2009 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
February 2009
Report


Openness to Foreign Investment

Legal Framework
The Free Trade Agreement between the United States, Central America, and the Dominican Republic (CAFTA-DR) entered into force on April 1, 2006, for the United States and Nicaragua. The CAFTA-DR Investment Chapter establishes a secure, predictable legal framework for U.S. investors in Central America and the Dominican Republic. The agreement provides six basic protections: (1) nondiscriminatory treatment relative to domestic investors and investors from third countries; (2) limits on performance requirements; (3) the free transfer of funds related to an investment; (4) protection from expropriation other than in conformity with customary international law; (5) a minimum standard of treatment in conformity with customary international law; and (6) the ability to hire key managerial personnel without regard to nationality. Through PROCAFTA, the U.S. Agency for International Development provides support for the implementation of CAFTA-DR.

In addition to CAFTA-DR, Nicaragua’s Foreign Investment Law defines the legal framework for foreign investment. The law allows for 100% foreign ownership in most sectors (see Right to Private Ownership and Establishment for exceptions). It also establishes the principle of national treatment for investors, guarantees foreign exchange conversion and profit repatriation, clarifies foreigners’ access to local financing, and reaffirms respect for private property. The Law to Simplify Administrative Processes and Services (2009) shortens the procedures for establishing a business.

Other major laws governing foreign investment include the Temporary Entry Law, which allows for the duty free import of machinery, equipment, raw materials, and supplies for companies exporting the majority of their production (see Performance Requirements and Incentives); the Export Processing Zone Law (see Foreign-Trade Zones/Free Ports); the Tax Equity Law (see Performance Requirements and Incentives); the Banking Law (see Conversion and Transfer Policies and Performance Requirements and Incentives); and a series of intellectual property laws (see Protection of Property Rights). In 2006, the Nicaraguan National Assembly approved a Competition Law, but the law has not yet been implemented (see Transparency of the Regulatory System). In 2005, the government amended the Tourism Incentive Law to strengthen incentives for investment in that sector (see Performance Requirements and Incentives). See http://www.asamblea.gob.ni for the Spanish-language text of Nicaraguan law.

Policy Environment
Several factors contribute to an increasingly uncertain policy environment for foreign investors. Harsh rhetoric against the United States, capitalism, and free trade has had a negative effect on foreign investor perceptions of risk. Government officials frequently deride neoliberal policies and the “tyranny of capitalism” and criticize foreign investors for paying “slave wages.” President Ortega has repeatedly suggested that it was a mistake to privatize the telecommunications and energy industries, where a number of foreign firms have invested. For official copies of speeches in Spanish, see www.presidencia.gob.ni and www.conamornicaragua.org.ni.

Under an International Monetary Fund (IMF) program signed in October 2007, the Government of Nicaragua agreed to implement free market policies linked to targets on fiscal discipline, spending on poverty, and energy regulation. However, in the wake of November 2008 municipal elections marred by allegations of fraud on the part of the ruling Sandinista National Liberation Front (FSLN), the government has been unable to secure continued budget support provided by European donors, resulting in a significant fiscal deficit that led President Ortega to initiate a series of government austerity measures in January 2009. In June 2009, the Board of the Millennium Challenge Corporation (MCC) partially terminated MCC’s compact assistance to Nicaragua for activities totaling $62 million for road construction and property regularization over concerns that the Nicaraguan Government had not adequately addressed allegations of fraud related to the municipal elections in November 2008.

Immediately upon taking office in January 2007, President Ortega signed Nicaragua onto the Bolivarian Alternative for the Americas (ALBA) with Cuba, Ecuador, and Venezuela. The government views participation in ALBA as an alternative to “failed neoliberal capitalism.” President Ortega has also pursued closer relations with countries such as Iran, Libya, and Russia.

On several occasions, the government has used its tax and customs authorities to pressure individuals and companies into accepting noncommercial terms in concessions or contracts (see Dispute Settlement, Transparency of the Regulatory System, and Expropriation and Compensation for examples). High profile rulings by the courts and oversight agencies are unpredictable and widely believed to be politicized. Transparency International ranked Nicaragua 134th of 180 countries in its 2008 Corruption Perceptions Index and in February 2008 Global Integrity named Nicaragua to its Grand Corruption Watch List, indicating that it is one of 13 countries in the world “with the lowest scores for regulating the flow of money through government.”

Legislative stalemate and a lack of executive branch initiative have resulted in an absence of policy initiatives that would improve Nicaragua’s competitiveness. A World Bank report, Governance Matter 2008, ranks Nicaragua in the bottom 15 percent of countries for Government Effectiveness. Since Daniel Ortega became president for a second time, Nicaragua has fallen in the World Economic Forum’s Competitive Index Rankings from 95th place in 2006 to 120th in 2008. In 2009, the Heritage Foundation Index of Economic Freedom put Nicaragua 84th worldwide for economic freedom, down from 65th in 2007. However, the Heritage Foundation has maintained Nicaragua’s strong placement at the 70th percentile on investment freedom, one of ten components comprising its Index of Economic Freedom.

