Interest rates, credit, and economic adjustment in Nicaragua

Ulrich Lachler

No 1529, Policy Research Working Paper Series from The World Bank

Abstract: 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. The author insists 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. The author explains the link between real interest rates and adjustment in Nicaragua and, in that context, explores policy options for reducing interest rates. The author's main conclusion: a sustained reduction in real interest rates to below those observed in neighboring countries would require further major structural cahnges, such as the adoption of a foreign currency standard.

Keywords: Payment Systems&Infrastructure; Banks&Banking Reform; Insurance&Risk Mitigation; Environmental Economics&Policies; Economic Theory&Research; Economic Theory&Research; Insurance&Risk Mitigation; Macroeconomic Management; Environmental Economics&Policies; Banks&Banking Reform (search for similar items in EconPapers)
Date: 1995-11-30
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