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2017 Article IV Consultation Summary: Nicaragua

Core Content

The 2017 Article IV consultation with Nicaragua by the IMF concluded with the Executive Board endorsing the staff appraisal. The report outlines Nicaragua's macroeconomic performance, fiscal and external challenges, and policy recommendations aimed at ensuring stability and long-term growth.

Main Views and Key Information

Macroeconomic Performance

• Real GDP Growth: Robust in 2016 at 4.7%, slightly moderated to 4.5% in 2017.
• Inflation: Subdued at 3.1% in 2016, expected to remain around 6% in 2017 due to the crawling peg exchange rate regime.
• Fiscal Deficit: Increased slightly in 2016 to 2.4% of GDP from 2.2% in 2015, driven by election-related spending and INSS financial deterioration.
• Public Sector Debt Ratio: Rose to 41.9% of GDP in 2016, still within sustainable limits.

External Position

• Current Account Deficit: Narrowed to 8.6% of GDP in 2016 from 9% in 2015.
• Gross International Reserves: Remained broadly stable at US$2.3 billion, providing about 4 months of non-maquila import coverage.
• FDI and Long-Term Inflows: Continued to finance the current account deficit despite a decline in Venezuela cooperation inflows.

Monetary and Financial Conditions

• Private Sector Credit Growth: Slowed to 17.4% in 2016, still above nominal GDP growth.
• Bank Soundness: Remained solid, with non-performing loans below 1% of total loans and a capital adequacy ratio of 13.5% of risk-weighted assets.
• Liquidity and Capital Buffers: Banks should enhance liquidity, capital, and provisioning buffers to counter potential financial shocks.

Fiscal Policy Recommendations

• Fiscal Consolidation: Staff recommends a 1.6% of GDP consolidation over two years to ensure medium-term fiscal sustainability.
• Tax Reforms: Rationalization of subsidies and tax expenditures, especially VAT exemptions, is necessary.
• Social Security Reforms: Urgent action is needed to improve the sustainability of INSS, as its liquid reserves are expected to be depleted by 2019.
• Fiscal Resilience: Fiscal policy should be more countercyclical to mitigate risks from U.S. policy spillovers and climate change.

External Resilience and Competitiveness

• Exchange Rate: The crawling peg regime helps anchor inflation.
• Competitiveness: Enhancing competitiveness through infrastructure and human capital development can reduce vulnerability to external shocks.
• Dollarization: High dollarization increases sensitivity to U.S. interest rate changes and financial spillovers.

Statistical and Supervisory Frameworks

• Data Quality: There is a need to improve the scope and quality of macroeconomic statistics.
• Supervisory Perimeter: Gaps in financial supervision remain, particularly for non-bank entities and microfinance institutions.
• AML/CFT Oversight: Nicaragua has made progress, but enforcement of the legal framework remains a challenge.

Key Policy Advice

• Strengthen fiscal buffers to address risks from INSS deficits and potential impacts of the NICA Act.
• Enhance financial stability by increasing liquidity, capital, and provisioning buffers.
• Expand the financial supervision perimeter to include all deposit-taking and systemically important non-bank institutions.
• Improve competitiveness through infrastructure investment and human capital development.
• Introduce a short-term policy rate and a corridor to reduce interest rate volatility and stabilize financial markets.
• Strengthen the statistical framework using IMF methodologies and complete the national accounts rebasing.

Risks and Challenges

• U.S. Policy Spillovers: Could negatively impact trade, investment, and foreign financing.
• Decline in Venezuelan Cooperation: Poses a risk to the external position and fiscal sustainability.
• Climate Change and Disasters (CCDs): May affect borrower repayment capacity, particularly in agriculture.
• Exchange Rate Volatility: The NICA Act could lead to FX market pressure if approved.
• Fiscal and Financial Vulnerabilities: Risks include the potential impact of the NICA Act and the sustainability of INSS.

Summary of Economic Indicators (2012-2017)

Conclusion

The IMF's assessment highlights the need for continued fiscal consolidation, enhanced financial supervision, and improved external resilience. While the economy has shown strong growth and stability, risks from U.S. policies, Venezuela cooperation decline, and climate change remain pressing. Strengthening the statistical framework and addressing gaps in the supervisory perimeter are also critical for long-term financial stability and sustainable growth.