Economics Project

The Nicaraguan economy

By - Prakhar sinha
UID-163047
SYBMS
Abstract
The main focus of the project is to understand the
working of the Nicaraguan economy, by profiling it's
core competencies, tracing the NIGR pattern over the
years, and discussing the various monetary, fiscal and
commercial policies adopted over the years. On the
basis of this information, recommendedations will be
made and the overall trajectory of the economy will be
determined. This would be done with special focus on
interest rates, inflation rates, and rates of investment
of the economy.
 Nicaragua's Profile
Republic of Nicaragua

Capital - Managua

Independece day - September 15, 1821 from Spain.

Size - 129,494 sq.km. Largest country in Central America

Official languages-Spanish

Population

• 2012 census-6,167,237

GDP (PPP)-$35.835 billion

Currency-Córdoba (NIO)

Birth rate-24.12/1,000

Death - 4.42/1,000

Infant mortality rate -27.14/1,000

Life expectancy - 70.92 years

Religions

Roman - 58.5%

Evalangical - 21.6%

Moravian-1.6%

Jehovah's Witnesses-0.9%

Noneg-15.7%

Others- 1.5%

GDP Growth Rate- 4.7%

 Part I
Core Competencies
A. Geography and Topology
Nicaragua is the largest country in Central America, taking into account both the land mass and
the sea waters. There are extensive Atlantic coastal plains rising to central interior mountains
and narrow Pacific coastal plain interrupted by volcanoes. Keeping in mind the geography, the
main natural resources found in the landmass are gold, silver, copper, tungsten, lead, zinc.
Agricultural land is a part of 42.2‰, and till the 1990s was the sector for contributio to the GDP.
Current environmental issues include deforestation, soil erosion, water pollution. The major
crop grown here is Sugarcane, and this activity along withthe sugar industry contribute 5% of
the GDP. The timber business is another backbone of the Nicaraguan economy. Unfortunately,
between 1990 and 2005, the country lost almost 21‰ of its forest cover, as the then president
had made it easier for corporations to access timber. This again reminds us that a country
should focus more on being self reliant and not be dependent on outside forces as usually these
forces care only about their own self interests. Production is heavily oriented towards export of
coffee and cotton, as they account for nearly half of export revenues. Almost 80% of the
agricultural sector is owned privately. Offshore oil exploration and natural gas exploration is
being taken undertaken in the Pacific and Caribbean Sea. The need for energy is fulfilled by oil
and petroleum exports from Mexico and Venezuela. Corinto is a major port, along with two
other smaller ports.

B.Demography
Since the 1950s, the country has had a high population growth rate. This is reflected in the
falling mortality and increasing fertility rates. Most of the urban growth is seen in the capital
city. This increase has lead to a large amount of younger population. By 1993, almost half the
population was below the age of 15. This has manifested in present in such a way that currently
the service sector is the largest sector of the Nicaraguan economy. This section includes
transportation, commerce, warehousing, restaurant and hotels, arts and entertainment, health,
education, financial and banking services, telecommunications as well as public administration
and defense.Tourism in Nicaragua is one of the most important industries in the country. It is
the second largest source of foreign exchange for the country and is predicted to become the
first largest industry in 2017. More than 60% of the Nicaraguans live in the Pacific lowlands. The
people here share a Hispanic and European culture. Almost 40% of the population lives below
the poverty line. Life expectancy has improved from 64 years in 1990 to 74 years in 2017 . the
HDI has also improved from 0.48 to 0.60 during this period. Even though there is extensive
poverty, the literacy rate is quite high, at 82.4% for males and 83.2%for females. It is because
of all these factors that there has been tremendous growth in the tertiary sector of the
economy.

