NICARAGUA´S OPENNESS TO FOREIGN INVESTMENT

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OPENNESS TO FOREIGN INVESTMENT

Nicaragua has made significant progress in opening its markets to foreign investment since 1991. This opening has contributed to an average GDP growth of 4.5 percent in recent years, and visible signs of investment and economic progress are especially evident in the capital, Managua.

The Foreign Investment Law, Law No. 344 of 2000 a) assures that foreign and domestic investment receive the same treatment; b) eliminates the need to sign an investment contract; c) abolishes the foreign investment committee; d) eliminates restrictions on the way in which foreign capital can enter the country, and; e) recognizes the investor's right to own property and use it as he wishes, and in the case of a declaration of eminent domain, receive proper indemnification. In general, the law did away with the requirement to sign a foreign investment contract in order to receive benefits, which most investors enjoyed anyway. The Ministry of Development, Industry and Trade (MIFIC) is responsible for the enforcement of the law. Investments contracted under the previous or any former law are still in force, unless the investor voluntarily decides to renounce that contract.

Investors freely repatriate profits through banks. The Embassy knows of no instances in which profit repatriation has been a problem. Foreign investors receive national treatment with respect to import/export policies. There are no onerous visa, residence, or work permit requirements which inhibit foreign investment, although investors who have lived in Nicaragua but did not comply with Nicaraguan law by failing to obtain a residency permit have encountered immigration problems. Investors should consult with Nicaraguan immigration authorities to ensure they have an appropriate visa or resident status while engaged in business in Nicaragua.

Individuals wishing to establish themselves permanently in the country must request a resident visa from the Office of Immigration. Several investors have been deported because they were deemed to be "working" on a visitor's visa, even though they had declared the purpose of their visit as "business" upon entry into Nicaragua. As investors move towards solidifying their investments (preparing to open bank accounts, registering their investment at MIFIC, etc.), they should consult with the Nicaraguan Immigration Service to determine if they need to file for residency or obtain a type of work permit.

Water and sewage systems and airports remain under exclusive ownership of the state. In 1998, Nicaragua began to open up to private investment other state-run sectors. Puerto Cabezas Port was leased to an American company in 2000. After four attempts, 40 percent of the shares of the national telecommunications company, ENITEL, was sold to a Swedish-Honduran consortium in 2001. There are currently two private enterprises that sell cellular telephones, beepers, and public phone booths. Nicaragua’s first private power plant began operations in 1997 and a second private plant came on line in early 1999. The government sold the distribution facilities of the state energy company (ENEL) to a Spanish firm (Union Fenosa) in 2001. In 2000, the government auctioned a 25-year lease for the state cement plant and has also leased the state gasoline distributor.

Two major U.S. energy companies interested in geothermal power generation projects withdrew from Nicaragua in 1999 after long, unsuccessful negotiations with the government. Meanwhile, three power generation companies (Amfels/Censa, May 1997; Tipitapa Power, March 1999; and ENRON, January 2000) successfully initiated commercial operations under Power Purchase Agreements.

In 2000, the National Assembly passed laws allowing the privatization of four state-owned companies: a cardboard manufacturer (CARTONICA), a textile company (FANATEX), a concrete product manufacturer (COPRENIC), and metal mechanic company (EMENSA). The Nicaraguan government is signing leases with options to buy with workers of these companies. The process is on-schedule for a September 2002 completion. Under an Inter-American Development Bank loan, the government seeks to contract out management of its water systems as a first step towards granting water and sewage concessions.

The government still owns an insurance company, a construction company, and various other enterprises. The military also operates several stores and companies that compete with local privately owned businesses.

The National Assembly passed a law in 1997 allowing private road concessions. The government eliminated its import monopoly in the petroleum sector in 2000. It also freed up prices on high-octane gasoline, lubricants, jet fuel, regular gas and kerosene. Price controls remain on liquefied natural gas.

CONVERSION AND TRANSFER POLICIES

Dollars are freely available through a legal parallel exchange market operated by local financial institutions. The Central Bank monitors this activity through a reporting requirement, but in all other respects private exchanges operate free from government controls. Embassy is aware of no instances where an investor has been unable to obtain dollars or repatriate earnings or capital. Exchange transactions at financial institutions are usually completed instantly. The Central Bank also buys and sells dollars, but charges a one-percent commission. Beginning in 1993, the Cordoba was placed on a monthly crawling-peg devaluation schedule at the rate of one percent per month. The government gradually reduced that rate of adjustment to nine percent per year, and then to the current six percent. The Central Bank reported that consumer price inflation in 2001 was 4.84 percent.

The U.S. Embassy has local currency expenditures of approximately $ 4.2 million per annum. Local currency is purchased through the U.S. Government Regional Finance Center in Charleston, South Carolina.

