Nicaragua’s economy expected to decelerate

The country’s top economic think tank projects Nicaragua’s economic expansion will slow but should remain above 4 percent over the next three years. Still, vulnerabilities abound, including Nicaragua’s insalubrious dependency on Venezuela, which is looking increasingly unhinged since last weekend’s contested presidential election

Nicaragua’s economic expansion is projected to decelerate slightly over the next three years yet maintain a steady rate of around 4.5%— a full percentage point above the Latin American average— according to the Nicaraguan Foundation of Economic and Social Development (FUNIDES).

After posting two consecutive years of 5% growth, Nicaragua’s economy is projected to slow to 4.2—4.5% over the next three years, according to new numbers published last week by FUNIDES. Carlos Muñiz, executive director of the economic think tank, says the country’s projected growth rate is “reasonable” but shy of the accelerated expansion that Nicaragua needs to reduce poverty. And even those modest economic projections come with a giant asterisk.

Dr. Carlos Muñiz, executive director of FUNIDES (courtesy photo)

Nicaragua’s fledgling economy remains highly vulnerable to external factors, FUNIDES warns. For example, if the U.S. economy grows by .5% less than projected in 2013, if Nicaragua experiences a 10-20% dip in exports, or if Venezuelan political crisis affects current levels of ALBA aid flow, Nicaragua’s economic expansion would slow considerably—to around 2.5%, according to FUNIDES.

“Confronted with the possibility of slower growth, we need to stress once again the importance of strengthening our economy’s capacity to grow faster despite adverse (external) factors,” Muñiz said during the presentation of the FUNIDES’ report last Thursday.

The keys to strengthening Nicaragua’s economy, FUNIDES says, are, “Consolidating macroeconomic stability, diversifying our sources of foreign aid, increasing productivity, improving infrastructure, health and education, and strengthening our institutional democracy and governability.”

While the Sandinista government continues to get good marks for maintaining macroeconomic stability, it could use some work in the other areas, according to FUNIDES.

Growing external deficit

Nicaragua’s external deficit continues to grow. Financed mostly by remittances, foreign direct investment and private Venezuelan aid through ALBANISA, Nicaragua is consuming upwards of 32% more than it produces, according to FUNIDES.

Remittances, which continue to grow steadily—topping $1 billion last year—are a major source of financing for household consumption in Nicaragua, where salaries remain stagnant, Muñiz says. Curiously enough, despite the rising cost of living and frozen wages, Nicaraguans perceive a slight improvement in their purchasing power, the FUNIDES report suggests.

“The last consumer confidence survey we conducted in December 2012 shows that even though the situation in households remains difficult, people perceive a slight improvement from December 2011 in terms of their purchasing power and their employment situation,” the report reads. “For the first time since May 2008, the percentage of those who said they have a better purchasing power was greater than those who said they have less purchasing power (from the previous year).”

Changes in foreign aid

The composition, use and terms of foreign aid entering Nicaragua has changed dramatically since the Sandinistas returned to power in 2007.

Before President Daniel Ortega took office, all of Nicaragua’s foreign aid came from the so-called “traditional donors”—the U.S., Europe, Asia and multilateral lending institutions. Today, the traditional donors (many of whom have reduced aid or pulled out of Nicaragua altogether due to political and transparency concerns or shifting developmental priorities) represent only 60% of the aid entering Nicaragua. The other 40% comes from Venezuela, which six years ago represented 0% of aid to Nicaragua, according to Muñiz.

With political instability on the rise in Venezuela, Nicaragua’s growing dependence on the oil-rich country could become an issue if things continue to fall apart amid the contested political elections held last week.

The type of aid given to Nicaragua has also changed dramatically over the past six years. In 2006, 70% of the aid that entered the country went directly to the government and 30% to the private sector. Today, only 35% of the foreign aid goes to the Sandinista government while 40% of the aid goes to ALBANISA and 23% goes to the other private sector groups, Muñiz reports.

