Nicaragua: Staff Report for the 2013 Article IV Consultation

KEY ISSUESContext. Macroeconomic stability has been maintained and policies are broadly in line with therecommendations of the 2012 Article IV consultation. Growth is expected to slow somewhat,reflecting in part lower coffee production and slowdown in construction. Inflation expectationsare anchored by the crawling peg and core inflation remains stable. The external current accountdeficit has remained large, while international reserves coverage of imports has been broadlyadequate. Bank credit to the private sector increased rapidly over the past year and may poserisks. The Board discussion of the 2012 Article IV took place in June 2012.Outlook and Risks. Under current policies, growth is expected to decline from about 5.2 percentin 2012 to 4.2 percent in 2013; inflation is projected to pick up marginally to about 7 percent byend-2013. Large external current account deficits with associated financing needs and highexternal debt will keep vulnerabilities relatively high. Risks to the outlook stem from slower thanexpected economic recovery in the United States and Europe, higher oil prices, andunexpected changes to the oil collaboration scheme with Venezuela.Policy recommendations. Sustained implementation of prudent macroeconomic policies hasstrengthened the economy's resilience to risks but large external and fiscal vulnerabilities remain.The authorities' fiscal strategy is to keep deficits low and to lower public debt ratios over themedium term which will require protecting revenues, reforming the social security system toensure its long-term financial viability, containing current spending, and rationalizing subsidies toelectricity and other economic sectors. Economic collaboration with Venezuela, while beneficial,has generated dependency on financing that could pose risks to external stability, and needs tobe made more transparent.Authorities' views. The authorities broadly agreed with staff's assessment of near-term risks andthe need to reduce fiscal and external vulnerabilities. In particular, there was agreement on theneed to continue prudent fiscal policy and lower public debt ratios to gain fiscal space, and tofurther increase transparency of public sector operations. The authorities also concurred with theassessment that rapid credit growth might pose risks and required monitoring. They welcomedclose cooperation with the Fund and its role as a trusted advisor.