EXPROPRIATION AND COMPENSATION

Many thousands of individuals--including some 950 U.S. citizens--and corporations have filed claims for compensation for property confiscations that took place in the 1980s under the Sandinista government. The administrative mechanism for compensation is slow, cumbersome, and results in modest settlements. Compensation is generally based on the declared taxable value at the time of confiscation, without including lost profits or interest in the intervening decades. Payment is made in 15-year Nicaraguan government bonds that are currently trading for a fraction of face value (30 percent for newly issued bonds and somewhat higher for those nearing maturity). The new property tribunals established last year have proven a disappointment, because the Property Appeals Courts (Salas de Propiedad) consistently rule against original owners. While about 3,700 U.S. citizen claims have been settled, over 900 claims remain outstanding.

DISPUTE SETTLEMENT

Difficulty in resolving commercial disputes in Nicaragua, particularly the enforcement of contracts, is a serious obstacle to investment. There is a Commercial Code and Bankruptcy Law, but both need revision. On the whole, the legal system is cumbersome and often corrupt or subject to outside pressures. Enforcement of court orders is uncertain and often subject to non-judicial considerations. Misuse of the criminal system sometimes results in individuals being charged with crimes arising out of otherwise civil disputes, often for the purpose of pressuring those targeted into a accepting a civil settlement.

Because of the history of property invasions and confiscations, determining who is the legal owner of real property can be very difficult. Often, more than one person has seemingly valid title documents. A key weakness in the law allows legitimization - through subsequent sale to a third-party - of properties illegally taken from the rightful owner. Purchasing or leasing coastal property is especially risky, given legal limits to owning such land and easily-manipulated municipal governments' constitutional role in administering the coast. For these reasons, great care must be taken when purchasing or leasing land in Nicaragua.

Dispute resolution can be especially complex on the Atlantic Coast, where the division of authority between the central and regional autonomous governments is often murky. Furthermore, the traditional indigenous peoples of the Atlantic Coast have interpreted in a very broad way a regulation that says that the communities have ownership of their "traditional" areas. This has led to many challenges, both legal and physical, to purchases of property, even those with legal titles. Especially on the Atlantic Coast, many titles were improperly or fraudulently registered. Recently, the government has tried to reassert ownership of some coastal property even though the lands may have been in private hands before the enactment of a law declaring such areas sovereign territory.

Nicaragua is a party to the Inter-American Convention on Arbitration and a member of the International Center for the Settlement of Investment Disputes (ICSID). Arbitration clauses are recommended as a means to avoid the uncertainty of the judicial system.

PERFORMANCE REQUIREMENTS/INCENTIVES

Investors are generally not required to export specific amounts, incorporate minimum percentages of local content, agree to transfer specific technologies, or meet other performance criteria. In the fishing industry, investment and employment commitments have been made conditions for receiving licenses.

The 1997 tax law replaced a five-percent duty drawback for non-traditional exports with a 1.5-percent tax rebate for all exported goods. In addition, exporters can recover most import duties paid on raw materials and components that are incorporated in exported goods. Law 303, published in June 1999, sets a rebate on the luxury tax (IEC) for every pound of exported seafood provided all fuel used by the exporter’s fleet was bought in Nicaragua. The rebate amounts to: 37 cents on exports of captured shrimp tails, 7 cents on farmed shrimp, 10 cents on lobster tails, 5 cents on fish, and 5 cents on other seafood products.

The Tourism Industry Incentive Law, signed in June 1999, is now being fully implemented. To qualify for the benefits offered under the law, an investor must invest a minimum of $30,000 to $500,000, depending on the activity. Benefits, which are usually given for ten years, include property and income tax exemptions, as well as full or partial import tax or value-added tax exemptions on a list of tourism development materials. For more information, see the government Tourism Institute’s website at http://www.intur.gob.ni and Chapter 5 of the Country Commercial Guide.

RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT

Both foreign and domestic private entities or individuals may establish and own business enterprises and profit-making activities. Local law grants the right to freely establish, acquire, and dispose of virtually any type of business interest or property, with the exception of those sectors where government monopoly is established by law. The Embassy is aware of no instances where private enterprises were not treated on equal footing with public enterprises with respect to access to markets, credit, and other business operations. However, the local construction chamber has complained about competition from state construction companies.

PROTECTION OF PROPERTY RIGHTS

Protection of rights for both tangible and intangible (intellectual) property is inadequate, though improving, in Nicaragua. After signing a Bilateral Agreement on Intellectual Property Protection with the U.S. in early 1998, the National Assembly went on to pass a package of six modern intellectual property laws. The final law to pass was the Trademark Law, which came into effect in April 2001. Enforcement of Intellectual Property Rights remains weak, however. The government has initiated steps to fully enforce the laws.

