UN DESA | DPAD | Development Policy Analysis Division
Capacity Development and Advisory Services
Macroeconomic policy, external shocks and social protection
Nicaragua must be ready to react to external conditions
The most important external shocks for the Nicaraguan economy are an increase in global oil prices, a fall in capital inflows, and a fall in remittances from abroad. A higher oil price has a large effect on private consumption, poverty, health care expenditures, and government outlays. The fall in capital inflows affects mainly health care expenditures, private fixed capital formation, and to a lesser extent poverty and private consumption. A simulated 50% fall in incoming remittances has a large effect on private consumption, poverty, and income distribution. This simulated shock also proved to be the most significant for poverty given the importance of this income source for the Nicaraguan households.
External shocks have a large effect on poverty rates
Social policies are effective, but carry a large cost
Simulations of policy responses to external shocks found that:
- The negative effect of higher oil prices on poverty and consumption can be mitigated through transfer policies to poor households, in particular a small education grant and a senior citizens grant.
- The negative effect of smaller capital inflows can be similarly mitigated, but with smaller education and senior grants. However, the negative effect of the external shocks on domestic investment cannot be mitigated with any of the simulated policy responses.
- With respect to the fall in remittances, there are few alternatives given the size of the simulated shock. The best alternative seems to be to wait out the shock. A smaller and more realistic shock can be mitigated with transfer policies (education and senior grants).
Counter-cyclical spending policies (constant real spending levels in social security, healthcare and/or education) were found to be effective without adding to fiscal pressure.Social policies also affect poverty rates, but are costly