Conversion and Transfer Policies

The Foreign Investment Law (2000/344) and the Banking, Nonbank Intermediary, and Financial Conglomerate Law (2005/561) allow investors to freely convert and transfer funds associated with an investment. Article 10.8 of CAFTA-DR ensures the free transfer of funds related to a covered investment. Local financial institutions freely exchange U.S. dollars and other foreign currencies. Foreigners may open bank accounts, but the process can be cumbersome and time consuming. The Superintendent of Banks and other Financial Institutions (SIBOIF) monitors financial transactions for illicit activity.

The official exchange rate is adjusted daily according to a crawling peg that devaluates the córdoba against the U.S. dollar at an annual rate of 5%. The official exchange rate as of June 23, 2009, was 20.3 córdobas to one U.S. dollar. Annual inflation for the year was 13.8%, the second highest in Latin America behind Venezuela. President Ortega joined other ALBA leaders in October 2008 to announce plans to study the introduction of a regional currency, the sucre.

Expropriation and Compensation

During the 1980s, the Sandinista government confiscated 28,000 real properties. Since 1990, thousands of U.S. citizens have filed claims against the government to have their property returned or receive compensation. As of June 2009, the Nicaraguan Government had settled more than 4,500 U.S. citizen claims. A total of 592 Embassy-registered U.S. claims remain.

Since November 2007, the Government of Nicaragua has dismissed 98 of these claims through the retroactive application of Decrees 3 (1979) and 38 (1979), which legalized the confiscation of property belonging to the Somoza family and “close allies.” The U.S. Embassy has expressed concern that the government has failed to apply these decrees in a transparent and objective manner. In addition, the government regards as resolved 25 claims for which it has published notice in the Official Gazette and deposited in escrow bonds offered as compensation. The U.S. Embassy has asked the government to continue negotiating with these claimants. U.S. citizen claims dismissed through both these mechanism remain on the list of Embassy-registered claims.

The U.S. Embassy in Nicaragua is working with claimants to ensure that the property rights of U.S. citizens are respected. A U.S. citizen with such a claim may contact mailto:managuapropoffice@state.gov.

The CAFTA-DR Investment Chapter prohibits expropriation unless for a public purpose. The government must pay prompt, adequate, and effective compensation.

In August 2007, the Nicaraguan Government seized, via judicial order, several petroleum storage tanks owned by a U.S. company on the pretext that the company had not paid value-added taxes associated with the import of crude oil, despite the fact that petroleum and petroleum products are not subject to this tax and no mechanism exists to collect it. The government then used the tanks to store petroleum products imported from Venezuela under the terms of a government-to-government financing agreement. In January 2008, the U.S. company sold the tanks in question to state-owned company Petronic and negotiated a purchase agreement with Petronic for crude oil imported from Venezuela.

See Protection of Property Rights for a description of other forms of land security problems affecting investors.

Dispute Settlement

Difficulty in resolving commercial disputes, particularly the enforcement of contracts, remains one of the most serious drawbacks to investment in Nicaragua. The legal system is weak, cumbersome, and members of the judiciary, including those at senior levels, are widely believed to be corrupt or subject to political pressure. A commercial code and bankruptcy law exist, but both are outdated.

Enforcement of court orders is frequently subject to nonjudicial considerations. Courts routinely grant injunctions (“amparos”) to protect citizen rights by enjoining official investigatory and enforcement actions indefinitely. Foreign investors are not specifically targeted but are often at a disadvantage in disputes against nationals with political or personal connections. Misuse of the criminal justice system sometimes results in individuals being charged with crimes arising out of civil disputes, often to pressure the accused into accepting a civil settlement. The World Bank estimates that on average local courts issue a preliminary ruling on contract disputes in 540 days, placing Nicaragua in the upper half of the 181 countries ranked. Monetary judgments normally are rendered in Nicaraguan currency, but may be denominated in U.S. dollars.

Dispute resolution is even more difficult in the Northern and Southern Atlantic Autonomous Regions (RAAN and RAAS, respectively), where most of the country's fishery, timber, and mineral resources are located. These large regions, which share a Caribbean history and culture, comprise more than one-third of Nicaragua’s land mass. The division of authority between the central government and regional authorities is complex and flexible. Local officials may act without effective central government oversight.

The Mediation and Arbitration Law (2005/540) establishes the legal framework for alternative dispute resolution. Nicaragua is a signatory of the New York Convention and the Inter-American Convention on International Commercial Arbitration. Arbitration clauses should be included in business contracts if one has doubts about the Nicaraguan judicial system. In 2008, the American Chamber of Commerce of Nicaragua merged its mediation and arbitration center with that of the Nicaraguan Chamber of Commerce.

CAFTA-DR establishes an investor-state dispute settlement mechanism. An investor who believes the government has breached a substantive obligation under CAFTA-DR or that the government has breached an investment agreement may request binding international arbitration in a forum defined by the Investment Chapter. Proceedings under this mechanism are generally open to the public and documents are made publicly available.

