Nicaragua: Staff Concluding Statement of the 2019 Article IV Mission

November 20, 2019

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

This statement summarizes the preliminary findings and recommendations of the mission that visited Managua during October 29-November 12 in the context of the 2019 Article IV consultation. The mission is grateful to the authorities for the constructive dialogue and hospitality.

Context and recent economic developments

1. Social unrest in April 2018 and its aftermath have caused an abrupt economic contraction. Real GDP fell by 3.8 percent in 2018 as road blockades and impairments to infrastructure caused supply disruptions, while sharply weaker consumer and investor confidence resulted in bank deposit outflows and decreased private investment. The tourism, construction, and retail sectors were particularly affected. In 2019, the economy is projected to shrink by 5.7 percent. The contraction is due to the deterioration in confidence and international sanctions, which aggravated financial constraints and reduced investment, employment, and social indicators. Inflation is projected at 6.4 percent by end-2019 (as compared to 3.9 percent in 2018), which reflects the transient effect of tax measures adopted earlier this year.

2. The economic contraction resulted in an external current account surplus in 2018 and 2019H1. Steady growth in remittances, exports, and a drop in imports—due to lower disposable income—caused an improvement in the current account. The stronger current account was more than fully offset by capital outflows (FDI and private portfolio flows). In recent months, however, capital outflows have decelerated, and banks improved their liquidity positions. Overall, net international reserves (NIR) are expected to increase by US$ 171 million in 2019 (in 2018 NIR reached US$ 1,146 million, down US$ 656 million from the 2017 level).

3. Strong buffers and the authorities’ determined macroeconomic policy response to the very difficult circumstances helped avoid a downward economic and financial spiral.

4. The Consolidated Public Sector (CPS) position in 2018 deteriorated to a deficit of 3.9 percent of GDP but is expected to improve significantly in 2019. In response to the difficult situation posed by the 2018 events when tax collection plummeted, the pension system depleted its reserves and external financing dwindled, in 2019, the government adopted revenue-enhancing measures and reduced capital expenditure to reverse the deterioration in the fiscal balance. Overall the CPS deficit is estimated at 2.2 percent of GDP in 2019.

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