Nicaragua: Staff Report for the 2005 Article IV Consultation, Seventh, Eighth, and Ninth Reviews Under the Three Year Arrangement Under the Poverty Reduction and Growth Facility, Requests for Rephasing and Waiver of Performance Criteria, Financing Assurances Review, and Request for Extension of the Arrangement

This paper discusses Nicaragua’s 2005 Article IV Consultation and Seventh, Eighth, and Ninth Reviews Under the Three Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF). The economy continued to perform well, notwithstanding pressure from higher oil prices. Strong performance under the program in 2003–04 allowed Nicaragua to reach the Heavily Indebted Poor Countries completion point in January 2004. Since then, growth has moderated toward 4.1 percent y/y in 2005. Key medium-term challenges include addressing vulnerabilities arising from weak balance sheets, reflected in high levels of debt and dollarization.

Abstract

This paper discusses Nicaragua’s 2005 Article IV Consultation and Seventh, Eighth, and Ninth Reviews Under the Three Year Arrangement Under the Poverty Reduction and Growth Facility (PRGF). The economy continued to perform well, notwithstanding pressure from higher oil prices. Strong performance under the program in 2003–04 allowed Nicaragua to reach the Heavily Indebted Poor Countries completion point in January 2004. Since then, growth has moderated toward 4.1 percent y/y in 2005. Key medium-term challenges include addressing vulnerabilities arising from weak balance sheets, reflected in high levels of debt and dollarization.

I. Introduction and Historical Context

1. The 2005 Article IV Consultation provides an important opportunity to take stock of achievements under the authorities’ reform program and the challenges ahead. Over the last years, the economy has grown in the context of a stable macro-framework. Poverty reducing spending has increased and human development indicators have improved. Nonetheless, Nicaragua remains the second-poorest country in Latin America. Half of the population lives below the poverty line, with 15 percent living in extreme poverty. Still high debt levels, large current account deficits and high levels of dollarization will require careful macro management and concessional donor support over the medium term. The key focus should be on policies that boost growth and poverty reduction, especially those that encourage private investment, strengthen the fiscal framework, and protect the health of the financial sector.

2. Nicaragua experienced an economic collapse during the 1980s with recovery over the 1990s. By the late 1980s, real per capita income had fallen to one-third of its level of a decade earlier and the country had experienced hyperinflation. With the return of democracy in 1990, and significant donor support in the context of successive Fund programs, the economy began to recover (Figure 1). The economy has also increasingly benefited from rising flows of workers’ remittances and FDI. The recovery has been associated, however, with an economic structure highly dependent on foreign grants, helping to finance large twin deficits. The latter part of the 1990s was marred by corruption, weak fiscal policy, and an accommodative monetary policy. These problems culminated in a banking crisis in 2000, which resulted in a jump in public debt of 20 percentage points of GDP and a major loss of international reserves.

Figure 1.
Figure 1.

A Path to Stabilization

Citation: IMF Staff Country Reports 2006, 174; 10.5089/9781451829280.002.A001

Source: Central Bank of Nicaragua.

3. In early 2002, the new Bolaños government implemented strong reforms. The administration put in place a tax reform, streamlined expenditures, and strengthened enforcement of prudential rules for banks. The government also took firm measures to improve governance, including imprisoning former President Alemán (head of the Liberal Party) on corruption charges. The authorities’ program was supported through a three-year PRGF arrangement approved in December 2002. The program began to pay quick dividends—in 2003 GDP growth recovered, inflation remained subdued, and NIR increased, facilitating macro stability and some progress on structural reform.

4. However, political tensions rose sharply from early 2004 contributing to an environment that drove the program off track (Box 1). The escalation of latent tensions between the executive and legislative branches of government stalled the structural reform effort. The situation was compounded following approval of a 2005 budget that widened the deficit relative to the executive’s proposal and included significant public sector wage increases. Together, these developments delayed, for over a year, the completion of pending program reviews under the PRGF arrangement after September 2004.