Several U.S. companies and the U.S. Chamber of Commerce in Washington have voiced their concern that Nicaraguan Law 364, enacted in 2000 and implemented in 2001, presumes guilt without due process and retroactively imposes arbitrary liabilities on foreign companies that manufactured or allegedly used or distributed the chemical pesticide dibromochloropropane (DBCP, or Nemagon) in Nicaragua. DBCP was banned in the United States after the Environmental Protection Agency cancelled its certificate for use (with exceptions) in 1979.

Performance Requirements and Incentives

Performance Requirements
Nicaragua’s labor code states that 75% of all employees, not including management posts, must be Nicaraguan. The Law on Promotion of National Artistic Expression and Protection of Nicaraguan Artists (1996/215) requires that foreign production companies contribute 5% of total production costs to a national cultural fund. In addition, the law requires that 10% of the technical, creative, and/or artistic staff be locally hired. Under CAFTA-DR, U.S. companies are exempt from these requirements.

Investment Incentives
The Tax Equity Law (amended 2005/528) allows firms to claim an income tax credit of 1.5% of the free-on-board (FOB) value of the exports. The Law of Temporary Admission for Export Promotion (2001/382) exempts businesses from value-added tax (VAT) for the purchase of machinery, equipment, raw materials, and supplies duty if used in export processing. Businesses must export 25% of their production to take advantage of these tax benefits. See Foreign Trade Zones/Free Ports for a description of incentives for investments in free trade zones.

The Fishing and Fish Farming Law (2004/489) exempts gasoline used in fishing and fish farming from taxes. Investors in the sector must register with the Directorate General for Natural Resources in the Ministry of Trade, Industry, and Development and with the Nicaraguan Fishing and Aquaculture Institute (INPESCA). Environmental regulations also apply (see Transparency of the Regulatory System).

The Forestry Conservation and Sustainable Development Law (2003/462) establishes preferential property tax rates and income tax exemptions, in addition to duty and tax exemptions, for inputs and capital goods used in forestry projects. In September 2007, the Nicaraguan Government implemented a temporary ban on commercial logging and compelled operators to supply all timber felled by Hurricane Felix to the government for reconstruction of the RAAN after the hurricane. In September, 2008, the government published a Presidential Decree authorizing the RAAN government to permit the commercial harvest and export of fallen timber.

The Hydroelectric Promotion Law (amended 2005/531) and the Law to Promote Renewable Resource Electricity Generation (2005/532) provide incentives to invest in electricity generation, including duty free imports of capital goods and income and property tax exemptions. Regulatory concerns limit investment despite these incentives (see Transparency of the Regulatory System). In particular, private investment in hydroelectric dams is banned from the Asturias, Apanás, and Río Viejo Rivers and is limited to 30 megawatts on all other rivers.

The Special Law on Mining Prospecting and Exploitation (2001/387) exempts mining concessionaires from import duties on capital inputs (see Transparency of the Regulatory System for additional information on the mining sector).

The Tourism Incentive Law (amended 2005/575) includes the following basic incentives for investments of $30,000 or more outside Managua and $100,000 or more within Managua: income tax exemption of 80% to 100%; property tax exemption; exoneration from import duties on vehicles; and value added tax exemption on the purchase of equipment and construction materials.

Immigration
Those wishing to permanently reside in Nicaragua must request a resident visa from the Office of Immigration in Managua. Investors who live in Nicaragua but fail to obtain a residency permit have encountered immigration problems, including deportation. The Nicaraguan private sector has encouraged the government to establish a short-term business visa category to mitigate the problem. Investors should consult with Nicaraguan immigration authorities to ensure that they have an appropriate visa or resident status while engaging in business.

Right to Private Ownership and Establishment

In 1992, the Nicaraguan Government began to privatize small state-owned companies that the first Ortega government had nationalized or established in the 1980s. Subsequent privatization programs managed by the World Bank and Inter-American Development Bank sold state-owned telecommunications and electricity generation and distribution companies. Over the past 15 years, Nicaragua has privatized more than 350 state enterprises.

The government owns and operates the National Sewer and Water Company (ENACAL), National Port Authority (EPN), and National Electricity Transmission Company (ENTRESA). Private sector investment is not permitted in these sectors. In sectors where competition is allowed, the government owns and operates the Nicaraguan Insurance Institute (INISER), Nicaraguan Electricity Company (ENEL), Las Mercedes Industrial Park, Nicaraguan Food Staple Company (ENABAS), and Nicaraguan Petroleum Company (Petronic). Through the Nicaraguan Social Security Institute (INSS), the government owns a pharmaceutical manufacturing company, Laboratorios Ramos.

