Sunday 26 June 2022

International Monetary Fund Praises Nicaragua

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Lake Nicaragua
Lake Nicaragua

The IMF noted the positive evolution of all the country’s economic indicators, and the drastic fall in poverty, with an increase of 33% in per capita consumption.

From a press release issued by the IMF:

On January 28, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Nicaragua.

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Economic developments in 2015 have been broadly positive. Growth, after reaching 4.7 percent in 2014, is expected to moderate owing to the effects of a drought and the decline in commodity prices; real GDP grew by 3.9 percent in the first half of the year. Inflation declined to 3 percent in October, mainly reflecting declines in food and transportation costs. Core inflation remained stable at around 6.5 percent.

The consolidated public sector deficit widened to 2 percent in 2014 (1.3 percent of GDP in 2013), largely due to a decline in grants originating from the oil collaboration with Venezuela. Nevertheless, the public debt ratio declined to about 41 percent of GDP in 2014 from 43 percent in 2013. The fiscal position through August 2015 improved relative to the same period in 2014. This is largely explained by a better performance at the central government level that has compensated for the deterioration in the fiscal balance of state-owned enterprises.

The current account deficit improved to 7.1 percent of GDP in 2014, largely due to a smaller oil bill. However, the current account deficit deteriorated in the first half of 2015 as the country faced a less favorable external environment. In particular, export performance weakened as a result of the softening of commodities prices and the expiration of the preferential trade agreement with the United States in late 2014.

The financial sector appears to remain robust despite still high credit growth. As of August 2015, capital adequacy ratios (13.3 percent) were above the 10 percent regulatory level, and the non-performing loan ratios, including restructured loans, remained below 3 percent. Private sector credit growth has slowed but remains high (20 percent), in particular for consumer and commercial credit, and continues to exceed the growth rate of deposits.

Poverty has fallen sharply and there has been progress in gender equality, but education attainment remains a drag on growth. The 2014 household survey reveals that 29.6 percent of the population lives in poverty (42.5 percent in 2009), and 8.3 percent in extreme poverty (14.6 percent in 2009). Per capita consumption increased by 33 percent, helped by a fall in the average household size and a rise in per capita remittances. Nicaragua has made inroads in improving gender equality. However, despite some improvement in primary school completion rates (from 74 percent in 2005 to 80.4 percent in 2010), surveys of private firms suggest that labor skills remain a bottleneck to growth.

The medium-term outlook remains broadly favorable. Growth is expected to moderately accelerate in 2016, owing to the projected recovery in foreign demand and an increase in election-related spending, which would result in a more expansionary fiscal policy. In the medium term, staff estimates that growth will converge to its potential of 4 percent. The current account deficit is expected to widen to 8½ percent of GDP as terms of trade are projected to deteriorate. To address large infrastructure and social needs, the government plans to step up spending by over 3 percentage points of GDP over the medium term. As a result, the public debt ratio is projected to stabilize around 41 percent of GDP by 2020.

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Executive Board Assessment
Directors commended the Nicaraguan authorities’ sound policies, which have enhanced macroeconomic stability and led to strong economic growth and poverty reduction. They noted, however, that risks to the outlook are tilted to the downside, particularly due to external factors. Against this backdrop, Directors emphasized that, 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.

Directors noted that the fiscal stance will be moderately expansionary in 2016, but that it remains consistent with the authorities’ plans to stabilize the debt-to-GDP ratio by 2020. They considered, however, that building additional fiscal buffers, following the forthcoming elections, will be essential to insure against potential risks and to put public finances on a more solid footing. This consolidation could be attained by reducing tax exonerations and exemptions and improving the targeting of fiscal subsidies, which in turn would strengthen the efficiency and equity of public finances. From a longer-term perspective, Directors stressed the importance of improving the financial viability of the social security institute and loss-making state-owned enterprises.
Directors welcomed the authorities’ continued interest in strengthening the fiscal accounts. They emphasized the importance of increasing the 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.

Directors agreed that rapid credit expansion amid high dollarization warrants close monitoring, especially in light of possible currency mismatches, persistent U.S. dollar strength, and the likely increase in U.S. interest rates. In this regard, they noted that macro-prudential policies could help mitigate some of these risks. Directors also called for additional efforts to strengthen banking supervision and enhance regional financial regulatory cooperation. They encouraged full implementation of the 2009 Safeguards Assessment’s recommendations and further strengthening the framework for anti-money laundering and combating the financing of terrorism.

Directors agreed that improvements in competitiveness would reduce the economy’s vulnerability to external shocks, support its diversification, and spur its structural transformation. In this context, they recommended further improving infrastructure, enhancing trade networks, investing in human capital, and reducing barriers to entry. Such reforms would also serve to reduce the size of the informal economy, unemployment, and poverty.
Directors called for continued improvements in the timeliness, quality, and reliability of statistics, which will help enhance economic decision-making and transparency. They also recommended following a consistent communication strategy when methodological changes are introduced.

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Q24N is an aggregator of news for Latin America. Reports from Mexico to the tip of Chile and Caribbean are sourced for our readers to find all their Latin America news in one place.

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