Country Profile 2005

Nicaragua This Country Profile is a reference work, analysing the country’s history, politics, infrastructure and economy. It is revised and updated annually. The Economist Intelligence Unit’s Country Reports analyse current trends and provide a two-year forecast.

The full publishing schedule for Country Profiles is now available on our website at http://www.eiu.com/schedule The Economist Intelligence Unit 15 Regent St, London SW1Y 4LR United Kingdom

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Copyright © 2005 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited. All information in this report is verified to the best of the author's and the publisher's ability. However, the Economist Intelligence Unit does not accept responsibility for any loss arising from reliance on it. ISSN 1473-9178

Symbols for tables “n/a” means not available; “–” means not applicable Printed and distributed by Patersons Dartford, Questor Trade Park, 151 Avery Way, Dartford, Kent DA1 1JS, UK.

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Sources: Economist Intelligence Unit estimates; national sources.

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Contents Nicaragua

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Basic data

4 4 5 7 9 12

Politics

14 14 15 16 16 17 18

Resources and infrastructure

19 19 20 23 24

The economy

25 25 27 27 29 29 31

Economic sectors

32 32 33 34 35

The external sector

36 36

Regional overview

39 39 41 41 41 41 42

Appendices

Political background Recent political developments Constitution, institutions and administration Political forces International relations and defence

Population Education Health Natural resources and the environment Transport, communications and the Internet Energy provision

Economic structure Economic policy Economic performance Regional trends

Agriculture Mining and semi-processing Manufacturing Construction Financial services Other services

Trade in goods Invisibles and the current account Capital flows and foreign debt Foreign reserves and the exchange rate

Membership of organisations

Sources of information Reference tables Population Education indicators Health indicators Transport statistics

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42 43 43 43 44 44 44 45 45 45 45 46 46 46 46 47 47 48 49 49 50 50 50

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Electricity generation by plant type Central government finances Money supply Interest rates Gross domestic product Nominal gross domestic product by expenditure Real gross domestic product by expenditure Prices and earnings Labour force Production of staple food crops Production of main export crops Livestock production Fisheries production Gold and silver production Construction: gross value of production Tourist arrivals and revenue Main exports and imports Main trading partners Balance of payments, IMF series Balance of payments, national series External debt, World Bank series Exchange rates Foreign reserves

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Nicaragua Basic data Land area

Population Main towns

121,428 sq km; mountainous upland in the central area, with a wide plain on the western coast and tropical forest on the eastern coast 5.63m (2004 official estimate) Population in ‘000 (1995 census) Managua Matagalpa Chinandega León Masaya Estelí Granada

Climate

820 365 348 330 236 169 153

Tropical; tropical rainforest on the Atlantic coast

Weather in Managua (altitude 83 metres)

Hottest month, May, 27-32ºC (average daily minimum and maximum); coldest month, January, 23-30ºC; driest month, January; wettest month, October

Languages

The official language is Spanish. Miskito, Sumo and English are spoken on the Atlantic coast

Measures

Metric system, but imperial measures are in popular use. Other measures include: quintal = 46 kg manzana = 0.7 ha

Currency

Time Public holidays

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Córdoba (C). Average exchange rate in 2004: C15.94:US$1. Exchange rate on June 7th, 2005: C16.678:US$1 6 hours behind GMT January 1st, Maundy Thursday, Good Friday, May 1st (Labour day), July 19th (1979 revolution), September 14th (Battle of San Jacinto), September 15th (Independence Day), November 2nd (All Souls’ Day), December 8th and 25th

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Politics Political background Nicaragua is a presidential democracy. Enrique Bolaños Geyer, the candidate of the Partido Liberal Constitucionalista (PLC), was sworn in as president in January 2002 following his election victory in November 2001. Mr Bolaños enjoys the support of a maximum of 12 legislators in Nicaragua’s unicameral National Assembly, most of them members of the Azul y Blanco bench (Blue and White, the national flag colours). At important moments he has also used the opposition Frente Sandinista de Liberación Nacional (FSLN, also known as the Sandinistas), which holds 38 seats, for support. The PLC, which controls 41 of the 92 seats, remains under the control of the former president, Arnoldo Alemán. It moved into opposition to the government in February 2003. The Sandinistas overthrow the corrupt Somoza regime

