The mission from the International Monetary Fund (IMF) that visited Managua last month, concluded that the country’s macroeconomic outlook is positive. However, the mission stressed the need to reinforce the policy framework in some areas in order to build buffers to face fiscal and external vulnerabilities.
The mission reviewed recent economic developments and discussed the economic prospects of Nicaragua, with officials from the Central Bank, the Ministry of Finance and Public Credit, and other members of the economic cabinet, as well as members of the economic commission of the National Assembly, business community and labor leaders, academic groups, and representatives of think tanks.
Gerardo Peraza, Head of the mission said, “Nicaragua continues to experience a favorable economic performance. The Gross Domestic Product (GDP) growth in the past three years has averaged 4.8 percent and is among the highest in the region. In 2014, the consolidated public sector deficit was 2 percent of GDP and public debt (including all the debt relief of the Highly Indebted Poor Countries Initiative) fell by 2.2 percentage points to 40.8 percent of GDP. The deficit of the external current account was reduced from 11 in 2013 to 7 percent of GDP, and international reserves increased to the equivalent of 4.1 months of imports excluding free trade zone imports.”
By end-2015, they expect GDP growth of 4 percent and, while inflation is projected at 3.5 percent. However, the deficit and the debt of the consolidated public sector are projected to rise, respectively, to 2.7 percent and about 42.5 percent of GDP in 2015. As well as that the external current account deficit will widen to 8 percent of GDP and that the coverage of international reserves will remain stable. For the medium term, the mission projects that GDP growth will converge to its potential level (about 4 percent) with inflation at about 7 percent annually.
The mission suggests an additional fiscal effort in 2017 to build fiscal buffers in case risks materialize; policy measures that could be considered include a reduction in tax exemptions and improved targeting of electricity subsidies to poor households. Looking further ahead, the mission recommends identifying economic measures to strengthen the financial viability of the social security institute, as well as maintaining an adequate level of international reserves remains a critical objective of macroeconomic policy. “This is crucial to reduce the vulnerability of the Nicaraguan economy to downturns in the global economy or abrupt changes either in the terms of trade or in the availability of external financing. The mission welcomes the central bank’s efforts to strengthen short-term liquidity management in the financial system. Moreover, the authorities should continue to monitor the rapid growth in credit and strengthen banking supervision,” said Peraza.
The mission also emphasizes the need to continue strengthening the statistical framework, continue strengthening the mechanisms to collect data, the procedures to monitor the quality of statistics, and the communication strategies. The IMF will continue assisting the authorities with these strengthening efforts.