Through Petronic, the government owns a 45% share in ALBA Nicaragua (ALBANISA), the company that imports and monetizes Venezuelan petroleum products through the ALBA Energy Agreement. Venezuelan state-owned oil company Venezuelan Petroleum Company (PDVSA) owns the remaining 55% share of ALBANISA. This joint venture owns electricity generating assets, storage tanks for petroleum products, and construction equipment. In November 2008, ALBA Foods of Nicaragua (ALBALINISA)—a subsidiary of ALBANISA—bought the Nicaraguan assets of the Seminole Tribe of Florida, including a hotel and cattle ranch. ALBANISA has also provided capital to a microfinance institution, ALBA-CARUNA.

The government enjoys exclusive rights to manage public social security pension funds (see Efficient Capital Markets and Portfolio Investment). In 2000, Spanish company Union Fenosa won the concession rights to both the north and the south electricity distribution companies from ENEL (see Transparency of the Regulatory System). However, operation of the concession has suffered greatly from weak regulatory oversight and the lack of a supportive legal regime.

The military pension fund has invested in many sectors, especially retail and construction. These companies compete on equal terms with privately owned businesses and do not constitute an impediment to foreign investment.

Protection of Property Rights

Real Property
Many foreign investors in Nicaragua experience difficulties defending their property rights. The expropriation of 28,000 properties in the 1980s has created endless claims and counter claims involving real estate. Property registries suffer from years of poor recordkeeping, making it difficult to establish a title history. Unscrupulous individuals have engaged in protracted confrontations with U.S. investors to wrest control of beachfront properties along the Pacific coast in the Departments of Carazo, Rivas, and Chinandega, as well as prime real estate in the cities of Managua, Granada, and Leon. Judges and municipal authorities have been known to collude with such individuals, and a cottage industry supplies false titles and other documents to those who scheme to steal land. In addition, Citizen Power Councils affiliated with the Sandinista National Liberation Front (FSLN) have led to some land invasions (see Political Violence).

Property invasions usually go unchallenged by local law enforcement officials and in some cases turn violent. Police are barred from intervening in property invasion cases or assisting in the enforcement of court orders to remove illegal occupants. The Embassy is working with several U.S. citizens to press the Nicaraguan government to protect the right to due process for the lawful owners of property in Nicaragua.

Those interested in purchasing property in Nicaragua are strongly encouraged to seek legal counsel to represent their interests in the transaction. The Embassy maintains a list of attorneys. The government’s investment promotion agency, ProNicaragua, also offers assistance with due diligence.

The Capital Markets Law (2006/587) provides a legal framework for securitization of movable and real property. The banking system is expanding its loan programs for housing purchases, but there is no secondary market for mortgages. See Efficient Capital Markets and Portfolio Investment for more information on the financial sector.

Intellectual Property
CAFTA-DR made Nicaraguan standards for the protection and enforcement of IPR consistent with U.S. and emerging international intellectual property standards. To implement the agreement, Nicaragua has strengthened its legal framework to 1) provide state-of-the-art protections for digital products such as software, music, text and videos; 2) afford stronger protection for patents, trademarks, and test data, including an electronic system for the registration and maintenance of trademarks; and 3) deter piracy and counterfeiting. The Nicaraguan Government has not yet implemented an effective system for test data protection and patent linkage for pharmaceutical products, as required by CAFTA-DR.

The legal regime for protection of intellectual property rights (IPR) in Nicaragua is adequate but enforcement of intellectual property law has been limited. In 2008, the National Police implemented a strategy to improve IPR enforcement that included a public awareness program, training on the detection of pirated goods and the application of IPR law, as well as the coordination of raids and seizures of pirated goods and equipment for their production. During the first eight months of 2008, the police seized 350,000 pirated and 80,000 blank DVDs and CDs and audiovisual equipment worth approximately $803,000. However, the Nicaraguan Government did not make any IPR-related arrests or convictions during 2008.

Nicaraguan IPR laws, made available online by the National Assembly, include:

Patent, Utility Model, and Industrial Design Law (amended 2007/634)
Copyright and Related Rights Law (amended 2006/577)
Satellite Signal Programming Protection Law (amended 2006/578)
Trademark and Other Distinctive Signs Law (amended 2006/580)
Plant Variety Protection Law (1999/318)

Nicaragua is a signatory to the following international conventions and agreements on intellectual property:

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)
Bern Convention for the Protection of Literary and Artistic Works (1971)
Geneva Convention for the Protection of Producers of Phonograms (1971)
Brussels Satellite Convention (1974)
International Convention for the Protection of New Plant Varieties (1978)
Agreement on Trade-Related Aspects of Intellectual Property Rights (1994)
Paris Convention for the Protection of Industrial Property (1996)
The World Intellectual Property Organization (WIPO) Copyright Treaty and Performances and Phonograms Treaty (2002)


Transparency of the Regulatory System

A World Bank report, Governance Matters 2008, placed Nicaragua in the bottom 37th percent of countries worldwide for regulatory quality. Investors regularly complain that regulatory authorities are arbitrary, negligent, or slow to apply existing laws—at times in an apparent effort to favor one competitor over another. Lack of a reliable means to quickly resolve disputes with government administrative authorities or business associates has resulted in some disputes becoming intractable (see Dispute Resolution).