Eighty percent of the foreign aid entering Nicaragua is now in the form of loans, while only 20% is donations. Six years ago, it was 60% loans and 40% donations, FUNIDES reports.

“Logically all these changes have an effect on us, some of which are positive and others are negative,” Muñiz says. “The positive is the important increase in foreign direct investment, which is very good for the country because it increases growth and productivity. The fact that much of Venezuelan aid is in the form of concessional loans with low interest rates and long terms for repayment is also something good.

But, he added, “on the negative side, the fact that donations have decreased means that the support we are receiving is more expensive than it could be. And depending so much on one donor (Venezuela) increases our vulnerability, which is already high.”

The effectiveness of Venezuelan aid is also not entirely clear, Muñiz says. Though President Ortega likes to grouse about “conditional aid,” aid without conditions can be less effective, Muñiz said.

“Traditional aid went to projects that were designed and focused, but Venezuelan aid is less conditioned which opens the possibility that it is less effective,” Muñiz said.

  • Ternot

    How accurate are the figures release by the government?
    If the economy grows, how does the wealth generated distributed? What percentage of this growth goes to the one percent?
    Does it affect the unemployment rate? If so how significantly?

    What percentage of the population engages in the economic activity known as underemployment? What are the average wages of this group?

    Why have the donations decreased so dramatically? Is it related to corruption in government? Poor administration? The fact that government jobs are given/assigned based on party loyalty?
    Who is the biggest employer in the country? The government (all levels) or the private sector?

    These questions are not a criticism of the author of the article. But they are relevant to any discussion of economic development or the economic status of any population, even in developed countries. The distribution of wealth is now a major topic of discussion among economists and political observers in this country. The major banks, Wall Street operators, the so-called one percent and the middle class. The poor is never mentioned in these debates for one simple reason. The Republicans would call it class warfare, a clever devise to avoid a thoughtful discussion of the issue.

    At any rate, I liked the article.Thanks

  • Car

    Republicans? Wrong country friend.

  • Bernard

    With the help of $$ over the years from Venezuela Daniel Ortega has gone from being a dirt poor revolutionary in the 1970’s to becoming one of the 10 wealthiest men in Nicaragua. Hmmm… seems to me that the people of this wonderful and beautiful country ( of which my heritage ls as my mother was born and raised there ) are being blinded by the corruption of this leader and government. The majority of voters in Nicaragua have no memory of what the war was like in the 1980’s because they were themselves so young…many of them not even born when the war began. There are a vast majority of Nicaraguans who would tell you that they were far better off economically during the Somoza years. Maybe the younger generation of Nica’s should take a good look at the past before Ortega came into the picture and then they would realize that he and his government are not all the good that they seem to be.

  • TheCarguymiami .

    Nicaragua being a U.S. Citizen American/Cuban I can attest and agree that Nicaragua is a sad and depressing Country. With so much pain to see in kids,mothers,and just about all around the small towns. I visited Cuba in 1979 and 1980 and I thought that was bad!,. Nicaragua does have more food, somewhat more liberty, there’s no G2 secret Police like in Cuba at every corner watching you.
    Nicaragua does have free open markets, people selling just about anything on roads, and small towns, actually everywhere. However Sanitation is poor, the place is very Dirty, Forget A/C, again it’s so depressive I cried and even back in the USA I’m still in pain just thinking of those poor souls. How Can a Government Daniel Ortega and the Sandinistas Explain that? when they have received on average every year $700 MILLION DOLLARS? And yet the People are living like animals in make shift shacks, of wood, and leftover metal sheets? How Can a SO CALLED “Celebrate the Revolution” Billboards be so abundant all around the roads when the Country is in so much despair? As for the Politician Past President Aleman he stole Millions!, his wedding cost over $1Million Dollars! Again People where is your Humanity? How can you spend $1MILLION DOLLARS on a wedding when your people are starving,sweating,and living like animals in a make shift shelter, or concrete/wood home that’s falling apart with no A/C,?? I guess that’s being a Hypocrite Daniel Ortega your no Christian!, Your Not a Kind Human being! You are what you are,..