IMF Executive Board Concludes 2019 Article IV Consultation with Nicaragua
IMF News, February 25, 2020
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- Published: February 25, 2020
Economic developments and outlook
- Since April 2018, social unrest and its aftermath eroded confidence and caused large capital and bank deposits outflows, adversely affecting Nicaragua’s economic activity.
- Real GDP is estimated to have contracted in 2019 by 5.7 percent (-3.8 percent in 2018) owing to the deterioration in aggregate demand, strong fiscal consolidation, and sanctions.
- Inflation is estimated to have increased to 6.1 percent by end-2019 (as compared to 3.9 percent in 2018), driven by tax measures adopted to partially offset the collapse in revenues and financing.
- The economic downturn translated into a current account surplus in 2018 and 2019, but the improvement was fully offset by a reversal in the financial account.
- The authorities announced in October 2019 a reduction in the rate of crawl from 5 percent to 3 percent, to signal a commitment to low inflation.
Policy response and financial sector measures (2018–19)
- Monetary and financial sector easing to avoid a downward economic spiral:
- Central Bank measures included introducing repos, reducing reserve requirements, and phasing-in regulatory provisioning.
- Fiscal measures:
- To bring back the deficit from 4 percent of GDP in 2018 to 2 percent of GDP in 2019, the government adopted a package of tax and pension reforms in the first quarter of 2019.
- Authorities eased monetary and financial sector policies during 2018–19 to stabilize the financial sector.
Executive Board assessment and recommendations
- Executive Directors agreed with the thrust of the staff appraisal and noted the authorities’ determined policy response contained the impact of the fiscal and financial sector shocks in 2018 and 2019.
- With domestic and external vulnerabilities persisting, Directors emphasized:
- Importance of measures to preserve macroeconomic and financial stability and restore confidence.
- Continued commitment to prudent policies.
- Careful design and communication of reforms to ensure social acceptability.
- Continued support from development partners, in collaboration with the Fund.
- Fiscal policy guidance:
- Directors considered the fiscal position outlined in the 2020 budget adequate to support the economic recovery.
- Underscored the importance of rebalancing public expenditures in the short term to generate fiscal space for spending on social safety nets, critical social programs, and efficient investments.
- Recommended gradual reduction of the fiscal deficit over the medium term to ensure sustainability, together with reforms to strengthen the financial position of state-owned enterprises and the pension system.
- Stressed the need to strike the right balance to provide enough expansionary impulse to medium-term economic growth.
- Called for greater fiscal transparency to assess fiscal risks and enhance fiscal governance.
- External sector and competitiveness:
- Need to increase international reserves coverage to support the crawling peg exchange regime and restore external buffers.
- Keeping inflation low while adopting structural reforms to raise productivity will increase competitiveness and resilience to shocks.
- Financial sector resilience and reforms:
- Welcomed the resilience of the financial sector to recent confidence shocks but called for further efforts to mitigate risks from the elevated level of distressed assets.
- Recommended enhancing crisis preparedness, strengthening banking sector supervision, and improving institutional coordination for resolution activities, including adequate resources for the financial safety net.
- Welcomed reforms to the AML/CFT framework but stressed the need for further efforts to ensure its effective implementation and to address governance weaknesses in line with the recommendations of the 2017 Financial Action Task Force.
- Structural reforms and data:
- Recommended steadfast implementation of structural reforms aimed at restoring investors’ confidence and improving the business environment, in consultation with key stakeholders.
- Emphasized strengthening institutions, improving infrastructure, investing in human capital, addressing labor skills bottlenecks, and upgrading technological readiness.
- Urged the authorities to improve the quality and timeliness of economic data with continued Fund technical assistance.
Nicaragua: Selected Economic Indicators, 2016–20 (key figures)
- Output (Annual percent change)
- Real GDP: 2016: 4.6; 2017: 4.7; 2018: -3.8; 2019: -5.7; 2020 (Projections): -1.2
- Real GDP per capita: 2016: 4.4; 2017: -6.6; 2018: -8.1; 2019: -3.1
- Consumer price inflation (period average): 2016: 3.5; 2017: 3.9; 2018: 5.0; 2019: 5.4
- Consumer price inflation (end of period): 2016: 3.1; 2017: 5.7; 2018: 6.4
- Central Government (In percent of GDP)
- Revenue: 2016: 17.6; 2017: 17.8; 2018: 16.8; 2019: 19.1; 2020: 18.1
- Grants: 2016: 0.9; 2017: 0.6; 2018: 0.5
- Expenditure 1/: 2016: 19.6; 2017: 20.6; 2018: 20.3; 2019: 20.1
- Current: 2016: 15.3; 2017: 15.1; 2018: 16.3; 2019: 16.7
- Capital: 2016: 4.3; 2017: 4.5; 2018: 3.4
- Overall balance (after grants): 2016: -1.1; 2017: -0.9; 2018: -3.2; 2019: -0.7; 2020: -1.4
- Total public sector gross debt 2/: 2016: 41.7; 2017: 44.2; 2018: 47.8; 2019: 51.0; 2020: 52.4
- External: 2016: 32.2; 2017: 34.8; 2018: 38.1; 2019: 41.8; 2020: 43.1
- Domestic: 2016: 9.5; 2017: 9.4; 2018: 9.2; 2019: 9.3; 2020: 10.7
- Money and Credit (Annual percent change, end of period)
- Broad money: 2016: 13.0; 2017: 11.7; 2018: 10.8; 2019: -21.2
- Domestic credit of the banking system: 2016: 21.8; 2017: 20.8; 2018: 11.1
- Public sector (net): 2016: 66.1; 2017: -60.3; 2018: 24.3; 2019: 13.7; 2020: 22.4
- Private sector: 2016: 14.8; 2017: 9.1; 2018: -20.4
- External sector (In millions of U.S. dollars, unless otherwise indicated)
- Current account: 2016: -870.8; 2017: -675.1; 2018: 83.0; 2019: 186.4; 2020: 140.2
- Current account (percent of GDP): 2016: -4.9; 2017: 1.5; 2018: 1.1
- Gross official reserves 3/: 2016: 2,296; 2017: 2,593; 2018: 2,080; 2019: 2,071; 2020: 2,016
- Months of imports excl. maquila: 2016: 4.1; 2017: 5.3; 2018: 4.8; 2019: 4.9
- Memorandum Items
- Nominal GDP (billions of Cordobas): 2016: 380.3; 2017: 416.0; 2018: 413.9; 2019: 411.3; 2020: 426.4
- Per capita GDP, US$: 2016: 2,099.6; 2017: 2,165.2; 2018: 2,030.5; 2019: 1,904.3; 2020: 1,882.5
- Cordoba/U.S. dollar (period average): 2016: 28.6; 2017: 30.1; 2018: 31.6
- Notes included in the source:
- 1/ Central government expenditure in 2018 include transfers to INSS for repayments of historical debt for 1.2 percent of GDP, and projections for 2019 and 2020 of 1.4 and 1.7 percent of GDP, respectively.
- 2/ Assumes that HIPC-equivalent terms were applied to the outstanding debt to non-Paris Club bilaterals. Does not include SDR allocations.
- 3/ Excludes the Deposit Guarantee Fund for Financial Institutions (FOGADE).
IMF Communications Department — Press Release No. 20/69, February 25, 2020.