In July 1979, after an insurrectionary war, the FSLN overthrew the dictatorship of Anastasio Somoza Debayle. The Somozas and members of their inner circle had ruled the country since 1936. The revolutionary government sought to transform the economy along semi-socialist lines and accorded priority to social projects, including extended healthcare, an improvement in literacy rates and land reform. However, growing state control of production and distribution generated opposition. In particular, Nicaragua became a stage for the Cold War with more than 12,000 US-backed Contras (counter-revolutionaries) fighting the socialist government. The defeat of the Contras became the government’s priority and a growing proportion of the national budget was consequently diverted to military spending. The FSLN was confirmed in power by election in November 1984 when its leader, Daniel Ortega, was elected president.

The US covertly funds armed opposition

Contra aid was one of the most controversial policies adopted by the US administration under the then president, Ronald Reagan. Covert funding began in 1981, channelled through the US Central Intelligence Agency (CIA). Apart from arming the Contras, the US used trade and aid embargoes as well as diplomatic pressure to weaken the government. Ensuing overt funding provoked disagreement between Mr Reagan and the US Congress. Contra aid eventually lost support following the Iran-Contra arms scandal (a US foreign-policy scandal) and in the wake of the 1987 peace plan devised by the then president of Costa Rica, Oscar Arias. It was signed by the leaders of all five Central American republics as part of a move towards ending the bloody political and military conflicts that had plagued the region since the late 1970s.

The Chamorro years

In February 1990 more than ten years of rule by the FSLN came to an end with a surprise electoral defeat at the hands of the 14-party Unión Nacional Opositora (UNO) alliance led by Violeta Barrios de Chamorro, the widow of a martyred newspaper editor, Pedro Joaquín Chamorro. Mrs Barrios de Chamorro won 54.7% of the vote, compared with 40.8% for Mr Ortega. The UNO took control of the National Assembly and a majority of municipal councils. Mrs Barrios de Chamorro initially secured the demobilisation of the Contras, but in 1991 many former Contras, unhappy that they had failed to obtain the

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land to which they felt they were entitled, started to form armed bands known as recontras. In the north of the country in particular there were conflicts between the recontras, the recompas (demobilised Sandinista soldiers) and the government. In September 1993 a new amnesty was granted to all recontras and recompas who had given up their arms, and in February 1994 a further peace agreement was signed with the recontras of the Frente Norte 380 (FN-380). Remnants of the FN-380 laid down their arms in June-July 1997, as did a Sandinista grouping, the Frente Unido Andrés Castro (FUAC), later in that year.

Recent political developments Mr Alemán comes to power

Mr Alemán, previously the mayor of the capital, Managua, became president in 1997 after defeating Mr Ortega with 51% of the vote against 38%. The PLC was the largest party in the legislature, but the Sandinistas continued to act as a strong opposition and a major force in politics. However, Mr Alemán’s popularity was short-lived owing to discontent among farmers over property titles and debts, and among students over university budgets. Although the government and FSLN agreed to compromise over the disputed properties, the level of popular dissatisfaction with the government rose again, owing to a lack of progress on social policy and widespread allegations of corruption against the president and his close collaborators. By 1998 splits had emerged in the ruling PLC, with dissident deputies frustrated by Mr Aléman’s autocratic style.

The FSLN has difficulty capitalising on the PLC’s problems

The FSLN was unable to capitalise in the late 1990s on the divisions within the ruling PLC owing to memories of their revolutionary excesses and the continued dominance of Mr Ortega in the party. However, the Sandinistas retained a hardcore vote of about 20% of the electorate, and at elections their supporters turn out to vote in large numbers, pushing the party’s share of the vote higher.

