Nicaragua: Staff Concluding Statement of the 2022 Article IV Mission
November 16, 2022
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Washington, DC: A staff team from the International Monetary Fund (IMF), led by Ms. Alina Carare, held virtual discussions during November 3-4, and visited Managua during November 7-15 for the 2022 Article IV Consultation. The team met with the Finance Minister Iván Acosta, the Central Bank President Ovidio Reyes, other senior officials, and representatives from the private sector, banks, and the international community.
After contracting by about 9 percent during 2018-2020, economic activity is recovering well, supported by appropriate macroeconomic and financial policies and substantial pre-crisis buffers from government deposits and international reserves . International official financing, including IMF emergency assistance, also helped the economy to cope with the pandemic and the reconstruction efforts after the two consecutive hurricanes of November 2020. Real GDP grew by 10.3 percent in 2021, and is expected to grow by 4 percent in 2022, sustained by private consumption and exports, given favorable export prices. Strong remittances, large FDI projects and the SDR allocation in August 2021 allowed the continued accumulation of gross international reserves to about US$ 4.2 billion (6.0 months of imports, excluding maquila), by end-September 2022. Notwithstanding the government’s introduction of measures in May 2022 to mitigate the impact of the increase in oil, wheat and fertilizers prices, inflation reached 12 percent (year-on-year) in October 2022, driven mostly by import prices. The authorities are appropriately focusing on managing the exit from accommodative policies adopted during Covid and adjusting the public finances to tighter global financial conditions. The Central Bank of Nicaragua also tightened the monetary stance to maintain exchange rate and financial stability.
Nicaragua’s economic outlook is favorable, although risks to the outlook are on the downside, primarily due to global headwinds . Real GDP growth is expected to moderate to 3 percent in 2023, due to weaker external demand and tighter external financial conditions. Over the medium term, real GDP growth is projected to converge to its potential of about 3½ percent, given the cautious recovery in investment and credit to the private sector, and lower labor force participation. Risks to the outlook are on the downside: a more severe global downturn, further external monetary tightening and higher import prices than expected. If these risks materialize, they could result in lower real GDP and remittances growth, higher inflation, worse food affordability, and a wider fiscal deficit. Fiscal balances, economic activity and social outcomes could be strained by natural disasters, given Nicaragua’s high exposure to climate change and economic dependence on climate sensitive sectors. A deterioration in the business climate and stricter international sanctions would affect trade and financing flows.
Prudent monetary, fiscal, and financial policies need to continue, to build resilience and achieve sustained medium-term growth . A consistent policy mix, with appropriately tight fiscal and monetary policies, is needed to strengthen buffers amid global uncertainty, accumulate reserves and maintain an interest rate differential with the U.S. needed to support the exchange rate crawling peg. The mission supports the authorities’ efforts to sustain medium-term growth through investing in infrastructure, reducing energy costs, and enhancing human capital. Sustained efforts to improve the business climate and structural reforms to increase formal employment will help curb emigration and strengthen the social security accounts.
The fiscal policy stance for 2023 is appropriate and consistent with the authorities’ commitment to safeguard fiscal sustainability . In 2023, the consolidated public sector deficit is expected to improve by 0.9 percentage points of GDP, to 2.4 percent of GDP, primarily through the unwinding of the crisis-related measures and the continued consolidation at the central government level. Over the medium term, a sustainable approach to fiscal policy is expected to continue, to reduce public debt—which is currently about 57 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 and expected tighter global financial conditions. In this respect, the mission recommends better targeting subsidies and reallocating current expenditures, to maintain adequate levels of social spending, reduce poverty and support growth.
While banks are well capitalized and liquid, the resilience of the financial sector could be further strengthened . Bank deposits continue to grow, surpassing their pre-crisis aggregate level (measured in Córdobas), and credit to the private sector is also rebounding but remains below pre-crisis levels. Non-Performing Loans (NPLs) have halved over the past two years to 1.9 percent in September 2022 and the level of distressed assets (comprised of NPLs, forborne, restructured and refinanced loans as well as repossessed assets) continues to decline but remains significant (12.1 percent in September 2022). The mission recommends increasing the level of provisions for distressed assets and supports the authorities’ efforts to ensure that sound lending practices are preserved. The authorities should align the crisis preparedness framework with best international practices and expand the prudential supervisory perimeter by overcoming data gaps for credit and savings cooperatives and start their oversight, prioritizing the largest ones. The authorities should also continue monitoring FX risk given the high degree of dollarization.
