IMF Executive Board Concludes 2017 Article IV Consultation with Nicaragua

June 26, 2017

On June 22, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Nicaragua, and considered and endorsed the staff appraisal without meeting on a lapse-of-time basis. [2]

Macroeconomic performance in 2016 was robust. Real GDP grew by 4.7 percent in 2016, supported by strong domestic demand, while inflation remained subdued at 3.1 percent as of end-2016, owing largely to the contribution of food prices.

The fiscal deficit increased slightly in 2016. Tax revenues increased by 0.7 percent of GDP in 2016, because of advances in tax administration and the impact of the full implementation of the 2012 tax reform. Nevertheless, the deficit of the consolidated public sector (CPS) widened slightly to 2.4 percent in 2016 from 2.2 percent in 2015 due to election-related spending, expansion of public investment and a further deterioration of the financial position of the Social Security Institute (INSS). The CPS debt ratio edged up to 41.9 percent of GDP in 2016 from
40.7 percent in 2015.

The external position improved moderately from the previous year. The current account deficit for 2016 is estimated to have narrowed to 8.6 percent of GDP, compared with 9 percent in 2015. This consolidation is largely explained by maquila exports, which have been better captured due to improvements in statistical compilation. The current account deficit remained financed by foreign direct investments (FDI) and other long-term inflows. Despite declining Venezuela cooperation inflows, gross international reserves remained broadly stable at US$2.3 billion at end-2016, with coverage of about 4 months of non-maquila imports.

Monetary and financial conditions remained stable. Private sector credit growth slowed to
17.4 percent in 2016 but remained above nominal GDP growth. Bank soundness indicators remain solid, with non-performing loans at below 1 percent of total loans and capital adequacy ratio of 13.5 percent of risk-weighted assets at end-2016.

GDP growth is expected to moderate to its potential. Real GDP growth in 2017 is projected at 4.5 percent, while inflation is expected to remain contained anchored by the crawling peg at about 6 percent. The deficit of the CPS is projected to moderate somewhat, to about 2.3 percent of GDP, implying a broadly neutral fiscal stance in line with the authorities’ fiscal anchor. The current account balance is projected to remain stable at about 8.5 percent of GDP.

Executive Board Assessment

In concluding the 2017 Article IV Consultation with Nicaragua, Executive Directors endorsed staff’s appraisal as follows:

The fiscal stance is broadly adequate to maintain macroeconomic stability in the near term, but fiscal buffers are needed to confront risks. The need to finance growing INSS deficits and to take over some critical social programs currently financed by Venezuelan cooperation are likely to intensify spending pressures in the next few years. Furthermore, if approved, the potential impact of the NICA Act on public finances could be significant if it affects investment and growth, and rates on public debt. Staff recommends a fiscal consolidation of 1.6 percent of GDP, implemented over two years, to maintain fiscal sustainability in the medium term. This could be achieved primarily through a rationalization of subsidies and tax expenditures, particularly VAT exemptions.

Reforming the social security system is a priority. INSS liquid reserves will be depleted by 2019, which could increase government transfers to finance pensions and health benefits. Urgent action should be taken using a combination of measures to improve sustainability, which, to the extent possible, should be introduced gradually.

In the medium-term, fiscal policy should strive to improve resilience against potential external shocks. Given the risks related to spillovers from U.S. policies, and vulnerability to CCDs, fiscal policy should aim to be more counter-cyclical. A better monitoring of fiscal risks would assist the authorities in calibrating the appropriate fiscal stance. Efforts to improve the oversight of SOEs represent an important step forward in this regard.

External and financial buffers should be strengthened. The combination of a further reduction of Venezuela’s cooperation and lower IFI financing, in case of approval of the NICA Act, could put pressure on the FX market. Given the exchange rate framework, a stronger reserve position to reach the IMF’s suggested adequacy range would be advisable. Banks should further enhance their liquidity, capital and provisioning buffers to preserve financial stability against the potential impact of declining asset quality, higher interest rates and lower remittances.

The authorities should address the gaps in the supervisory perimeter. Every deposit-taking and systemically important non-bank should be subject to effective risk-based supervision and AML/CFT oversight. Additional efforts are needed to strengthen regional financial regulatory cooperation. The stress test methodology should be further improved in line with best practices. The CBN continues to publish the audited financial statements in accordance with the Safeguards Policy. However, implementation of IFRS remains in progress.

