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.