Nicaragua Trade Policy Analysis.

Nicaragua Trade Policy Analysis

Ryan Danisavage

Nicaragua Trade Policy Analysis

        The modern economy is characterized by strong trade ties and interdependence of the economies of different countries. Historically, the countries maintained more closed trade systems protecting their growing economies. However, the globalization pushed the global trade system towards greater liberalization. All countries are characterized by different resources and processing capabilities. With the rapid growth of the population the economies are not able to satisfy the demand for all types of goods and service. Therefore, the global exchange is a necessary aspect of economy operation as trade allow the countries to compensate for what they cannot produce and focus on the most efficient production. Various economic theories explain the trade relations and specialization from different points of view.

        The following paper will use the economic theory to describe the trade policy of Nicaragua in the relation to macroeconomic indicators of this country. This country has made a significant progress towards the stabilization of its economy during the past 2 decades. Nevertheless, the integration of Nicaragua into the global trade system remains challenging. The country views the integration trade as a key tool to sustainable development. This paper will discuss the changes in the country’s trade policy with reference to macroeconomic indicators and relevant economic theories.

Background Information

Nicaragua is open to international trade, which represents a significant share of its economy. The country has become a member of World Trade Organization (WTO) since 1995 and undertook a series of efforts to integrate in the global economy (WITS, n.d.). Nicaragua has developed a strategy to diversify its exports and reduced customer duties and trade barriers to gain access to larger markets. The country has benefited from CAFTA agreement and the agreement between EU and Central America, mostly focused on agricultural products. The economic development of Nicaragua was rather challenging but the country managed to improve its macroeconomic indicators over the past decades.

        The foreign trade policy is closely related to the macroeconomic performance as international trade is a major driver of economic growth. Hence, it is reasonable to study the GDP trends to see how the changes in trade policies affected the economy and businesses in Nicaragua (see Figure 1).

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Figure 1. GDP of Nicaragua (1995-2018). Retrieved from Tradingeconomics.com

        It is clear that country’s GDP has been growing at a steady pace since 1995 despite challenging market context. The unfavorable climate conditions (e.g. hurricane Felix) and global financial and oil crises did not impede the growth of the country’s output (WTO, 2012). The factors that contributed to the growth of GDP included strong export performance and prudent fiscal policy.

        The graph (see Figure 2) shows that the inflation rate has been declining since 1996 with a sharp peak in 2008. Inflation was most affected by the growth of food price indexes as it is the main product demanded by households (WTO, 2012). The prices for goods and services are determined by the relationship between the Nigerian currency rate and currencies of other countries. When inflation is high, 1 unit of Nigeria currency can buy less imported goods and the consumer trends show preferences towards more consumption of domestically produced goods. On the contrary, when inflation rate is low, Nicaraguan goods become more affordable on the global market.

        The Nicaraguan robust fiscal strategy has been gradually lowering the inflation rate of the country. Nevertheless, it used to be rather high which negatively affected the exchange results with other countries and challenged Nicaraguan exports. Thus, it is possible to conclude that Nicaraguan inflation rate used to impede the development of country’s international trade.

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Figure 2. Nicaragua inflation rate (1995-2018). Retrieved from Tradingeconomics.com

        Interest rate is another indicator that affects the currency rate as the monetary policies can influence the value of the currency and therefore, the competitiveness of the international trade. On the one hand, the growth of the interest rate attracts more investors and increases the demand for the Nicaragua currency. On the other side, a lower interest rate stimulates domestic economy and household spending. This causes economic growth, which in its turn attracts investors. Hence, it is possible to conclude that lower interest rate is more preferable as it offsets the price effect by the economic growth.