5. A recent political accord between President Bolaños and the opposition political parties has allowed re-starting the reform agenda, although risks remain. The key political actors have agreed to defer controversial constitutional reforms—linked to the sharp political tensions that derailed the program—until after the November 2006 presidential and congressional elections. In a major step connected with this accord, the assembly approved CAFTA–DR, which had previously been blocked by the opposition Sandinista party. Since then, there has been a flurry of legislative activity on prior actions to put the program back on track. Nonetheless, political uncertainty remains high, especially as the country enters the run-up to the 2006 elections. This is a key factor driving the authorities’ desire to extend the Fund-supported program to help provide an anchor for economic policies in the year ahead.

The Political Environment

The political situation deteriorated significantly in late 2004. This reflected a political “pact” in late 2004 between the two main parties (Liberal and Sandinista) to approve a set of constitutional amendments aimed at curbing the power of the executive branch. President Bolaños rejected these amendments, setting the stage for a constitutional crisis that put the President under threat of being impeached and tested Nicaragua’s institutional stability. Moreover, the structural agenda stalled as brokering a political truce proved to be elusive despite several rounds of negotiation.

In October 2005, however, Sandinista leader Ortega and President Bolaños reached a political accord to postpone pursuit of the constitutional amendments until after the upcoming general elections in November 2006. This accord, which has also drawn support from the Liberal party, in part reflects pressures from the international community to advance reforms as well as a political consensus to revive the program, including in the run-up to the MDRI. The political accord has made possible the approval of a large number of economic reform laws that were pending as prior actions for completing reviews and extending the PRGF arrangement.

The political outlook for the next year, however, remains fragile with the source of instability shifting to the national elections. Since the return of democracy in 1990, these elections have been contested mainly by the Sandinistas and the Liberals. President Bolaños cannot run for re-election. At the current moment, Sandinista leader Ortega has again declared his candidacy and the Liberal party is to hold a primary selection early next year. However, two alternatives have emerged from within the two main parties, responding to a high level of popular disenchantment with their political “pact.” Indeed, recent surveys indicate that these breakaway candidates have large leads in public opinion. However, it is unclear whether they will be able to build up a sufficiently strong party organization to effectively contest the elections. As such, the outlook for the elections remains very fluid at this stage.

uA01fig01

Voter Intentions, November 2005

(percentage)

Citation: IMF Staff Country Reports 2006, 174; 10.5089/9781451829280.002.A001

Source: EIU

6. In the context of completion of prior actions and strengthened macro-policies, the authorities are requesting the completion of pending reviews and the extension of the PRGF arrangement. In the attached letter to the Managing Director (Attachment I), dated December 27, 2005, the authorities request: (i) waivers for the nonobservance of the quantitative performance criterion (PC) on the overall balance after grants of the central government at end-December 2004 and the structural performance criterion of submitting to the National Assembly a fiscal responsibility law (FRL) by October 15, 2004; (ii) the eighth, ninth and tenth disbursements under the arrangement, in the proposed rephased amount of SDR 13.93 million; and (iii) the extension of the arrangement until December 12, 2006. The authorities’ memorandum of economic and financial policies (MEFP) and a revised technical memorandum of understanding (TMU) are also attached.

II. Recent Economic Developments

7. Macro developments in 2004 were generally favorable while performance under the program was broadly satisfactory. Real GDP growth accelerated to 5.1 percent in 2004 on the back of a strong recovery in exports, higher commodity prices, and booming remittances. Private sector credit expanded rapidly. Nicaragua reached the HIPC completion point in January 2004, leading to delivery of external debt relief to date of about US$4½ billion in NPV terms.1 The combined public sector (CPS) deficit in 2004 was 2.8 percent of GDP compared with the program target of 4 percent of GDP. Strong external receipts, coupled with higher official financing, boosted NIR at end-2004 to US$128 million over target. However, rising oil prices drove up end-2004 inflation to 9.3 percent. All but one quantitative PCs were met in 2004.2 The authorities missed the structural PC on submitting an FRL to the National Assembly by mid-October, as they were not able to form a domestic consensus on this important reform in a period of mounting political tensions.

