IMF Executive Board Concludes 2019 Article IV Consultation with Nicaragua

Via IMF (Den Internationale Valutafond)

IMF Executive Board Concludes 2019 Article IV Consultation with Nicaragua







February 25, 2020















On
February 21, 2020,

the Executive Board of the International Monetary Fund (IMF) concluded the
Article IV consultation


[1]

with

Nicaragua.


Since April 2018, social unrest and its aftermath eroded confidence and
caused large capital and bank deposits outflows, adversely affecting
Nicaragua’s economic activity. Real GDP is estimated to have further
contracted in 2019 by 5.7 percent (-3.8 percent in 2018) owing to the
deterioration in aggregate demand, strong fiscal consolidation, and
sanctions. Inflation is estimated to have increased to 6.1 percent by
end-2019 (as compared to 3.9 percent in 2018), as a result of tax measures
adopted to partially offset the collapse in revenues and financing.
Although the economic downturn translated into a current account surplus in
2018 and 2019, the improvement was fully offset by a reversal in the
financial account.

The authorities eased monetary and financial sector policies during 2018–19
to avoid a downward economic spiral. The Central Bank managed to stabilize
the financial sector by introducing repos, reducing reserve requirements,
and phasing-in regulatory provisioning. To bring back the deficit from 4
percent of GDP in 2018 to 2 percent of GDP in 2019, the government adopted
a package of tax and pension reforms in the first quarter of 2019. The
authorities announced in October 2019 a reduction in the rate of crawl from
5 percent to 3 percent, to signal a commitment to low inflation.

Executive Board Assessment

[2]

Executive Directors agreed with the thrust of the staff appraisal. They
noted that the authorities’ determined policy response had contained the
impact of the fiscal and financial sector shocks in 2018 and 2019.
Nonetheless, with domestic and external vulnerabilities persisting, they
emphasized the importance of measures to preserve macroeconomic and
financial stability and restore confidence. They stressed that commitment
to prudent policies will remain important. The careful design and
communication of reforms will also be crucial in ensuring their social
acceptability. Continued support from development partners, in
collaboration with the Fund, will be important.

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Directors considered that the fiscal position outlined in the 2020 budget
is adequate to support the economic recovery. They underscored the
importance of rebalancing public expenditures in the short term to generate
fiscal space for spending on social safety nets, critical social programs,
and efficient investments. Over the medium term, the fiscal deficit will
need to be gradually reduced to ensure sustainability, together with
reforms to strengthen the financial position of state-owned enterprises and
the pension system. It will be important to strike the right balance to
provide enough expansionary impulse to medium-term economic growth. Greater
fiscal transparency will be needed in assessing fiscal risks and enhancing
fiscal governance.

Directors highlighted the need to increase the international reserves
coverage to support the crawling peg exchange regime and restore external
buffers. Keeping inflation low while adopting structural reforms to raise
productivity will increase competitiveness and resilience to shocks.

Directors welcomed the resilience of the financial sector to recent
confidence shocks but called for further efforts to mitigate risks from the
elevated level of distressed assets. Enhancing crisis preparedness,
strengthening banking sector supervision, and improving institutional
coordination for resolution activities, including adequate resources for
the financial safety net, would shield the financial system against
downside risks. Directors welcomed the reforms to the AML/CFT framework but
stressed the need for further efforts to ensure its effective
implementation. They also emphasized the importance of addressing
governance weaknesses in line with the recommendations of the 2017
Financial Action Task Force.

Directors recommended the steadfast implementation of structural reforms
aimed at restoring investors’ confidence and improving the business
environment, in consultation with key stakeholders. Strengthening
institutions, improving infrastructure, investing in human capital,
addressing labor skills bottlenecks, and upgrading technological readiness
would improve competitiveness.

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Directors urged the authorities to improve the quality and timeliness of
economic data with continued Fund technical assistance.


Nicaragua: Selected Economic Indicators, 2016–20

2016

2017

2018

2019

2020

Projections

Output

(Annual percent change)

Real GDP

4.6

4.7

-3.8

-5.7

-1.2

Real GDP per capita

4.7

4.4

-6.6

-8.1

-3.1

Consumer price inflation (period average)

3.5

3.9

5.0

5.4

5.0

Consumer price inflation (end of period)

3.1

5.7

3.9

6.4

5.0

Central Government

(In percent of GDP)

Revenue

17.6

17.8

16.8

19.1

18.1

Grants

0.9

0.9

0.6

0.5

0.6

Expenditure 1/

19.6

19.6

20.6

20.3

20.1

Current

15.3

15.1

16.3

16.8

16.7

Capital

4.3

4.5

4.4

3.5

3.4

Overall balance (after grants)

-1.1

-0.9

-3.2

-0.7

-1.4

Total public sector gross debt 2/

41.7

44.2

47.8

51.0

52.4

External

32.2

34.8

38.1

41.8

43.1

Domestic

9.5

9.4

9.2

9.3

10.7

Money and Credit

(Annual percent change, end of period)

Broad money

20.6

13.0

11.7

10.8

-21.2

Domestic credit of the banking system

21.8

20.8

21.8

16.8

11.1

Public sector (net)

66.1

-60.3

24.3

13.7

22.4

Private sector

14.8

20.6

9.1

11.7

-20.4

External sector

(In millions of U.S. dollars, unless otherwise indicated)

Current account

-870.8

-675.1

83.0

186.4

140.2

(percent of GDP)

-6.6

-4.9

0.6

1.5

1.1

Gross official reserves 3/

2,296

2,593

2,080

2,071

2,016

Months of imports excl. maquila

4.1

5.3

4.8

4.9

4.8

Memorandum Items

Nominal GDP (billions of Cordobas)

380.3

416.0

413.9

411.3

426.4

Per capita GDP, US$

2,099.6

2,165.2

2,030.5

1,904.3

1,882.5

Cordoba/U.S. dollar (period average)

28.6

30.1

31.6

Sources: National authorities and IMF staff calculations.

1/ Central government expenditure in 2018 include transfers
to INSS for repayments of historical debt for 1.2 percent
of GDP, and projections for 2019 and 2020 of 1.4 and 1.7
percent of GDP, respectively.

2/ Assumes that HIPC-equivalent terms were applied to the
outstanding debt to non-Paris Club bilaterals. Does not
include SDR allocations.

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

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[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]

At the conclusion of the discussion, the Managing Director, as
Chairman of the Board, summarizes the views of Executive Directors,
and this summary is transmitted to the country’s authorities. An
explanation of any qualifiers used in summings up can be found
here:

http://www.imf.org/external/np/sec/misc/qualifiers.htm

.


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