C. Impact of Capital flows.

Nicaragua recorded a capital and financial account deficit of 233.70 USD Million in the first
quarter of 2017. Capital Flows in Nicaragua averaged -3.37 USD Million from 2006 until 2017,
reaching an all time high of 2373.40 USD Million in the first quarter of 2007 and a record low of
-602.90 USD Million in the fourth quarter of 2005 . Apparently, remittances are a major source
of income for the economy. It contributes upto 15% of the GDP, and comes manky from the
USA and Costa Rica. In early 2004, Nicaragua secured some $4.5 billion in foreign debt
reduction under the International Monetary Fund and World Bank Heavily Indebted Poor
Countries initiative. In April 2006, the US-Central America Free Trade Agreement went into
effect, expanding export opportunities for Nicaragua's agricultural and manufactured goods.
Textiles and apparel account for nearly 60% of Nicaragua's exports. In October 2007, the IMF
approved an additional poverty reduction and growth facility program in support of the
government's economic plans. Nicaragua relies on international economic assistance to meet
internal- and external-debt financing obligations, although foreign donors curtailed this funding
in response to widespread allegations of electoral fraud in Nicaragua's November 2008
elections.

Historical view
The coffee Boom - 1840s-1940s.
One of the major changes that came in the country's economy was the production boom of
coffee. As the drink became popular in America, it's production in the country turned from a
hobby to a cash crop. Large areas were cleared out for its production. But this needed a of
capital and large pools of labour. By the end of the 19th century, the economy turned into a
Banana economy, the Republic being controlled foreign elites and a few domestic players who
wanted to focus on the production of this singular commodity. Profits flowed outside the
country. The price of coffee lead to the boom and depression of the economy in those years.
Taxes on coffee was virtually non existent.

Diversification and Growth 1945-1977

The period after the world war 2 was a time of economic diversification. The Korean War during
the 1950s lead to the increase in demand of cotton, which was supplied by the Nicaraguan
economy. Hence, cotton became the second most produced commodity in the country.
Economic growth continued during the 1960s,largely as a result of industrialization. Soon, the
central American market common market was formed and the economy gained a specialisation
in processed food, metals and chemical manufacturing. However, by the end of the 1960s,
import substitution industrialization had come to a halt. The soccer war between el Salvador
and houndras, part of the CACM, lead to its disintegration and caused a major block in the
economy. The period from 1970-1977 continued to show growth, the focus was more on
demand fluctuations and not on proper diversification. In 1974, the GDP rose by 13‰, the
greatest up till now, but that was only because the country had to rebuild itself after a
disastrous earthquake in 1972. The earthquake destroyed much of the industrial infrastructure
and killed atleast 30,000 people. The somoza family had control over most of the nations
production during this time. The central bank gave a lot of personal loans to this family, which
were never repaid. The banamerica group and the basic group were two other groups that had
control over the countries economy.

Sandanista era 1977-1990

By the mid -1970s, the government's economic and dictatorial political policies had alienated
nearly all sectors of society. Armed opposition to the Somoza regimes,which had started as a
small rural insurrection in the early 1960s,had grown by 1977 to a full-scale civil war . the
fighting caused foreign investment to drop sharply and the private sector to cut investment
plans . many government expenditures were shifted to the military budget. The forces finally
won the struggle in 1979, but it took a huge toll on the economy. The new leadership was
conscious of the social inequities produced during the previous thirty years of unrestricted
economic growth and was determined to make the country's workers and peasants
,the"economicallyunder-privileged ,"the prime beneficiaries of the new society.Conse-quently,in
1980 and 1981, unbridled incentives to private investment gave way to institutions designed to
redistribute wealth and income. Private property would continue to be allowed,but all land
belonging to the Somoza was confiscated.However, the ideology of the Sandanista put the
future of the private sector and of private ownership of the means of production in doubt . even
though under the new government both public and private ownership were
accepted,government spokespersons occasionally referred to are construction phase in the
country's development,in which property owners and the professional class would be tapped
for their managerial and technical expertise . After reconstruction and recovery ,the private
sector would give way to expanded public ownership in most areas of the economy . despite
such ideas,which represented the point of view of a faction of the government,the Sandanista
government remained officially committed to a mixed economy.

