; - investing in human capital; - encouraging financial depth; - reducing barriers to entry. - Sectoral emphasis: - While diversification and quality upgrading are mainly focused on the manufacturing sector, about ¼ of Nicaragua’s population is still employed in agriculture. - For the economic benefits from diversification to include all segments of society, agricultural development would need to take a central role, given the productivity and quality gains that can be achieved. ### Key statistics and indicators (as presented) - Table 1. Theil Diversification Index for CAPDR (1= most diversified) - 1975-1980 / 2005-2010 - Costa Rica: 3.787 / 3.568 - Dominican Republic: 3.756 / 2.592 - El Salvador: 3.928 / 3.165 - Guatemala: 3.482 / 2.451 - Honduras: 3.755 / 3.447 - Nicaragua: 3.573 / 3.256 - Panama: 2.941 / 2.774 - LMICs: 4.143 / 3.81 - Export share categories shown in figures (2005-2010 and 1975-1980): Food and live animals; Manufactured Goods; Misc. Manufactured articles; Crude Materials; Machinery and Transport; Others. - Export quality indices and shares depicted for subsectors in 2010 (figures referenced): - Quality ladder and export share (%) axes and subsectors include Food and Live Animals; Animal and Vegetable Oils; Beverages and Tobacco; Chemicals; Crude Materials, etc; Machinery and Transport Equipment; Mfg Goods; Minerals; Misc. Mfg Articles; Others. - Selected subsector quality indices for 2010 include Miscellaneous Manufacturing Articles; Travel goods, handbags, etc; Clothing; Footwear; Food and Live Animals and subcomponents (Live animals; Meat & meat preparation; Dairy products and eggs). *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1634.pdf* ### Box 2. Nicaragua: Data Revisions to National Accounts and Balance of Payments Statistics ### Box 2. Nicaragua: Data Revisions to National Accounts and Balance of Payments Statistics ### Overview of revisions and methodological changes - In March 2015, the Central Bank of Nicaragua (BCN) published revised national accounts (NA) and balance of payments (BOP) data for 2010–13. - Methodological refinements introduced: - Updating trade and producer price indices. - Using a new employment matrix. - Revising agricultural production. - BCN harmonized the methodology to process trade data by applying the reporting system that enters the preparation of NA also in the BOP statistics. - The directory of maquila firms was updated, which changed both NA and BOP statistics. ### Maquila sector methodology and implications - The update of the maquila firms’ directory affects the calculation of value added in the maquila sector. - Firms are classified into: - Full package (FP): those that own the inputs; for FP firms, the value of imports and exports is known. - Cut, make, and trim (CMT): those that offer the maquila service; CMT firms rely on a second best netting method to estimate manufacturing services on inputs owned by others. - Footnote detail: Maquila exports (goods and manufacturing services) represented about 50 percent of total exports of goods and services in 2014. - Footnote detail on netting method: If exports are higher than imports, then the company is declaring the value of the exported goods and services, and the difference of exports and imports is equal to the value of the exported services. However, if exports are lower than imports, then it is assumed that the company is declaring the value of the service, which is then set equal to the value of the exports. - The second best netting methodology needs further improvement; authorities have committed to develop more comprehensive surveys to enable further improvements. ### FDI, import of services, and primary income estimation - Additional methodological improvement affects estimation of import of services and FDI, primarily related to operations in the energy sector; these mainly affect the primary income. - BCN is exploring the introduction of complementary surveys to identify the import of services undertaken by FDI enterprises in Nicaragua. - Revisions related to these changes impact foreign direct investment, import services, and primary income statistics; these are characterized as categorical additions with limited impact on aggregate GDP. ### Impact on GDP, current account, and statistical consistency - The impact of these revisions on total GDP was limited, but composition changed; caution is required when comparing data before and after 2010 because of the firm-directory changes. - Timing of revisions: - NA changes start in 2010. - BOP is revised beginning in 2006. - Effects on demand and supply composition: - Demand side: larger imports are offset by higher investment. - Supply side: upward revisions mostly in construction, transport and communication, and financial intermediation are broadly offset by downward revisions in manufacturing, electricity, gas and water supply, and housing, among others. - As a result of the harmonization, trade data is now broadly consistent between BOP and NA statistics. - Balance of payments outcomes: - The BOP revisions resulted in smaller current account deficits and higher errors and omissions. - The increase in errors and omissions highlights the need to investigate further the sources of the latter. ### Policy and statistical recommendations - Develop more comprehensive surveys to improve estimation for CMT maquila firms and to better capture manufacturing services on inputs owned by others. - Introduce complementary surveys to identify import of services undertaken by FDI enterprises, particularly in the energy sector, to improve primary income and FDI statistics. - Investigate sources of increased errors and omissions in the BOP after harmonization to enhance overall statistical consistency. *Prepared by Francesco Grigoli and Juan Zalduendo. — Box 2 text from the IMF staff report content supplied.