Abstract
Selected Issues
Technical Note: Macroeconomic Scenarios1
A. Adverse and Adjustment Scenarios
Risks stemming from Venezuela and the NICA Act could have a significant impact on fiscal and external balances if they materialize. We use a simple model of the Nicaraguan economy to quantify the potential impact and ascertain how much fiscal adjustment might be needed.
Model and assumptions
1. The effects of the shocks are modeled using a reduced form model of the Nicaraguan economy developed by staff. The parameters of the model are drawn from various cross-country papers and staff’s own estimates of the Nicaraguan economy. The model can be tailored to analyze the impact of different types of shocks on key macroeconomic variables such as the current account (CA), international reserves, GDP growth, and the fiscal balance. It can also be used to analyze the impact of policy variables. Nicaragua does not have an independent monetary policy, given the crawling peg exchange rate regime, so fiscal policy is the only adjustment channel.
2. The shock scenario assumes a disappearance of Venezuela’s oil cooperation within two years. We assume that the loss of oil-related concessional financing result in social programs of about 0.6 percent of (baseline) GDP being absorbed by the budget. Furthermore, FDI from Venezuela declines in 2017 and is zero from 2018 onwards.
3. The scenario also encompasses a negative impact on investment and availability of concessional financing from the NICA Act. In the model, the NICA Act is assumed to be passed by the U.S. Congress in the latter part of 2017, and cause a confidence shock in 2018. The NICA Act would require the U.S. Executive Director at international financial institutions, such as the IMF, World Bank and the Inter-American Development Bank (IaDB), to oppose loans to Nicaragua unless they are for humanitarian purposes or the promotion of democracy.2 It would also require the preparation of a report on corruption by the Department of State, which would identify senior Nicaraguan government officials involved in acts of public corruption. The potential impact of a measure such as the NICA Act on investor confidence is inherently difficult to forecast; however, given Nicaragua’s strong trade and investment links with the U.S., we believe a significant impact on investment is possible, although not necessarily likely.3 We therefore assume that, in an adverse scenario, the NICA Act could result in a confidence shock which reduces investment by 25 percent relative to the baseline, applied equally to foreign and domestic investment.4 The shock only applies to 2018; after 2018, investment returns to its previous growth path, but from a lower base.5
4. We also assume that the NICA Act will affect the availability of concessional financing from the IaDB and the World Bank. The IaDB is Nicaragua’s largest creditor, and is expected to account for about half of all external disbursements over the 2017–2022 period. The adverse scenario assumes that no further Policy-Based Loans (PBLs) from the IaDB are disbursed and that, from 2019 onwards, financing from the IaDB and the World Bank is halved, given that project loans for 2018 are mostly already committed. Additional financing needs are met through a combination of external multilateral (but less concessional) sources and domestic sources.6 Effective rates on external borrowing rise from around 2 percent in 2016 to about 5 percent in 2022. There is some crowding out in the model because of increased borrowing from the domestic financial sector, with an impact on domestic interest rates.
Results
5. The shock impacts growth, the fiscal position, and external balances. Output growth contracts to 2.9 percent in 2018, compared to 4.3 percent in the baseline. In addition, output growth in the 2020–2022 period is negatively affected by crowding out and the rapid increase in public debt. Thus, revenues are 1.5 percentage points of (baseline) GDP lower by 2022. At the same time, primary expenditure increases by 0.6 percent of GDP due to the absorption of social programs previously financed by Venezuela. Interest expenditure increases due to the higher financing needs and the recourse to less concessional debt. The overall CPS deficit widens to 3.8 percent of GDP in 2018 and continues to increase in the absence of any policy changes, driven primarily by higher interest payments and lower revenues. The resulting increase in debt weighs on growth, impeding a full recovery. On the external side, the CA deficit narrows marginally, as demand for imports contracts, while exports also contract due to lower investment. The reduction in capital inflows through lower FDI puts pressure on reserves, which fall to 1.4 months of non-maquila imports by 2022.
Adjustment Scenario
6. Policy measures could be taken to forestall the potential macroeconomic impact described in the adverse scenario. In the adjustment scenario, we assume a reduction in discretionary spending equal to 0.6 percent of GDP, which in staff’s view could come from eliminating most electricity and bus subsidies. Moreover, although social programs financed by the Venezuela cooperation are absorbed by the budget, only 0.4 percent of GDP is incorporated, and programs are gradually phased out over the 2019–2022 period.
