IMF hails economic prospects in Nicaragua
The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Nicaragua. Economic developments in 2015 have been broadly positive. Growth, after reaching 4.7 percent in 2014, is expected to moderate owing to the effects of a drought and the decline in commodity prices; real GDP grew by 3.9 percent in the first half of the year. Inflation declined to 3 percent in October, mainly reflecting declines in food and transportation costs. Core inflation remained stable at around 6.5 percent.
The consolidated public sector deficit widened to 2 percent in 2014 (1.3 percent of GDP in 2013), largely due to a decline in grants originating from the oil collaboration with Venezuela. Nevertheless, the public debt ratio declined to about 41 percent of GDP in 2014 from 43 percent in 2013. The fiscal position through August 2015 improved relative to the same period in 2014. This is largely explained by a better performance at the central government level that has compensated for the deterioration in the fiscal balance of state-owned enterprises.
The current account deficit improved to 7.1 percent of GDP in 2014, largely due to a smaller oil bill. However, the current account deficit deteriorated in the first half of 2015 as the country faced a less favorable external environment. In particular, export performance weakened as a result of the softening of commodities prices and the expiration of the preferential trade agreement with the United States in late 2014.
The financial sector appears to remain robust despite still high credit growth. As of August 2015, capital adequacy ratios (13.3 percent) were above the 10 percent regulatory level, and the non-performing loan ratios, including restructured loans, remained below 3 percent. Private sector credit growth has slowed but remains high (20 percent), in particular for consumer and commercial credit, and continues to exceed the growth rate of deposits.
Poverty has fallen sharply and there has been progress in gender equality, but education attainment remains a drag on growth. The 2014 household survey reveals that 29.6 percent of the population lives in poverty (42.5 percent in 2009), and 8.3 percent in extreme poverty (14.6 percent in 2009). Per capita consumption increased by 33 percent, helped by a fall in the average household size and a rise in per capita remittances. Nicaragua has made inroads in improving gender equality. However, despite some improvement in primary school completion rates (from 74 percent in 2005 to 80.4 percent in 2010), surveys of private firms suggest that labor skills remain a bottleneck to growth. The medium-term outlook remains broadly favorable. Growth is expected to moderately accelerate in 2016, owing to the projected recovery in foreign demand and an increase in election-related spending, which would result in a more expansionary fiscal policy.
In the medium term, staff estimates that growth will converge to its potential of 4 percent. The current account deficit is expected to widen to 8½ percent of GDP as terms of trade are projected to deteriorate. To address large infrastructure and social needs, the government plans to step up spending by over 3 percentage points of GDP over the medium term. As a result, the public debt ratio is projected to stabilize around 41 percent of GDP by 2020. Directors commended the Nicaraguan authorities' sound policies, which have enhanced macroeconomic stability and led to strong economic growth and poverty reduction.