* ### Appendix I. External Assessment ### Appendix I. External Assessment ### Exchange Rate Assessment and Competitiveness - Overall assessment: the real effective exchange rate (REER) is broadly in line with fundamentals; staff estimates an average overvaluation of 1.2 percent across methodologies, with a range between an overvaluation of 6.5 percent and an undervaluation of 3.9 percent. - Current account: the external current account deficit is close to the estimated norm. The average norm for the external current account deficit is 6.9 percent, or 0.2 percent of GDP higher than the actual deficit in 2014. - CGER / EBA-lite results (based on IMF CGER methodologies and extensions by Francis Vitek (2009, unpublished), and EBA-Lite methodology): - Macroeconomic Balance Approach (MBA): CA norm (percent of GDP) -5.9; CA gap (percent of GDP) -1.2; RER gap (percent) 3.7 - Equilibrium Real Exchange Rate Approach (ERER): RER gap (percent) 6.5 - External Sustainability Approach (ES): CA norm (percent of GDP) -7.6; CA gap (percent of GDP) 0.5; RER gap (percent) -3.9 - External Balance Assessment (EBA)-lite: CA norm (percent of GDP) -7.1; CA gap (percent of GDP) 0.0; RER gap (percent) -1.6 - Averages: CA norm (percent of GDP) -6.9; CA gap (percent of GDP) -0.2; RER gap (percent) 1.2 - REER dynamics: - Since mid-2011, the REER slightly appreciated and increased its appreciation pace starting in October 2014, reflecting a real appreciation vis-à-vis the U.S. and Mexico. - Nicaragua’s export market share in the U.S. remained relatively stable in terms of world exports and gained ground with respect to other Central American economies and the Dominican Republic, mostly owing to the loss of market share by Costa Rica. - Competitiveness indicators: - Global competitiveness index: Nicaragua ranked 99th in a ranking of 148 countries (second worst among peers after Honduras). - Doing Business index: Nicaragua ranked 125th in a ranking of 189 countries and is behind all other CAPDR countries. - Doing Business sub-indicators: particularly poor performance in dealing with construction permits, getting electricity, registering property, and getting credit. Specific sub-indicator percentile ranks for Nicaragua (percent of rank in parentheses): Starting a Business (63), Deal with Constr. Permits (71), Getting Electricity (50), Registering Property (71), Getting Credit (47), Protecting Investors (91), Paying Taxes (87), Trading Across Borders (39), Enforcing Contracts (37), Resolving Insolvency (58). - Security risk: Nicaragua remains one of the safest countries in Latin America; among Central American peers only Costa Rica and Panama enjoy a better security risk environment (Security Risk Index in 2015, 100=more risky). - Labor cost competitiveness: - Minimum wages: all sectors have hourly minimum wages below US$2; agriculture and manufacturing are among the most competitive. - Maquila sector: Nicaragua presents the lowest minimum wage in Central America (Maquila Minimum Wage in 2015: Nicaragua = 100 percent; comparative country indices shown in source). ### Reserve Adequacy - Stock of gross international reserves (GIR): about 18 percent of GDP, exceeding benchmarks of: - 3 months of imports excluding maquila, - 20 percent of broad money, - 100 percent of short-term debt. - Model-based optimal reserves (Dabla-Norris et al (2011) framework): - The model suggests an optimal level of reserves of about 4 months of imports. - Actual coverage at end-2014: 4.7 months of imports, which is above the model optimal. - The model settings: shock variables set at the bottom 10 percent of Nicaragua’s specific distribution over 2009-14; Nicaragua’s fundamentals (CPIA, fiscal balance, and imports to GDP) set at 2014 levels; frequency of large natural disasters set at 0.24. - Cost-sensitivity: optimal coverage is shown as a function of the cost of holding reserves; the 2014 coverage line sits above the optimal coverage curve for a range of assumed costs of holding reserves. ### Gross Financing Requirements and International Investment Position - Gross financing requirements (GFR): - External gross financing requirements were 14.6 percent of GDP in 2014. - Projected to increase to 15.9 percent of GDP in 2015, owing mostly to large debt service obligations of the private sector. - In the medium term, GFR are projected to stabilize around 17 percent of GDP, reflecting high current account deficits and an increase in amortizations on private sector external debt. - GFR components shown include: private sector amortization, private sector interest, public sector interest, public sector amortization, non-interest current account. - Net international investment position (IIP): - 2014 net IIP: -116 percent of GDP (the lowest among Nicaragua’s Central American peers including Dominican Republic). - After slight improvement in 2014 owing to large accumulation of reserves, the net IIP is projected to worsen further to about -139 percent of GDP in the medium term. - Deterioration drivers: large current account deficits backed by fast accumulation of private sector liabilities, mostly concentrated in foreign direct investment and other investment. - IIP components displayed: reserve assets, other investment, direct investment, portfolio investment, net position (percent of GDP, right axis). *Prepared by Francesco Grigoli and José Luis Saboin.* ### Appendix II. A Framework for Future Tax Reform ### Appendix II. A Framework for Future Tax Reform ### Background and recent reforms - Nicaragua undertook major tax code modernization reforms: - 2009 Law 712 (Ley de Equidad Fiscal (LEF)) broadened the income tax base to include capital income and eliminated exemptions in excise taxes. - 2012 Law 822 (Ley de Concertación Tributaria (LCT)), effective in 2013, aimed to address structural deficiencies in the tax system. - Revenue impact of reforms: - Following the LEF, revenue increased more than 2 percent of GDP over 2010–12, driven largely by corporate income tax (CIT) and VAT gains. - Following the 2013 reform, revenue increased by an estimated 1 percent of GDP over the 2013–15 period. - Administrative implementation difficulties led to a December 2014 law rescinding key elements of the 2013 reform. Rescinded elements include: - Phase-out of business tax incentives. - Extension of the VAT base to import services. - Planned reduction of the CIT rate from 30 to 25 percent. ### Revenue performance and cross-country comparisons (key statistics) - Table 1. Central American Tax Revenue to GDP Ratios (2012) — selected entries (values preserved exactly): - Nicaragua: GDP per Capita (US$) 1,733; Total Tax Revenue 15.0; Personal Income Tax 1.4; Corporate Income Tax 4.1; Property taxes 0.1; VAT 6.1; Excises 2.8 - Costa Rica: GDP per Capita (US$) 9,753; Total