Western Hemisphere > Nicaragua

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International Monetary Fund. Western Hemisphere Dept.
This 2019 Article IV Consultation with Nicaragua highlights that social unrest and its aftermath eroded confidence and caused large capital and bank deposits outflows that resulted in a prolonged output contraction. Banks cut lending, which exacerbated the downturn. Faced with sharply lower revenues and a severe tightening in available financing, including on account of sanctions, the government was forced to cut spending and adopt a procyclical tax package. The economy is projected to continue to contract in the near term as it adjusts to weaker confidence and lower external financing. The sharp contraction in credit will continue to depress investment, and the tight fiscal and external financing situation will continue to drag down medium-term growth. The key risks relate to further erosion in confidence and renewed deposit outflows. The imposition of additional sanctions by trading partners could also heighten economic stress. It is recommended to maintain a conservative fiscal stance in 2020 remains the key to maintain macroeconomic stability. Curbing expenditures on goods and services will allow increased spending on social programs, social safety nets, and public investment, which would lead to more equitable and sustainable growth.
Mr. Geoffrey J Bannister, Mr. Jarkko Turunen, and Malin Gardberg
Despite significant strides in financial development over the past decades, financial dollarization, as reflected in elevated shares of foreign currency deposits and credit in the banking system, remains common in developing economies. We study the impact of financial dollarization, differentiating across foreign currency deposits and credit on financial depth, access and efficiency for a large sample of emerging market and developing countries over the past two decades. Panel regressions estimated using system GMM show that deposit dollarization has a negative impact on financial deepening on average. This negative impact is dampened in cases with past periods of high inflation. There is also some evidence that dollarization hampers financial efficiency. The results suggest that policy efforts to reduce dollarization can spur faster and safer financial development.
International Monetary Fund. Western Hemisphere Dept.
This 2017 Article IV Consultation highlights Nicaragua’s robust macroeconomic performance in 2016. Real GDP grew by 4.7 percent in 2016, supported by strong domestic demand, while inflation remained subdued at 3.1 percent as of the end of 2016, owing largely to the contribution of food prices. The current account deficit for 2016 is estimated to have narrowed to 8.6 percent of GDP, compared with 9 percent in 2015. This consolidation is largely explained by maquila exports, which have been better captured owing to improvements in statistical compilation. The current account deficit remained financed by foreign direct investment and other long-term inflows.
Mr. Andrew J Swiston, Ms. Florencia Frantischek, Mr. Przemek Gajdeczka, and Alexander Herman
This paper examines the financial strength of central banks in Central America and the Dominican Republic (CADR). Some central banks are working off the effects of intervention in distressed financial institutions during the 1990’s and early 2000’s. Their net income has improved since then owing to lower interest rates, a reduction in interest bearing debt, and recapitalization transfers. Claims on the government have fallen, but remain high and are typically reimbursed at below-market rates, and capital is negative when adjusting for this. Capital is sufficient to back a low inflation target given that the income position is supported by unremunerated reserve requirements. Capital is likely to increase over time, but only gradually, leaving countries vulnerable to macroeconomic risks. The capacity of CADR central banks to engage in macroeconomic stabilization would benefit from increased emphasis on low inflation as the primary objective of monetary policy and a stronger commitment by governments to recapitalization.
Ms. Corinne C Delechat, Ms. Camila Henao Arbelaez, Ms. Priscilla S Muthoora, and Svetlana Vtyurina
Banks’ liquidity holdings are comfortably above legal or prudential requirements in most Central American countries. While good for financial stability, high systemic liquidity may nonetheless hinder monetary policy transmission and financial markets development. Using a panel of about 100 commercial banks from the region, we find that the demand for precautionary liquidity buffers is associated with measures of bank size, profitability, capitalization, and financial development. Deposit dollarization is also associated with higher liquidity, reinforcing the monetary policy and market development challenges in highly dollarized economies. Improvements in supervision and measures to promote dedollarization, including developing local currency capital markets, would help enhance financial systems’ efficiency and promote intermediation in the region.
International Monetary Fund
The Nicaraguan economy continued to post robust growth in the first half of 2011. The Seventh Review Under the Extended Credit Facility (ECF) and Financing Assurances Review highlights that all quantitative performance criteria for end-June 2011 were met and the structural agenda is broadly on track. The fiscal performance of the central government was stronger than envisaged. The deficit in the external current account is projected to remain large and to be financed by resilient capital flows.
Mr. Alejandro Carrion-Menendez and Ms. Florencia Frantischek
Several Central American (CADR) countries with independent monetary policies are strengthening their monetary frameworks and some have implemented or are moving towards inflation targeting (IT) regimes. Strengthening the monetary policy frameworks of CADR is key to improving the effectiveness of monetary policy. The paper reviews the literature on the reforms needed for strengthening the monetary policy frameworks, and examines the experiences of IT countries, Chile, Peru, and Uruguay to help distill lessons for CADR. It also constructs an index to measure the relative strength of the monetary policy framework of CADR countries.
International Monetary Fund
Nicaragua's economic performance in 2010 was satisfactory. Real GDP grew, supported by strong consumption and investment. Bank credit started recovering while the financial system remained liquid and profitable. Exchange-rate and monetary policy have contributed to macroeconomic stability. The authorities plan to improve public financial management and also to adopt a legal framework and remain committed to contain the macroeconomic risks from external aid flows. They also welcomed the sixth review and Financing Assurances under the Extended Credit Facility (ECF) arrangement.
International Monetary Fund
Economic performance in Nicaragua has been better than envisaged; nonetheless, vulnerabilities remain and will be compounded by electoral uncertainties. The decision to use part of the strong revenue performance to lower the fiscal deficit is appropriate. Exchange-rate and monetary policy remain broadly adequate. Fiscal adjustment should set the stage for a strong program of fiscal consolidation following the elections. Continued vigilance in the financial sector will be critical. Improvement in reporting and monitoring of foreign aid flows and transparency is necessary.