7. The adjustment would also encompass some revenue-raising measures as well as a pension reform. An additional one percent of GDP of tax revenue could be raised, by reducing some tax expenditures, continuing with improvements to tax administration, and by implementing the legislation on international taxation. We assume that the increase is permanent and would take place over two years (0.5 percent in 2018 and an additional 0.5 percent in 2019). Finally, there is a resolution to the financial problems of INSS, principally through parametric reforms rather than transfers from the budget.
8. Output growth contracts initially but then rebounds. Output growth contracts to 2.3 percent of GDP, a more severe deterioration than in the adverse scenario in 2018 because of the contractionary fiscal impulse, including from the reduction in the INSS deficit. However, in 2019, investment rebounds to about 90 percent of levels in the baseline as investors are encouraged by the government’s policy measures.7 This causes a recovery in output growth to 4.6 percent in 2019.
9. The fiscal balance and reserve position remain within reasonable limits. The fiscal balance deteriorates slightly relative to the baseline initially but remains below 2.2 percent of GDP over the medium term, while the CA deficit registers a slight improvement. GIR falls in 2018 to about 3.3 months of non-maquila imports and remains close to these levels over the medium term.
10. The size of adjustment considered represents the minimum needed to weather a shock scenario. The analysis indicates that a cumulative consolidation of 1.6 percent of GDP plus a phasing out of the Venezuela cooperation programs in the budget plus the achievement of a rapid and sustainable solution to the INSS problem seem to be the minimum needed for ensuring fiscal and external sustainability under a shock scenario.8 In our view, the size of the adjustment is manageable in the current environment, and, even if the shock scenario is not realized, it would create much needed fiscal space to stave off potential external shocks and the impact of climate change and natural disasters.
Baseline, Adverse and Adjustment Scenarios
Citation: IMF Staff Country Reports 2017, 174; 10.5089/9781484305645.002.A004
Source: Authorities’ data; and Fund staff estimates.Baseline, Adverse and Adjustment Scenarios
Citation: IMF Staff Country Reports 2017, 174; 10.5089/9781484305645.002.A004
Source: Authorities’ data; and Fund staff estimates.Baseline, Adverse and Adjustment Scenarios
Citation: IMF Staff Country Reports 2017, 174; 10.5089/9781484305645.002.A004
Source: Authorities’ data; and Fund staff estimates.Scenarios
(Percent of GDP, unless otherwise indicated)
Scenarios
(Percent of GDP, unless otherwise indicated)
| Projections | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | ||
| Baseline | ||||||||||
| Real GDP (percent change) | 4.8 | 4.9 | 4.7 | 4.5 | 4.3 | 4.5 | 4.5 | 4.5 | 4.5 | |
| (per capita) | 26,996 | 27,989 | 28,166 | 29,091 | 29,990 | 30,975 | 31,990 | 33,040 | 34,125 | |