Tax Revenue 14.7; Personal Income Tax 1.4; Corporate Income Tax 2.0; Property taxes 0.4; VAT 4.9; Excises 2.8 - El Salvador: GDP per Capita (US$) 3,788; Total Tax Revenue 14.0; Personal Income Tax 2.9; Corporate Income Tax 2.3; Property taxes 0.1; VAT 7.1; Excises 0.9 - Guatemala: GDP per Capita (US$) 3,326; Total Tax Revenue 10.8; Personal Income Tax 0.4; Corporate Income Tax 2.3; Property taxes 0.1; VAT 5.3; Excises 0.8 - Honduras: GDP per Capita (US$) 2,331; Total Tax Revenue 14.5; Personal Income Tax 1.6; Corporate Income Tax 3.2; Property taxes 0.1; VAT 5.6; Excises 2.6 - Panama: GDP per Capita (US$) 9,833; Total Tax Revenue 12.5; Personal Income Tax 0.1; Corporate Income Tax 3.5; Property taxes 0.7; VAT 3.3; Excises 1.0 - Central America (aggregate): GDP per Capita (US$) 5,127; Total Tax Revenue 13.6; Personal Income Tax 1.3; Corporate Income Tax 2.9; Property taxes 0.3; VAT 5.4; Excises 1.8 - Latin America (aggregate): GDP per Capita (US$) 7,357; Total Tax Revenue 16.7; Personal Income Tax 1.5; Corporate Income Tax 3.1; Property taxes 0.9; VAT 6.8; Excises 1.9 - Observations: - Relative to other Central American countries, Nicaragua raises a higher percentage of GDP in tax revenue despite a low GDP per capita (US$1,733). - The strong revenue performance, despite many tax incentives and exemptions, may be remarkable or could reflect an underestimation of GDP given the importance of the informal economy. - On personal income tax (PIT), Nicaragua’s top rate is high for the region but applies at high income level thresholds. ### Tax efficiency indicators and base issues - Key indicators (preserved from source narrative and Table 2 summary): - Nicaragua’s corporate tax efficiency ratio is well above average for the region despite many tax incentives. - Possible explanations: relatively high share of corporate profits in GDP and/or high level of tax compliance by state-owned enterprises. - Nicaragua’s VAT “C-efficiency” indicator is more than 10 percentage points below the regional average, suggesting a narrower VAT base due to VAT exemptions and exonerations. - Note: C-efficiency is defined as the ratio of VAT revenue to aggregate consumption divided by the standard VAT rate. - Implication: scope exists to improve equity and efficiency by broadening tax bases. ### Policy findings and recommendations - Address excessive tax incentives and exemptions: - Priority areas: income tax and VAT. - Recommendation on incentives: link tax relief to investment expenditure rather than to profits. - Broaden the PIT base: - Reduce the minimum income threshold to develop revenues from personal income tax. - Broaden the VAT base: - Reduce exemptions for goods used by wealthier households. - Reinstate reverse-charging on import services (extension of VAT base to import services was part of the 2013 reform that was put on hold). - Revisit tax regime for small and medium enterprises (SMEs): - Goal: encourage formality and growth. - Design principles: keep compliance simple and rates moderate; avoid sharp increases in effective tax rates as business income increases. - Reconsider reinstating elements of the 2013 reform: - Some elements may require modifying the original reform design to address administrative implementation difficulties. ### Implementation considerations - Administrative capacity constraints were a key reason for rescinding parts of the 2013 reform in December 2014; future reforms should consider administrative feasibility and possibly redesign measures to ease implementation. - When reforming incentives, prioritize mechanisms that are verifiable and tied to tangible investment expenditure to limit profit-based tax avoidance. *Prepared by Thornton Matheson (Fiscal Affairs Department). Source: Appendix II. A Framework for Future Tax Reform.* ### 4. The pipeline for IADB approvals in 2015 includes five operations in the public sector ### _cr1634 - 4. The pipeline for IADB approvals in 2015 includes five operations in the public sector ### IADB pipeline for 2015 and approvals (public sector) - Total pipeline: US$275.7 million distributed as follows: - Two operations related to energy for US$105 million, focused on: - (a) electrification in rural areas - (b) a Policy-Based Loan to improve the institutional strengthening of the sector - One operation in the transport sector for US$90.7 million for the improvement of road infrastructure in rural areas - US$55 million to improve the infrastructure and systems for trade and border integration - US$25 million to increase coverage of broadband connectivity - As of October 15th, three operations for US$120 million have been approved; the rest of the pipeline will be approved in the last trimester of the year. ### IADB Sovereign Guaranteed Loan Portfolio in Nicaragua (as of October 15th 2015) - Sector — Current Approved — Available Amount (In millions of US Dollars) - Transport 235.7 128.2 - Health 196.2 131.2 - Energy 128.0 62.8 - Trade 55.0 55.0 - Agriculture and Rural Development 40.0 31.7 - Social Investment/ECD 35.0 10.8 - Water and Sanitation 30.0 4.7 - Urban Development and Housing* 20.0 0.0 - Private Firms and SME Development 20.0 17.6 - Modernization of the State 10.0 5.9 - Environment and Natural Disasters 10.0 0.5 - Sustainable Tourism 10.0 2.7 - Total 789.9 451.1 - Note: *In process of closing ### IADB Non-sovereign Guaranteed Loan Portfolio in Nicaragua (as of October 15th 2015) - Sector — Current Approved — Available Amount (In millions of US Dollars) - Private Firms and SME Development 30.0 30.0 - Agriculture and Rural Development 12.0 12.0 - Total 42.0 42.0 ### IADB disbursements and net flows (Sovereign Guaranteed) 2010–2014 (In millions of US Dollars) - Disbursement by year: - 2010 147.9 - 2011 154.8 - 2012 168.3 - 2013 154.7 - 2014 169.7 - Annual net flows table (In millions of US Dollars): - Repayments: -11.3 -13.0 -14.0 -15.2 -17.8 - Disbursement: 147.9 154.8 168.3 154.7 169.7 - Net Loan Flow: 136.6 141.7 154.3 139.5 151.8 - Subscriptions and Contributions: -1.2 -4.7 -6.1 -6.1 -6.7 - Net Capital Flow: 135.4 137.1 148.2 133.4 145.1 - Interest and Charges: -10.1 -12.3 -14.8 -18.7 -22.1 - Net Cash Flow: 125.3 124.8 133.4 114.7 123.0 ### Statistical issues — assessment of data adequacy for surveillance (as of November 30, 2015) - General: Data provision is broadly adequate