See Chapter 3: Selling U.S. Products and Services, for information on regulatory issues related to establishing an office.

The Competition Promotion Law (2006/601) creates a Superintendency for Competition to investigate and discipline businesses engaged in anticompetitive business practices, including price fixing, dividing territories, exclusive dealing, and product tying. To date, the superintendency is not staffed, and the competition law remains unenforced.

The Consumer Defense Law (1994/182) includes a consumer bill of rights that establishes minimum standards for product safety and quality as well as for truth in marketing. Under this law, the Consumer Defense Directorate of the Ministry of Trade, Development, and Commerce (MIFIC) may investigate business and levy fines. The Ministry of Public Health, Directorate General of Sanitary Regulation, regulates the sale of food and drugs (including cosmetics), while the Ministry of Agriculture and Forestry is responsible for plant and animal health issues (see Chapter 5: Trade Regulations, Customs, and Standards, for further information on food, drug, and consumer product regulation). Government resources to enforce these public health and safety regulations are limited, especially in informal markets.

The Directorate General of Taxation in the Ministry of Finance and Public Credit (MHCP) collects income and value-added taxes, as set forth in the most recent version of the Tax Code (2006/598). MHCP’s Directorate General of Customs collects customs duties (see Chapter 5: Trade Regulations, Customs, and Standards for further information on customs procedures). Investors cite arbitrariness in taxation and customs procedures, as well as a lack of delegation of decision-making authority. Tax audits of foreign investors have increased in frequency and duration, to the point where they may hinder normal business operations. Investors also complain that customs authorities wrongly classify goods to boost tariff revenue.

The Environment and Natural Resources Law (amended 2008/647) authorizes the Directorate General for Environmental Compliance, Ministry of Natural Resources and the Environment (MARENA), to evaluate investment plans and monitor ongoing operations to verify compliance with environmental standards. The Law on Crimes against the Environment and Natural Resources (2005/559) includes additional environmental standards. Some investors complain that MARENA takes political considerations into account in determining whether to issue an environmental permit. Budgetary constraints limit MARENA’s ability to enforce environmental standards.

The Coastal Law (2009) provides a framework for environmental protection, public access rights, commercial activity, and property rights along the shoreline of any body of water in Nicaragua. For coastal property along the Atlantic and Pacific Oceans, the law establishes environmental and public access requirements for the first 50 meters of shoreline, as measured from the high-tide mark. It recognizes beachfront property rights within this area, but gives municipalities zoning authority. There is a five-meter setback, measured from the high-water mark, for natural lakes, artificial lakes, rivers, and other bodies of water. The law establishes a Commission for Coastal Zone Development (CDZC) to provide technical assistance and advice to municipalities on coastal development and management and on concessions for use of public land.

In addition to environmental regulation, mining investments are regulated under the Special Law on Mining Prospecting and Exploitation (2001/387), which the Ministry of Energy and Mining (MEM) administers. MEM also retains the authority to grant oil and gas exploration concessions. In 2007, the Supreme Court ruled that several oil exploration concessions had been awarded without proper consultation with the governments of the autonomous regions on the Atlantic coast, even though the concessions were situated outside recognized regional waters. The matter was subsequently resolved through negotiation.

The telecommunications sector is fully privatized. Under CAFTA-DR, Nicaragua was required to open its telecommunications sector to U.S. investors, service providers, and suppliers. U.S. exports of telecommunications equipment receive duty-free treatment. In addition, CAFTA-DR requires the establishment of a fair and transparent pricing regime. The Nicaraguan Institute for Telecommunications and Postal Service (TELCOR) regulates the sector and has generally encouraged competition. However, TELCOR has failed to issue regulations to promote competition in telecommunications services and address key regulatory concerns as required by CAFTA-DR. As a result, competition in the sector is limited. Enitel, the former state telephone company that owns the fixed lines, is now 99% owned by a Mexican company. Enitel controls switching for all cellular service. The mobile telephone industry is served by two nationwide operators. In cooperation with the World Bank, TELCOR has drafted new telecommunications legislation that, if passed, should improve the competitive environment of the sector.

The Electricity Sector Law (amended 2004/465), Energy Stability Law (amended 2008/644), and Electricity Distribution and Use Law (2008/661) establish the legal framework for the electric power sector. The Ministry of Energy and Mines Law sets policy for the sector and grants licenses and concessions to investors, while the Nicaraguan Energy Institute sets prices and regulates the industry. Investment in transmission and distribution is limited by law (see Right to Private Ownership and Establishment). Investment in this sector has been constrained by regulatory and political uncertainty and by a complex tariff system that does not provide clear incentives to generators.