| CPI inflation (eop; percent change) | 6.5 | 3.1 | 3.1 | 5.8 | 7.4 | 7.1 | 7.3 | 7.2 | 7.3 | |
| NFPS primary balance | −1.0 | −1.0 | −1.2 | −1.0 | −1.1 | −1.0 | −1.0 | −1.6 | −1.5 | |
| NFPS overall balance | −1.8 | −1.9 | −2.2 | −2.1 | −2.0 | −1.8 | −1.8 | −2.3 | −2.4 | |
| CPS primary balance | −1.1 | −1.1 | −1.2 | −1.1 | −1.2 | −1.0 | −0.9 | −1.6 | −1.5 | |
| CPS overall balance | −2.0 | −2.2 | −2.4 | −2.3 | −2.2 | −1.9 | −1.7 | −2.4 | −2.5 | |
| CPS debt | 40.2 | 40.7 | 41.9 | 41.5 | 40.0 | 39.1 | 38.2 | 38.5 | 38.5 | |
| Current account balance | −7.1 | −9.0 | −8.6 | −8.5 | −8.5 | −8.6 | −8.5 | −8.4 | −8.6 | |
| GIR (months of non-maquila imports) | 4.2 | 4.6 | 3.9 | 3.9 | 3.8 | 3.8 | 3.8 | 3.6 | 3.4 | |
| (in U.S. dollars) | 2,147 | 2,353 | 2,296 | 2,365 | 2,449 | 2,551 | 2,658 | 2,730 | 2,751 | |
| Scenario 1 (Adverse) | ||||||||||
| Real GDP (percent change) | 4.8 | 4.9 | 4.7 | 4.1 | 2.9 | 3.8 | 4.3 | 3.8 | 3.7 | |
| (per capita) | 26,996 | 27,989 | 28,166 | 28,971 | 29,471 | 30,243 | 31,179 | 31,971 | 32,784 | |
| CPI inflation (eop; percent change) | 6.5 | 3.1 | 3.1 | 5.6 | 6.7 | 6.8 | 7.2 | 7.1 | 7.1 | |
| NFPS primary balance | −1.0 | −1.0 | −1.2 | −1.1 | −2.2 | −2.3 | −2.4 | −3.2 | −3.3 | |
| NFPS overall balance | −1.8 | −1.9 | −2.2 | −2.3 | −3.5 | −4.0 | −4.5 | −5.4 | −6.1 | |
| CPS primary balance | −1.1 | −1.1 | −1.2 | −1.2 | −2.3 | −2.3 | −2.3 | −3.2 | −3.4 | |
| CPS overall balance | −2.0 | −2.2 | −2.4 | −2.5 | −3.8 | −4.1 | −4.5 | −5.5 | −6.2 | |
| CPS debt | 40.2 | 40.7 | 41.9 | 42.0 | 42.9 | 44.5 | 46.1 | 49.3 | 52.5 | |
| Current account balance | −7.1 | −9.0 | −8.6 | −8.4 | −8.2 | −8.2 | −8.3 | −8.3 | −8.8 | |
| GIR (months of non-maquila imports) | 4.2 | 4.6 | 4.0 | 3.8 | 3.4 | 2.9 | 2.4 | 1.9 | 1.4 | |
| (in U.S. dollars) | 2,147 | 2,353 | 2,296 | 2,279 | 2,146 | 1,928 | 1,671 | 1,374 | 984 | |
| Policy variables | ||||||||||
| Primary fiscal effort (deviation from baseline, percent of GDP) | 0.0 | 0.0 | 0.0 | −0.6 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Private capital flows (dev. from baseline, percent of GDP) | 0.0 | 0.0 | −0.7 | −2.1 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Scenario 2 (Adjustment) | ||||||||||
| Real GDP (percent change) | 4.8 | 4.9 | 4.7 | 4.1 | 2.3 | 4.6 | 4.9 | 4.3 | 4.3 | |
| (per capita) | 26,996 | 27,989 | 28,166 | 28,990 | 29,322 | 30,317 | 31,441 | 32,411 | 33,401 | |
| CPI inflation (eop; percent change) | 6.5 | 3.1 | 3.1 | 5.7 | 6.4 | 7.2 | 7.5 | 7.1 | 7.2 | |
| NFPS primary balance | −1.0 | −1.0 | −1.2 | −1.1 | −1.1 | −0.1 | 0.1 | −0.3 | 0.0 | |
| NFPS overall balance | −1.8 | −1.9 | −2.2 | −2.2 | −2.3 | −1.7 | −1.7 | −2.1 | −2.1 | |
| CPS primary balance | −1.1 | −1.1 | −1.2 | −1.2 | −1.1 | −0.1 | 0.2 | −0.3 | 0.0 | |
| CPS overall balance | −2.0 | −2.2 | −2.4 | −2.4 | −2.6 | −1.8 | −1.7 | −2.2 | −2.2 | |
| CPS debt | 40.2 | 40.7 | 41.9 | 41.8 | 41.6 | 40.5 | 39.0 | 38.9 | 38.5 | |
| Current account balance | −7.1 | −9.0 | −8.6 | −8.4 | −8.4 | −8.3 | −8.4 | −8.2 | −8.5 | |
| GIR (months of non-maquila imports) | 4.2 | 4.6 | 4.0 | 3.8 | 3.3 | 3.2 | 3.1 | 2.8 | 2.9 | |