8. Economic growth is projected to have moderated to 4 percent in 2005 (Figure 2). Reflecting the impact of higher oil prices and weakening global demand, activity has slowed across most sectors, though agriculture output has so far held up. Export growth has also dropped off, in part because of lower agro-exports, while public investment has moderated reflecting delays in official financing. However, private investment and consumption growth remain buoyant, on the back of strong growth in credit and remittances, while imports remain robust. Separately, formal sector employment continues to rise.

uA01fig02

Contribution to Real GDP Growth

(percent)

Citation: IMF Staff Country Reports 2006, 174; 10.5089/9781451829280.002.A001

Figure 2.
Figure 2.

Real and Financial Sector Indicators

Citation: IMF Staff Country Reports 2006, 174; 10.5089/9781451829280.002.A001

Source: Central Bank of Nicaragua.

9. Inflation has picked up, reflecting in part the oil shock, though core inflation has also increased. CPI inflation rose to 10.3 percent y/y in October, while both non-oil related inflation and core inflation (excluding food and energy related prices) increased steadily. The prices of oil related components of CPI inflation, including oil, electricity and transport have risen significantly, in line with international petroleum prices.

uA01fig03

CPI and Core Inflation, 2001-2005

y/y growth in percent

Citation: IMF Staff Country Reports 2006, 174; 10.5089/9781451829280.002.A001

10. The authorities have taken steps to strengthen the fiscal policy framework following passage of the weakened 2005 budget (Figure 3). The executive’s proposal for the 2005 budget targeted a 1.2 percentage point of GDP reduction in the CPS deficit relative to the expected 2004 outcome of 4.0 percent of GDP. However, the budget approved by the National Assembly implied instead an adjustment of only 0.6 percent of GDP, and included an increase in the total wage bill of some 21 percent. In response to this, the authorities have implemented revenue measures expected to yield about ½ percent of GDP on a full year basis to offset the impact of the higher wage bill. This has supported continued strong revenue growth this year, which also reflects some improvements in tax administration and a surge in taxes on imports (Box 2).

Figure 3.
Figure 3.

Fiscal Developments

Citation: IMF Staff Country Reports 2006, 174; 10.5089/9781451829280.002.A001

Source: Central Bank of Nicaragua.

11. The CPS deficit is now expected to fall by more than ½ percent of GDP in 2005. Buoyant revenues combined with higher-than-originally-budgeted foreign grants, have facilitated approval of a revised central government budget consistent with a projected CPS deficit of 2.2 percent of GDP in 2005 while also finding room to increase capital spending. In this context, the deficit of the state electricity company is expected to rise as it is funding the bulk of the power subsidy granted this year because of delays in tariff adjustments (see ¶12). On the other hand, the CPS balance has been supported by the improved quasi-fiscal performance of the central bank reflecting in part lower interest costs (as it has continued to pay down expensive domestic debt and benefited from HIPC relief). In previous years, capital outlays have typically been higher-than-expected in the last quarter. This year, the authorities have required that foreign-financed project spending be tightly controlled by the ministry of finance and therefore feel the scope for unexpected outlays has been considerably lessened.

12. Power sector losses increased sharply in 2005 as rates were not increased in line with rising fuel input costs (Box 3). Electricity tariffs paid by consumers were not adjusted during December 2003 through July 2005, creating losses at the electricity distributor, which are estimated to have reached over 0.6 percent of GDP in 2005. The regulator granted a tariff increase in July 2005, which was later stayed by the Supreme Court. Rolling blackouts during September drove political support for a solution, resulting in the regulator granting tariff increases adding up to about 20 percent through December 2005, with the scope to have further tariff revisions granted under the new Energy Stability Law (ESL). The government has financed the sector’s losses in 2005 through the central government budget (0.2 percent of the GDP) and indirectly through ENEL, the state-owned power company (0.4 percent of GDP), which condoned arrears accumulated by the distributor.

