Economic studies
Nicaragua

Nicaragua

Population 6.5 million
GDP per capita 1,943 US$
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Synthesis

MAJOR MACRO ECONOMIC INDICATORS

  2019 2020 2021 (e) 2022 (f)
GDP growth (%) -3.7 -2.0 6.0 3.5
Inflation (yearly average, %) 5.4 3.7 6.0 4.0
Budget balance (% GDP) -0.3 -2.2 -1.5 -2.0
Current account balance (% GDP) 6.0 7.6 2.5 3.0
Public debt (% GDP)* 41.7 47.9 49.5 50.8

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

STRENGTHS

  • Mineral (gold), agricultural (coffee, sugar, meat) and fishery (shellfish) resources
  • Membership of the Central America/U.S. and Central America/EU free trade areas
  • Large flows of expatriate remittances

WEAKNESSES

  • High vulnerability to natural disasters
  • Health and education deficiencies, persistent poverty
  • Insufficient infrastructure (energy, transport)
  • Institutional shortcomings: power concentrated with the executive and Sandinista party, corruption
  • Highly dollarized economy

RISK ASSESSMENT

A recovery that is running out of steam

The economic recovery observed in 2021 is expected to slow in response to the cooling U.S. economy, which is the main destination for exports and the source of expatriate remittances. However, remittance flows will remain high and will support household consumption amid the sluggish labour market, without regaining the pre-crisis levels of 2017. In addition, with Daniel Ortega's re-election in November 2021, many of the household transfers used by the government to shore up popular support are likely to be phased out. In this context, the return of inflation to the upper end of the central bank's target window (3 +/- 1%) in 2022 will be a welcome development for the poorest households. This should allow the central bank to maintain its accommodative policy in the early part of the year, before tightening once the recovery is sufficiently established. This will underpin continued growth in credit to the private sector, which has been underway since the end of 2021 but is too weak to meet the needs of the economy, as, given the default risk in the productive sector, banks tend to lend primarily to the public sector, leaving the private sector in a vicious circle of under-investment. Foreign investment will remain restricted to a few areas of activity, such as mining and energy (e.g. U.S. firm New Fortress Energy's gas refinery project on the Pacific coast). U.S. sanctions against the primary contact persons for investors in the country pose a threat to the success of these investments. If these projects fail, they could deter future investments. Public demand is expected to remain focused on infrastructure and reconstruction following the storms of late 2020, with the humanitarian exemption used to access funds from multilateral agencies, which are normally blocked by international sanctions. U.S. demand will support ore production, especially gold, as well as agricultural production (coffee, sugar, meat), which will be helped by a base effect following the losses in the 2021 harvest due to storms. Manufacturing production, including cables, electrical appliances and clothing, should see some momentum. Construction will be driven by public demand, while the tourism sector remains underdeveloped, affecting hotels and restaurants.

 

Sound public accounts and a comfortable external position

The increase in revenues in 2021 allowed the government to significantly reduce the public deficit. However, cooling demand is expected to lead to lower revenue growth in 2022, causing the deficit to swell again. The deficit will be financed through multilateral loans from the Central American Bank for Economic Integration, whose share of the country's financing has increased in recent years. Because of its regional ownership, the CABEI is not subject to the U.S. sanctions that affect the provision of funds by other multilateral agencies. That said, the government is expected to invoke the humanitarian exemption again to obtain funds from the Inter-American Development Bank, the IMF and the World Bank to finance reconstruction and fight COVID-19. Largely concessional (93% of disbursements in 2021 came from multilateral agencies), the country’s debt remains limited in GDP terms and is therefore sustainable.

 
Looking at the external accounts, the goods deficit is expected to narrow as slacker domestic demand limits import growth and offsets higher oil prices. Exports of agricultural products, ore and manufactured goods will benefit from U.S. demand. The services surplus will remain tiny, while the income surplus is expected to shrink, reflecting increased dividend repatriation against slower growth in remittance flows. The current account surplus will boost the very comfortable foreign exchange reserves (eight months of imports in September 2021), which should be enough to keep the cordoba pegged to the dollar.

 

Strained relations with the international community following disputed elections

On 7 November 2021, Daniel Ortega, who has been in power since 2007, and his vice president and first lady, Rosario Murillo, won the presidential election with 75% of the vote, as well as the legislative elections. The process was widely boycotted by the opposition and criticised internationally. Given that the government had systematically arrested all opposition candidates in the preceding months, turnout was low. While the government claimed that turnout was 65%, the opposition said it was only 20%, suggesting that only Ortega's supporters showed up to vote (18% of people said they intended to vote for the president, according to some polls). The election was widely criticised by the United States, the European Union and the Organization of American States, which initiated an expulsion procedure. For its part, the United States stepped up sanctions against the country's top officials. The adoption of the Renacer Act by Congress on 3 November 2021 obliges the executive branch to take such measures. The Biden administration has, however, stated that it wants to avoid comprehensive economic sanctions that would add to the economic stresses faced by households. However, the sanctions are unlikely to facilitate a democratic transition. Any financial impact is followed by an adjustment in spending at the expense of the population, with the regime clamping down on any attempted uprising. 

 

Last updated: February 2022

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