Nicaragua: Risks to Economic Recovery in 2021

Nicaragua: Risks to Economic Recovery in 2021

Like most other countries, Nicaragua’s economy slowed in 2020 owing to the international effects of the COVID-19 pandemic. Nicaragua was also affected by a rough hurricane season, sustaining damage particularly from Hurricanes Eta and Iota. Compounding these challenges, the country’s political environment remains an obstacle to encouraging foreign direct investment and improving the country’s socioeconomic situation. How is Nicaragua’s situation likely to change in 2021?

2020’s Economic Shocks

Though Nicaragua has operated quite a lax COVID-19 policy, shying away from rigorous testing and lockdown measures, it has nevertheless been subjected to the virus’ international economic effects in the form of reduced levels of trade, tourism and remittances. As a result, the World Bank has forecast that Nicaragua’s growth rate in 2020 is set to fall to -5.9%; further evidence of the virus’ impact on the economy comes from Nicaragua’s central bank, which reported a GDP drop of 7.9% for the second fiscal quarter of 2020.

The country was also battered by 2020’s particularly rough hurricane season, especially the double disasters of Hurricanes Eta and Iota in October and November respectively. The damage caused to Nicaragua by Hurricane Eta is estimated at approximately $172 million; combined with the impact of Hurricane Iota, which made landfall only a few weeks after Eta, the total losses to Nicaragua are estimated at over $740 million. It is also worth noting that even before the onset of the pandemic and these natural disasters Nicaragua was already in the midst of a recession; therefore, it is probable that 2020’s economic challenges will place additional strain on Nicaragua’s already struggling economic circumstances with the effect of extending the country’s recession.

Despite these economic blows, other developments will likely serve to help limit the worst effects of COVID-19 and the hurricanes on Nicaragua. Firstly, in November the International Monetary Fund (IMF) approved $185 million in emergency financial assistance for the country, which is likely to help the country to a limited degree in maintaining its balance of payments and address the obstacles posed by COVID-19 to the country’s healthcare system. Secondly, in January this year the World Bank decided to provide Nicaragua with $80 million in credit for the purpose of funding the country’s efforts to recover from 2020’s hurricanes. Like the IMF’s assistance, the World Bank’s decision has the potential to help Nicaragua with its strained financial state of affairs and contribute to a swifter recovery from 2020’s economic shocks.

The Outlook for 2021

Despite the aforementioned international economic support, it is not likely that Nicaragua’s economy will experience a significant rebound this year, though it is likely to return to a positive growth rate. Tourism, remittances and other valuable income avenues for Nicaragua are likely to see an uptick as we move further into 2021 due to increasing COVID-19 vaccinations and decreasing restrictions on businesses and international travel. Nevertheless, it remains probable that for much of the year income from these avenues will remain low compared to pre-pandemic levels, slowing the pace of the country’s recovery.

Another important issue which has the potential to affect Nicaragua’s economic circumstances is its political environment. Confidence in the stability of Nicaragua’s socio-political landscape took a particularly negative turn in 2018 after the government of Daniel Ortega announced unpopular changes to the country’s social security system which cut benefits, leading to the outbreak of widespread protests. Ortega responded by cracking down with force, leaving approximately 300 dead and 2000 injured. As a result of this violence the country underwent a decline on various fronts; the number of international tourist arrivals saw a 27% decrease, while net foreign direct investment inflows fell by around 49.7% between 2017 and 2019.

The reason that Nicaragua’s political environment is particularly important to keep in mind for the country’s economic outlook this year is that 2021 is an election year. Uncertainty over what the outcome of the election might be and of the Nicaraguan public’s response to it will likely put a damper on investment. In a worst case scenario where political violence erupts, probably in the event that Ortega wins and the election is not viewed by the public as fair, Nicaragua would likely experience a further erosion of investor confidence and quite possibly economic losses as a result of property damage and trade disruption. Naturally, such a scenario would further delay Nicaragua’s economic recovery and, importantly, may have wider regional effects as a result of refugee outflows.

Questionable Governance

Ultimately, the policies of the Ortega government and its foreign relations are likely to pose a hurdle to Nicaragua’s economy over the longer term. With Ortega’s party, the Frente Sandinista de Liberación Nacional (FSLN), dominant in the National Assembly and having passed laws which the government could possibly use to suppress the political opposition, Nicaragua is on a dangerous path towards autocracy which is highly likely to pose socio-economic risks in the medium to long term.

For example, various individuals tied to the Ortega regime have been subject to sanctions by states including the United States and United Kingdom for alleged abuses including money laundering. In an effort to protect those who have been sanctioned, the government recently introduced a law which will obligate banks and other financial bodies in Nicaragua to do business with those who have been sanctioned. This law has the potential to cause an escalation in restrictions on Nicaragua’s financial system, as the possibility exists that any banks which are obligated to attend to sanctioned officials may themselves become a target of sanctions. Such an outcome has the chance to obstruct Nicaragua’s reception of much-needed international funds. It would also likely increase barriers to businesses and discourage consumer spending as a result of greater difficulty in processing remittances.

Given the above, it would likely benefit Nicaragua if the government opted to take serious steps to improve investor confidence and its foreign relations by rolling back these aforementioned laws which pose a risk to the country’s financial institutions and international political standing. Unfortunately, it appears unlikely that Ortega and his party will take such steps in 2021.

Categories: Central America, Economics

About Author

Samuel Arnold-Parra

Samuel graduated from LSE in 2020 with a degree in International Relations and History. Since graduating, he has been building up experience in research and analysis. Currently, he is conducting voluntary research on Japanese national and sub-national responses to COVID-19. He is eager to use his skills in Spanish and Japanese to contribute valuable insights focusing on Japan and Latin America.