Nicaragua as seen by the IMF in May 2017

The entity highlighted macroeconomic strength, but warned about the Social Security Institute's growing deficit and other risks linked to less cooperation with Venezuela over oil matters.

Monday, May 8, 2017

From a press release issued by the IMF:

This statement summarizes the preliminary findings and recommendations of the mission that visited Managua during April 24-May 5 in the context of the 2017 Article IV consultation. The mission is grateful to the authorities for the constructive dialogue and hospitality.

Growth has been robust while inflation remains well anchored. External imbalances improved moderately in 2016 while the fiscal deficit increased marginally. Given heightened uncertainties with respect to the external environment, Nicaragua needs to continue strengthening its policy framework to stave off downside risks and promote sustained and inclusive growth. Policy discussions focused on (i) creating fiscal space to manage risks and promote sustainable growth; (ii) strengthening monetary management, financial stability and the AML/CFT framework; and (iii) improving external resilience and competitiveness.

Recent Developments and outlook

1. Macroeconomic performance in 2016 was solid

  • Economic activity remained 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 low food prices. Inflation expectations remain well anchored by the crawling peg.

  • The fiscal deficit increased slightly in 2016. Revenues increased by over 0.6 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 from 2.2 percent in 2015 to 2.4 percent in 2016 due to election-related spending, expansion of public investment and a higher Social Security Institute (INSS) deficit. The CPS debt ratio edged up to 40.1 percent of GDP in 2016 from 39.3 percent in 2015, excluding state-owned enterprises (SOEs) and municipalities.

  • 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. The deficit reduction 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. 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 . Bank soundness indicators as of end-2016 were relatively robust. However, balance sheet risk from an expansion of bank credit in dollars to unhedged borrowers is rising in the context of increasing interest rates, continued dollar strength and higher reliance on external financing. Consolidated supervision of regional banks continues to be a challenge and some non-bank financial institutions, including deposit-taking credit cooperatives, remain unsupervised.

2. 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 at about 6 percent, assuming food and oil prices remain consistent with projections of the IMF’s World Economic Outlook. The deficit of the CPS is projected to moderate somewhat, to about 2.2 percent of GDP, implying a broadly neutral fiscal stance in line with the authorities’ fiscal anchor. At the same time, however, the deficit of the INSS is expected to continue increasing up to 0.43 percent of GDP in 2017. CPS debt, excluding domestic debt of SOEs and municipalities, is projected at rise further to about 40.6 of GDP. The current account balance is projected to remain stable at about 8.4 percent of GDP.

3. Risks are tilted to the downside against a background of high global uncertainties . In addition to the growing deficits of the INSS, risks include spillovers related to the decline in Venezuelan oil cooperation and potential shifts in U.S. trade and migration policies, which might have global spillovers on exports and remittances.

More on this topic

Nicaragua as Seen by the IMF in February 2018

February 2018

Economic growth in 2017 exceeded expectations, and although the outlook for 2018 is optimistic, the entity points out that there is a need to reduce tax expenditure and rationalize subsidies.

From a statement issued by the IMF:

Economic performance in 2017 was above expectations and the 2018 outlook is favorable.

Nicaragua as Seen by the IMF in June 2017

June 2017

The institution highlights the strength of the economy, but warns of the need to reform the social system and the impact that approval of the NICA law in the US could have on public finances.

From the statement by the IMF:

IMF Executive Board Concludes 2017 Article IV Consultation with Nicaragua

Nicaragua as Seen by the IMF in December 2016

December 2016

"Nicaragua's main challenge is to maintain strong, sustainable and inclusive growth in the context of increased uncertainty regarding global trade and economic activity."

From a press release by the IMF:

  • Despite challenging external conditions, economic activity remains buoyant
  • The financial system appears to be robust, notwithstanding strong credit growth
  • Nicaragua needs to continue strengthening its public finances by creating fiscal buffers

Guatemala As Seen by the IMF in August 2016

September 2016

Growth and the external position have been boosted by low oil prices and strong remittances, while the fiscal deficit had declined. However, progress on social objectives is lagging. There are downside risks from global uncertainties and domestic policy constraints.

From the press release by the IMF:

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