Country Report Nicaragua

Outlook for 2008-09

• The policy direction of the president, Daniel Ortega of the Frente Sandinista de Liberacion Nacional (FSLN, the Sandinistas), is generating concern among the business community, civil society organisations and donors.
• The FSLN, which lacks a majority in the legislature, will struggle to implement its policy programme in the face of a strengthening opposition. This will undermine governability and political effectiveness over the forecast period.
• Recent indicators suggest an acceleration of domestic demand started in the second half of 2007, but as external growth decelerates on the back of a recession in the US from mid-2008, GDP growth will slow in 2008 and 2009.
• After reaching 17% in 2007 inflation will rise in 2008 before easing to 15% in 2009 as commodity prices soften, but an expansionary fiscal policy and sharp rises in the minimum wage will keep the risks weighted to the upside.
• The external deficit will remain large. However, with continued donor support a balance-of-payments crisis is unlikely.

Monthly review

• The fight over the postponed elections in the North Atlantic Autonomous Region appears to have provided the opposition with a boost, while paralysing the government's agenda.
• The government's suggestion to negotiate the issue in late April provoked a break in the opposition ranks. Nevertheless, legislative activity remained suspended.
• The government was forced to raise its diesel subsidy for buses following strike action in May. The strikers had been emboldened by the illusion, created by the government, of unlimited Venezuelan assistance.
• Inflation accelerated to 19% in April. With monetary policy incapable of controlling liquidity and dampening aggregate demand for now, price rises are set to rise further.
• Continued failure by the government to secure passage of the energy fraud law, a PRGF requirement, resulted in the IMF postponing the completion of its first programme review until June and holding up US$16m in disbursements.
• Although export earnings rose by 26% in the first quarter, the trade deficit more than doubled to US$566m, owing to higher import spending. Export earnings from agro-produce and manufacturing performed particularly well.
• The decision in May of one of the largest free-zone clothing companies to transfer production to Asia will hurt exports and employment in 2008-09—the company employs 16% of total free-zone staff.

SOURCE: Country Report