for surveillance but there are numerous data shortcomings in national accounts, fiscal, debt, and external sector statistics. - National Accounts: - BCN changed base year of annual national accounts to 2006 and is finishing implementation of integrated economic accounts by institutional sector per 1993 SNA and relevant 2008 SNA recommendations where source data are available. - March 2015 release of 2014 NA data revised 2010–13 data (updates to trade and producer price indexes, new employment matrix, revised agricultural production, addressed discrepancies between NA and BOP trade data in tax-free zones). - Revisions led to discontinuities in supply and demand GDP series with earlier years, complicating historical sectoral analysis. - Price and Labor Statistics: - CPI uses expenditure weights from 2006/07 household expenditure survey; covers Managua and eight other cities; published monthly; rural expenditures and prices excluded. - PPI (July 2006=100) covers a sample of small and medium-size establishments and goods for processing in maquila sector; scope to expand PPI coverage to services. - Labor market statistics are scarce and unemployment figures are available irregularly. - Government Finance Statistics (GFS): - Institutional coverage not in line with international standards: extra-budgetary institutions such as public universities and all 153 municipalities (except Managua) are not included in consolidated public sector accounts. - Recording mostly on a cash basis but with inconsistencies (e.g., checks recorded at issuance rather than when cashed). - MHCP compiles monthly fiscal statistics and remits to BCN for publication; typically published with about a 5-week lag. MHCP also produces its own quarterly budget execution report. - Annual financial statements of public enterprises are produced but not audited externally or published. - Data on budgetary central government and social security institute are reported for GFS Yearbook publication, but with delay. - Monitoring fiscal performance from the financing side needs significant improvement; need to strengthen MHCP–BCN collaboration to estimate external and domestic financing of the nonfinancial public sector and monitor domestic public debt outside the budgetary central government. - Monetary and Financial Statistics: - Monetary statistics generally consistent with MFSM (2000). Nicaragua publishes detailed daily, weekly, and monthly monetary data and remits monthly data to STA on a timely basis. - In 2015, coverage was enhanced to include insurance companies and microfinance institutions. Sectorization is incomplete; microfinance sector data exclude Caja Rural Nacional (Caruna). - Major differences exist between data remitted to STA and monetary data published on BCN’s website, which are not consistent with MFSM 2000. - Authorities plan to report Financial Soundness Indicators (FSI) to STA quarterly, but coverage needs extension to include all deposit taking institutions. - External Sector Statistics: - Since September 2013, BOP statistics follow BPM6 concepts and definitions within limits of source data availability. - Resident institutional units defined per BPM6. Coverage of private sector incomplete for current and financial accounts. - BCN is revising FDI transactions and reinvested earnings using available information, but efforts hampered by low survey response and inconsistent enterprise data. - Central bank needs enterprise-by-enterprise cross checks of trade flows, FDI and external debt to address discrepancies and large errors and omissions in the balance of payments, which hinder external sustainability assessment. - Data Dissemination and Quality: - Nicaragua has participated in the General Data Dissemination System (GDDS) since February 2005. Data ROSC published in December 2005. ### Debt Sustainability Analysis (DSA) update — key messages and assumptions - Overall assessment: - Risk of external debt distress: Moderate - Augmented by significant risks stemming from domestic public and private external debt - Staff concludes Nicaragua remains at moderate risk of debt distress based on public external debt, and faces a heightened overall risk of debt distress. - On external debt, a customized contingent liability scenario and two standardized stress scenarios breach the threshold. - Lower oil prices have reduced risk of debt distress, but magnitude of private external debt elevates risk; concerns about continuation of external financing from Venezuela remain. - On public debt, macroeconomic management has been prudent, but the fiscal position has become more expansionary and is expected to remain so over the medium term, worsening public debt dynamics. - Outlook for INSS has deteriorated; unless additional reforms are undertaken, this could pose a significant long-term fiscal burden. - Underlying assumptions (highlights): - Growth assumed to stabilize at medium-term potential level of 4 percent. - Analysis considers consolidated public sector (budgetary central government, decentralized entities, INSS, municipality of Managua, SOEs, central bank). - Assumes relief has been obtained on HIPC terms for all eligible debt where negotiations are pending; outstanding debt subject to relief at end-June 2015 stood at US$1 billion, most on central bank books; additional debt relief obtained since 2013 DSA amounted to US$500 million. - Official statistics revisions lowered projections for current account deficit: current account deficit revised down by 1.2 percent of GDP over 2010–14. - Exports of goods and services are lower compared to 2013 DSA due to downward revision of traditional export prices and lower estimated import volumes of trading partners; oil price projections revised downwards lowering import projections and affecting future loan disbursements linked to Venezuela (recorded as private external debt). - External financing assumptions: higher average real interest rate projected in long term; reclassification in July 2015 from IDA-only to IDA-gap affects concessionality; IADB terms shifted in 2015 from 50–50 concessional/non-concessional to 40–60, trend of declining grant element expected to continue; external financing from concessional sources assumed constant at 3.5 percent of GDP from 2020 through 2035 with residual financing met through domestic