Tangible Property: Lack of clear title to property, both urban and rural, continues to be a major impediment to investment. Many properties were confiscated during the Sandinista years and redistributed to individuals and cooperatives. Progress has been slow in either returning confiscated properties to their original owners or providing compensation, almost always in the form of government bonds. Many claimants would like compensation in comparable pieces of property (which was authorized by Nicaraguan law in 1999) or equity shares of to-be-privatized companies. The latter would require new legislation. In 2000, the government established new property courts, which are intended to speed-up resolution of claims for those who do not want to accept bonds. These courts have proven to be detrimental for the U.S. claimants, magistrates of the Property Appeals Courts - from which there is no further appeal - consistently rule against original owners.

Invasions of private property by squatters continue to be a problem, with both the central and local governments often powerless to prevent such takeovers. There are a variety of mechanisms by which title to invaded land can be legitimized, to the harm of the original owner. For more information, see the “Dispute Settlement” section earlier in this chapter.

Intellectual Property: Nicaragua approved the World Intellectual Property Organization’s (WIPO) “Internet Treaties” in early 2002. These treaties, officially the WIPO Copyright Treaty and WIPO Performances and Phonograms Treaty, will become official once they appear in the federal register in mid-2002. On January 7, 1998, Nicaragua signed a Bilateral Intellectual Property Rights Agreement with the United States -- the first such agreement in Central America and only the fourth in the hemisphere. The agreement covers copyrights, patents, trademarks, semiconductor layout designs, and encryption encrypted program-carrying satellite signals, trade secrets, and industrial designs. The agreement addresses criminal and civil penalties for infractions and requires a level of protection that exceeds Nicaragua's commitments to the World Trade Organization's Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). The agreement called for full implementation by mid-1999, a deadline that Nicaragua did not meet. The new Trademark Law was published in 2001, completing implementation. In 1998, Nicaragua also signed a Free Trade Agreement with Mexico, which includes some protection for intellectual property rights. Agreements have also been signed with the Dominican Republic, Chile and Panama, but not yet implemented.

Patents: In February 1996, the National Assembly ratified the Paris Convention for the Protection of Industrial Property. In June 2000, the National Assembly passed a modern patent law, which provides protection for 20 years.

The National Assembly passed the Law on Protection of Plant Varieties in 1999, but it is being challenged in the Supreme Court. The government sent the instruments of ratification of the 1978 International Convention for the Protection of New Plant Varieties to the United Nations.

Copyrights: There is piracy of video and sound recordings, U.S. satellite signals and broadcast theft. In July 1999, the National Assembly passed copyright legislation that greatly strengthens copyrights. A complementary law on television programming carriers was passed in November 1999. Much of the broadcast and satellite signal theft has stopped, and formerly illicit cable operators are negotiating agreements with programmers. Videocassette piracy remains a major problem, although there is now at least one legitimate video distributor. Enforcement continues to be the major problem. The Government has twice seized illegal materials in the capital city recently, but the seizures are not systematic or consistent. Nicaragua is a signatory to the following copyright conventions:

- Mexico Convention on Literary and Artistic Copyrights (1902)
- Buenos Aires Convention on Literary and Artistic Copyrights (1910)
- Inter-American Copyright Convention (1946)
- Universal Copyright Convention (Geneva 1952 and Paris 1971)
- Brussels Satellite Convention (1974)
- Bern Convention for the Protection of Literary and Artistic Works (1971)
- Geneva Convention for the Protection of Producers of Phonograms (1971)

Trademarks: The new Trademark Law was published in April 2001, completing the package of laws required under the bilateral agreement. It should provide protection for internationally recognized trademarks.

Trade Secrets: The new Patent Law provides protection for trade secrets.

Semi-conductor Chip Layout Design: A law to protect integrated circuit chip design was passed by the National Assembly in December 1999, and the government has issued implementing regulations.

TRANSPARENCY OF THE REGULATORY SYSTEM

Despite significant streamlining in recent years, Nicaragua's legal and regulatory framework remains cumbersome. The rules are not fully transparent, and much business is still conducted on a "who you know" basis. Lack of reliable dispute resolution mechanisms -- whether judicial or administrative -- complicates even relatively minor disputes with the authorities or local business contacts. Although the 1997 tax law eliminated many special tax exonerations, investors still express frustration at a high level of discretionality and over-centralized decision-making in taxation and customs procedures.

EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT

Nicaragua's capital base is small and the financial system has limited assets. As of December 2001, total assets in the Nicaraguan financial system had reached $1.9 billion. 70 percent of those deposits are held in dollars. The market establishes interest rates. At present, interest rates range from 16-29 percent for short-term loans and 14-23 percent for long-term loans with "maintenance of value" provisions (i.e., the loan is indexed to the Dollar-Cordoba exchange rate present at the time of loan approval). A previous clause limiting domestic financing of foreign investors to short-term working capital has been eliminated through the Foreign Investment Law. Although foreign investors have the same credit opportunities as local investors, large-scale credits are rarely observed due to a limited capacity to fund big projects. In 2001, loan portfolio assets dropped 18 percent to $696 million. In addition, long-term financing has been scarce; however, outstanding loans of one year or less have dropped from 85 percent of total loans in 2000 to 41 percent in 2001.

Commercial banks are supervised by the Superintendency of Banks, which has intervened in seven banks due to a series of deficiencies. In the span of one year (August 2000-August 2001), four local banks were taken over and auctioned. The assets from the failed banks are to be liquidated in late 2002 and 2003. The four bank failures have cost the government an estimated $400 million. One key result of the financial crisis has been the implementation of a law assuring deposit insurance. In the first six months of the law’s existence, the government guaranteed 100 percent of all deposits. Following that initial period, deposits were guaranteed for up to $20,000 per depositor, per institution. The banks are currently paying into a fund to back this insurance.

Nicaragua is facing an impending internal debt crisis resulting from an accumulation of $800 million in long-term property bonds issued to compensate owners for government expropriations during the Sandinista era, as well as the government issuance of $700 million in short-term bonds to cover GON losses resulting from the bank failures. The property bonds are scheduled to mature starting in 2006, with the bulk scheduled to mature between 2008-1011. The outstanding Central Bank bonds will be maturing during 2003-2004; 2004 is viewed as a particularly critical year. As well as being a considerable burden to public finances, the internal debt creates a perverse incentive to private banks, which prefer to derive profit from government papers rather than provide credit to productive sectors. The government is working to develop a plan to start paying back this debt.

The Superintendency of Banks also regulates insurance companies, leasing firms, and the stock exchange. The stock market is underdeveloped in Nicaragua. Government bonds dominate transactions on the stock market. Several private firms have issued commercial paper, but not equity stock, as Nicaraguan companies tend to be reluctant to go public. There are no laws or regulations that specifically authorize private firms to adopt articles of incorporation or association that limit or prohibit foreign investment, participation or control. The Embassy is not aware of any other practices by private firms to restrict foreign investment, participation in, or control of domestic enterprises. The Social Security Law, passed in May 2000, allows private agencies to administer pension funds under the supervision of the Superintendency of Pensions. When these administrators start operations in 2003, the funds will be available for private investment, up to 30 percent outside Nicaragua.

POLITICAL VIOLENCE

Political violence is not prevalent in Nicaragua. There have been no recent instances of political violence targeted against foreign business operations. The lack of violence relative to the rest of the region has been cited by numerous foreign investors as a key incentive for investment in Nicaragua. Rural areas in the mountainous north and central Nicaragua continue to see some violence by groups of bandits formerly part of armed political factions. In 2001 and early 2002, the police and army successfully disbanded one such group responsible for the vandalizing of the Mining Triangle near the Atlantic Coast. Former residents have since returned to the area, and no further activity has been reported.

CORRUPTION

The Bolaños Administration, which took office in January 2002, has been working to address the corruption prevalent in the prior government. The Attorney General’s Office has indicted several senior government officials from the previous Administration, who are in jail awaiting trial, and indicted others who have since fled the country.

The Bolaños Administration supports efforts to strengthen the judicial system through the approval of a “Judicial Career Law” that makes the selection and retention of judges merit-based. Nevertheless, corruption remains a problem in the court system. The Office of the Controller General (CGR) is a partisan body controlled by the two leading political parties, that has not succeeded in bringing corruption cases to the courts. The Office of the Attorney General has been active in investigating and prosecuting cases of corruption, most recently in the case against Byron Jerez, the former head of the government’s tax agency, who is currently in prison awaiting trial. Bribery is illegal in Nicaragua. During the previous administration, foreign investors reported instances of government officials refusing to perform routine services unless bribes are paid, or asking for "silent partnerships" in companies in exchange for "making life easier." Additionally, the concept of “conflict of interest” is not widely understood, and political factors can affect business decision-making.

The Government Procurement Law passed in 2000 should make bidding procedures more transparent. Currently, most government procurements have to be announced in the main newspapers and posted on the internet.

BILATERAL INVESTMENT AGREEMENTS

Nicaragua has signed and ratified bilateral investment agreements with the United States, Mexico, Spain, Taiwan, Denmark, the United Kingdom, the Netherlands, Korea and Ecuador. The U.S.-Nicaragua Bilateral Investment Treaty has been submitted to the U.S. Senate for ratification.

OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS

The U.S. Overseas Private Investment Corporation offers financing for U.S. investments in Nicaragua. It can also provide political risk, expropriation, and inconvertibility insurance. Nicaragua participates in the U.S. Department of Agriculture's GSM-102/103 program providing credit guarantees for the importation of selected U.S.-origin agricultural products. The Nicaraguan private sector is eligible for the U.S. Export-Import Bank's short and medium-term programs to finance U.S. exports. Nicaragua is a member of the World Bank’s Multilateral Investment Guarantee Agency (MIGA).

LABOR

Nicaragua's labor force, estimated at 1.9 million workers, is rural-based and largely unskilled. An estimated 43 percent of the employed population is working in the agricultural sector, 15 percent in manufacturing, and 42 percent in services. In 2001, the Government estimated an unemployment rate of 10.7 percent and a combined unemployment and underemployment rate of 23 percent; unofficial estimates are significantly higher. Nicaragua has the lowest population density in Central America. There is a shortage of skilled technicians and managerial personnel.

The high unemployment rate has eroded the strength of the trade union movement. Less than one-third of the unionized labor force belongs to the National Labor Federation (FNT), an Sandinista-affiliated umbrella organization. Workers may freely exercise their right to strike, but only after exhausting other methods of dispute resolution, including mediation by the Ministry of Labor. Despite the code’s provisions for streamlining the mediation process, some unions ignore them when initiating a strike. The Labor Code requires employers to demonstrate just cause and obtain approval from the Ministry of Labor before firing union leaders or laying off workers. Employers who sidestep this provision may be forced to reinstate the fired employees. Approval to lay off employees is usually granted by the Ministry, but may not be immediate.

The Labor Code contains many benefits that increase business costs. For example, there are generous medical (including maternity) leave and vacation provisions, and upon termination the employer must pay a month's salary for each year worked, up to five months salary. At year-end, employers must pay the equivalent of an extra month's salary. Potential investors should review the law’s requirements before initiating business activities.

FREE TRADE ZONES

45 firms (Nicaraguan, U.S., Asian, and European) are currently operating under the free trade zone regime, primarily manufacturing clothing. The state-owned Las Mercedes Industrial Free Trade Zone is located near Managua's international airport. Additionally, there are ten private free trade zones (Index, Saratoga, Opinsa, Unisebaco, San Marcos, Zip Argeñal, Senika, Mateare, Granada and Tipitapa). Investors report that the quality of the work is quite good for repetitive, simple tasks, but considerable additional training is necessary for employees to perform more complicated tasks. The free trade zones generated $ 380 million in exports in 2001, up from $300 million in 2000. Currently there are approximately 40,000 jobs at the various Free Trade Zones. They are a major source of employment growth, a cornerstone of the Bolanos administration’s agenda.

FOREIGN DIRECT INVESTMENT STATISTICS

New investment (public and private) in 2001 amounted to $648.5 million, a 2 percent decline from 2000. Foreign direct investment in Nicaragua declined to $110 million in 2001 compared to $150 million in 2000, following increases to more than $300 million in 1999 and $184 million in 1998. This decline can be attributed in part to the national elections held in November. Many private investors delayed investing pending the outcome of the election. Private investment flows are primarily in tourism, construction, services, industry, energy, and aquaculture.

MAJOR FOREIGN INVESTORS

* ESSO STANDARD OIL (U.S.), refiner and major distributor of petroleum derivatives
* E. D. AND F. MAN (U.K.), agriculture supply and financing firm
* BELLSOUTH (U.S.), investments in cellular phones and service
* AMFELS (Singapore), energy generating plant
* TEXACO CARIBBEAN (U.S.), sales of petroleum derivatives
* HOTEL INTERCONTINENTAL MANAGUA (U.S.), owned by Taiwanese investors
* HOTEL INTERCONTINENTAL METROCENTRO (U.S.), owned by Salvadoran investors
* HOTEL MONTELIMAR (Spain), owned by the Barcelo Group
* BAYER QUIMICAS (Germany), production of agro-chemical products, primarily for domestic consumption with German, Salvadoran, and Guatemalan investment
* PEPSI-COLA (U.S.), soft drink manufacturer.
* KATIVO DE NICARAGUA (U.S.), paint and paint-related products
* KRAFT FOODS-NABISCO (U.S.), processed foods with U.S. and Nicaraguan capital
* TRITON (Canada), mining company with gold mining interests
* GULF KING (U.S.), shrimp boat fleet
* NICA HOLDINGS (U.S.), variety of seafood processing operations and a flower nursery
* SAN MARINO SEA FARMS (U.S.), aquaculture firm with Nicaraguan and U.S. capital
* SAHLMAN SEAFOODS (U.S.), aquaculture operation
* SHELL NICARAGUA (U.K.), petroleum distributor
* FREE TRADE ZONES (U.S., Taiwan, Korea, Nicaragua), more than 40 companies mostly in apparel
* COCA-COLA (U.S.), soft drink manufacturer with capital from the United States, Mexico, Venezuela and Nicaragua
* HOLIDAY INN (U.K.), franchise with Nicaraguan and U.S. capital.
* METROCENTRO (El Salvador), shopping mall
* PLAZA INTERCONTINENTAL (Taiwan, Nicaragua), shopping mall, cinemas, conference rooms
* HOTEL PRINCESS (El Salvador, Guatemala, Nicaragua)
* COASTAL POWER (Tipitapa Power Co.—U.S.), power generation with capital from Nicaragua and the United States
* ENRON (Corinto Power Co.—U.S.), power generation with capital from Nicaragua, Great Britain, Guatemala and the United States.
* CINEMARK (U.S.), movie theaters
* LEGENDS HOTEL (U.S.)
* HELECHOS DE NICARAGUA, S.A. (U.S., Nicaragua), fern farm
* ORMAT (Israel), geothermal power generation.
* UNION FENOSA (Spain), energy distribution firm.