Building on recent achievements, the authorities should continue strengthening the AML/CFT framework . Nicaragua has implemented a comprehensive set of legal reforms to align its AML/CFT framework with international standards. As a result, the FATF has announced its removal from the “Grey list”. The mission recommends the proper application of the AML/CFT framework and supports the authorities’ efforts to strengthen its effectiveness.
The mission commends the authorities for publishing their first fiscal risks report in May 2022 and urges the authorities to sustain efforts for greater fiscal transparency. The authorities remain committed to publish the external audit reports on the use of all COVID-19 funds; a first report covering the execution until May 2021 is expected to be published by end-November 2022. 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 publication of audit reports.
The state has taken steps to enhance governance and anticorruption frameworks, and further efforts are needed to strengthen these frameworks and their effective application. The Comptroller General Office has introduced a platform to collect asset declarations of public officials. The mission recommends that the Comptroller General Office takes additional measures to ensure public access to these declarations, digital reporting, and to prioritize reviews of politically exposed persons. To support business climate and growth, the state should strengthen the capacity to detect and prosecute possible acts of corruption at all levels of government by fully implementing the Law of Access to Public Information and enacting norms that ensure whistleblower protection. Ensuring fair and impartial access to the court system and to recourse in legal proceedings, would support property rights, contract enforcement, and investment protection.
The mission welcomes the authorities’ intentions to continue building on technical assistance recommendations to improve the quality and consistency of statistics , which is 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 2023. 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.
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Table 1. Nicaragua: Selected Social and Economic Indicators, 2017-23 |
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I. Social and Demographic Indicators |
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GDP per capita (current US$, 2021) |
2,141.0 |
Income share held by the richest 10 percent (2014) |
37.2 |
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GNI per capita (Atlas method, current US$, 2021) |
2,010 |
Unemployment (percent of labor force, 2020) |
11.1 |
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|
GINI Index (2014) |
46.2 |
Poverty rate (national pov. line, in percent, 2016) |
24.9 |
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Population (millions, 2020) |
6.5 |
Adult literacy rate (percent, 2015) |
82.6 |
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Life expectancy at birth in years (2019) |
74.7 |
Infant mortality rate (per 1,000 live births, 2020) |
13.8 |
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II. Economic Indicators |
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|
2017 |
2018 |
2019 |
2020 |
2021 |
2022 |
2023 |
|
|
Prel. |
Projections |
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|
Output |
(Annual percentage change; unless otherwise specified) |
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|
GDP growth |
4.6 |
-3.4 |
-3.8 |
-1.8 |
10.3 |
4.0 |
3.0 |
|
GDP (nominal, US$ million) |
13,786 |
13,025 |
12,611 |
12,586 |
14,001 |
15,737 |
17,233 |
|
Prices |
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|
GDP deflator |
4.1 |
2.7 |
5.5 |
5.5 |
3.3 |
10.2 |
8.4 |
|
Consumer price inflation (period average) |
3.9 |
4.9 |
5.4 |
3.7 |
4.9 |
10.2 |
8.4 |
|
Consumer price inflation (end of period) |
5.7 |
3.9 |
6.1 |
2.9 |
7.2 |
11.2 |
6.1 |
|
Saving and investment (percent of GDP) |
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Gross domestic investment |
29.9 |
24.1 |
17.4 |
19.3 |
23.6 |
23.5 |
24.0 |
|
Private sector |
22.0 |
16.5 |
10.8 |
11.4 |
14.0 |
14.8 |
15.0 |
|
Public sector |
8.0 |
7.6 |
6.6 |
7.8 |
