IMF hails eco­nomic prospects in Nicaragua

The Pak Banker - - COMPANIES/BOSS -

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.

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