bond issuance. - Fiscal policy assumed more expansionary: fiscal anchor shifted to maintaining overall deficit of consolidated public sector at about 2.5 percent of GDP; primary deficit assumed higher than in 2013 DSA (1.4 percent of GDP versus 0.3 percent in 2015–20). - INSS reserve fund projected to be depleted by 2024; thereafter central government transfers to INSS assumed and financed via domestically issued bonds, affecting debt dynamics. - Key macroeconomic assumptions underlying the DSA (Baseline Scenario) — comparative table values preserved: - Real GDP growth (in percent): Current DSA 4.0; 2013 DSA 4.0; Historical averages 2005-2014 3.8 - GDP deflator in US$ terms (in percent): Current DSA 1.3; 2013 DSA 2.1; Historical averages 2005-2014 3.6 - Non-interest current account (in percent of GDP): Current DSA -6.8; 2013 DSA -6.9; Historical averages 2005-2014 -8.2 - FDI (in percent of GDP): Current DSA 6.0; 2013 DSA 5.8; Historical averages 2005-2014 6.0 - Primary balance (in percent of GDP): Current DSA -1.4; 2013 DSA -1.4; Historical averages 2005-2014 0.3 - Revenue and grants (in percent of GDP): Current DSA 29.4; 2013 DSA 30.3; Historical averages 2005-2014 26.0 - Primary expenditure (in percent of GDP): Current DSA 30.8; 2013 DSA 31.7; Historical averages 2005-2014 25.7 - Average real interest rate on public debt (percent): Current DSA 1.3; 2013 DSA 2.3; Historical averages 2005-2014 0.5 ### External debt sustainability projections and risk drivers - External debt-to-GDP trajectory: - External debt as a ratio of GDP expected to decline marginally from 79 percent at end-2014 to 76 percent in 2035. - Private external debt: - Private external debt-to-GDP likely to continue increasing until the mid-2020s, but at a more gradual pace than observed since the Venezuela oil collaboration began in 2007. - Current oil price projections imply Venezuela inflows will be lower than anticipated in the 2013 DSA. *Prepared by the staffs of the International Monetary Fund and the International Development Association (December 14, 2015).* ### 3. Under the baseline scenario, external public debt increases slightly from 33 percent at ### _cr1634 - 3. Under the baseline scenario, external public debt increases slightly from 33 percent at ### External public debt — baseline and historical scenarios - Under the baseline scenario, external public debt increases slightly from 33 percent at end-2014 to 36 percent in 2035. - The present value of external public debt is projected to remain well below all the relevant thresholds in the baseline scenario. - The historical scenario (which assumes a higher current account deficit than in the baseline: 8.2 percent, based on the average non-interest current account balance over the past 10 years) results in a breach in the outer years. - A change in the terms of external financing is projected to result in a significant (and permanent) increase in the PPG external debt stock; because financing from official sources is typically at fixed interest rates, the risk of such a shock is considered low, but it highlights the need for caution in considering external borrowing at market rates. ### Private external debt and contingent liability scenarios - Rapid increase in private external debt (including debt arising from the oil collaboration with Venezuela) requires continuous monitoring. - The DSA includes a scenario where the government absorbs about 60 percent of private external debt onto its balance sheet; this results in: - Breach of the PV of PPG external debt-to-GDP+remittances threshold of 36 percent, with the ratio increasing to 38 percent in 2016 (compared to 23 percent in the baseline). - The nominal amount of the additional debt is about US$3.2 billion or 25½ percent of GDP. - The concessional terms in the debt with Venezuela imply less of an impact in present value terms. - Assumptions for absorption scenario: same concessional terms apply to this new debt (specifically, 2 percent interest rate, 2 years grace period, 25 year maturity and a 5 percent discount rate), and that the government will not absorb any additional debt generated from future oil imports. - Not considered in the DSA update: risk that deterioration in financial conditions or levels of the Venezuela oil cooperation could lead to certain projects currently financed by CARUNA being absorbed by the budget; staff estimates these projects could amount to about 1 percent of GDP. ### Public debt dynamics and INSS sustainability - Public debt-to-GDP stood at 40.8 percent at end-2014 (a slight decrease since the 2013 DSA). - Under the baseline scenario, public debt-to-GDP is projected to stabilize at around 41 percent by 2020, or 30 percent in present value terms, comfortably below the 56 percent benchmark. - In the absence of further policy actions to enhance INSS’s sustainability, the INSS fund is projected to be fully depleted by 2024. - If this materializes, the central government will need to transfer resources to INSS to help cover its obligations, as reflected in the baseline of this DSA update report (from 32 percent of GDP in PV terms in 2015 to 48 percent in 2035). - Of standardized stress scenarios, a shock to real GDP growth in 2016–17—where growth falls to 1.3 percent in these two years—results in the least favorable outcome for all indicators. - The unchanged primary balance scenario highlights the need for fiscal consolidation—if the fiscal policy stance of 2015 is maintained over the long term, public debt will come close to breaching the benchmark in 2035. - The contingent liability scenario applied to the public DSA would increase the PV of public debt to GDP to 50 percent of GDP in 2016 compared to 32 percent in the baseline; this scenario would eventually exceed the benchmark over the longer term. ### Key metrics and assumptions preserved from the DSA - External public debt: 33 percent at end-2014 → 36 percent in 2035 (baseline). - Historical scenario current account deficit assumption: 8.2 percent. - Private external debt absorption: government absorbs about 60 percent → PV PPG external debt-to-GDP+remittances = 38 percent in 2016 (versus 23 percent baseline). - Nominal additional debt from absorption: about US$3.2 billion or 25½ percent of GDP. - Concessional terms assumed for absorbed debt: 2 percent interest