Efficient Capital Markets and Portfolio Investment

In the 1990s, the Nicaraguan Government privatized the banks that had been nationalized during the Ortega administration in the 1980s. In 1999-2001, four banks collapsed as the result of fraud and mismanagement on the part of bank officers. Stability returned to the banking system after the government engineered the transfer of assets and liabilities from the failed banks to several healthy banks. However, the government was forced to issue bonds to finance the purchase of distressed assets. These bonds have become unduly politicized and the subject of two rounds of renegotiations. In 2008, the government filed criminal charges against a former finance minister who refinanced the bonds issued by the government in 2003, as well as other former government officials and banking executives, in what many view as an effort to discredit them politically.

Through the Heavily Indebted Poor Country Initiative, the Multilateral Debt Reduction Initiative, and the World Bank’s Commercial Debt Buyback Program, the Nicaraguan Government has been able to significantly reduce external debt from more than $12 billion in 1990 to less than $3.5 billion (50% of GDP) as of December 2008, including about $1.7 billion held by non-Paris Club members.

Among other services, local financial institutions offer commercial and industrial loans, credit lines, factoring, leasing, and bonded warehousing. The Foreign Investment Law allows foreign investors to access local credit. However, many investors find lower cost financing and more product variety from offshore banks. Short-term government bonds dominate Nicaragua’s infant capital market. Several local firms have issued corporate debt; only one has issued public stock.

U.S. and other foreign banks have acquired a presence in Nicaragua through the purchase of local banks. In 2007, Citigroup acquired Grupo Financiero Uno, a Nicaraguan bank with a large consumer credit portfolio throughout Central America. In 2007, GE Money announced plans to increase its ownership of Nicaraguan-owned Bank of Central America from 49.99% to 100%. In 2006, HSBC bought Banistmo, a Panamanian bank with operations in Nicaragua. HSBC announced in February 2009 that it would operate a representative office in Nicaragua rather than a subsidiary bank.

Microfinance institutions (MFIs) are an important source of capital for small businesses in Nicaragua. These institutions manage loan portfolios of approximately $250 million. In July 2008, President Ortega called for Nicaraguans to halt payments on their microfinance loans and demand renegotiation of “usurious” interest rates. Later that month, mobs attacked several microfinance institutions in northern Nicaragua, forcing them to close for several weeks in July 2008. President Ortega reversed his position in January 2009, advising Nicaraguans to repay their loans, but many MFIs report that delinquency rates increased significantly in the interim.

As of year-end 2008, total deposits in the banking system had reached $2.45 billion, of which $1.66 billion was held in U.S. dollars. Interest rates hon savings accounts averaged 2.73% at year-end 2008 for accounts denominated in córdobas and 1.92% for accounts denominated in U.S. dollars. The banking system’s loan portfolio totaled $2.2 billion as of year-end 2008. Interest rates on loans denominated in córdobas averaged 13.92%; loans denominated in U.S. dollars averaged 13.02%.

The Superintendency of Banks and other Financial Institutions Law (amended 2006/576) and the General Law on Banks, Financial Institutions, Nonbank Financial Intermediaries, and Financial Conglomerates (2005/561) establish the legal framework for financial sector regulation. The Superintendency of Banks and other Financial Institutions (SIBOIF) regulates banks, insurance companies, stock markets, and other financial intermediaries. SIBOIF requires that supervised entities provide audited financial statements, prepared according to international accounting standards, on a regular schedule. The Deposit Guarantee System Law (2005/551) established the Financial Institution Deposit Guarantee Fund (FOGADE) to guarantee bank deposits up to $10,000 per depositor, per institution.

CAFTA-DR allows U.S. financial services companies to establish subsidiaries, joint ventures, or bank branches in Nicaragua. The agreement also allows cross-border trade in financial services. Nicaragua has ratified its commitments under the 1997 WTO Financial Services Agreement. These commitments cover most banking services, including the acceptance of deposits, lending, leasing, the issuing of guarantees, and foreign exchange transactions. However, they do not cover the management of assets or securities. Nicaragua allows foreign banks to operate as 100% owned subsidiaries or as branches.

The Nicaraguan Social Security Institute (INSS), a government agency, manages a pension fund for private and public sector employees. INSS is the primary buyer of Nicaraguan sovereign debt; the government has also tapped INSS resources to finance housing projects. The October 2007 Poverty Reduction Growth Facility with the IMF requires the Nicaraguan Government to evaluate shortcomings in the current system and prepare recommendations for reform as needed. Private pension funds invest almost exclusively in offshore instruments.

Political Violence

In 2007, the Ortega administration installed Citizen Power Councils (CPC) at neighborhood levels throughout Nicaragua by presidential mandate. CPCs are staffed by the FSLN party. They have been designated as the government's preferred civil society partner in implementing its economic and social agenda, including decisions on infrastructure development, local regulatory authority, distribution of subsidized food, access to healthcare, and access to low-income housing. Civic leaders allege that CPC members have been monitoring citizens to differentiate between those who support the FSLN and those who do not, in order to channel benefits to those who do. On several occasions, CPC members have taken physical possession of property either through force or the threat of violence. Municipal officials, court officers, and Nicaraguan National Police have been unwilling to intervene in these cases. Constitutional experts, human rights activists, and nongovernmental organizations have criticized the imposition of CPCs for their unelected role in government and for displacing existing nongovernment organizations.

