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.
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.