In 2022, Nicaragua had the second highest tax burden in Central America (19.5% of GDP)at the same time that its position in the Corruption Perception Index deteriorated (IPC), produced by Transparency International. Normally, this affects “the quality of spending and the results that can be obtained,” and makes it difficult to collect taxes “by deteriorating tax morale,” according to the Panorama of Public Finances in Central America 2023, prepared by the Central American Institute of Fiscal Studies (Icefi).
The record collections achieved by the regime in 2021 and 2022 —nearly a quarter of a billion córdobas, if both years are added— meant that the State extracted from the family economy and the companies19.1% and 19.5% of GDP in both years, which represented an increase of 0.4 percentage points, the same as El Salvador, and only less than the 0.9 percentage points in which the Panamanian tax burden grew.
Referring to the entire region, Icefi, based in Guatemala, points out that “perhaps the biggest challenge for Central American public finances is to reverse the citizen perception of the lack of effectiveness of public spending and the lack of transparency, which can lead to in corruption.”
Although having large sums of money —such as the 222,000 million córdobas that the Nicaraguan State will have collected between 2021 and 2022, and revenues of another 120,000 million are projected for 2023— sounds like a great opportunity to improve the economic situation of many, the economist Abelardo Medina Bermejo, from Icefi’s Macrofiscal Analysis area, and editor of the report, warns that the task of evaluating the effectiveness of public spending is still pending.
To do this, he recommends obtaining its results, measuring its effectiveness and efficiency, as well as “the effects of taxation on the decision-making of people in society and, of course, evaluate the benefits and costs that identify whether the actions adopted, or whether the way they are executed by the State, generate well-being for society”.
“It is incorrect to measure the management of the public apparatus only from the percentage of execution of the expense, without taking into account the results obtained and how the well-being of the population increased, since the fact that a ministry or a secretariat has spent all the allocated resources, does not necessarily imply that there was an improvement in the quality of life of the population”, he warns.
GDP growth will moderate in 2023
Looking ahead to 2023the Institute cites growth estimates for each country. In the case of Nicaragua, the Economic Commission for Latin America (Cepal) forecasts growth of 2.1% for the current year, while the World Bank leaves it at 2.0%, and the International Monetary Fund (IMF) places it at 3.0. %. The Central Bank of Nicaragua, for its part, calculates a return of between 3% and 4% by 2023.
“The economic dynamics forecast for the region in 2023, both by its authorities and by multilateral organizations, shows a maximum trajectory around its potential level, far from the extraordinary results due to economic transformations that some authorities announced at the beginning of 2022” , explains Medina Bermejo.
even when they are far from what the country needs to generate to lift its citizens out of povertyany of the three forecasts that come true, will be above the potential growth of the Nicaraguan economy, if compared to the average observed between 2015 and 2019, which was 1.4%, calculates Icefi.
Using 2019 as the base year, the accumulated performance of the Nicaraguan economy in the 2020-2022 triennium was 12.7%, (the highest in Central America in that period), when it should have been only 4.2%, although Icefi warns that it is not possible to make a valid comparison with the rest of the countries in the region, because “the year used as the calculation base is depressed due to the political crisis that [Nicaragua] between 2018 – 2019”.
The document observes that Guatemala also had a good cumulative performance in the year studied, noting that both Nicaragua and Guatemala “applied less intense practices of confinement and protection of the population in the face of the Covid-19 epidemic, for which reason the relative economic normalization , in the absence of deeper analysis, seems to be related to said policy decision”.
Tax burden as percentage of GDP
Additionally, they recall that although the entire region reported impressive growth rates in 2021 (10.3%, in the case of Nicaragua), this did not imply “real changes in the productive structure of any country, but only a normalization of the economic trajectory”.
In reference to expected performance by 2023Medina Bermejo forecasts a decrease in the tax burden as a percentage of GDP, which is partly explained by the disappearance of the exogenous variables that affected them, estimating that these “should return to levels close to those observed in 2021, therefore that it is reasonable for countries to be a little more conservative in estimating budgets for the current year”.
The expert admits that “the old practice of dramatically underestimating the values considered in the budget” makes it difficult to prepare a more precise calculation, “highlighting the cases of Nicaragua, El Salvador and Guatemala, which present values of the tax revenue well below its economic normality and real collection capacity”, referring to the fact that the General Budget of the Republic for 2023 proposes a 3.1% decrease in the tax burden.
