Nicaragua & IDA: An Enduring Partnership

Decades of political instability and a series of catastrophic natural disasters led Nicaragua to a difficult macroeconomic situation, including public debt amounting to 350 percent of gross domestic product (GDP) in 1991. Half of all Nicaraguans were living in poverty and one-fifth in extreme poverty by 1993. In the mid-1990s, significant gains were made in stabilizing the economy, improving basic infrastructure and raising private investment. Then in 1998, the devastating effects of Hurricane Mitch set the country back again.

Despite these challenges, Nicaragua has made strong progress in restoring and sustaining macroeconomic stability. Real GDP growth has averaged 3.7 percent since 1998, and real per capita growth, 2.3 percent. Inflation fell from 3-digit levels in 1991 to less than 8 percent in 2012. Alongside these improvements, private investment grew from 18 to 25 percent of GDP between 1998 and 2012.

IDA is focused on scaling-up the country’s more successful innovations for reaching the rural poor. IDA’s investment and knowledge portfolio cuts across many sectors and is anchored on long-term engagement for lasting results in terms of poverty reduction and shared prosperity.

IDA has been a steady partner in Nicaragua since 1991, representing in recent years about one-fifth of the country’s development aid. In 2002, IDA helped launch a debt relief effort that resulted in $ 6.4 billion of debt relief (equivalent to Nicaragua’s annual GDP). This created the fiscal space to allow Nicaragua to increase annual spending on poverty reduction programs to almost 13 percent of GDP in 2011.

Despite debt relief efforts, improved macroeconomic performance, and increased spending, by 2005 the poverty rate had only decreased by 2 percentage points and social indicators were showing only very gradual improvements.

It appeared that poverty-related spending was not reaching the more remote rural communities where almost 80 percent of Nicaragua’s poor households live.

Given the tumultuous history and persistence of poverty, there was a broad consensus that “business as usual” was not closing the gaps. Since then, Nicaragua has been a virtual innovation lab—across government administrations and within civil society—of programs to rapidly reach and improve the lives of its rural poor.

Today poverty is falling faster. Over the last decade, the Government’s rural programs have made significant progress in improving service delivery to the poorest. Between 2005-09, poverty fell by nearly 6 percentage points (or around 230,000 fewer poor people) and by 7 percentage points in rural areas. Extreme poverty fell from 17.2 to 14.6 percent and, despite previous concerns, a significant number of MDGs are now back on track.

And Nicaragua is sharing the prosperity. Nicaragua stands out in the region in terms of progress towards shared growth. Mean per capita income grew by 1.0 percent and the growth rate of the bottom 40 was 4.8 percent, which surpasses both the Latin America and the Caribbean region and Central America (4.0 and 0.6 percent, respectively).