Nicaragua

Slower pace of business dependent on the United States

Growth accelerated in 2023, driven by private consumption and investment, in the wake of the US economy and the concomitant surge in expatriate remittances. Growth is likely to be slower in 2024. Private consumption will remain a driving force, but the rapid expansion seen in 2023 will be curbed by the slowdown in remittances (13.3% year-on-year in February 2024), almost entirely from the US (90% of the total in 2023). In addition, inflation will remain high, though maintaining its downward trajectory thanks to reduced external pressures. It will remain above the Central Bank of Nicaragua's (BCN) target range of 2% to 4%. Combined with rising unemployment, which reached 3.5% of the working population in 2023, this will erode household disposable income. The NCB's restrictive monetary policy, with a key rate maintained at 7.0% since December 2022, will slow investment. State budgetary discipline will limit the contribution of the public sector. Under-investment is also likely to worsen due to the caution of private investors and the completion of projects financed by multilateral organisations. Indeed, US export sanctions, initiated in October 2022 with restrictions on sugar and measures against local officials and gold mining, are likely to persist, also prompting some Canadian mining companies to reduce their presence.

Exports are expected to maintain their 2023 trajectory, which is being impacted by a decline in external demand, particularly in the textile, livestock, fishing and aquaculture sectors. Pressure from the United States and strong trade dependence on the latter (52% of exports and 27% of imports in 2022), are driving the country to turn to China (0.5% of total exports and 12% of total imports in 2022). This rapprochement could lead to an increase in foreign demand. However, it will not quickly reduce Nicaragua's heavy dependence on US investment, trade and remittances.

Economic discipline in the face of external adversity

In 2023, the increase in expatriate remittances, which represent 28% of GDP, combined with lower import costs for oil and fertilisers, enabled a return to a current account surplus. This will decline in 2024 due to the moderation in remittances and exports. Although the country has a significant trade deficit - 14.9% of GDP in 2023 - the recent entry into force of the trade agreement with China will open up new opportunities. As such, most export products will benefit from near-zero customs duties. Moreover, this trade deficit will continue to be more than offset by tourism receipts (4.6% in 2023 and 4.8% of GDP projected for 2024) and remittances. Despite a slowdown in inward FDI (estimated at 6.4% of GDP in 2024) and external loans, these will support the country's external position. However, although its current account balance is not a cause for concern, Nicaragua could nonetheless encounter difficulties in covering its substantial external financing needs. Multilateral organisations could reduce their debt-related disbursements, and some foreign investors, notably in the United States, could reduce their exposure to the country. However, Chinese loans and investments would offer a definite support. In this perspective, the NCB's reserves (the equivalent of 6 months' imports at the end of October 2023, excluding maquilas), will ensure the country's ability to repay its debt.

In 2023, fiscal policy remained cautious, marked by a slight increase in revenues and tight control of public spending. In 2024, this policy will continue, with a slight reduction in the public deficit. The budget is based on the objectives of reducing public debt and strengthening fiscal sustainability. Consolidation will be based on a reduction in public investment and adjustments to current expenditure. On the other hand, the balance of the SPNF will continue to be affected by weaknesses in the finances of public enterprises and the social security system. Nevertheless, fiscal policy will continue to favour the accumulation of reserves. This will reduce the state's dependence on multilateral institutions, which is important in the context of sanctions. The stock of public debt will gradually decline, although the burden of public debt will increase due to a more onerous repayment schedule and limited access to external financing. Debt, which is mainly external and represents around 80% of public debt stock, is expected to remain predominantly concessional, with 86% of disbursements that are likely to be increasingly limited coming from multilateral organisations in 2022, including 24% of outstanding external debt due to CABEI in 2022.

Between political repression and diplomatic isolation

Daniel Ortega and his wife Rosario Murillo were re-elected as President and Vice-sPresident in November 2021, garnering 75% of the vote according to the authorities. They have held these respective positions since 2007 (with a first term between 1985 and 1990 for Daniel Ortega) and 2017. Their party, the Frente Sandinista de Liberación Nacional (FSLN - the Sandinistas), holds 75 of the 92 seats in the National Assembly. The next elections are scheduled for 2026. Although opposition to the government is strong, it is unlikely that the Ortegas will lose power. The main opposition party, the Partido Liberal Constitucionalista (PLC), is co-opted by the FSLN and holds 10 seats. Ready to use brute force to quash anti-government protests, the regime has demonstrated weakness. Although Nicaragua does not suffer gang-related violence as is the case for many of its neighbours, the country experienced a serious crisis in 2018-2019 when an attempt to reform the pension system sparked violent protests that left 300 dead and 2,000 injured, and disrupted the economy. Civil society continues to demand pro-democratic reforms which has caused socio-political tensions despite the cessation of demonstrations.

This situation has led to an increase in emigration particularly to the United States and Costa Rica, the situation being exacerbated by chronic under-investment in infrastructure, particularly social infrastructure. The trend is also due to the government's deliberate expulsion of opponents of the regime. The erosion of democracy has led to European and American sanctions; the former’s sanctions have been in place since October 2019 and have been extended until at least October 2024). In 2021, the RENACER Act notably imposed US sanctions against senior Nicaraguan officials for human rights violations, corruption and electoral malpractice. This law also allows for Nicaragua's possible exclusion from CAFTA-DR, new sanctions and suspensions of multilateral loans. More recently, in March 2024, the United States imposed restrictions on arms exports to Nicaragua, but the supply of arms is mainly attributed to Russia. The ties to Russia were also illustrated by the signing, in 2023, of a decree authorising Russia to deploy troops and establish military bases in the country. In May 2024, the United States also imposed visa restrictions on over 250 members of the government and sanctioned three Nicaraguan entities in response to repression and migrant smuggling. Nicaragua is also becoming an increasingly attractive destination for West African migrants, such as the Senegalese who have recently been seeking a clandestine route to the United States. Emigration could intensify if the United States were to step up its sanctions, particularly in the economic and trade spheres. The pressure exerted by the United States should therefore remain limited.

On the external front, the Ortega administration has strengthened ties with China since 2021. At the same time, Nicaragua is seeking to bolster alliances with other countries ideologically opposed to the United States, such as Russia, Iran, Cuba and Venezuela.

Last updated:May 2024