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Nicaragua - Economy

Nicaragua is a poor country. In this context, emigration to Costa Rica, Guatemala or the United States appeared as the best option for acquiring remunerated employment. The US government estimated the total population at 5.9 million (July 2015 figures). It was calculated that 850,000 to 1,000,000 Nicaraguans live and work outside the country, many of them young people with an education level superior to the national average. These emigrants contribute some US$800 million annually in remittances for the survival of their families, making it the country’s main source of income. On the other hand, negative effects of migration have showed up in terms of family disintegration, xenophobic discrimination and violation of labor and human rights. In one 2004 survey, it was observed that 27% of the population expressly stated its intention to go live or work in another country in the coming years.

Nicaragua was expected to avoid a fourth successive year of negative growth in 2021, without benefiting from a rebound in activity. The political crisis, still unresolved since its outbreak in the spring of 2018, the U.S. sanctions imposed to put an end to the repression of opponents, the weak dynamism of demand in the United States and climate conditions are all factors that will weigh on the country's activity. In 2020, Nicaragua was one of the few countries in the world not to impose lockdown measures to counter the spread of COVID-19. Domestic demand has therefore been less affected than elsewhere, but the progress of the pandemic was still very uncertain, while public confidence in the information produced by the government on its spread was low. This uncertainty, coupled with the political crisis, was expected to prevent a real recovery in household consumption, which accounted for 72% of GDP in 2019. Nevertheless, the relatively dynamic flows of expatriate remittances will support this sluggish demand. The catch-up effect observed on these flows in the second half of 2020, together with the reopening of the economy in the United States, was expected to fade away in 2021.

Unemployment among the Latino population in the United States, the main source of these flows, was slower than for the rest of the population. Public demand will continue to be constrained by a lack of financing due to U.S. sanctions, which limit access to most multilateral lenders (IMF, World Bank, Inter-American Development Bank). In addition, investment will remain limited because of these same U.S. sanctions and the climate of political uncertainty. Finally, external demand will remain constrained, while the main partners (United States, Europe, Costa Rica) will only experience a moderate recovery.

On the supply side, the agricultural sector was expected to suffer from the repercussions of the two hurricanes, Eta and Iota, which hit the country in November 2020, the economic cost of which represents 6% of GDP according to initial estimates. The flooding of agricultural land, but also the destruction of roads, was expected to limit the volume of coffee production in the 2020-2021 season (September-August), as well as sugar production. The manufacturing industry, especially in the free zones (electronic components, clothing), will be affected by the weak recovery in U.S. consumption and will compete with production from other countries, especially Vietnam for clothing. Mining production will be buoyed by a high gold price, boosting the results of the country's main gold companies.

The 2021 budget planned by the government takes note of poor access to external sources of financing, providing for a limited amount of expenditure, 98.9% of which should be financed by tax revenues, assuming a 6.5% increase in these revenues compared to 2020. Although the 2019 tax reform has led to a significant increase in tax revenues (+8% in 2019), the absence of a rebound in activity in 2021 was expected to make it difficult to achieve this objective in the absence of a further reform. The deficit was therefore expected to be higher than that envisaged by the government. Financing needs are expected to be met by obtaining loans from the Central American Bank for Economic Integration, which was not affected by U.S. sanctions (a loan of USD 300 million obtained in December 2020).

From the point of view of the external accounts, the deficit in the balance of goods, although still reduced compared to its pre-crisis level, was expected to increase in 2021. The expected resumption of imports, linked to the stabilisation of the economy, will only partially offset the sharp contraction in imports in 2020 due to the fall in domestic demand and the fall in oil receipts. Exports are not expected to compensate for this recovery, affected by the lower export volumes of coffee, clothing and sugar, despite the rise in gold exports. Expatriate remittances are still largely expected to offset this deficit, but the resulting current account surplus will be lower than that observed in 2020. In this context, the country will continue to consolidate its reserves, up 30% in September 2020 compared to the year 2019, equivalent to 8 months’ worth of imports. This will support the mobile pegging of the Cordoba (annual depreciation of 2% per year against the dollar).

The International Monetary Fund closed its resident representative office in Managua which had been headed by Mr. Juan Zalduendo effective August 1, 2016. This decision reflected Nicaragua’s success in maintaining macroeconomic stability and growth since the conclusion of the Enhanced Credit Facility supported program in 2011.