| (in U.S. dollars) | 2,147 | 2,353 | 2,296 | 2,291 | 2,086 | 2,116 | 2,127 | 2,102 | 2,030 | |
| Policy variables | ||||||||||
| Primary fiscal effort (deviation from baseline, percent of GDP) | 0.0 | 0.7 | 0.8 | 0.1 | 0.3 | 0.3 | ||||
| Private capital flows (dev. from baseline, percent of GDP) | −0.7 | −2.1 | 2.9 | 0.0 | 0.0 | 0.0 | ||||
Scenarios
(Percent of GDP, unless otherwise indicated)
| Projections | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | ||
| Baseline | ||||||||||
| Real GDP (percent change) | 4.8 | 4.9 | 4.7 | 4.5 | 4.3 | 4.5 | 4.5 | 4.5 | 4.5 | |
| (per capita) | 26,996 | 27,989 | 28,166 | 29,091 | 29,990 | 30,975 | 31,990 | 33,040 | 34,125 | |
| CPI inflation (eop; percent change) | 6.5 | 3.1 | 3.1 | 5.8 | 7.4 | 7.1 | 7.3 | 7.2 | 7.3 | |
| NFPS primary balance | −1.0 | −1.0 | −1.2 | −1.0 | −1.1 | −1.0 | −1.0 | −1.6 | −1.5 | |
| NFPS overall balance | −1.8 | −1.9 | −2.2 | −2.1 | −2.0 | −1.8 | −1.8 | −2.3 | −2.4 | |
| CPS primary balance | −1.1 | −1.1 | −1.2 | −1.1 | −1.2 | −1.0 | −0.9 | −1.6 | −1.5 | |
| CPS overall balance | −2.0 | −2.2 | −2.4 | −2.3 | −2.2 | −1.9 | −1.7 | −2.4 | −2.5 | |
| CPS debt | 40.2 | 40.7 | 41.9 | 41.5 | 40.0 | 39.1 | 38.2 | 38.5 | 38.5 | |
| Current account balance | −7.1 | −9.0 | −8.6 | −8.5 | −8.5 | −8.6 | −8.5 | −8.4 | −8.6 | |
| GIR (months of non-maquila imports) | 4.2 | 4.6 | 3.9 | 3.9 | 3.8 | 3.8 | 3.8 | 3.6 | 3.4 | |
| (in U.S. dollars) | 2,147 | 2,353 | 2,296 | 2,365 | 2,449 | 2,551 | 2,658 | 2,730 | 2,751 | |
| Scenario 1 (Adverse) | ||||||||||
| Real GDP (percent change) | 4.8 | 4.9 | 4.7 | 4.1 | 2.9 | 3.8 | 4.3 | 3.8 | 3.7 | |
| (per capita) | 26,996 | 27,989 | 28,166 | 28,971 | 29,471 | 30,243 | 31,179 | 31,971 | 32,784 | |
| CPI inflation (eop; percent change) | 6.5 | 3.1 | 3.1 | 5.6 | 6.7 | 6.8 | 7.2 | 7.1 | 7.1 | |
| NFPS primary balance | −1.0 | −1.0 | −1.2 | −1.1 | −2.2 | −2.3 | −2.4 | −3.2 | −3.3 | |
| NFPS overall balance | −1.8 | −1.9 | −2.2 | −2.3 | −3.5 | −4.0 | −4.5 | −5.4 | −6.1 | |
| CPS primary balance | −1.1 | −1.1 | −1.2 | −1.2 | −2.3 | −2.3 | −2.3 | −3.2 | −3.4 | |
| CPS overall balance | −2.0 | −2.2 | −2.4 | −2.5 | −3.8 | −4.1 | −4.5 | −5.5 | −6.2 | |
| CPS debt | 40.2 | 40.7 | 41.9 | 42.0 | 42.9 | 44.5 | 46.1 | 49.3 | 52.5 | |
| Current account balance | −7.1 | −9.0 | −8.6 | −8.4 | −8.2 | −8.2 | −8.3 | −8.3 | −8.8 | |
| GIR (months of non-maquila imports) | 4.2 | 4.6 | 4.0 | 3.8 | 3.4 | 2.9 | 2.4 | 1.9 | 1.4 | |
| (in U.S. dollars) | 2,147 | 2,353 | 2,296 | 2,279 | 2,146 | 1,928 | 1,671 | 1,374 | 984 | |
| Policy variables | ||||||||||
| Primary fiscal effort (deviation from baseline, percent of GDP) | 0.0 | 0.0 | 0.0 | −0.6 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Private capital flows (dev. from baseline, percent of GDP) | 0.0 | 0.0 | −0.7 | −2.1 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Scenario 2 (Adjustment) | ||||||||||
| Real GDP (percent change) | 4.8 | 4.9 | 4.7 | 4.1 | 2.3 | 4.6 | 4.9 | 4.3 | 4.3 | |
| (per capita) | 26,996 | 27,989 | 28,166 | 28,990 | 29,322 | 30,317 | 31,441 | 32,411 | 33,401 | |