Before the November 2008 municipal elections and during their aftermath, FSLN and opposition supporters clashed throughout the country, leading to one death and many injuries. FSLN militants and CPC members established checkpoints throughout major cities in an effort to intimidate opposition supporters and discourage them from joining protests; police refused to intervene. Government supporters also violently targeted media and civil society organizations. On one occasion, opposition supporters seriously injured a journalist. These actions paralyzed commercial activity in many parts of the country for several weeks.

Disputes over labor issues, microfinance lending, property rights, and elections turned violent in 2008. Police clashed with drivers and fare collectors during a May 2008 transportation strike. After President Ortega sided with microfinance clients to demand renegotiation of their loans, mobs attacked the offices of several lenders in northern Nicaragua, burning one of them and in another case holding a manager captive for several hours (see Efficient Capital Markets and Portfolio Investment for more on microfinance).

Corruption

Nicaragua is a signatory to the Organization for Economic Cooperation and Development (OECD) Convention on Combating Bribery, the Inter-American Convention against Corruption (IACC), and the United Nations convention against corruption (UNCAC). The Penal Code (amended 2007/641) and the Special Law on Bribery and Crimes Against International Trade and Foreign Investment (2006/581) define corruption offenses and establish sanctions. Offering or accepting a bribe is a criminal act punishable by a fine and a minimum three years in prison. Legislation similar to the U.S. Foreign Corrupt Practices Act makes bribery by a Nicaraguan company of a foreign official a criminal act punishable by a minimum five years in prison. The Attorney General and the Controller General share responsibilities for investigating and prosecuting corruption cases. The anti-corruption provisions of CAFTA-DR require each participating government to ensure under its domestic law that bribery in matters affecting trade and investment is treated as a criminal offense or subject to comparable penalties.

Public opinion surveys indicate that many Nicaraguans believe corruption is endemic to government. A 2008 World Bank study, Governance Matters, placed Nicaragua in the bottom quartile of all countries for control of corruption. Transparency International—which has links with local organization “Etica y Transparencia”—ranked Nicaragua 134th of 180 countries in its 2008 Corruption Perceptions Index. In February 2008, Global Integrity named Nicaragua to its Grand Corruption Watch List, making it one of 13 countries in the world “at serious risk for high-level corruption.”

Local sources and international organizations rank the legal environment in Nicaragua as among the weakest in Latin America. Nicaraguans commonly believe that the judicial system is controlled by political interests and is corrupt. The World Bank’s Governance Matters study ranked Nicaragua in the 22nd percentile for rule of law in 2008, while the World Economic Forum’s Competitive Index Rankings ranked Nicaragua 131st of 134 countries for judicial independence.

Influence peddling in the judicial branch puts foreign investors at a sharp disadvantage in any litigation or dispute. Therefore, seeking administrative decisions or legal recourse in the courts is not the preferred method to clarify rights and responsibilities or resolve a dispute. Political connections and nepotism also affect regulatory and procurement decisions. Regulators often maintain business interests within the very sectors they regulate. On occasion, government officials ask investors to cover costs associated with the supervision of a concession or business operation (for example, in the review of an engineering design or a legal contract).

On November 9, 2008, Nicaragua held municipal elections in 146 of the country’s 153 municipalities. Unofficial electoral observer groups noted numerous irregularities on election day, including early closures of polling stations and the exclusion of opposition poll watchers from both polling stations and the central tabulation center. Official results released by the Superior Electoral Tribunal (CSE) differed greatly from the results the opposition was able to reconstruct from tabulation sheets provided to each party by local polling stations. The final tally gave the FSLN 105 municipalities, although the opposition asserts that irregularities in at least 40 cities were severe enough to have affected the results.

During the Bolaños administration, the government successfully prosecuted former President Arnoldo Alemán for embezzlement, fraud, and money laundering. In December 2003, a Nicaraguan court sentenced Alemán to a 20-year jail term, nearly all of which he served under an interpretation of house arrest that allowed him to travel freely throughout the Department of Managua, and later the entire country, and continue to serve as the de facto head of the Liberal Constitutional Party (PLC). In January 2009, the Supreme Court freed Alemán from house arrest and vacated the charges against him.

Bilateral Investment Agreements

Nicaragua has signed and ratified bilateral investment agreements with Argentina, Chile, Czech Republic, Denmark, Ecuador, El Salvador, Finland, France, Germany, Italy, the Netherlands, South Korea, Spain, Switzerland, Sweden, Taiwan, and the United Kingdom. CAFTA-DR includes an Investment Chapter.