The Nicaraguan economy continues to register high growth rates and sustainable macroeconomic policies. In 2015, real Gross Domestic Product (GDP) grew by 4.9 percent and the average of the previous five years (5.2 percent) was one of the highest in the region. Inflation was lower than in earlier years (3.1 percent at end 2015) as a result of the fall in oil prices. The consolidated public sector registered a deficit of 2.2 percent of GDP, largely on account of greater dynamism in tax revenues. Gross international reserves increased by more than US$200 million, thus expanding the reserves coverage from 4 to 4.4 months of imports (excluding imports from the free trade zone) between 2014 and 2015.

The economic outlook remained favorable. For 2016, IMF staff projected real GDP will grow by 4.5 percent while annual inflation was projected at 6 percent. The consolidated public sector deficit was expected to widen to 2.4 percent of GDP owing primarily to the costs related to the presidential elections and an increase in capital expenditure. The external current account deficit was expected to widen, but the gross international reserves coverage will remain broadly stable (4.2 months of imports excluding the free trade zones).

With an estimated gross domestic product (GDP) of $7.08 billion and a per capita GDP of $1,202 in 2011, Nicaragua was the second-poorest country in the Western Hemisphere. In 2011, the economy grew by 4%, according to official government sources, largely due to an increase in demand for Nicaraguan exports abroad and increased consumer spending at home. Official unemployment in 2010 was 8%, but 65% of all workers earn a living in the informal sector, where underemployment was high. In 2011, Nicaraguans received $912 million in remittances from abroad, the majority from the United States and Costa Rica.

The Nicaraguan economy was characterized by a technologically backward productive structure with a predominance of primary activities (30% GDP), a weak and dispersed manufacturing sector (28% GDP) and a broad tertiary sector of personal services and informal commerce. The economic situation Nicaragua experienced after 2000 was characterized by profound imbalances provoked by a large fiscal deficit (6.8% of the GDP in 2003), limited Gross Domestic Product (U$4.135 million nominal GDP) that only covered half of the overall demand and a strong trade deficit (U$1.2 million in 2003) that reached 31% of that year’s GDP. International remittances from Nicaraguan workers were estimated at U$800 million a year.

The mean annual economic growth rate for the 1994-2003 period was 3.7%, with an average inflation rate of 8%, while the population has grown at an annual 2,7% and the labor underutilization rate was 27% of the EAP in 2003. The majority of those surveyed in one 2004 study (67%) qualifies the country’s economic situation as bad or very bad and perceiveed that it will remain the same or worse in the near future. A third of the population surveyed expressed positive expectations with the future implementation of the US-Central America free trade agreement (CAFTA). Open unemployment was 13% of the EAP, added to 36% underemployed in the informal sector. In other words, half of the population lacked stable employment with a fair income.

Nicaragua’s foreign debt of U$6.596 million (December 2003) was reduced at the beginning of 2004 by 80% once Nicaragua qualified in the Initiative for Highly Indebted Poor Countries (HIPC). On the other side was a huge domestic debt that originated with the credits contracted by the governments to deal with the indemnification for those whose properties were expropriated during the eighties and to cover the bank collapses of the nineties. Poverty was more widespread in the rural areas than in the urban ones, and particularly affects the social groups of women, children and indigenous peoples. It was regrettable to observe that 6 of every 10 children and in a situation of poverty and 2 of those in extreme poverty. The average monthly per-capita household income was U$60, in other words a survival income of US$2, which buys 1.5 plates of basic food.

Because Nicaragua has abundant arable land and water resources, agriculture will always be an important component of the economy. Close to one-third of GDP was derived from agriculture, timber, and fishing. Opportunities exist in food and timber processing and preparation for export. Currently, most agriculture was small-scale and labor intensive. Livestock and dairy production have seen steady growth over the past decade and have taken the greatest advantage of free trade agreements. Many export products, especially coffee and gold, have benefited from the recent rise in international commodity prices.

