January 23, 2024
On January 16, 2024, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Nicaragua and considered and endorsed the staff appraisal without a meeting.
Nicaragua’s economy has remained resilient in the face of multiple shocks, supported by appropriate economic policies, substantial buffers, and multilateral support. After a very strong rebound in 2021, the economy grew at a steady pace since 2022 and is expected to grow by 4 percent in 2023. Inflation is declining, and the central government is maintaining a small surplus and healthy government deposits. Remittances are projected to reach about 28 percent of GDP at end-2023, double their end-2021 level, and supporting a turnaround in the current account balance to a surplus of about 4 percent of GDP in 2023. The foreign exchange inflows and prudent macroeconomic policies, contributed to a rapid accumulation of gross international reserves to US
$5 billion by end-October (or about 6 months of imports, excluding maquila).
Economic growth is expected to continue over the medium-term, albeit at a slower rate than average. In 2024 and over the medium term, real GDP is projected to grow by about 3½ percent, supported primarily by private consumption. These projected growth rates remain below historical averages (2000-17) of 3.9 percent, given the cautious recovery in investment, limited approved new official financing lower and lower labor contribution to growth due to recent emigration. The external and fiscal positions are assessed to be sustainable under the baseline scenario, given the current policy mix and financing plans.
This positive outlook is accompanied by balanced risks. On the upside, real GDP growth might be higher than projected due to a more sustained recovery in domestic demand, including investment, and stronger remittances than projected, especially in the near term. On the downside, a deterioration of the terms of trade, or a more severe global downturn than currently incorporated into the baseline scenario could result in lower exports and remittances growth. Economic activity and social outcomes could be vulnerable to natural disasters, given Nicaragua’s high exposure and economic dependence on climate sensitive sectors. In the political environment, stricter and wider international sanctions, could negatively affect the economic outlook.
Executive Board Assessment2
In concluding the 2023 Article IV consultation with Nicaragua, Executive Directors endorsed staff’s appraisal, as follows:
Nicaragua’s economy has remained resilient in the face of multiple shocks, supported by appropriate macroeconomic policies, substantial buffers, and multilateral support. After a very strong rebound in 2021, the economy has continued to grow at a steady pace (about 4 percent in 2023).
Inflation is declining, and the central government has maintained a small fiscal surplus and healthy government deposits. Remittances, which doubled since end-2021 are reaching about 28 percent of GDP at end-2023, supporting a turnaround in the current account balance to a projected surplus of about 4 percent of GDP in 2023. The foreign exchange inflows from remittances, sustained FDI, and exports, along with prudent macroeconomic policies, contributed to a rapid accumulation of gross international reserves to US$5 billion by end-October (or about 6 months of imports, excluding maquila). The policy mix was consistent and adequate in 2023, with tight fiscal and monetary policies and a continued reserve accumulation, supporting a balanced growth path. The external position at end-2022 was assessed as stronger than the level implied by medium-term fundamentals and desired policies. Nicaragua is assessed at moderate overall risk of external and public debt distress.
Economic growth is expected to continue in 2024 and over the medium term, albeit at a slower rate than historical averages. In 2024 and over the medium term, real GDP is projected to grow by about 3½ percent, supported primarily by private consumption, below historical averages (2000-17) of 3.9 percent, given the cautious recovery in investment, limited approved new official financing, and lower labor contribution to growth due to recent emigration.
This positive outlook is accompanied by balanced risks. On the upside, real GDP growth could be higher than projected due to a more sustained recovery in domestic demand, including investment, and stronger remittances than projected, especially in the near term. On the downside, a deterioration of the terms of trade, or a more severe global downturn than currently incorporated into the baseline scenario could result in lower exports and remittances growth. Economic activity and social outcomes could be vulnerable to natural disasters, given Nicaragua’s high exposure an economic dependence on climate-sensitive sectors. Stricter and wider international sanctions could also negatively affect the economic outlook.
Staff supported the authorities’ plans to maintain prudent fiscal policy. Staff supported the multi-year fiscal consolidation plans and the authorities’ efforts to address the structural imbalances in the social security system (pensions), and enhance buffers given the country’s vulnerability to natural disasters. Staff recommended more ambitious fiscal efforts, to entrench fiscal sustainability, build fiscal buffers and create space for higher social and capital spending in the medium term, to reduce poverty, and support growth, through tax administration measures, better targeting subsidies and reallocating current expenditures.
Staff recommended that monetary policy should remain geared towards supporting the exchange rate regime, while safeguarding price stability. Staff supported the authorities’ decision to continue adjusting the rate of crawl of the exchange rate and emphasized the need to remain vigilant and adjust monetary and exchange rate policies as needed to support the exchange rate regime, while safeguarding price stability. Staff assessed the fiscal and monetary policy stances as appropriate, and the policy mix supportive of growth. Staff emphasized that continued reserve accumulation over the medium-term is essential to maintain the exchange rate regime.
While banks are well-capitalized and liquid, the resilience of the financial sector could be further enhanced. Staff recommended increasing the level of provisions for distressed assets and supported the authorities’ efforts to ensure that sound lending practices are preserved by activating countercyclical buffers as needed and increase the minimum payments for credit cards. Staff encouraged the authorities to align the crisis preparedness framework with best international practices, obtain complete data for credit and savings cooperatives, and expand their oversight if needed. Staff also recommended continuing to monitor FX risks and strengthen FX risk mitigation measures.
Staff welcomed the authorities’ efforts to sustain medium-term growth through continued investment in infrastructure and human capital and recommended implementing policies to raise labor force participation and enhance the business climate through strengthening government institutions and frameworks in the areas of contract enforcement, protection of property rights, and resolution of insolvencies.
Staff recommended improving the effective application of the AML/CFT framework. In particular, staff recommended the proper application of the AML/CFT framework, in line with the FATF recommendations, to ensure that Nicaragua continues to fare well in the next evaluation round after being removed from the “gray list” in 2022.
The authorities have taken steps to enhance governance and anti-corruption frameworks, yet major efforts are needed to strengthen these frameworks and their effective application, especially the rule of law. Following on the recent progress in the implementation of the Law of Access to public Information and collecting asset declarations of politically exposed persons through the digital platform, staff recommended: (i) publishing the asset declarations of politically exposed persons; (ii) implementing risk-based assessments of these declarations; and (iii) enacting whistleblower protection regulations. To ensure that the anti-corruption and governance frameworks are effective, and property rights, contract enforcement, and investments are protected properly, staff recommended that the government strengthens the rule of law by guaranteeing adequate, effective, and fair administrative and judicial recourse to legal proceedings, especially those which have consequences for property rights.
Staff commended the authorities’ efforts to improve fiscal transparency and urges that these efforts be sustained through continuing publication of all audit reports regarding the use of pandemic- related funds, promptly publishing the annual financial statements of the central government and their audit reports, and expanding the publication of SOEs financial statements.
Staff recommended continuing to improve data quality and working further to enhance institutional capacity in fiscal, monetary, financial, and statistical issues.