9.7 |
8.7 |
9.0 |
|
Gross national savings |
22.8 |
22.3 |
23.4 |
23.2 |
21.4 |
21.8 |
22.2 |
|
Private sector |
17.9 |
19.6 |
18.8 |
18.9 |
13.9 |
17.0 |
16.1 |
|
Public sector |
4.8 |
2.7 |
4.5 |
4.3 |
7.4 |
4.8 |
6.1 |
|
Exchange rate |
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|
Period average (Cordobas per US$) |
30.1 |
31.6 |
33.1 |
34.3 |
35.2 |
… |
… |
|
End of period (Cordobas per US$) |
30.8 |
32.3 |
33.8 |
34.9 |
35.6 |
… |
… |
|
Fiscal Sector |
(Percent of GDP) |
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Consolidated public sector (overall balance after grants)1/ |
-2.2 |
-3.8 |
-1.2 |
-2.6 |
-1.4 |
-3.3 |
-2.4 |
|
Revenue (Incl. grants) |
29.4 |
28.4 |
31.6 |
31.1 |
33.2 |
30.3 |
29.6 |
|
Expenditure |
31.6 |
32.3 |
32.8 |
33.7 |
34.6 |
33.7 |
32.0 |
|
of which: Central Government overall balance 2/ |
-17.7 |
-18.9 |
-0.5 |
-2.3 |
-1.2 |
-1.6 |
-0.6 |
|
Revenue |
2.2 |
1.9 |
19.6 |
19.2 |
21.3 |
19.5 |
19.0 |
|
Expenditure |
19.9 |
20.9 |
20.1 |
21.5 |
22.6 |
21.0 |
19.5 |
|
Cash payments for operating activities |
15.3 |
16.6 |
16.6 |
17.1 |
16.7 |
16.4 |
14.9 |
|
Net cash outflow: investments in NFAs |
4.5 |
3.5 |
3.5 |
4.4 |
5.8 |
4.6 |
4.7 |
|
of which: Social Security Institute (INSS) overall balance3/ |
-0.6 |
0.1 |
0.2 |
0.0 |
0.3 |
0.0 |
0.0 |
|
Revenue |
5.9 |
7.4 |
7.9 |
8.0 |
7.7 |
7.2 |
6.9 |
|
Expenditure |
6.5 |
7.3 |
7.7 |
8.0 |
7.4 |
7.2 |
6.9 |
|
Money and financial |
(Annual percentage change) |
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Broad money |
11.7 |
-18.7 |
6.2 |
15.6 |
13.8 |
14.3 |
11.7 |
|
Credit to the private sector |
16.0 |
-8.7 |
-15.6 |
-3.6 |
5.3 |
8.1 |
11.6 |
|
of which bank credit to the private sector |
12.6 |
-10.2 |
-14.5 |
-3.4 |
6.8 |
… |
… |
|
Net domestic assets of the banking system |
8.8 |
-7.7 |
-15.0 |
-6.3 |
2.4 |
7.8 |
18.2 |
|
Non-performing loans to total loans (ratio) |
1.0 |
2.4 |
3.1 |
3.7 |
2.4 |
… |
… |
|
Regulatory capital to risk-weighted assets (ratio) |
13.8 |
17.0 |
19.5 |
23.9 |
21.1 |
… |
… |
|
External sector |
(Percent of GDP, unless otherwise indicated) |
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|
Current account |
-7.2 |
-1.8 |
6.0 |
3.9 |
-2.3 |
-1.7 |
-1.8 |
|
of which: oil imports |
6.4 |
7.6 |
7.6 |
5.4 |
8.0 |
11.1 |
9.5 |
|
Capital and financial account |
11.8 |
1.8 |
-1.9 |
3.0 |
11.8 |
9.2 |
6.2 |
|
of which: FDI |
7.0 |
5.9 |
3.5 |
3.9 |
8.6 |
7.8 |
5.1 |
|
Gross international reserves (US$ million)3/ |
2,593 |
2,080 |
2,199 |
3,003 |
3,828 |
4,256 |
4,293 |
|
In months of imports excl. maquila |
4.6 |
4.3 |
5.0 |
7.1 |
6.5 |
6.2 |
6.2 |
|
Net international reserves (US$ million)4/ |
1,802 |
1,146 |
1,374 |
1,887 |
2,531 |
2,769 |
2,863 |
|
In months of imports excl. maquila |
3.2 |
2.3 |
3.1 |
4.4 |
4.3 |
4.0 |
4.1 |
|
Public sector debt 5/ |
44.4 |
48.3 |
50.2 |
57.8 |
56.9 |
58.1 |
56.1 |
|
Domestic public debt |
9.5 |
10.2 |
8.6 |
11.2 |
11.6 |
13.1 |
12.3 |
|
External Public Debt |
34.9 |
38.0 |
41.6 |
46.6 |
45.3 |
44.9 |
43.9 |
|
Private sector external debt |
43.6 |
44.2 |
44.0 |
44.4 |
40.1 |
35.4 |
32.1 |
|
Sources: National authorities; World Bank; and IMF staff calculations. |
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1/ The consolidated public sector comprises the central government, social security and the municipality of Managua, the state-owned enterprises and the central bank. |
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2/ Central government deficit and INSS revenue in 2018 include a 1.2 percent of GDP for repayment of INSS historical debt. Similar transfers for 2020-27. |
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3/ Excludes the Deposit Guarantee Fund for Financial Institutions (FOGADE). |
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4/ Excludes resources from the Deposit Guarantee Fund for Financial Institutions (FOGADE), and reserve requirements for FX deposits. |
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5/ Assumes that HIPC-equivalent terms were applied to the outstanding debt to non-Paris Club bilaterals. Does not include SDR allocations. Includes data on the domestic debt of SOEs and municipalities. |
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