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MAJOR TRENDS AND OUTLOOK




Nicaragua’s economy grew by 3 percent in 2001, down from 5.5 percent in 2000. While production and exports experienced significant ups and downs during the year, the lower growth rate was primarily due to steady declining prices for Nicaragua’s main export commodities. In 2001, GDP (Gross Domestic Product) reached $2.5 billion. The primary sector (farming, livestock and fishing) grew by 3 percent in 2001. Livestock went from 13 percent growth in 2000 to 8 percent growth. Agriculture grew 2 percent after growing 13 percent in 2000. Fishing dropped from 14 percent growth in 2000 to a 10 percent decline in 2001. Coffee and sugar cane, which in 2000 registered their highest production levels ever, experienced drops (coffee by a dramatic 29 percent and sugar by 4 percent).

The secondary sector (manufacturing, construction and mining) continued to grow, rising by 3 percent after growing at the same rate in 2000. Construction went from a growth rate of 10 percent in 2000 to 5 percent. Mining rebounded modestly from a 20 percent decline in 2000, growing by 2.5 percent; an increase in silver production primarily accounted for this modest growth. Drastic reductions in production of sand and stones used for reinforced concrete were evident, at -24 percent and –16 percent, respectively. The manufacturing industry grew 2.6 percent compared to 2.8 percent in 2000.

The tertiary sector (commerce, government, transport and communication, banking, energy, housing, and others) grew by 2.9 percent in 2001, almost unchanged from 3.0 percent in 2000. Top contributors were housing (4.0 percent), transportation and communication (3.1 percent), banking (3.5 percent) and commerce (3.2 percent).

Private investment, both domestic and foreign, sharply declined ($110 million from $150 million in 2000 after topping $300 million in 1999), and the private banking sector remained stagnant. Because of rapid population growth, GDP per capita was unchanged at an estimated $467, the second lowest in the hemisphere. The unemployment rate rose from 10 percent in 2000 to 11 percent in 2001. The combined rate of unemployment and underemployment was 23 percent. Many believe that the official levels underreport the real unemployment and underemployment rates. As 2002 develops, it appears that coffee and sugar will experience greater production decreases, further reducing the economic growth rate. Likewise, manufacturing is expected to remain stagnant in 2002, and the construction sector does not appear to be significantly recovering.

Nicaragua has one of the highest per capita foreign debt figures in the world with a foreign debt of $6.4 billion and a population of only 5 million. The previous government signed a structural adjustment program with the International Monetary Fund (IMF) in March 1998, agreeing to cut the fiscal deficit, implement structural reforms, and maintain overall monetary stability and poverty reduction. Several of the IMF and Nicaraguan government jointly negotiated fiscal targets were missed. The current government is negotiating a new three-year IMF program, which it hopes to have signed by mid-October.

Under the Heavily Indebted Poor Country (HIPC) Initiative, Nicaragua’s main creditors have committed themselves to providing significant debt relief when Nicaragua reaches the HIPC Completion Point. Nicaragua seeks to erase over 90 percent of its eligible bilateral foreign debt and over 70 percent of its multilateral debt – altogether approximately $4.5 billion. Donor countries have directly linked debt relief with increasing social expenditures. Resources saved by debt forgiveness are to be used to fund projects and programs in Nicaragua’s Poverty Reduction Strategy, which aims to improve the allocation and expansion of fiscal resources to disadvantaged sectors of the population. If Nicaragua signs a new three-year IMF program in late 2002, the government will be expected to maintain fiscal and monetary stability, an adequate exchange rate, and stable consumer price inflation, while making progress on providing transparency to the financial sector and advancing good governance measures and public sector reforms. An IMF team visited Managua in late February and returned in mid-July to specifically assess Nicaragua’s progress on the latter two areas. Nicaragua is expected to comply with the conditionalities of the structural reforms left pending by the former administration, and show implementation of the Poverty Reduction and Growth Facility program.