Trends in Tax Revenue

Tax revenues have grown strongly in recent years, especially taxes on income and imports. Tax revenues as a share of GDP have increased by more than 3½ percentage points from 2001, reaching 16.9 percent of GDP by 2004. This reflects, in part, the impact of tax policy measures taken by the authorities during 2002–04 that are estimated to have yielded about one percent of GDP. Additional tax measures in 2005 are expected to yield about ½ percent of GDP on annual basis. Furthermore, the tax base has grown strongly, with imports rising at an average yearly rate of 14½ percent in dollar terms during 2004–2005. Moreover, the internal tax administration (DGI) has been undertaking, starting in 2003, a modernization plan to strengthen its information and control systems, and reorganizing the large taxpayer unit (LTU). As a result, the percentage of stop-filers at the national level LTU has declined to under 1 percent from over 20 percent in 2003, while the ratio of taxpayers in arrears for the same group declined to 1.3 percent.

uA01fig04

Contribution to Real Growth of Tax Revenues: 2002-05, Sept.

(in percent)

Citation: IMF Staff Country Reports 2006, 174; 10.5089/9781451829280.002.A001

However, it is unclear how long this rapid pace of revenue growth can be sustained. Growth in collections from the large taxpayers unit has slowed, in part as early gains from administrative improvements are being exhausted. Moreover, 90 percent of collections come from the top 1.3 percent of taxpayers, leaving overall performance vulnerable to factors affecting these few taxpayers. The high concentration of tax revenues in a few taxpayers also indicates that many taxpayers remain outside the tax net and/or could be under-reporting their tax obligations. Furthermore, the most dynamic taxes are now on imports, but import growth is expected to slow to about 5–8 percent in the coming years. Additionally, the looming elections pose an additional, if hard to quantify, risk. During the last general election cycle in 2002, tax collections fell sharply (by over 1 percent of GDP), partly due to a slowdown in economic activity, but also reflecting the difficulty of tax enforcement in a politically charged environment.

uA01fig05

Real Tax Revenue: 2002-05, Sept.

(12-month percent change)

Citation: IMF Staff Country Reports 2006, 174; 10.5089/9781451829280.002.A001

Electricity Sector in Nicaragua

Over December 2003–June 2005, electricity tariffs were not increased in line with rising oil input prices. Final tariffs are regulated and had been reviewed (though not necessarily revised) once a year. However, prices charged by generators to the distribution company are market determined. Political infighting had created a leadership vacuum at the electricity regulator and tariffs had last been revised in 2003. As a result, distribution margins turned negative in late 2004 with rising oil prices (most electricity generation uses oil as its main input—hydro accounts for 20 percent of total production).

uA01fig06

Electricity Costs and Current Tariffs

Citation: IMF Staff Country Reports 2006, 174; 10.5089/9781451829280.002.A001

Source: Nicaraguan Authorities

As a result, losses in the sector increased sharply, requiring a policy response. A one-time subsidy (0.6 percent of GDP) was granted in 2005 to the main private distributor to cover accumulated losses. The authorities also began implementing a plan combining rate increases and targeted subsidies. Tariffs increased by about 20 percent between July and December 2005. However, additional tariff increases, estimated by the authorities at about 6½ percent, are required to eliminate quasi-fiscal losses in the sector. The authorities plan to carry out this adjustment in increments by June 2006. In order to limit the impact on the poor, there has been no increase in prices for consumers using less than 150 KWH per month, about 75 percent of all consumers. This subsidy will be financed by the projected additional value added tax revenues collected from charging some consumers higher tariffs. To stem future losses in the sector, an Energy Stability Law approved in September 2005 authorizes the regulator to make monthly tariff adjustments, on the basis of fluctuations in generation costs.