Strengthening liquidity management tools is important to deepen financial markets. Efforts to strengthen short-term liquidity management should continue, with a stronger focus on calibration, choice of instruments, and monitoring of liquidity developments. Introducing a short-term policy rate and a corridor will reduce interest rate volatility, deepen financial markets and, eventually, may provide some cushion against external shocks. The amplification of the negative impact of an external shock on output, competitiveness and exports should be carefully weighed against the price stability anchor provided by the crawling peg exchange regime.


Further improvements in competitiveness would reduce vulnerability to external shocks and spur structural transformation. Key actions include maintaining the investment in infrastructure, increasing human capital development, and addressing labor skills bottlenecks.

The authorities need to further improve data quality and scope of macroeconomic statistics. Recent progress has been significant. Nevertheless, further efforts are needed to strengthen base statistics, complete the rebasing of the national accounts, and increase data quality by applying IMF’s compilation methodologies.


Nicaragua: Selected Economic Indicators, 2012–17

2012

2013

2014

2015

2016

2017

Proj.

Output

(Annual percentage change)

GDP growth

6.5

4.9

4.8

4.9

4.7

4.5

GDP (nominal, U.S.$ million)

10,532

10,983

11,880

12,748

13,230

13,942

Prices

GDP deflator

6.2

4.3

8.4

7.5

4.1

5.9

Consumer price inflation (period average)

7.2

7.1

6.0

4.0

3.5

5.4

Consumer price inflation (end of period)

6.6

5.7

6.5

3.1

3.1

5.8

Exchange rate

Period average (Cordobas per U.S.$)

23.5

24.7

26.0

27.3

28.6

…

End of period (Cordobas per U.S.$)

24.1

25.3

26.6

27.9

29.3

…

Fiscal sector

(Percent of GDP)

Consolidated public sector

Revenue (excl. grants)

25.4

25.3

25.5

26.3

27.9

27.9

Expenditure

28.3

28.3

28.6

29.6

31.2

31.1

Current

23.0

22.4

22.6

23.0

24.2

24.1

of which: wages & salaries1/

7.6

7.7

7.4

7.4

7.6

7.5

Capital

5.3

5.9

6.0

6.7

7.0

7.0

Overall balance, before grants

-2.8

-3.0

-3.1

-3.3

-3.3

-3.2

Overall balance, after grants

-0.8

-1.3

-2.0

-2.2

-2.4

-2.3

Money and credit

(Annual percentage change)

Broad money

15.4

18.3

15.4

19.0

11.0

10.8

Credit to the private sector

26.3

20.2

20.5

23.5

17.4

14.0

Net domestic assets of the banking system

23.9

17.3

5.1

18.7

13.0

11.7

External sector

(Percent of GDP, unless otherwise indicated)

Current account

-10.7

-10.9

-7.1

-9.0

-8.6

-8.3

of which: oil imports

12.2

10.9

9.6

6.1

5.2

6.1

Capital and financial account

16.9

14.4

13.7

14.0

8.8

9.1

of which: FDI

6.7

6.1

6.7

7.1

6.5

6.3

Gross reserves (U.S.$ million)2/

1,778

1,874

2,147

2,353

2,296

2,393

In months of imports excl. maquila2/

3.6

3.7

4.2

4.6

4.0

3.9

Net international reserves2/

1,609

1,721

2,024

2,262

2,236

2,354

Public sector debt3/

41.5

42.3

40.2

40.7

41.9

41.5

Private sector external debt

42.5

45.1

44.7

44.9

44.8

42.6

Sources: Country authorities; World Bank; and Fund staff calculations and estimates.

1/ The figures for 2013 include an off-budget wage bonus that was financed with Venezuela-related resources. Starting in 2014 the wage bonus is included in the budget.

2/ Excludes the Deposit Guarantee Fund for Financial Institutions (FOGADE).

3/ Assumes that HIPC-equivalent terms were applied to the outstanding debt to non-Paris Club bilaterals. Does not include SDR allocations. From 2016 onwards includes preliminary data on the domestic debt of SOEs and municipalities. Prior to 2016, the stock of domestic debt of SOEs and municipalities is calculated based on the capitalization of flows.


[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually

every year. A staff team visits the country, collects economic and financial information, and discusses with officials

the country's economic developments and policies. On return to headquarters, the staff prepares a report, which

forms the basis for discussion by the Executive Board.

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can

be considered without convening formal discussions.

IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Raphael Anspach

Phone: +1 202 623-7100Email: MEDIA@IMF.org