| CPI inflation (eop; percent change) | 6.5 | 3.1 | 3.1 | 5.7 | 6.4 | 7.2 | 7.5 | 7.1 | 7.2 | |
| NFPS primary balance | −1.0 | −1.0 | −1.2 | −1.1 | −1.1 | −0.1 | 0.1 | −0.3 | 0.0 | |
| NFPS overall balance | −1.8 | −1.9 | −2.2 | −2.2 | −2.3 | −1.7 | −1.7 | −2.1 | −2.1 | |
| CPS primary balance | −1.1 | −1.1 | −1.2 | −1.2 | −1.1 | −0.1 | 0.2 | −0.3 | 0.0 | |
| CPS overall balance | −2.0 | −2.2 | −2.4 | −2.4 | −2.6 | −1.8 | −1.7 | −2.2 | −2.2 | |
| CPS debt | 40.2 | 40.7 | 41.9 | 41.8 | 41.6 | 40.5 | 39.0 | 38.9 | 38.5 | |
| Current account balance | −7.1 | −9.0 | −8.6 | −8.4 | −8.4 | −8.3 | −8.4 | −8.2 | −8.5 | |
| GIR (months of non-maquila imports) | 4.2 | 4.6 | 4.0 | 3.8 | 3.3 | 3.2 | 3.1 | 2.8 | 2.9 | |
| (in U.S. dollars) | 2,147 | 2,353 | 2,296 | 2,291 | 2,086 | 2,116 | 2,127 | 2,102 | 2,030 | |
| Policy variables | ||||||||||
| Primary fiscal effort (deviation from baseline, percent of GDP) | 0.0 | 0.7 | 0.8 | 0.1 | 0.3 | 0.3 | ||||
| Private capital flows (dev. from baseline, percent of GDP) | −0.7 | −2.1 | 2.9 | 0.0 | 0.0 | 0.0 | ||||
B. Macroeconomic Impact of U.S. Policy Changes
Spillovers from potential changes in U.S. policies could be particularly important in case of revisions to trade agreements and immigration enforcement, due to the extensive trade ties and substantial remittances from Nicaraguan residents in the United States.
Methodology
11. Estimates are based in the results obtained from the IMF’s FSGM and the reduced form model of the Nicaraguan economy described in Section A. The magnitudes of the spillovers stemming from potential changes to the U.S. policies were estimated through a simulation based on the WHDMOD module of the IMF’s Flexible System of Global Models (FSGM)9 considering two scenarios: (1) effective immediately, NAFTA and CAFTA-DR members’ tariffs increase to the most-preferred nation (MFN) tariff of the World Trade Organization;10 and (2) an increase in deportation rate and ensuing reduction of workers’ remittances by about 1 percent of GDP within the next five years.11 Results from each scenario were fed into the reduced form model of the Nicaraguan economy to estimate parameters not directly generated by the FSGM.12 Each shock was assessed separately due to their independent probabilities of materializing. Substantial impact is observed in all sectors under the trade shock, whereas impact stemming from migration policy changes is moderate, as the share of Nicaraguans in total foreign workers in the U.S. is relatively small.
Scenario 1 – Macroeconomic Implications of a Trade Shock13
12. GDP and private consumption would decline. The increase in tariffs would immediately dampen Nicaragua’s exports, putting downward pressure on domestic growth and aggregate demand. The real GDP growth rate would fall by 2.3 percentage points below the baseline scenario, to recover in the medium-term. Private consumption is projected to deviate from the baseline by 3.2 percent of GDP over a 5-year period14 and inflation would decline up to 1.5 percentage points.