The energy sector will require significant new investment in the medium term. Power supply is not reliable, while distribution losses and production costs are among the highest in Central America. Nicaragua needs significant investment in reliable and low-cost generation capacity.

uA01fig07

Cost of Electricity, December 2003

(US$ cent/kWh)

Citation: IMF Staff Country Reports 2006, 174; 10.5089/9781451829280.002.A001

Source: Latin American Energy Organization
uA01fig08

Electricity Transmission and Distribution Losses, 2002

(in percent of output)

Citation: IMF Staff Country Reports 2006, 174; 10.5089/9781451829280.002.A001

Source: World Development Indicators, World Bank

Reform of the regulatory framework is a sine qua non for attracting new investment and putting the sector on a sound financial footing. As a first step, reforms of the ESL to eliminate distortionary interventions will be needed. It will also be important to develop an independent regulator and introduce a transparent, rules-based pricing framework that allows investors a reasonable rate of return. The IDB and the World Bank are considering supporting further reforms in this area.

13. Banking sector soundness indicators have improved, though credit has expanded rapidly and risks remain from high levels of dollarization. Following recovery from the financial crisis of 2000–01, the sector has become highly profitable with pre-tax returns to average equity of about 35 percent in 2005. The non-performing loan ratio was 4.3 percent of all loans in 2005 with reported capital adequacy ratios at just over 14 percent. Bank deposits have grown strongly in recent years, supported by family remittances, though the pace has moderated in recent months, likely reflecting the slower economic activity and falling interest differentials. However, real credit has been growing rapidly at just under 20 percent in the last year. Moreover, the banking system is highly dollarized, and while the open foreign currency position does not appear large, underlying credit risk could be transformed as well into currency risk (Box 4).

14. The sharp increase in the oil bill in recent years has been only partially offset by strong remittances and exports (Figure 4). The external current account balance had been continuously strengthening since 1999, supported by gains in competitiveness, buoyant remittance flows (which at 11 percent of GDP were higher than net official financing in 2004), and the post-completion point reduction in interest payments. However, exports and remittances have slowed since early 2005, reflecting weaker U.S. growth, while rising world oil prices put pressure on total imports. Indeed, the oil bill is projected to increase to almost 12½ percent of GDP in 2005, up from 6½ percent of GDP in 2002 (Box 5 discusses the broader impact of elevated oil prices). As a result, the current account deficit is estimated to have reached about 17 percent of GDP in 2005. Combined with delays in donor disbursements (arising from political uncertainties and the stalled reform agenda), the increase in net international reserves was projected to be held to US$15 million in 2005.

Figure 4.
Figure 4.

External Developments

Citation: IMF Staff Country Reports 2006, 174; 10.5089/9781451829280.002.A001

Source: Central Bank of Nicaragua and Information Notice System.

15. Progress has been made on implementation of the PRSP. Since the adoption of Nicaragua’s first PRSP in 2001, poverty reducing spending has increased from about 10 percent of GDP in 2002 to 13½ percent of GDP projected for 2005. The positive effects of the PRSP implementation are reflected in improved indicators in the education and water sectors, where PRSP-I targets on primary school enrollment and water coverage were exceeded in 2003 and 2004. However, implementation of the PRSP-I has been more mixed in the health sector where targets have not been achieved, and the coverage of vaccination programs has been weak.

Financial System Vulnerability

Nicaragua has one of the highest levels of dollarization in Latin America. The financial system is relatively small with foreign currency denominated deposits accounting for over 80 percent of total deposits. The elevated level of dollarization reflects continued low levels of policy credibility as well as some hysteresis in the aftermath of past high inflation episodes.

uA01fig09

Dollarization in Latin America, 2004

Citation: IMF Staff Country Reports 2006, 174; 10.5089/9781451829280.002.A001

Source: Central banks; and IMF staff estimates.