Contemporary era 1990-2017

Since the 1990s, the economy has gone through a major revolution. The then president
Chomorro, sought to revitalise the economy by shifting focus back to the private sector. The
IMF demands included halting the spiraling inflation, lowering the fiscal deficit by lowering
public spending, and also reducing the military. In 1992, a major drought ravaged the export
crops. Since then, the focus kept shifting from the primary sector to the tertiary sector.
Nicaragua suffers from persistent trade and budget deficits and a high debt-service burden,
leaving it highly dependent on foreign assistance—which represented almost 25% of GDP in
2001.One of the key engines of economic growth has been production for export. Although
traditional products such as coffee, meat, and sugar continued to lead the list of Nicaraguan
exports, the fastest growth is now in nontraditional exports: textile and apparel; gold; seafood;
and new agricultural products such as peanuts, sesame, melons, and onions.Nicaragua is
primarily an agricultural country, but construction, mining, fisheries, and general commerce also
have been expanding during the last few years. Foreign private capital inflows topped $300
million in 1999 but, due to economic and political uncertainty, fell to less than $100 million in
2001. In the last 12 years, tourism has grown 394%. An International Monetary Fund (IMF)
program is currently being followed, with the aim of attracting investment, creating jobs, and
reducing poverty by opening the economy to foreign trade. This process was boosted in late
2000 when Nicaragua reached the decision point under the Heavily Indebted Poor Countries
(HIPC) debt relief initiative. However, HIPC benefits were delayed because Nicaragua
subsequently fell "off track" from its IMF program. The country also has been grappling with a
string of bank failures that began in August 2000. Moreover, Nicaragua continues to lose
international reserves due to its growing fiscal deficits.The country is still a recovering economy
and it continues to implement further reforms, on which aid from the IMF is conditional. In
2005, finance ministers of the leading eight industrialized nations (G8) agreed to forgive some of
Nicaragua's foreign debt, as part of the HIPC program. According to the World Bank Nicaragua's
GDP was around $4.9 US billion dollars. Recently, in March 2007, Poland and Nicaragua signed
an agreement to write off $30.6 million which was borrowed by the Nicaraguan government in
the 1980s.

Tracing the NIGR pattern

The economy has

grown steadily from the
1960s to the 1980s, owing
majorly to the export of
coffee as it's main trade.
The fluctuations
between 1983-1990, the
period of Sanidista
revolution, mainly happened
due to the natural calamities as well as the the political unrest in the country. Economic growth
was uneven in the 1980s. Restructuring of the economy and the rebuilding immediately
following the end of the civil war caused the GNP to jump about 5% in 1980 and 1981. Each
year from 1984 to 1990, however, showed a drop in the GDP. Major reasons for the contraction
included the reluctance of foreign banks to offer new loans at American behest and atmosphere
of Capitalist fear mongering, the diversion of funds to fight the ex-La Guardia rapists called the
Contra against the government, a terrorist organisation backed by the United States of America,
U.S. illegal acts of war such as mining of Corinto and special forces operations in-country.

Between 1995-
2017, the economy has
grown almost linearly. In
2013,it registered a growth of 4.3% making it the fastest growing economy in Central America.
The construction sector is currently in a boom. In the recent years, their Bop has been positive
and their budgets have been accurate to a large extent. In 2016, the NIGR improved
considerably due to the increase in employment by 11.2% and hence the development of the
tertiary sector. It seems that the economy is moving towards the service sector.