Impact of a Trade Shock on GDP Growth, Private Consumption, Inflation and Gross International Reserves
Citation: IMF Staff Country Reports 2017, 174; 10.5089/9781484305645.002.A004
Impact of a Trade Shock on GDP Growth, Private Consumption, Inflation and Gross International Reserves
Citation: IMF Staff Country Reports 2017, 174; 10.5089/9781484305645.002.A004
Impact of a Trade Shock on GDP Growth, Private Consumption, Inflation and Gross International Reserves
Citation: IMF Staff Country Reports 2017, 174; 10.5089/9781484305645.002.A004
13. The CA deficit increases in the medium term. Imports and exports decline by about 1 percent of GDP which keeps the CA deficit stable in the short term at around 8.7 percent of GDP. In the medium term, the CA deficit increases gradually from 8.6 to 9.4 percent of GDP, 0.8 percentage points above the baseline, owing to lower exports and limited financing resources. Gross international reserves in months of imports decline from 3.4 to 3.0 by 2022.
Impact of a Trade Shock on the Current Account Balance, Exports and Imports of Goods
Citation: IMF Staff Country Reports 2017, 174; 10.5089/9781484305645.002.A004
Impact of a Trade Shock on the Current Account Balance, Exports and Imports of Goods
Citation: IMF Staff Country Reports 2017, 174; 10.5089/9781484305645.002.A004
Impact of a Trade Shock on the Current Account Balance, Exports and Imports of Goods
Citation: IMF Staff Country Reports 2017, 174; 10.5089/9781484305645.002.A004
14. The trade shock worsens the CPS balance and results in public debt stabilizing at a higher level. The overall deficit would reach 3 percent of GDP in 2018, due to a reduction in fiscal revenue of 1.3 percent of GDP. Total public debt increases from 39 percent of GDP to 43 percent in the medium term.
Impact of a Trade Shock on the CPS Overall Balance and Debt
Citation: IMF Staff Country Reports 2017, 174; 10.5089/9781484305645.002.A004
Impact of a Trade Shock on the CPS Overall Balance and Debt
Citation: IMF Staff Country Reports 2017, 174; 10.5089/9781484305645.002.A004
Impact of a Trade Shock on the CPS Overall Balance and Debt
Citation: IMF Staff Country Reports 2017, 174; 10.5089/9781484305645.002.A004
15. The model enables a comparative analysis of the macroeconomic impact assuming exchange rate could partially absorb the trade shock. Allowing the exchange rate to react as a shock absorber would reduce the immediate impact on GDP by 1.7 percentage points to a relatively moderate 0.6 percentage points. Real interest rates also reverse their path from an increase of 1 percentage point to a reduction of 0.4 percent point, vis-à-vis the baseline scenario. Domestic prices rebound by 1.2 percentage points and private consumption declines only by 1.2 percent of GDP below the baseline, compared to 3.2 percent of GDP in the peg scenario. In the medium term, the CPS debt stock decreases from 42.8 to 39.3 percent of GDP, owing to higher revenue collection and lower debt service.
Impact of a Trade Shock with Exchange Rate Flexibility
Citation: IMF Staff Country Reports 2017, 174; 10.5089/9781484305645.002.A004
Impact of a Trade Shock with Exchange Rate Flexibility
Citation: IMF Staff Country Reports 2017, 174; 10.5089/9781484305645.002.A004
Impact of a Trade Shock with Exchange Rate Flexibility
Citation: IMF Staff Country Reports 2017, 174; 10.5089/9781484305645.002.A004
Scenario 2 – Macroeconomic Implications of a Shock on Migration and Remittances
16. GDP growth, the CPS deficit and public debt sustainability would deteriorate, albeit to a lesser extent than under Scenario 1. The impact on remittances would reduce private consumption by 1.4 percent of GDP and would push inflation down by 0.2 percentage points in the medium term. Thus, GDP would decrease by 0.3 percent over the same period, vis-à-vis the baseline. Imports would decline by 0.6 percent of GDP with respect to the baseline, reducing the CA deficit by 0.2 percent of GDP in the short term. As imports recover gradually and workers’ remittances keep constant at a lower level, the CA deficit would increase to 9 percent of GDP, 0.4 percent below the baseline, by 2022. The CPS balance and total debt would worsen by 0.2 percent and 0.8 percent of GDP, due to lower tax income (0.4 percent of GDP).