The financial system is also exposed to the risk of currency mismatches. Banks generally maintain a balanced foreign currency book, with small net-open positions in some months. However, a significant part of bank assets are held domestically in the form of dollar denominated loans to the private sector and it is unclear how much of this exposure is naturally hedged. Consumer and commercial loans comprise the largest share (28.5 and 26.8 percent respectively). Indeed, credit growth has been particularly brisk to the construction and real estate sectors. Further, banks’ direct exposure to dollar-linked bonds issued by the public sector (including the central bank) is also sizeable. Credit events linked to large exchange rate movements could transform this exposure into a sizeable currency risk. Against this, banks are required to maintain 16¼ percent of their total foreign currency assets as reserves with the central bank. Available data suggest that banks maintain additional foreign currency assets offshore with BIS reporting banks.

uA01fig10

Banking system balance sheet, 2004

(billions of US$)

Citation: IMF Staff Country Reports 2006, 174; 10.5089/9781451829280.002.A001

Source: Banking Superintendency1/ Includes BPIs and bank bailout bonds

Impact of Higher Oil Prices on the Nicaraguan Economy

Nicaragua is a relatively energy intensive economy, including in comparison to other countries in the region. The increase in international oil prices has therefore led to a reduction in the rate of growth of output and to a near doubling in the oil bill since 2002.

uA01fig11

Energy Use per PPP GDP and Oil Imports

Citation: IMF Staff Country Reports 2006, 174; 10.5089/9781451829280.002.A001

Source: World Development Indicators
uA01fig12

Energy sources for electricity production

Citation: IMF Staff Country Reports 2006, 174; 10.5089/9781451829280.002.A001

Source: World Development Indicators1/ Other source include coal, natural gas and nuclear energy

One of the factors driving the large impact of the oil shock, relative to other countries in the region, is the important role of oil-based generation in the total production of electricity. Oil fuelled plants account for about 80 percent of total electricity produced in Nicaragua.

Pass-through of higher oil prices to domestic gasoline prices has been complete. Domestic gasoline prices are not regulated, and have moved broadly in line with US retail prices. This has contributed to the pick-up in headline inflation, although non-oil inflation has also increased, indicative of second round effects and possible demand pressures. However, the increase in oil prices has not yet been completely passed through to final electricity prices, which are regulated (see Box 3 on the power sector).

uA01fig13

Oil Importers in Central America and the Caribbean: Change in domestic fuel prices relative to equivalent change in U.S. prices, 2002-2005

Citation: IMF Staff Country Reports 2006, 174; 10.5089/9781451829280.002.A001

Source: Pass-through for oil products in member countries, PDR and RES departments
Table 1.

Impact of Rise in Oil Prices on Central American Countries

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Source: Dealing with Higher Oil Prices in Latin America and the Caribbean, WHD.

Higher oil prices have had a relatively large impact on growth and inflation in Nicaragua compared to many other countries in Central America. This reflects the country’s relatively high energy intensity of output and large oil import bill in 2005. Estimates of the impact of higher oil prices on Central American countries prepared by WHD staff are shown in the adjoining table. The analysis assesses the impact of higher baseline oil prices in 2005–06 (in the October 2005 WEO relative to the May WEO exercise) on growth and inflation in the region.

III. Outlook and Vulnerabilities

16. The near term outlook contains important risks. Growth in 2006 is expected to moderate, reflecting the impact of higher oil prices and some slowdown in external demand. Inflation remained elevated in 2005 and, while the path of oil prices remains a key uncertainty, there is likely to be a need to tighten liquidity conditions to bring inflation down further in 2006. Moreover, further electricity tariff increases in the pipeline will continue to pressure headline inflation. Core inflation will likely continue rising in early 2006 before the second-round effects of the oil shock start to wane. The fiscal outlook for 2006 will hinge on expenditure restraint. Political uncertainty in the run-up to the November 2006 presidential and legislative elections, and increases in election-related expenditures remain key risks.