Part 2

(a) Fiscal policy

In 2014, the government maintained a mildly expansionary fiscal policy whose primary
objective was to ensure the sustainability of public finances. Efforts were made to strengthen
revenue collection and modernize the tax and customs administration. The 2014 general budget
was adopted by Act No. 851 for a total of 55.781 billion córdobas. The deficit was financed
through external cooperation, confessional loan disbursements and government bond issues.
The budget was amended twice in 2014, first in August by Act No. 877 and then in November by
Act No. 887. Furthermore, during the year, an amount of 1.300 billion córdobas in international
donations was added to the budget.Total central government revenues expanded by 15% in
nominal terms in 2014 (higher than the 6.7% growth recorded in 2013). Tax revenues increased
by 15.8% as a consequence of higher direct and indirect tax revenues. Income tax and value
added tax (VAT) receipts grew by 21.6% and 15.8%, respectively, in 2014. The tax burden was
therefore equivalent to 15.4% of GDP, slightly higher than in 2013. Total central government
expenditure also increased (16.1% versus 8.5% in 2013), as a result of higher wages and salaries
(20.4%) and capital and current transfers (11.2%).The central government balance, including
grants, was equivalent to 0.3% of GDP in 2014. When added to the net results of State-owned
enterprises, the consolidated deficit of the non-financial publicsector, including grants, stood at
1.5% of GDP (compared with 1.1% in 2013). External and internal funding operations nudged up
total public debt by 0.2% to US$ 5.800 billion in December 2014,representing 49.1% of GDP (as
against 53.3% of GDP in 2013). The foreign debt-to-GDP ratio held steady at 40.6%.In the first
quarter of 2015, total central government revenues rose by 12.4% year-on-year. Cumulative
income tax receipts totalled 7.597 billion córdobas, a rise of 16.2%. Total VAT receipts grew at a
cumulative rate of 5.6%, mainly because of the VAT hike on imports. The tax burden is expected
to reach about 15% at the end of the year. Spending rose by 26.5% year-on-year to March
(compared with 19.5% in the first quarter of 2014) owing mainly to the early payment of the
April payroll and a rise in purchases of goods and services. Meanwhile, grants increased by
15.2% year-on-year. In the first quarter of 2015, a surplus, after grants, of 167.8 million
córdobas was recorded, compared with 1.729 billion córdobas in the same period of 2014. A
central government deficit, after grants, of around 2% of GDP is expected in 2015, in line with
projected revenue and expenditure of 16.5% of GDP and 18.2% of GDP, respectively. Total public
debt stood at US$ 5.791 billion in March (47.1% of GDP), with 82% of that debt financed by
external sources.

(b) Monetary and exchange-rate policy

In 2014, the central bank held its nominal crawling-peg exchange-rate policy at 5% and
continued to use instruments such as open-market operations and reserve requirements. The
reserve requirement continued to be used, furthermore, as a monetary and prudential control
instrument, maintaining a dual system of daily and fortnightly reserve requirements (12% and
15%, respectively, on deposits subject to the requirement under resolution CD-BCN-VI-1-11
adopted by the Board of Directors of the Central Bank of Nicaragua, in force since 4 April
2011).In April 2015, in response to a liquidity shortage, the central bank implemented an
expansionary monetary policy through the net redemption of securities worth US$ 21 million.
Gross international reserves thus totalled US$ 2.243 billion, equivalent to 2.5 times the
monetary base.

(c) Financial policy

The gross loan portfolio grew by 19.4% to December 2014 over the previous year (compared
with growth of 21.3% in 2013), ending the year with a balance of 99.354 billion córdobas (US$
3.827 billion). By institutional sector, credit to households posted the most robust growth
(23.2%), followed by lending to companies (17.2%). By type of debtor, the largest growth was
seen in credit to the livestock sector (31.2%), personal loans (28.2%) and mortgages (20.7%). In
2014, financial sector assets grew by 19.4% (17.4% at the end of 2013), while total liabilities
expanded by 19.1% (17.1% in 2013). In terms of the distribution of deposits by currency, dollar-
denominated deposits (22%) grew faster than those denominated in domestic currency (16.2%).
In March 2015, the national financial system continued to build on its momentum, with growth
in both deposits (13.8%) and credit (19.0%, owing mainly to increased commercial and personal
loans). Deposits were higher for both national currency (9.7%) and foreign currency (15.3%).
The profitability of the financial sector remained stable in the first quarter of 2015. The return
on total assets (RoA) stood at 2.2% (slipping down from 2.3% in March 2014), while the return
on equity (RoE) was 20.7% (compared with 21.9% in the same period last year).

(d) Trade policy

A key area of progress in trade policy was the entry into force of a partial scope agreement
between Cuba and Nicaragua in October 2014, which establishes tariff preferences and
eliminates non-tariff barriers between the two countries. Furthermore, Nicaragua continued
negotiating lists of market openings, which remain pending with Colombia and Paraguay, as part
of the process of acceding to the Latin American Integration Association (LAIA). It also pursued
negotiations on a partial scope agreement with Ecuador and the Plurinational State of Bolivia,
and on an economic complementarity agreement with the Bolivarian Republic of Venezuela. In
2014, trade policies were applied to ensure the supply of goods and to establish fair prices for
the population. In this connection, the government approved safeguards for products including
oil, wheat flour, personal hygiene products, chicken, rice, red beans and maize. The preferential
tariff treatment granted by the United States to Nicaragua since 2006 under the Dominican
Republic-Central America-United States Free Trade Agreement (CAFTA-DR) expired on 31
December 2014. Under this arrangement, Nicaragua had enjoyed preferential access to the
United States market for garments produced in the free zone with fabric or yarn not originating
from the signatory countries of the Agreement.