Impact of a Shock on Migration and Remittances
Citation: IMF Staff Country Reports 2017, 174; 10.5089/9781484305645.002.A004
Impact of a Shock on Migration and Remittances
Citation: IMF Staff Country Reports 2017, 174; 10.5089/9781484305645.002.A004
Impact of a Shock on Migration and Remittances
Citation: IMF Staff Country Reports 2017, 174; 10.5089/9781484305645.002.A004
17. If migration policy remains unchanged but a two percent fee is imposed on remittances, the macroeconomic impact is estimated at about half that of Scenario 2’s. Using an alternative cost-elasticity approach, staff estimates that remittances will fall by about 8.9 percent if an additional two percent fee were to be added to the existing 4.9 percent fee component of money transfer costs,15 assuming an elasticity of remittances to transaction costs of −0.22.16 This is equivalent to 0.4 percent of GDP and is slightly less than half the size of the hypothesis under Scenario 2 (which was for a one percent of GDP decline in remittances). Further, while Scenario 2 is considered permanent and, thus, could have prolonged negative consequences from both the initial shock and secondary impact from lower economic growth on disposable income, the effect of raising a temporary two percent fee will reverse when the fee is lifted. Also, part of the macroeconomic impact might be diluted by using alternative and informal channels for international transfers.17
Prepared by Rosalind Mowatt and Xiaodan Ding. This work builds on previous work by Francesco Grigoli. Assistance in modeling U.S. spillovers from Michal Andrle and Benjamin Hunt (both RES) is gratefully acknowledged.
The U.S. does not have the voting power to block loans at any of these institutions, but could possibly use its influence.
The NICA Act itself does not restrict U.S. investment in Nicaragua; however, it could be a red flag to potential investors. Discussions with public and private sector representatives yielded a range of views on the subject, with some noting that, while the institutional environment remains relatively weak, investment has continued to flow to Nicaragua, due in part to comparative advantages vis-à-vis regional peers. The announcement of the NICA Act has not affected investment significantly thus far.
This is a somewhat conservative estimate, as FDI from the U.S. to Nicaragua accounts for about 20 percent of total flows. It would entail that U.S. FDI comes to a halt and that confidence spillovers affect a similar share of domestic investment, plus a few more non-U.S. potential projects.
As with the hypothesis on the initial impact on FDI, this is an arbitrary assumption. The economic rationale is that, while macroeconomic equilibria will be threatened under the adverse scenario, the disappearance of the main uncertainty factor—the impact of the NICA Act—would have a positive effect that would allow for continuity of at least some of the investment projects planned.
We assume that public investment remains the same as in the baseline.
As with most investor confidence crises, a steady state close to the original is likely to be recovered when and if the source of the risk disappears or its impact is deemed to be minor.
Taking all these elements into account, the total fiscal effort is equivalent to about 2.7 percent of GDP.
The model assumes that, after the initial shock affecting a steady status, the economy will adjust and eventually stabilize at a different steady status that, in case of a negative shock, would be worse than the initial.
As of December 2016, the average tariff applied by the U.S. to Nicaraguan imports was 0.2 percent. The MFN tariff is 6.2 percent.
The magnitude of the shocks is arbitrary and does not correspond to any specific U.S. approved or announced policy. It is presented here solely for analytical purposes.
These include consolidated public sector and nonfinancial public sector overall balance and debt, as well as gross international reserves.
The size of the impact on output growth and external sector balance might be underestimated, as the FSGM assumes no accompanying decrease in U.S. FDI to the rise in tariffs’ shock. The FSGM yields a 5 percent reduction in total investment because of the reduction in output growth, which is assumed to affect proportionally all its components, including FDI.
All ratios on GDP over the medium-term refer to baseline 2022 GDP. Short-term rations refer to baseline 2018 GDP.
World Bank “Remittance Prices Worldwide,” February 2017.
John David and Halahingano (2005) estimated the cost-elasticity of remittance with respect to the fix cost component is −0.22, which is the average of the elasticity over those who would decrease their remittance (for whom the elasticity is −0.74) and whose who would not (for whom it is zero).
In 2006, only 0.4 percent of the transactions were made through online banking, and the figure in 2016 is 5.5 percent. Traditional, cash-based systems (hawallah) have worked effectively in many countries, although with negative effects on risk and financial sector development.
