Evaluation of the effects of the global financial crisis at macro-level and on vulnerable households in Nicaragua

Evaluation and Lessons Learned
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The global financial crisis is creating a major recession in both developed and developing countries. According to a recent report from the International Monetary Fund, Nicaragua is considered at 'medium' vulnerability to negative effects of the financial crisis at macrolevel, based on its current GDP growth and financial reserves. However, GDP growth, trade balance and national debt are expected to worsen due to the high dependence of the country's economy on the United States for exports ('maquilas' especially in the garment sector, coffee, seafood) and remittances (almost 20% of GDP). In fact, some maquilas have already closed, laying off about 19,000 employees, and export trends are downward. This situation will deteriorate further if Foreign Direct Investment and Official Development Assistance also decrease.

The deterioration of macro-economic indicators is likely to affect the government's capacity to continue its investments in essential sectors whose levels of coverage and quality are already low, such as safe water, sanitation, health and education services. As a result, already high levels of poverty (46% of the population is poor and 15% extremely poor) and chronic malnutrition among children under 5 years of age (more than 1 child out of 5 was stunted in 2005) will worsen. Population groups most likely to be affected by the lack of investment in essential services are the poor who live in rural areas, particularly in the northern Atlantic and Central regions, and who depend essentially on agriculture for their income.

At household level, the financial crisis comes immediately after the shock of the high food and fuel prices in 2007-2008. Information provided by purposively selected vulnerable households (individual interviews and Focus Group discussions) and from Key Informants in villages and urban neighborhoods likely to be affected by the crisis (areas of high migration, employment in maquilas, tourism), indicated that:

- the frequency and sometimes the amount of remittances sent by migrants from the US, Costa Rica or El Salvador have decreased due to reduced employment opportunities abroad;

- employment in export-oriented factories ('maquilas' in textile and car equipment, seafood, mines) has decreased, including closure of some;

- profit from local small businesses is diminishing due to reduced households' demand.

However, while these effects can be directly attributed to global financial crisis, households are also suffering from decreased purchasing power due to prices of food, agricultural inputs and raw materials that have remained high in most of the visited areas. In addition, low producer prices and lack of credit are discouraging crop cultivation and animal rearing. The deterioration of households' economic situation is translating into poorer diet, lower incentives to cultivate and keep animals, decreased essential expenditures for health and education, and engagement into low-earning, informal income earning activities (e.g. petty trade). Less important expenses are also suspended, including for clothes, shoes and house improvement. In future, households intend to increase out-migration and efforts to obtain credit, despite the risk of indebtedness that these entail.

At present, households most directly affected by the global financial crisis are those who rely on external remittances for a large share of their income (more than half), or on wage employment in export-oriented enterprises and handicrafts. Other households are indirectly impacted by the slow-down of the economy and loss of purchasing power. While WFP 'typical' beneficiaries may not yet be directly affected by the financial crisis due to their low involvement in external migration and wage employment, they are negatively affected by the lower demand for agricultural labour, high food, fuel and input prices, low producer prices and increased difficulties to obtain credit for food purchases.

Both macro and micro analyses point towards likely higher levels of poverty (intensity and magnitude), malnutrition, and food insecurity. Current and future households' coping strategies entail severe costs for lives and livelihoods in the short and medium terms. The satisfactory progress made by Nicaragua to reach the Millennium Development Goals (MDGs) of reduced extreme poverty, increased primary school net enrollment, and reduced infant and child mortality, will be jeopardized, while the MDG targets that were already off track and needed additional efforts to sustain further improvement will definitely not be reached, including reduction of maternal mortality, access to reproductive health care services, chronic malnutrition, drinking water and sanitation, and illiteracy. There is also a risk of increased delinquency, particularly in urban areas, due to higher unemployment rates among the youth especially.