Estimates of real GDP growth in 2002 range from 1 percent to 2 percent. The economy may not reach the 2 percent real growth rate figure because of low commodity prices and high petroleum costs.

PRINCIPAL GROWTH SECTORS

Tourism, agriculture, construction, mining, telecommunications, and commerce are expected to be the principal growth sectors for the next few years.

Agriculture: In 2001, the primary sector (including farming, livestock, fisheries and forestry) accounted for 30 percent of Nicaragua's GDP, over 68 percent of exports, and 44 percent of labor generation. The agricultural sector grew by 2.3 percent in 2001, down from 11 percent growth in 2000. Although the volume of several key commodities was near record levels, low commodity prices (especially for coffee) largely deflated the agricultural sector. The Nicaraguan government, as well as the international donor community, has placed great emphasis on agricultural reactivation. Farming grew by 7.7 percent in 2001, down from 13.2 percent in 2000. Meat was the only agricultural commodity whose price remained constant while its production volume increased. Exports of slaughtered animals grew by 9 percent, while exports of live animals grew by 7 percent. Fishing declined by 10 percent in 2001, down from a 14 percent increase in 2000. Nicaragua's low population density and ample grazing land offer future potential for further expansion of the livestock sector.

Manufacturing: Overall, manufacturing made up 16 percent of the nation's GDP. Export-oriented manufacturing in the free trade zones rose by 27 percent in 2001 to $380 million. The Free Trade Zone regime houses 46 companies from eight countries and provides direct employment to 37,050 employees. Direct employment derived from the free trade zones account for almost 2 percent of the economically active population. As of February 2002, 13 U.S. firms operated under the free trade zone regime -- three in the government-owned zone, two in the private Zona Franca, and another eight in self-administered free trade zones outside the capital (Esteli, Masaya and Granada).

Mining: The sector registered an increase of 2.5 percent in 2001, after a 20 percent decrease in 2000. Gold production increased 5 percent to 123.5 thousand troy ounces, while silver production increased 60 percent to 81 thousand troy ounces. Non-metallic mining products once again experienced a significant slowdown, along with the construction sector. Production of construction materials has also fallen drastically.

Telecommunications: After four failed attempts, the government privatized the national telephone company, ENITEL, in 2001. Forty percent of the shares of ENITEL, including the management contract, was purchased through public tender by the Swedish telecommunication company TELIA. This purchase has been challenged in the courts. This past year the government awarded a PCS cellular license to a Mexican company. This concession was cancelled after the company failed to pay the agreed-upon installments. Current Nicaraguan technical infrastructure can support up to 5 cellular phone companies; only two exist, however, with one dominating the market. ENITEL, with its right to use the B band, might enter the cellular market with an investment of 40 million dollars. Recent research has found a current market of 160,000 users, and forecasts predict a market of 410,000 users by the year 2005. Bell South is the only cellular technology provider in the Pacific Coast, offering monthly plans that range from 70 to 500 minutes with price tags between US$30-US$130, plus tax.

Tourism: According to the Nicaraguan Institute of Tourism, tourism was the second most important source of foreign exchange in 2001, representing earnings of $110.5 million. In 2001, tourist arrivals did not meet the expected figure of 513,600, narrowly missing it at 482,870. 61 percent of these tourists arrived by land, while 35.6 percent arrived by air. 62 percent were Central American, while Americans made up 22 percent. Tourists in Nicaragua on average spent 3.2 days and some $70 per day. INTUR projects that in 2002 tourists will stay slightly longer (3.5 days) and will maintain their $70 daily spending allocation. In 2000, Nicaragua began to receive tourists via cruise liners, primarily in San Juan del Sur (31 ships in 2000 and 29 in 2001). The number of cruise ships is expected to grow in 2002. Nicaragua’s tourism incentive law (Law 306) provides tax breaks for investors in the hotel services, food and beverage, entertainment services, tourism infrastructure, and arts and crafts industries. New investment has helped to increase the number of hotel rooms by 24 percent compared to 1999.

Construction: In 2001, construction declined to 5.2 percent from 10.4 percent in 2000. Business and residential construction are expected to continue to rebound in the coming years after two decades of relative stagnation. Middle-class residential construction still has limited funding from local banks, which draw on offshore credit lines, the military pension fund, and limited funding through a national investment fund. Changes in the national Social Security law have permitted the investment of a certain portion of the national pension fund to open up new sources of financing. In 2001, the Overseas Private Investment Corporation (OPIC) approved a $30 million loan to Latin American Financial Services, Inc. (LAFISE), the American parent company of Banco de Crédito Centroamericano (BANCENTRO), to help finance home mortgages and develop a secondary mortgage market. The loan is expected to be disbursed in mid-2002.