(e) Prices, wages and employment

Cumulative inflation to December 2014 was 6.5% (compared with 5.7% in 2013), which was
determined by the crawling-peg devaluation rate set at 5.0% per annum. The rainy season
pushed updomestic prices of basic grains in the first part of the year, which was partially offset
by the decline in international oil and fuel prices in the fourth quarter and the introduction of
government subsidies for basic grains. With a view to protecting the purchasing power of
households, the government continued to subsidize public transport and electricity
consumption. In 2014 the food and non-alcoholic beverages category posted cumulative
inflation of 11.7% (6.0% in 2013).

Year-on-year inflation to May 2015 was 5.2% (4.9% in 2014), driven by transportation; food and
non-alcoholic beverages; recreation and culture; restaurants and hotels; and education. These
increases were partially offset by lower prices for communications. Core inflation rose by 6.9%
year-on-year.Inflation continues to trend upward and is expected to end the year within the
target range of 6.0%-7.0%.In 2014, the Ministry of Labour raised the minimum wage despite not
reaching a tripartite agreement between the government, employers and workers. It adopted
annual increases (divided into two equal parts) of 10.77% for the agricultural sector, 9.80% for
small and medium-sized enterprises (SMEs) and 10.27% for other sectors. In January 2014, an
annual adjustment of 8% was applied to the wages of workers in the free zone. Public-sector
workers in health and education received a 7% raise, while other workers in the public sector
received 5%. Enrolment in the Nicaraguan Social Security Institute (INSS) increased by 5.4% with
respect to 2013, as more jobs were created in commerce, hotels and restaurants, and
community, social and personal services. In the third quarter of 2014 the open unemployment
rate was 6.7% (5.3% in 2013) according to the findings of the continuous household survey.In
the first quarter of 2015, growth in the number of workers enrolled in the INSS rose to
7.6%.Most of the new jobs were concentrated in the commerce and services sector.

Part 3
Recommendedations
 Improving the tourism industry will create more employment and lead to growth
of NI.
 Working in agreement with developed economies such as the USA.
 Focus on making exports easier and development of infrastructure through FDI.
 Focusing more on the needs of the disadvantaged sections of the society. It
seems as if the divide between the rich and the poor is increasing in the
economy
 Investment in social programs and public finances for the overall development of
the economy.
 Controlling migration as it leads to the outflow of human resources of the
country. This would have to be done carefully as a lot of residents are living
on remittances they receive from relatives working abroad.
 . The current policy mix is broadly adequate to maintain macroeconomic
stability in the near term, but Nicaragua needs to fortify its policy
framework. In particular, reducing tax exonerations and exemptions and
improving the targeting of fiscal subsidies would strengthen the
efficiency and equity of public finances and contribute to rebuilding
fiscal buffers. Greater emphasis needs to be placed on improving public
sector accounting and fiscal transparency. With regard to the financial
sector, the supranational structure and cross-border activities of financial
conglomerates warrant a strengthening of regional cooperation in
prudential supervision. The timeliness, quality, and reliability of statistics
need to be improved, which will help to enhance economic decision-
making and transparency. Additional efforts are needed to improve the
 investment environment, promote competitiveness, and strengthen the
rule of law.

Bibliography
 Www.worldbank.org
 Www.imf.org
 Gerarado peraza's report on Nicaraguan
economy
 Economic Survey of Latin America and
the Caribbean ▪ 2015.
 Www.bancocentraldenicaraguaorg
 National Bureau of Economic Research
Volume Title: The Macroeconomics of
Populism in Latin America
 Uncefs report on Nicaraguan economy