OPIC and Other Investment Insurance Programs

The U.S. Overseas Private Investment Corporation (OPIC) offers financing and insurance against political risk, expropriation, and inconvertibility to U.S. investments in Nicaragua. A 2004 Investment Incentive Agreement between Nicaragua and the United States expanded the range of OPIC programs available to U.S. investors in Nicaragua and streamlined investment application procedures. Nicaragua is a member of the World Bank's Multilateral Investment Guarantee Agency.

Labor

In 2006, the Nicaraguan Government estimated Nicaragua’s labor force at 2.2 million, of which 2.09 million are reportedly employed. Of those employed, 29% work in agriculture, 19% in industry, and 52% in services. However, many of these jobs are informal, and underemployment is common. Unskilled labor is widely available and relatively inexpensive, but in rural areas outward migration has resulted in labor shortages during harvest season. The World Bank reports that 46% of Nicaraguans live below the poverty line and 15% in extreme poverty.

Nicaragua has ratified all eight of the International Labor Organization’s core labor conventions. The Nicaraguan Constitution, Labor Code (1996/185 and amendments), General Law on Labor Health and Safety (2007/618), and several other laws establish minimum standards for labor conditions and provide the legal framework for relations between employers and their employees. The Nicaraguan Constitution bans forced labor, slavery, and indentured servitude. The constitution also specifies that a standard work day be no more than 8 hours and a standard work week no more than 48 across six days. The minimum age for employment is fourteen, and teenage workers between ages fourteen and sixteen must have their parents consent in order to be employed. Labor unions complain that the Ministry of Labor lacks adequate staff and resources to fully enforce these provisions.

Business, government, and labor negotiate a statutory minimum wage that the National Assembly must subsequently confirm. Each sector of the economy has a different minimum wage, which must be reviewed every six months. However, an informal agreement between labor leaders, the government, and private sector stipulated a 9% wage increase for free trade zone (FTZ) workers for 2009 and 12% for 2010. From June 2007 to May 2009, the minimum wage increased by almost 70% for FTZ employees. In general, enforcement of the minimum wage only takes place within the formal sector. While the law mandates premium pay for overtime and prohibits excessive compulsory overtime, the government does not always effectively enforce these requirements.

The labor code sets forth significant benefits that increase business costs. For example, at year-end, employers must pay the equivalent of an extra month's salary. Other benefits include maternity leave, medical care, death and survivor’s benefits, pensions, and workers compensation for disability. Upon termination of an employee, the employer must pay a month's salary for each year worked, up to five months salary. Some business groups say that the five-month limit provides workers with an incentive to seek dismissal once they have completed five years with a firm.

Nicaraguan law grants public and private sector workers, except those in the military and police, the right to organize. Workers need not advise the employer or the Ministry of Labor of their intention to do so. In general, workers exercise the right to organize unhindered. Some labor activists allege that some businesses operating in free trade zones violate this right. Although employers are legally required to reinstate workers fired for union activity, formal reinstatement requires a judicial order which can be difficult to obtain because of a lengthy appeals process. In practice, employers often do not reinstate workers because the law is poorly enforced. Employers may dismiss any employee, including union organizers, by agreeing to pay double the legally mandated severance pay.

The law provides for the right to bargain collectively and for several unions, each with different membership, to coexist at any one enterprise. Employers may sign separate collective bargaining agreements with each union. Independent labor leaders complain that employers routinely violate collective bargaining agreements and Nicaraguan labor laws. They also complain that employers use company unions to disrupt the organization of independent unions. Although the law recognizes the right to strike, according to Ministry of Labor information, there were no legal strikes in 2008. Wildcat strikes are common, however. Division among labor unions along political lines complicates the resolution of these strikes and other labor issues.

Foreign Trade Zones/Free Trade Zones

The Nicaraguan Government reported that as of year-end 2008, there were 124 companies operating in free trade zones (FTZs) throughout Nicaragua, directly employing 73,224 workers, down from 88,629 workers in January 2008. In addition to export incentives and duty free capital imports granted by the Tax Equity Law and the Law of Temporary Admission for Export Promotion (see Performance Requirements and Incentives), the Free Trade Zones for Industrial Exports Decree (1991/46 and amendments) provides a 10-year income tax exemption for Nicaraguan and foreign investments in FTZs. The National Free Trade Zone Commission of Nicaragua (CNZF) administers the FTZ regime.

Foreign Direct Investment Statistics

The Nicaraguan Government reports that foreign investment inflows totaled $626 million in 2008, up from $335 million in 2007. Electricity generation projects and telecommunications infrastructure were the leading sectors, accounting for approximately $400 million of the total. For 2009, ProNicaragua (the government investment promotion agency) is targeting tourism, textiles and apparel, light manufacturing and assembly, agribusiness and forestry, and business process outsourcing.

Major U.S. Investors in Nicaragua include:

Cargill (poultry and animal feed)
ChevronTexaco (fuel distribution)
Citigroup (banking)
ExxonMobil (petroleum refining and fuel distribution)
GE Money (banking)
International Textile Group (textiles)
PriceSmart (retail)
Wal-Mart (grocery)


[This is a mobile copy of Nicaragua]