November 24, 2023
A staff team from the International Monetary Fund (IMF), led by Ms. Alina Carare, visited Managua during November 6-17 for the 2023 Article IV Consultation. The team met with Finance Minister Iván Acosta, Central Bank President Ovidio Reyes, other senior officials, and representatives from banks, free trade zones, and the international community.
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 on the back of private consumption and exports. Real GDP is expected to grow by 4 percent in 2023, inflation to slow down, and the fiscal position of the central government to maintain 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, driven by the rapid increase of Nicaraguan emigrants. The record-high remittances, coupled with sustained exports, are supporting a turnaround in the current account balance to a surplus of about 4 percent of GDP in 2023. These foreign exchange inflows and sustained FDI, along 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 next year and 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 affect negatively the economic outlook.
The mission supports the authorities’ plans to continue prudent macroeconomic policies, to maintain resilience and a clear and predictable economic management, while supporting medium-term growth. The multi-year fiscal consolidation envisaged by the authorities at the central government level is expected to continue to support external stability and reserves’ accumulation. The mission supports the authorities’ decisions to continue adjusting the rate of crawl of the exchange rate (from 2 percent to 1 percent in January 2023, and to 0 percent from 2024 onwards) and emphasizes the need to remain vigilant and monitor developments to adjust monetary and exchange rate policy accordingly. The mission also welcomes the authorities’ decision to introduce new instruments in local currency (Córdobas) with longer maturities (up to one year) to better manage domestic liquidity. The mission supports the authorities’ efforts to sustain medium-term growth through investing in infrastructure. The mission recommends the following growth-supporting measures: (i) increasing formal employment and human capital, (ii) developing capital markets, and (iii) enhancing the business climate by strengthening government institutions and contract enforcement, property rights, and insolvency resolution framework.
Nicaragua continues to strengthen fiscal consolidation. The fiscal policy stance for 2024 is appropriate and the mission welcomes the authorities’ commitment to strengthen the fiscal position and safeguard fiscal sustainability. In 2024, the public sector is expected to continue to maintain a small deficit at the consolidated level, as the state-owned enterprises increase investment and deficits. Over the medium term, a sustainable approach to fiscal policy is expected to continue, to reduce public debt—which is currently about 50 percent of GDP. The mission supports the authorities’ efforts to address the structural imbalances of the state-owned enterprises and social security accounts, and enhance buffers given the country’s vulnerability to natural disasters. In this respect, the mission recommends better targeting subsidies and reallocating current expenditures to continue to maintain adequate levels of social and capital spending in the medium term, reduce poverty, and support growth.
While banks are well-capitalized and liquid, the resilience of the financial sector could be further enhanced. Bank deposits continue to grow, surpassing their pre-crisis aggregate level (measured in Córdobas), while credit to the private sector is also growing solidly. Non-Performing Loans (NPLs) have declined to 1.2 percent by end-September 2023. The level of distressed assets also declined with the improvement in economic activity, but remains significant (7.9 percent). The mission recommends increasing the level of provisions for distressed assets and supports 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. The mission encourages the authorities to align the crisis preparedness framework with best international practices, to obtain complete data for credit and savings cooperatives, and to expand their oversight if needed, prioritizing the largest ones. The authorities should also continue monitoring FX risks and strengthen risk mitigation measures.
The authorities should continue strengthening the effective implementation of the AML/CFT framework by continuing to work with GAFILAT. Nicaragua has worked with FATF to align its AML/CFT framework with international standards, resulting in the removal of Nicaragua from the “grey list” in 2022, and is working to follow up on FATF recommendations to strengthen the effectiveness of the framework. The Financial Intelligence Unit (UAF) has made strong efforts to update the National Risk Assessment. All authorities are coordinating with UAF for the next mutual evaluation round to ensure that they focus their efforts on the higher risk reporting entities. Moreover, regulations for the not-for-profit organizations (NPO) Law 1115 were amended to include a graduation of penalties imposed on them. On the other hand, in the past year a large share of NPOs were closed. The FATF standards require a risk-based approach to trigger such decisions if using the AML/CFT framework. The mission recommends the proper application of the AML/CFT framework, in line with the FATF recommendations.
The mission commends the authorities’ efforts to improve fiscal transparency and urges that these efforts be sustained. The authorities remain committed to publishing the external audit reports on the use of all COVID-19 funds; a second report covering the execution from June 2021 until December 2022 is expected to be published by end-November 2023. The Comptroller General Office has taken steps to strengthen the spending oversight of the use of public funds; yet increased efforts are needed to ensure risk-based audits and the publication of audit reports of the central government and SOEs. The authorities continue to expand the publication and coverage of fiscal reports, including the audit of financial statements of three of the largest state-owned enterprises for 2021 and 2022, and a second fiscal risks report in May 2023. The mission strongly supports the authorities’ efforts to develop a standardized manual for consolidation of the financial statements and audit reports of the central government, decentralized institutions, and public companies, and expand the coverage and publication of public finance statistics, including frequency and timeliness.
The government has taken steps to implement transparency related norms and enhance oversight of public funds, and, at the same time major efforts are needed to strengthen anti-corruption and governance frameworks and their effective application, in particular the rule of law. Progress has been made in the implementation of the Law of Access to Public Information. To increase the law’s effectiveness, the government should assign one agency or body with comprehensive oversight over implementation. The Comptroller General Office has introduced a digital platform to collect asset declarations of public officials and has made significant progress in collecting asset declarations of politically exposed persons through this platform. The mission recommends strengthening the anti-corruption framework and its effectiveness by: (i) publishing the asset declarations of politically exposed persons, (ii) implementing risk-based assessments of these declarations, (iii) and 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, the government and the Judicial system should strengthen the rule of law by guaranteeing adequate, effective, and fair administrative and judicial recourse to legal proceedings which have consequences for property rights.
The mission welcomes the authorities’ intentions to continue implementing technical assistance recommendations, especially on improving the quality and consistency of statistics, as statistics are critical to assess risks, better formulate policies, and improve business confidence.
The IMF Executive Board is expected to hold Nicaragua’s Article IV Consultation in early 2024. The mission expresses its sincere thanks to the authorities for their warm hospitality, cooperation, and candor, and other Nicaraguan and international counterparts for the frank dialogue.