rate; 2 years grace period; 25 year maturity; 5 percent discount rate. - Public debt-to-GDP: 40.8 percent at end-2014; projected to stabilize at around 41 percent by 2020; 30 percent in present value terms. - INSS PV obligations baseline: from 32 percent of GDP in PV terms in 2015 to 48 percent in 2035. - GDP growth shock scenario: growth falls to 1.3 percent in 2016–17. - Projects financed by CARUNA potentially amount to about 1 percent of GDP. ### Policy implications and recommendations contained in the text - Continuous monitoring of private external debt, particularly obligations related to the oil collaboration with Venezuela. - Caution in considering external borrowing at market rates given potential for significant and permanent increases in PPG external debt. - Need for fiscal consolidation to avoid nearing or breaching debt benchmarks over the long term. - Build fiscal buffers beginning in 2017 to mitigate contingent liability risks and potential absorption of Venezuela-financed projects. - Enhance INSS sustainability to avoid full depletion by 2024 and the subsequent need for central government transfers. ### Staff assessment and risk classification - Staff considers that Nicaragua remains at a moderate risk of external debt distress. - Staff considers Nicaragua to be at a heightened risk of overall debt distress, given: - The magnitude of private external debt; - The quasi-fiscal nature of some of this debt; - The likelihood that some projects currently financed by Venezuela resources might end up being absorbed by the budget. - Public debt dynamics have worsened since the previous DSA due to a more expansionary fiscal policy; debt could become unsustainable if no additional action is taken to improve the INSS finances. *Source: _cr1634 - 3. Under the baseline scenario, external public debt increases slightly from 33 percent at (IMF DSA update excerpt).* ### 8. The authorities broadly concurred with the findings of the analysis, but noted some ### 8. The authorities broadly concurred with the findings of the analysis, but noted some important differences with their own debt sustainability analysis ### Authorities’ assessment and key differences with staff analysis - Authorities’ growth assumptions: average of 4.7 percent over the 2015–19 period and 5 percent thereafter. - Fiscal balance projections: authorities’ projections are more optimistic than staff’s, owing in particular to higher revenue assumptions. - INSS (social security) treatment: authorities acknowledge INSS will need reform to ensure long-term sustainability but do not include any central government transfers to INSS in their analysis, assuming additional reforms will be undertaken before any such transfers are required. - ALBANISA and CARUNA debt to PDVSA: authorities reiterated that the debt owed by ALBANISA and CARUNA to PDVSA is private; staff welcomes that government policy is neither to absorb nor to extend public guarantees on this debt. - Debt relief progress: authorities highlighted significant progress made on achieving debt relief from non-Paris Club creditors during 2014 and 2015. ### External Debt Sustainability Framework — Baseline scenario (selected indicators, 2012–35; percent of GDP unless otherwise indicated) - External debt (nominal): 77.6 (2012); 81.8 (2013); 78.6 (2014); 82.0 (2015); 83.3 (2016); 84.8 (2017); 86.3 (2018); 87.4 (2019); 88.3 (2020); Average 88.3; Standard 76.0 (2015-2020 average); 2025 76.0; 2035 not fully reported in snippet. - Of which: public and publicly guaranteed (PPG): 32.8 (2012); 33.6 (2013); 32.5 (2014); 34.0 (2015); 34.5 (2016); 35.1 (2017); 35.8 (2018); 36.2 (2019); 36.3 (2020); Average 36.9; 2025 36.2. - Change in external debt: 4.3 (2012); 4.2 (2013); -3.1 (2014); 3.3 (2015); 1.3 (2016); 1.5 (2017); 1.5 (2018); 1.1 (2019); 0.8 (2020); Average -0.5; Standard -1.5. - Identified net debt-creating flows: -1.1 (2012); 1.8 (2013); -5.9 (2014); -1.5 (2015); -1.3 (2016); -0.7 (2017); -0.7 (2018); -0.6 (2019); -0.7 (2020); Average -0.7; Standard -0.4. - Non-interest current account deficit: 9.1 (2012); 9.5 (2013); 5.5 (2014); 8.2 (2015); 1.9 (2016); 6.2 (2017); 6.6 (2018); 7.1 (2019); 7.0 (2020); Average 6.8; Standard 6.9 (2015-20 Average); 2025 6.9; 2035 6.9. - Deficit in balance of goods and services: 20.1 (2012); 20.8 (2013); 16.7 (2014); 17.4 (2015); and series through 2020 with 17.2 (2020); average 17.2. - Exports: 45.3 (2012); 42.5 (2013); 42.4 (2014); 40.0 (2015); 38.7 (2016); 38.1 (2017); 37.8 (2018); 37.2 (2019); 36.5 (2020); Average 36.5. - Imports: 65.4 (2012); 63.3 (2013); 59.2 (2014); 57.4 (2015); 56.2 (2016); 55.9 (2017); 55.5 (2018); 54.7 (2019); 53.8 (2020); Average 53.8. - Net current transfers (negative = inflow): -12.5 (2012); -12.6 (2013); -12.2 (2014); -13.3 (2015); 0.8 (2016); -12.3 (2017); -12.2 (2018); -12.0 (2019); -11.9 (2020); Average -11.7; Standard -11.5 (2015-20 Average); 2025 -11.5; 2035 -11.5. - Net FDI (negative = inflow): -6.8 (2012); -6.5 (2013); -6.4 (2014); -6.0 (2015); 1.7 (2016); -6.4 (2017); -6.2 (2018); -6.1 (2019); -5.9 (2020); Average -5.7; 2025 -5.8; 2035 -5.8. - Endogenous debt dynamics: -3.4 (2012); -1.2 (2013); -5.0 (2014); -1.2 (2015); -1.7 (2016); -1.6 (2017); -1.8 (2018); -1.7 (2019); -1.7 (2020); Average -1.8; Contribution from nominal interest rate: 1.6 (2012); 1.6 (2013); 1.6 (2014); 1.8 (2015); 1.6 (2016); 1.5 (2017); 1.4 (2018); 1.6 (2019); 1.6 (2020); Average 1.5. - Residual (3-4): 5.4 (2012); 2.5 (2013); 2.8 (2014); 4.8 (2015); 2.6 (2016); 2.2 (2017); 2.2 (2018); 1.7 (2019); 1.5 (2020); Average 0.2; 2025 -1.1. - PV of external debt (selected cells): 68.3, 71.5, 73.0, 74.4, 75.8, 76.6, 77.2, 76.5, 67.0 (year alignment not fully explicit in snippet). - PV of PPG external debt (selected): 22.2, 23.6, 24.1, 24.7, 25.3, 25.4, 25.2, 25.1, 27.2. - PV of PPG external debt in percent of exports: 52.3, 59.0, 62.4, 64.9, 66.9, 68.1, 69.0, 68.7, 74.5. - PV of PPG external debt in percent of government revenues: 86.0, 85.5, 85.9, 87.6, 88.9, 88.7, 87.7, 86.2, 92.2. - Debt service-to-exports ratio (in percent): 13.0 (2012); 13.5 (2013); 14.4 (2014); 16.6 (2015); 17.4 (2016); 17.9 (2017); 18.2 (2018); 19.2 (2019); 19.6 (2020); Average 20.1; 2025 18.1. - PPG debt service-to-exports ratio (in percent): 2.1 (2012); 2.1 (2013); 2.4 (2014); 3.5 (2015); 4.2 (2016); 4.6 (2017); 5.0 (2018); 5.7 (2019); 5.9 (2020); Average 6.5; 2025 7.7. - Total gross financing need (Millions of U.S. dollars): 1324 (2012); 1559 (2013); 1163 (2014); 1332 (2015); 1562 (2016); 1707 (2017); 1841 (2018); 1977 (2019); 2108 (2020); Average 2679; 2025 3876. ### Key macroeconomic assumptions used in the external DSA - Real GDP growth (in percent): 5.1 (2012); 4.5 (2013); 4.7 (2014); 3.8 (2015); 2.5 (2016); 4.0 (2017); 4.2 (2018); 4.0 (2019); 4.0 (2020); Baseline/projected 4.0 for subsequent years through 2035 in many cells. - GDP deflator in US dollar terms (change in percent): 2.0 (2012); -0.7 (2013); 3.9 (2014); 3.6 (2015); 3.1 (2016); -1.4 (2017); 1.1 (2018); 1.8 (2019); 2.1 (2020); average series includes 2.3, 2.1, 2.1 etc. - Effective interest rate (percent): 2.3 (2012); 2.1 (2013); 2.2 (2014); 2.1 (2015); 0.2 (2016); 2.4 (2017); 2.1 (2018); 1.9 (2019); 1.8 (2020); averages and projected ~2.0 series. - Growth of exports of G&S (US dollar terms, in percent): 13.6 (2012); -2.5 (2013); 8.5 (2014); 15.8 (2015); 13.5 (2016); -3.4 (2017); 1.9 (2018); 4.2 (2019); 5.5 (2020); subsequent averages include 4.6, 4.4, 2.9, 6.1, 6.1, 6.1. - Growth of imports of G&S (US dollar terms, in percent): 8.4 (2012); 0.5 (2013); 1.6 (2014); 11.9 (2015); 13.5 (2016); -0.6 (2017); 3.3 (2018); 5.3 (2019); 5.3 (2020); subsequent averages noted. - Grant element of new public sector borrowing (in percent): selected values include 30.8, 30.4, 31.2, 28.4, 32.3, 34.2, 31.2, 22.9, 3.0, 17.1 (cells partial in snippet). - Government revenues (excluding grants, in percent of GDP): 25.6 (2012); 25.9 (2013); 25.8 (2014); 27.6 (2015); 28.1 (2016); 28.2 (2017); 28.5 (2018); 28.6 (2019); 28.7 (2020); Average 29.1; 2025 29.5; 2035 29.3. - Aid flows (Millions of US dollars): 216 (2012); 180 (2013); 132 (2014); 286 (2015); 322 (2016); 336 (2017); 315 (2018); 345 (2019); 371 (2020); Average 406; selected grant/concessional breakdowns shown in table. - Grant-equivalent financing (in percent of GDP): series includes 2.2, 2.2, 2.2, 2.0, 2.2, 2.2, 1.8, 1.1, 1.6 (partial cells). ### Sensitivity analysis and stress tests (selected results, 2015–35) - Figure summary: The most extreme stress test by indicator varies (Terms shock, One-time depreciation shock, Non-debt flows shock, etc.), with charts showing baseline, historical scenario, most extreme shock, threshold, and contingent liability paths. - Table 2 (selected cells, percent): - PV of debt-to-GDP+remittances ratio (Baseline): 22 (2015); 22 (2016); 22 (2017); 23 (2018); 23 (2019); 23 (2020); 23 (2025); 25 (2035). - Alternative scenarios A1–A3 and Bound tests B1–B6 show higher ratios under stress; e.g., A3 contingent liability values include 23, 38, 39, 39, 39, 38, 36, 33 in one sequence. - PV of debt-to-exports+remittances ratio (Baseline): 47 (2015); 50 (2016); 52 (2017); 54 (2018); 55 (2019); 55 (2020); 55 (2025); 60 (2035). Under A2 and B6 shocks ratios can exceed 100–300 in some cells shown. - PV of debt-to-revenue ratio (Baseline): 85 (2015); 86 (2016); 88 (2017); 89 (2018); 89 (2019); 89 (2020); 88 (2025); 92 (2035). Under contingent liability and other scenarios ratios rise above 100 and in some cases exceed 150. - Debt service-to-revenue ratio (Baseline): 33 (2015); 34 (2016); 45 (2017); 55 (2018); 56 (2019); etc.; stress scenarios raise these ratios substantially (examples: A3 35, 88, 128; B6 up to 113 in one cell). - Table 4 (Public debt sensitivity, selected): - PV of Debt-to-GDP Ratio (Baseline): 32 (2015); 32 (2016); 31 (2017); 31 (2018); 30 (2019); 31 (2020); 30 (2025); 48 (2035). - PV of Debt-to-Revenue Ratio (Baseline): 112 (2015); 108 (2016); 107 (2017); 106 (2018); 102 (2019); 100 (2020); 103 (2025); 157 (2035). - Debt Service-to-Revenue Ratio (Baseline): 10 (2015); 10 (2016); 10 (2017); 10 (2018); 11 (2019); 12 (2020); 26 (2035). - Alternative and bound tests produce materially higher indicators under adverse shocks (examples: A4 Contingent liability scenario: PV debt-to-GDP 32/50/50/49/48/47/45/58 in a series; B4 one-time 30 percent real depreciation produces PV ratios in higher ranges). ### Public Sector Debt Sustainability — Baseline scenario (selected indicators, 2012–35; percent of GDP) - Public sector debt: 41.9 (2012); 43.0 (2013); 40.8 (2014); 42.6 (2015); 41.9 (2016); 41.8 (2017); 41.5 (2018); 41.0 (2019); 40.8 (2020); 42.6 (2015-20 Average); 56.7 (2025 in memorandum). - Of which: foreign-currency denominated: 40.2 (2012); 41.4 (2013); 39.5 (2014); 41.4 (2015); 40.8 (2016); 40.8 (2017); 40.7 (2018); 40.3 (2019); 40.2 (2020); 42.4 (2025); 56.8 (memorandum). - Change in public sector debt: -1.3 (2012); 1.1 (2013); -2.2 (2014); 1.8 (2015); -0.8 (2016); -0.1 (2017); -0.2 (2018); -0.5 (2019); -0.2 (2020); Average 0.8; 2025 1.9. - Identified debt-creating flows: -2.2 (2012); -0.2 (2013); -1.6 (2014); 1.6 (2015); 0.3 (2016); 0.4 (2017); 0.2 (2018); 0.0 (2019); 0.3 (2020); Average 0.6; 2025 1.4. - Primary deficit (percent of GDP): -0.4 (2012); 0.2 (2013); 0.9 (2014); -0.3 (2015); 1.5 (2016); 1.5 (2017); 1.4 (2018); 1.6 (2019); 1.5 (2020); 1.2 (2015-20 Average). - Revenue and grants (percent of GDP): 27.7 (2012); 27.6 (2013); 26.9 (2014); 28.8 (2015); 29.4 (2016); 29.3 (2017); 29.4 (2018); 29.6 (2019); 29.7 (2020); 29.4 (2015-20 Ave). - Automatic debt dynamics: -1.8 (2012); -0.4 (2013); -2.4 (2014); 0.1 (2015); -1.1 (2016); -1.2 (2017); -1.3 (2018); -1.2 (2019); -1.1 (2020); Average -0.9. - PV of public sector debt (selected series): 30.5; 32.2; 31.5; 31.3; 31.0; 30.2; 29.7; 30.8; 47.7 (series in table). - Gross financing need 2/: 7.6 (2012); 6.9 (2013); 7.9 (2014); 6.4 (2015); 5.9 (2016); 5.7 (2017); 5.5 (2018); 5.0 (2019); 5.4 (2020); Average 5.0; 2025 8.7. - PV of public sector debt-to-revenue and grants ratio (percent): 113.3, 111.7, 107.4, 107.0, 105.5, 102.2, 100.0, 102.5, 156.5 (series shown). - Debt service-to-revenue and grants ratio (in percent): 19.7 (2012); 15.2 (2013); 16.6 (2014); 9.5 (2015); 9.9 (2016); 9.9 (2017); 10.0 (2018); 10.3 (2019); 10.6 (2020); 12.2 (average); 26.0 (2025 memorandum). - Primary deficit that stabilizes the debt-to-GDP ratio: 1.0 (2012); -0.9 (2013); 3.0 (2014); -0.3 (2015); 2.1 (2016); 1.7 (2017); 1.7 (2018); 1.7 (2019); 1.5 (2020); 1.4 (2015-20 Average); 0.7 (2025); -0.5 (2035); 0.2 (2021-35 Average). - Key macro/fiscal assumptions (selected): Real GDP