GOVERNMENT ROLE IN THE ECONOMY

Since 1990, all state monopolies except for water services have been eliminated, virtually all price controls have been phased out, and more than 300 state enterprises have been privatized. The Government still retains a number of state enterprises in non-utility areas, such as construction, insurance, building materials, pharmaceuticals and agribusiness. Although the business climate is improving, doing business in Nicaragua can still mean a slow-moving bureaucratic process. Foreign investors have reported instances of officials in former governments requiring favors and/or bribes to provide routine services. The Embassy has also, in the past, received reports of former government officials offering government contracts in exchange for compensation, or asking for participation in a business, with an implied threat of retaliation if they are not allowed to "invest." In early 2002, an American company was provided legal and commercial documents and permits to import wood from a Nicaraguan company. These documents ended up being fraudulent and, as a result, were not upheld by other government agencies. The wood was not released following its purchase. Investors and U.S. exporters dealing with state-owned companies have experienced difficulties with government regulatory agencies acting in ways that are not impartial. Nicaragua’s legal and regulatory framework remains cumbersome and an impediment to investment.

BALANCE OF PAYMENTS SITUATION

Nicaragua suffers from a chronic external account deficit. Despite growing exports and tourism revenue, along with government progress on structural adjustment measures and foreign debt reduction, the country remains highly dependent on donor assistance to balance its accounts. This dependence will continue in the foreseeable future. The current account deficit in 2001 was $ 1,036.4 million (41 percent of GDP). The capital account in 2001 registered a net official capital transfer inflow of $404 million and a net private capital transfer inflow of $410 million.

INFRASTRUCTURE SITUATION: GOODS/SERVICES DISTRIBUTION

Ports: Because of poor infrastructure and high operating expenses, most cargo and fresh fruit shipped in containers are transported by road from Puerto Limón in Costa Rica and from Puerto Cortés in Honduras. Nicaragua has six seaports, five of which are operated by the government-run Port Authority (EPN). The government granted a concession in 1999 to DELASA, a U.S. company, at the port of Puerto Cabezas, on the Atlantic Coast. The most suitable port for commercial shipping is the Port of Corinto, located on the Pacific coast 110 miles northwest of Managua. The Port Authority has improved Corinto’s facilities and hopes that this will increase the port’s competitiveness. In 2001, the U.S. government donated Global Positioning System (GPS) equipment to the Port of Corinto. GPS technologies allow for safer and more pinpoint navigation and charting for incoming and outgoing sea vessels. The port has recently been dredged. Puerto Sandino, also located on the Pacific Coast, is primarily used for the import of crude petroleum and bulk cargo, such as fertilizer, clinker and steel. The remaining Pacific port of San Juan del Sur has limited capacity and uses barges to load and unload cargo. In 2000, the San Juan del Sur resort town began welcoming cruise ships. On the Atlantic Coast, Nicaragua has three seaports (El Bluff, El Rama and Puerto Cabezas). El Bluff has basic piers and handles limited cargo. El Rama is a floating steel wharf and is located on the Rama River, 40 miles from the Altlantic coast. There is no fully paved road from Managua to the port of Puerto Cabezas, and the route is not accessible during the rainy season.

Airport: Managua International Airport (located 7 miles east of the city center) has separate cargo facilities constructed in 1995. The main cargo carriers are Fine Airlines (based in Miami) and TACA Airlines (based in Costa Rica). UPS joined forces with Challenge Air Cargo in 2000, and now averages six flights per week. In addition, most passenger airlines, including American and Continental, maintain some cargo capacity. A 3,500 cubic foot cold storage facility at the airport opened in 1996. The airport is currently in the process of doubling its passenger traffic capacity. It is expected to handle 1.4 million passengers per year after 2002. Sansa, a Nicaraguan flag carrier whose reputation was stained by flight delays and lost luggage, was shut down by the current government after failing to present a bond to cover possible damages to passengers.

Highways: There are approximately 19,000 kilometers of roads in Nicaragua, with some 2,000 of them paved. Only 18 percent of the roads were scheduled for maintenance in 2001. The Pan-American Highway runs north-south through Nicaragua on the Pacific side and carries the majority of overland cargo. Most paved roads are located in the western part of the country. There is no all-weather road located between the Pacific and the Atlantic coasts. A secondary highway, which is also under reinstatement, runs from Managua to the interior port town of El Rama, from which there is river transport to Bluefields. The unpaved portion of road between Managua and the northern Atlantic Coast town of Puerto Cabezas is accessible during the dry season (December-April). After Hurricane Alma struck in May 2002, the highway and road situation deteriorated drastically throughout the country.

JORGE GIRALDEZ-BENARD
http://www.inversionica.com/