Social indicators for Nicaragua have improved since 1991. In 2011, the estimated population of Nicaragua was 5.89 million; life expectancy at birth was 73 years. Prenatal care coverage has steadily improved and infant mortality has dropped from 52 deaths per 1,000 live births in 1991 to 22.64 per 1,000 in 2011. The country has achieved 85% vaccination coverage, and since 2004, infectious disease has fallen from fourth to fifth place among the leading causes of death, with the number of such deaths down nearly 50% since 1996. In 2009, the Ministry of Education and the National Institute of Information Development reported school enrollment as 92.6%. Nicaragua's score on the United Nations Human Development Index rose by 30% from 1990 to 2011 (from 0.454 to 0.589). Despite these statistical gains, the benefits of economic development have been uneven. Blackouts, water shortages, and high energy prices disproportionately affect the poorest in the population. About 46% of the population lives below the national poverty line. About 16% of the population lives on less than $1.25 a day.

President Ortega’s stated objective was to implement “21st Century socialism” in Nicaragua, which he further defines as a mixed economy, guided by Christian and socialist ideals. He has used funds provided by Venezuela through the Bolivarian Alliance for the Americas (ALBA) to increase the role of the FSLN party in the economy, including the purchase of a hotel, cattle ranch, television station, gasoline filling stations, construction equipment, and electricity generators. At the same time, President Ortega has maintained many of the legal and regulatory underpinnings of the market-based economic model of his predecessors, despite rhetoric decrying the "neo-liberal economic model," and along with it capitalism and the United States, which he refers to as the imperial power.

Nicaragua signed a 3-year Poverty Reduction and Growth Facility (PRGF) with the International Monetary Fund (IMF) in October 2007. As part of the IMF program, the Government of Nicaragua agreed to implement free market policies linked to targets on fiscal discipline, poverty spending, and energy regulation. The lack of transparency surrounding ALBA funds, channeled through state-run enterprises rather than the official budget, has become a serious issue for the IMF and international donors. In November 2010, the IMF approved a 1-year extension of the arrangement. The extension allowed for the disbursement of the remaining $36 million dollars in 2011, but the program was contingent on the publication of additional information about off-budget expenditures.

Nicaragua has stayed current with the U.S.-Central America-Dominican Republic Free Trade Agreement (CAFTA-DR), which entered into force for Nicaragua on April 1, 2006. Nicaraguan exports to the United States, which account for two-thirds of Nicaragua’s total exports, were $2.6 billion in 2011, up 120% since 2005. Textiles and apparel account for about half of all exports to the United States, while automobile wiring harnesses add another 10%. Other leading export products are coffee, meat, cigars, gold, seafood, sugar, and fresh fruit and vegetables, all of which have seen remarkable growth since CAFTA-DR went into effect. U.S. exports to Nicaragua, meanwhile, were $924 million in 2010, up 57% from 2005.

Despite important protections for investment included in CAFTA-DR, the investment climate has steadily worsened since Ortega took office. President Ortega's decision to support radical regimes such as Iran and Cuba, his harsh rhetoric against the United States and capitalism, and his use of government institutions to persecute political enemies and their businesses have had a negative effect on perceptions of country risk. The government reported foreign investment inflows of $880.6 million in 2011, mostly in energy and telecommunications. There are over 120 companies operating in Nicaragua with some relation to a U.S. company, either as wholly or partly-owned subsidiaries, franchisees, or exclusive distributors of U.S. products. The largest are in energy, financial services, textiles/apparel, manufacturing, and fisheries.

Poor enforcement of property rights deters both foreign and domestic investment, especially in real estate development and tourism. Conflicting claims and weak enforcement of property rights has invited property disputes and litigation. The court system was widely believed to be corrupt and subject to political influence. Establishing verifiable title history was often entangled in legalities relating to the expropriation of 28,000 properties by the revolutionary government that Ortega led in the 1980s. Authorities seldom challenge illegal property seizures by private parties, occasionally undertaken in collaboration with corrupt municipal officials.

The U.S. Embassy's Economic and Commercial Section advances U.S. economic and business interests by briefing U.S. firms on opportunities and challenges to trade and investment in Nicaragua, encouraging key Nicaraguan decision makers to work with U.S. firms, helping to resolve problems that affect U.S. commercial interests, and working to change local economic and trade ground rules in order to afford U.S. firms a level playing field on which to compete.