growth consistent with external DSA (baseline 4.0 percent in projection years); Average nominal interest rate on forex debt (percent) series 3.0 (2012); 2.7 (2013); 2.7 (2014); 2.8 (2015); 0.7 (2016); 2.9 (2017); etc.; Inflation rate (GDP deflator, percent) 7.1 (2012); 4.2 (2013); 9.1 (2014); 8.7 (2015); 3.3 (2016); 3.5 (2017); 6.1 (2018); 6.8 (2019); 7.2 (2020); projected 7.4 and subsequent 7.2 series. ### Policy implications and vulnerabilities highlighted in the analysis - Authorities optimistic on growth and revenues relative to staff; these assumptions materially influence debt and fiscal projections. - INSS sustainability risk: authorities assume reforms will obviate the need for central government transfers; omission of transfers reduces projected public debt paths compared to scenarios including such contingent liabilities. - Contingent liabilities and external shocks (terms of trade, one-time depreciation, net non-debt flows shocks) can raise PV-of-debt and debt-service ratios substantially in stress scenarios, indicating vulnerability to adverse external or fiscal shocks. - Staff welcomes authorities’ stance not to absorb or guarantee ALBANISA and CARUNA debts to PDVSA, reducing public contingent liability risk. *Sources: Country authorities; and staff estimates and projections contained in the DSA tables and figures.* ### 17.2 to 8.3 percent in the last 10 years. Notwithstanding the still large informal sector of the economy, ### _cr1634 - 17.2 to 8.3 percent in the last 10 years. Notwithstanding the still large informal sector of the economy, ### Growth, labor markets, and gender equality - Formal job creation was the fastest growing in Latin America in 2014 according to the UN Economic Commission for Latin America and the Caribbean (ECLAC). - Gender equality: The World Economic Forum’s gender-gap index in 2014 and 2015 ranks Nicaragua among the top performers in Latin America and the Caribbean and among the best performers worldwide. ### Revisiting staff’s potential growth estimations - Staff estimates Nicaragua’s potential growth at 4 percent, despite a sustained track-record of GDP growth close to 5 percent per year since 2010. - Authorities contend staff’s estimates are outdated; the last potential growth estimation disclosed to the authorities was made in 2013 with data series that extended no further than 2011. - Authorities argue the low potential growth estimate introduces a downward bias in the Fund’s medium-term scenario. ### Fiscal policy and public investment - Authorities use a consolidated public sector deficit of 2½ percent of GDP as their fiscal anchor. - Fiscal deficit averaged 2.4 percent of GDP since 2010. - The administration increased capital expenditure in 2015 and the deficit is expected to reach 2.7 percent of GDP. - Public expenditure is expected to increase by about ½ percent of GDP in 2016 relative to last year, driven by the public investment medium-term plan (projected to peak in 2016) and election-related spending. - Under current policies, public debt is expected to stabilize at around 40 percent of GDP by 2020 (previously projected at 38 percent of GDP). - Staff recommended a fiscal consolidation plan amounting to 1 percent of GDP in 2017; authorities agree it is attainable but prefer postponing specific planning until after the elections. - Policy priority recommended: ramping up the financial position of deficit-contributing state-owned enterprises (SOEs) and the Social Security Institute. ### Monetary policy and reserves - Inflation receded significantly in 2015; year-end inflation is estimated at about 3 percent, the lowest in the decade. - Authorities maintain a pre-announced crawling peg arrangement; the real effective exchange rate (REER) remains broadly aligned with fundamentals. - BCN, with IMF support, has introduced short-term notes to improve liquidity management and reduce interest rate volatility in the interbank market. - Gross international reserves closed 2015 at a historic record high of nearly US$ 2.5 billion (5 months of imports). ### External sector developments - Value of exports increased more than twofold since 2007. - Gross FDI inflows have more than quadrupled since 2007. - Exports diversified in products and destinations; FDI diversified by country of origin and economic sector. - Exports have grown faster than imports since 2007, but oil dependence keeps the current account balance (CAB) negative. - CAB deficit narrowed to about 7 percent of GDP in 2014 from 11 percent the previous year. - For 2015, the CAB deficit is expected to slightly deteriorate due to a temporary decline in exports and an uptick in non-oil imports caused by higher consumption by the end of the year. - CAB is projected to remain negative at around 8 percent of GDP over the medium term, underpinned by continually strong FDI inflows. ### Banking system and financial sector - Bank capital adequacy has remained stable at around 13 percent. - Credit growth has been moderate. - Non-performing loans (NPLs) are less than 1 percent of total credit—the lowest in Central America. - Banks’ liquidity and profitability indicators are the highest in the region. - Bank regulation continued to be strengthened, including anti-money laundering and counter-terrorism financing prevention. ### External risks and recent external flow changes - Significant downside external risks include a slower recovery of the U.S. economy and possible financial volatility from U.S. monetary policy normalization. - Reduction of Venezuelan flows to Nicaragua was identified as a potential external risk in prior consultations; such reduction has materialized and transitioned from a potential abrupt adjustment to a gradual transition. - This year’s external flows expected from Venezuela—reflecting oil price behavior—are less than half with respect to 2013. ### Concluding policy stance - Nicaragua remains committed to coherent macroeconomic and development policies to remove structural hurdles, achieve higher productivity levels, and improve competitiveness. - Authorities continue to count on the Fund’s support through policy advice and capacity building tailored to Nicaragua’s needs and circumstances. *Source: Excerpt from the provided IMF country report content.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr1634.pdf_