Author: Ulrich Lächler

Publisher:

Published: 1999

Total Pages:

ISBN-13:

November 1995 Nicaragua's dollar-equivalent and real interest rates are not unusually high by regional standards. A sustained reduction of interest rates below the regional average may be possible, but would require further major structural reform. The high commercial lending rates Nicaragua is currently experiencing, together with a perceived scarcity of credit, have often been blamed for the country's slow growth and have been considered a major failing of the adjustment program initiated in 1991. Lächler suggests that such blame is largely misplaced. Current interest rates are indeed higher than historical levels or international benchmark rates (such as LIBOR or the U.S. treasury bill rate), but those are not the appropriate comparators for Nicaragua today. On the other hand, Nicaragua's real interest rates have risen significantly in recent years and currently exceed real rates in other Central American countries. These high real rates are attributable entirely to a real currency depreciation that has been taking place since 1992, and are not greatly different from rates observed in other Latin American countries that underwent similar adjustments. Lächler explains the link between real interest rates and adjustment in Nicaragua and, in that context, explores policy options for reducing interest rates. His main conclusion: A sustained reduction in real interest rates to below those observed in neighboring countries would require further major structural changes, such as the adoption of a foreign currency standard. This paper -- a product of the Country Operations Division, Country Department II, Latin America and the Caribbean Region -- is a self-standing report prepared as a contribution to the Bank's ongoing policy dialogue with Nicaragua on important economic issues facing the country.