17. Important vulnerabilities arise from weak balance sheets and institutions, and the political situation. The large trade deficit and elevated level of debt imply a heavy reliance on transfers, both private and official. Furthermore, the financial sector is highly dollarized and holds high levels of public debt. Moreover, experience has shown that confidence may be adversely affected in the run-up to elections. Further, the weakened regulatory framework for utilities and telecoms could hinder needed investment and raise fiscal risks.

uA01fig14

Total Deposits in Domestic and Foreign Currency, 1998-2005, Sept.

(billions of US dollars)

Citation: IMF Staff Country Reports 2006, 174; 10.5089/9781451829280.002.A001

18. Medium-term prospects hinge on measures to boost investment and productivity while reducing large existing imbalances. Reducing imbalances on a sustained basis will require continued fiscal consolidation and structural reforms aimed at boosting economic growth. Political uncertainty and an unstable regulatory environment are proving obstacles to investment, growth, and poverty reduction. Strengthening the investment climate and competitiveness will be crucial for boosting growth, as will taking full advantage of the opportunities offered by CAFTA–DR.3 Nicaragua’s external competitiveness has improved in recent years (Box 6), but the need to ensure further improvements as a result of productivity growth highlights the importance of wage restraint going forward, especially in the public sector.

Competitiveness and Business Environment

Nicaragua’s external competitiveness has improved in recent years, but gains remain fragile. The real exchange rate (REER) has depreciated since 2001, while the tradable sector has grown quickly (reflecting both manufacturing and commodity exports), driving a reduction in the current account deficit. Nevertheless, debt-creating external financing was still equivalent to about 8 percent of GDP in 2004. Moreover, the REER has been flat in recent months, and the non-oil trade balance is expected to deteriorate slightly in 2005.

Nicaragua’s appears to be in a strong competitive position with regards to other CAFTA-DR countries. Nicaragua has enjoyed the strongest rate of growth of the maquila sector in the region, indicating the investors’ relative preference for that country. Similarly, Nicaragua has been the only country in the region to broadly maintain market share in the US in competition with Chinese exports, including in textile products.

uA01fig16

U.S. imports by origin, 2003-05

(growth rates in percent)

Citation: IMF Staff Country Reports 2006, 174; 10.5089/9781451829280.002.A001

Much remains to be done to improve Nicaragua’s business environment. Governance, infrastructure, and access to credit are key concerns in this respect. The recent World Bank Investment Climate Survey looks at indicators such as security, regulation, taxation, finance, infrastructure, and labor markets. Using emerging markets as a benchmark, Nicaragua lags behind in all areas, except labor and taxation. More than half of Nicaraguan entrepreneurs perceive corruption and regulatory uncertainty as the major impediments to investment. Financing difficulties, the costs of starting up business, and weaknesses in infrastructure, particularly inadequate power services, are also ranked among the highest impediments to growth. Moreover, the World Economic Forum survey, ranks Nicaragua’s competitiveness among the worst of the region.

uA01fig17
Considered major constraint (percent of replies)Source: World Bank, Investment Climate Surveys

Survey-based Indicators of Competitiveness

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Number in italics indicates the rank among DR-CAFTA countries.

19. The authorities have prepared a revised poverty reduction strategy that re-asserts their focus on achievement of the millennium development goals (MDGs). The revised PRSP-II builds on the PRSP-I, with key objectives including poverty reduction and achievement of the MDG’s through economic growth, employment generation, increased investment and export promotion. Additional strategic areas emphasized in the PRSP-II include, human capital development and social protection, infrastructure development, good governance and state reforms. Implementation of the strategy laid out in the PRSP-II will remain a key challenge and it will be important to identify clearly the risks to the strategy to help mobilize domestic support for the agenda. Moreover, it will be important to discuss in the PRSP-II progress report how resources from MDRI debt relief would be used. At this point, achievement of the MDGs remains some way off (Table 15). In this context, a key concern is the need for further reforms of the fiscal framework to preserve the space for increasing investment to achieve the MDGs.

