Economic Analysis
Nicaragua

Nicaragua

Population 6,5 million
GDP per capita 2 031 US$
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Synthesis

MAJOR MACRO ECONOMIC INDICATORS

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 4.7 -3.8 -5.0 -2.0
Inflation (yearly average, %) 3.9 5.0 5.6 4.2
Budget balance (% GDP) -1.6 -3.1 -3.1 -3.6
Current account balance (% GDP) -4.9 0.6 2.3 1.8
Public debt * (% GDP) 33.9 37.2 39.0 40.2

(e): Estimate. (f): Forecast. *Including only Central Government, which also covers Social Security.

STRENGTHS

  • Mineral (gold) and agricultural resources (coffee, sugar, meat)
  • Member of Central America/United States and Central America/EU free trade areas
  • Significant remittance flows from expatriates

WEAKNESSES

  • Highly vulnerable to natural disasters
  • Healthcare and education shortcomings, persistent poverty
  • Inadequate infrastructure (energy, transport)
  • Dependent on international aid
  • Dependent on the United States, highly dollarized economy
  • Corruption (151/180 in the Transparency International ranking)
  • Business environment well below the regional average (142/190 countries in Doing Business 2020)

RISK ASSESSMENT

Recovery hampered by the austerity policy

The Nicaraguan economy will contract again in 2020, hurt by the lack of a solution to the political crisis since April 2018 and the restrictive tax measures put in place in 2019. Business confidence was severely dented by the social security and tax reforms of February 2019, which pushed up production costs with higher employer contributions and increased revenue taxation, in the face of feeble domestic demand. With bank deposits dropping 29.4% between May 2018 and May 2019 and non-performing loans on the rise, the risk of a banking crisis should not be ignored. The credit crunch is expected to start hitting businesses, leading to financing problems. This is likely to impact business investment, as many companies have already cut back on their margins to avoid passing on higher production costs to consumers already struggling with high inflation. The reduction in the authorised annual devaluation rate of the cordoba against the dollar from 5% to 3% following a decision by the central bank at the end of 2019 should mitigate the effect on prices of the VAT increase decided in February 2019 by limiting the devaluation of the currency. This decision will have ambiguous effects on household consumption, as pensions are indexed to this devaluation rate. The sharply rising unemployment rate (estimated at 8.5% in 2019) will continue to constrain household incomes, making them even more dependent on remittances from expatriates. These remittances, meanwhile, are expected to weaken owing to the economic slowdown in the United States, which is responsible for 56% of these flows. The US slowdown is likewise expected to affect exports from free zones, particularly electrical components and textile products. On the supply side, the construction and tourism sectors will continue to be hit by the crisis and weaker domestic demand, while agriculture and mining are poised to benefit from the expected rise in gold and coffee prices in 2020.

 

Public accounts reflect the vicious circle of crisis and austerity

Although the public accounts have been severely affected by the crisis, Daniel Ortega's administration ignored popular opposition to push ahead with social security and taxation reforms in February 2019. These austerity measures are expected to aggravate an already difficult situation without solving the deficit problems, as the increased social security contributions from companies (from 19% to 22.5% and 21.5% for large and small companies respectively) and employees (from 6.25% to 7%) will not compensate for the decrease in the number of contributors. Increased taxes on cigarettes and beer, the scrapping of VAT exemptions for certain products, as well as the increase in the tax on business earnings (from 1% to 2% or 3% of total sales depending on the size of the company) are unlikely to generate as much revenue collection as expected. The government's delay in publishing an assessment of these measures, as provided for in the bill, further fuels the doubts. Accordingly, the public deficit may well be higher than expected in 2020, while it remains uncertain whether international financing will be secured. The adoption of the Nicaragua Human Rights and Anti-Corruption Act by the US Senate at the end of 2018 requires the United States to veto any multilateral lending to Nicaragua. The country will therefore be dependent on loans from the Central American Bank for Economic Integration (CABEI), which granted it USD 585 million at the end of 2019 for infrastructure development.

In this context, the main source of foreign exchange will continue to be remittances from expatriates, which, combined with a contraction in imports in the face of falling domestic demand, will result in a new current account surplus in 2020. Exports are expected to be boosted by agricultural and mining products, notably owing to the jump in the price of gold and higher coffee prices. Foreign direct investment will remain very low, with investors feeling edgy because of the political crisis and US sanctions. The lack of external financing will put pressure on the central bank's reserves, while its decision to limit the authorised devaluation rate of the cordoba against the dollar should mean more intervention on the foreign exchange market.

 

A political crisis in deadlock

While Daniel Ortega of the Frente Sandinista de Liberacion Nacional Party, who has been in power since 2016, forcefully quelled the popular uprising that began in April 2018, an end to the crisis is unlikely. Negotiations between the government and the opposition, organised by the Catholic Church, have reached an impasse, while militias continue to repress demonstrators demanding the departure of Daniel Ortega and his wife, Vice-President Rosario Murillo. It is likely that Daniel Ortega will run again for a new term in the November 2021 elections or that his wife will run as his successor. In this context, relations with the international community are expected to remain strained at a time when the country needs to find new allies given the difficulties encountered by the other members of the Bolivarian Alliance (Venezuela, Cuba, Bolivia). Relations with Taiwan are expected to play an important role, as Taiwan and China play out their game of influence in the region.

 

Last update: February 2020

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