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Nicaragua’s economic performance remains robust, underpinned by prudent macroeconomic policies and very strong remittance flows. The economy continues to be open and resilient, on a backdrop of transfers of private property to the state, international sanctions, and a reorientation of official financing. Real GDP growth accelerated to around 4½ percent in 2023 and the first half of 2024, from about 3.8 percent in 2022, on the back of robust domestic demand, while inflation declined. Twin fiscal and external account surpluses are leading to a decline in the public debt-to-GDP ratio and the accumulation of strong buffers.
Real GDP growth is projected to moderate to 4 percent in the near term and to 3.5 percent in the medium-term, amid a slower pace of remittances growth, limited labor contribution to growth due to recent emigration, and cautious private sector investment decisions. International reserves are expected to grow at a slower pace than in the recent period, with narrowing of fiscal and current account surpluses as the authorities’ increase public investment.
Risks to the outlook are broadly balanced in the short-term and to the downside in the medium-term. Upside risks include stronger domestic demand, while downside risks include lower global growth, a deterioration in the terms of trade, natural disasters, stricter and wider international sanctions, and a change in immigration policies in the US.
In addition, going forward, domestic and international political developments, and deterioration of the rule of law may also impact economic performance by potentially increasing the cost of doing business.
Executive board assessment
Executive directors agreed with the thrust of the staff appraisal. They welcomed Nicaragua’s robust growth, declining inflation and public debt, and fiscal sector and current account surpluses, supported by prudent macroeconomic policies and high remittances. While noting the positive outlook, Directors stressed that risks are to the downside, including from natural disasters, international sanctions, and US immigration policies. They underscored the importance of continued efforts to safeguard macroeconomic stability, strengthen buffers, and support higher and more inclusive growth.
Directors welcomed the authorities’ commitment to preserving fiscal sustainability, while supporting growth. Efforts to strengthen domestic revenue mobilization, enhance spending efficiency, and support higher capital and social spending are important. Noting the limited availability of concessional financing, directors highlighted the importance of prudent debt management to safeguard debt sustainability. They underscored the need to mitigate fiscal risks by strengthening fiscal transparency, enhancing oversight of state-owned enterprises, and reforming the pension system.
Directors agreed that monetary policy should remain focused on supporting price stability and the exchange rate regime and highlighted the criticality of policy coordination. They recommended that the Central Bank of Nicaragua adjust monetary and exchange rate policies, as needed, enhance communication, and strengthen monetary policy transmission. Directors encouraged steadfast implementation of the 2021 safeguard assessment recommendations.
Directors welcomed the commitment to maintaining financial stability. Noting the vulnerabilities, they encouraged proactive provisioning of distressed assets, close monitoring of consumer credit growth, enhanced foreign exchange risk monitoring, and aligning the crisis preparedness framework with international best practice. Measures to increase financial inclusion and deepening, including developing local bond and capital markets, would support medium term growth.
Directors stressed the need for efforts to promote higher medium term growth and enhance climate resilience. Important measures include increasing human capital investment, targeted social spending, and promoting labor force participation, particularly for women. Directors also called for efforts to enhance the business climate and strengthen government institutions and frameworks to support increased private investment.
Directors noted the steps taken to enhance governance, anti-corruption, and AML/CFT frameworks, and emphasized that further efforts are needed to ensure their effective and appropriate application. They stressed the need to significantly improve the rule of law and safeguard judicial independence. Publishing asset declarations of politically exposed persons and supporting property rights are important. Directors welcomed the authorities’ commitment to enhancing the quality and consistency of statistics.
It is expected that the next Article IV consultation with Nicaragua will be held on the standard 12-month cycle. (https://caribbeannewsglobal.com/nicaraguas-economic-performance-remains-robust-imf-2024-article-iv-consultation-with-nicaragua/)