Table 1.

Nicaragua: Selected Economic Indicators

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Sources: Central Bank of Nicaragua; Ministry of Finance; and Fund staff estimates/projections.

As stated in Country Report No. 04/347

After HIPC relief, assuming that negotiations with non-Paris Club and commercial creditors are completed by end-2005. Includes accrued interests on private debt in arrears.

Table 2.

Nicaragua: Operations of the Central Government

(in percent of GDP)

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Sources: Ministry of Finance of Nicaragua; Central Bank of Nicaragua; and Fund staff estimates/projections.

As stated in Country Report No. 04/347

Total employee compensation is not entirely reflected in wages and salaries. Some employees obtain part of their salary through current transfers. In 2006, this figure includes salaries for temporary workers related to general elections of 0.2 percent of GDP.

Measured on an accrual basis for 2002 and 2003.

Wages and salaries plus social security contributions and other benefits in personal services; plus current. transfers to autonomous educational institutions.

Projected numbers from SECEP.

Change in methodology starting in 2004

Table 3.

Nicaragua: Operations of the Combined Public Sector

(in percent of GDP, unless otherwise indicated)

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Sources: Ministry of Finance of Nicaragua; Central Bank of Nicaragua; and Fund staff estimates/projections.

As stated in Country Report No. 04/347

Includes central government (CG), the municipality of Managua (ALMA) and the social security institute (INSS).

For 2002 and 2003, includes domestic interest payments on accrual basis.

For 2004-2006, consolidated public sector includes additional public enterprises: ENEL, TELCOR, and ENAP.

Projected numbers from SECEP.

Change in methodology starting in 2004

Includes forgiveness of arrears from ENEL to UF of U$18.6 mill. plus U$17.6 mill. (U$12 mill. of government subsidy and U$5.6 mill. of ENEL profits transferred to UF) to cover losses in electricity sector.

Table 4:

Operations of the Central Government

(in millions of Cordobas)

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Sources: Central bank of Nicaragua; and Fund staff estimates.

Total employee compensation is not entirely reflected in wages and salaries. Some employees obtain part of their salary through current transfers. In 2006, this figure includes salaries for temporary workers related to general elections of 0.2 percent of GDP.

Table 5:

Operations of the Combined Public Sector

(in millions of Cordobas)

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Source: Central Bank of Nicaragua and Fund staff estimates.

Includes central government (CG), the municipality of Managua (ALMA) and the social security institute (INSS).

Table 6.

Nicaragua: Summary Accounts of the Central Bank

(Flows in millions of cordobas; unless otherwise stated)

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Sources: Central Bank of Nicaragua; and Fund staff estimates/projections.

As stated in Country Report No. 04/347

Net international reserves less reserve requirements in foreign currency.

Letras, Bonos en Moneda Extranjera (BOMEX), and Titulos Especiales de Liquidez (TEL’s).

Table 7.

Nicaragua: Summary Accounts of the Central Bank-Quarterly

(Flows in millions of cordobas; unless otherwise stated)

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Sources: Central Bank of Nicaragua; and Fund staff estimates/projections.

Net international reserves less reserve requirements in foreign currency.

Letras, Bonos en Moneda Extranjera (BOMEX), and Titulos Especiales de Liquidez (TEL’s).

Table 8.

Nicaragua: Summary Accounts of the Deposit Banks and Financial Sector

(Flows in millions of cordobas; unless otherwise stated)

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Sources: Central Bank of Nicaragua; and Fund staff estimates/projections.

As stated in Country Report No. 04/347

Includes Financiera Nicaraguense.