Western Hemisphere > Nicaragua

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International Monetary Fund. Western Hemisphere Dept.
Nicaragua faces an acute crisis as the COVID-19 shock comes on top of a two- year recession. So far, the speed of transmission of the pandemic in Nicaragua, in terms of officially confirmed cases, has been slower than in neighboring countries, but this may understate the true spread of the disease. The pandemic is expected to produce the third year of consecutive recession and lead to large fiscal and external financing needs given the impact of voluntary distancing and regional and global spillovers. The very limited fiscal space, eroded by the ongoing recession and the limited external financing, constrains the authorities’ ability to self-finance the emergency response.
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.
International Monetary Fund. Western Hemisphere Dept.
This 2019 Article IV Consultation discusses that structural reforms, strengthened policy frameworks and the ongoing smooth political transition have laid the foundations for sustained growth in El Salvador. The discussions focused on policies that build on these achievements and address fiscal vulnerabilities, boost long-term growth, and strengthen the governance, anticorruption and Anti-Money Laundering and Combating the Financing of Terrorism frameworks. Continued US dollar appreciation led to a significant decline in inflation and widening of the current account deficit. The authorities agreed that debt would continue to drift upward in the absence of measures, and that weaker-than-expected global growth could have a negative impact on the domestic economy. The authorities emphasized their commitment to guarantee a smooth political transition by sharing information with the new administration and by inviting the Audit Office to oversee the handover process. It is recommended to improve the governance and anticorruption frameworks by increasing the fiscal transparency of the 2020 budget laws, strengthening audit and spending controls, and promptly implementing electronic invoicing.
Valentina Flamini, Pierluigi Bologna, Fabio Di Vittorio, and Rasool Zandvakil
Credit is key to support healthy and sustainable economic growth but excess aggregate credit growth can signal the build-up of imbalances and lead to systemic financial crisis. Hence, monitoring the credit cycle is key to identifying vulnerabilities, particularly in emerging markets, which tend to be more exposed to sudden external shocks and reversal in capital flows. We estimate the credit cycle in Central America, Panama, and the Dominican Republic and find that the creadit gap is a powerful predictor of systemic vulnerability in the region. We simulate the activation of the Basel III countercyclical capital buffers and discuss the macroprudential policy implications of the results, arguing that countercyclical macroprudential policies based on the credit gap could prove useful to enhance the resilience of the region’s financial sector but the activation of macroprudential instruments should also be informed by the development of other macrofinancial variables and by expert judgment.
Gabriel Di Bella and Mr. Francesco Grigoli
Poor performance of the electricity sector remains a drag to economic efficiency and a bottleneck to economic activity in many low-income countries. This paper proposes a number of models that account for different equilibria (some better, some worse) of the electricity sector. They show how policy choices (affecting insolvency prospects or related to rules for electricity dispatching or tariff setting), stochastic generation costs, and initial conditions, affect investment in generation and electricity supply. They also show how credible (non-credible) promises of stronger enforcement to reduce theft result in larger (smaller) electricity supply, lower (higher) government subsidies, and lower (higher) tariffs and distribution losses, which in turn affect economic activity. To illustrate these findings, the paper reviews the experience of Haiti, a country stuck in a bad equilibrium of insufficient supply, high prices, and electricity theft; and that of Nicaragua, which is gradually transitioning to a better equilibrium of the electricity sector.
International Monetary Fund. Western Hemisphere Dept.
The 2015 Article IV Consultation presents economic outlook and risks of Nicaragua. Over the last three years, real GDP growth has averaged 4.8 percent, one of the highest in the region, while inflation has remained anchored by the exchange rate regime. Poverty has fallen sharply, but unemployment has increased due to a decline in the manufacturing sector. The current policy mix is broadly adequate to maintain macroeconomic stability in the near term, but Nicaragua needs to fortify its policy framework. In particular, reducing tax exonerators and exemptions and improving the targeting of fiscal subsidies would strengthen the efficiency and equity of public finances and contribute to rebuilding fiscal buffers.
International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper examines opportunities and challenges for growth in Haiti. Achieving a sustained increase in living standards in Haiti will require deep-seated reforms across a range of areas. Diversifying the export base is needed to cushion the impact of severe shocks that have reduced per capita income and prevented a sustained increase in the capital stock. Integration into global-value chains would also allow Haiti to take advantage of its proximity to the U.S. market and favorable trade preferences to generate employment, spur the creation of human capital, and allow Haiti to begin climbing the value added chain.