A PLC-FSLN political pact deals a blow to democracy

By January 2000 the declining fortunes of both Mr Alemán and Mr Ortega led them to sign a political pact aimed at reducing their vulnerability to investigation and increasing their political influence. The agreement weakened Nicaragua’s fledgling democracy by allowing the two major parties to exercise joint control over important institutions, especially those involved in combating corruption, and to change the election rules to make it far more difficult for minor parties to challenge PLC and Sandinista dominance. Only one other party was able to register to contest the elections in 2000 and 2001.

Mr Bolaños wages war on corruption

Despite the FSLN’s strong showing in the municipal elections in November 2000, and Mr Ortega’s lead throughout much of the presidential election campaign in 2001, voters elected Mr Bolaños on the PLC ticket with a majority of 56.3% of the vote. Mr Bolaños’s anti-corruption stand and fear of Mr Ortega’s return to power persuaded voters in the end. Mr Bolaños began his term by tackling corruption and pledging to undo the PLC-FSLN pact. Unexpectedly, his government brought indictments against officials from the Alemán era and in August 2002, against the former president himself. Then in December 2002, the National Assembly stripped Mr Alemán of his parliamentary immunity and he was placed under house arrest.

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The government loses its leverage over policymaking

In December 2003 a court found Mr Alemán guilty of the corruption charges brought against him and convicted him to serve 20 years in prison. Nevertheless, Mr Alemán has managed to maintain control of the PLC (which had declared itself in opposition to the Bolaños government in February 2003), depriving Mr Bolaños of a legislative majority. In order to govern, Mr Bolaños had to rely in 2002-03 on tactical alliances between the Azul y Blanco bench, most of whom split from the PLC to support him, and the Sandinistas. This coalition enabled Mr Bolaños to fulfil most of the requirements of the IMF’s poverty reduction and growth facility (PRGF) and achieve foreign-debt relief under the heavily indebted poor countries (HIPC) programme in January 2004 (see The external sector, Capital flows and foreign debt). Constitutional reforms needed to overhaul the judiciary and the electoral branch were not passed as the Sandinistas opposed them.

Policy control slips away from the Bolaños government

Following the realisation of HIPC debt relief in early 2004, control over policy slowly slipped from the government’s grasp as the FSLN and the PLC started to negotiate a revision and expansion of their 2000 political pact. However, this time the FSLN was the dominant partner in the pact owing to its strong showing in the 2004 municipal elections and indications that the party was making political headway at the expense of the government and the PLC. Congress went on, in late 2004, and again in early 2005, to pass constitutional reforms, including changing the organisation of the executive branch of government, curtailing the powers of the executive and conferring upon the legislature the power to nominate the authorities of new and existing state entities. Mr Bolaños has staunchly rejected the reforms, which had not yet taken effect by mid-2005. After threatening to invoke a state of emergency, the government and FSLN agreed in January 2005, with help of the UN, to set up a National Dialogue forum to try to resolve the stand-off. But the contentious deliberations have made no headway. Mr Bolaños has also lobbied for international political support. He ostensibly prepared the ground to invoke the Inter-American Democratic Charter of the Organisation of American States (OAS) on the grounds that the reforms abridged the democratic principle of the separation of powers. He also sent the constitutional reforms to the Corte Centroamericana de Justicia (CCJ, the Central American Court of Justice) to decide upon their validity. In March 2005 the CCJ issued a ruling backing the government’s argument that the amendments violated the separation of powers. The PLC and FSLN leaders responded by having the Supreme Court, which they control, repeat its refusal to recognise the CCJ’s jurisdiction over Nicaragua’s domestic affairs.

Important recent events January 2000 The Partido Liberal Constitucionalista (PLC) and the Frente Sandinista de Liberación Nacional (FSLN, also known as the Sandinistas) change the constitution and election rules as part of a political pact designed to grant the two parties a large share of influence in the judiciary and other government institutions.

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November 2001 Enrique Bolaños Geyer of the PLC wins the presidency; he assumes power in January 2002.

December 2002 With a small majority the Assembly strips the former president, Arnoldo Alemán (1997-2002), of his parliamentary immunity. Subsequently he is indicted on corruption charges and placed under house arrest. Nevertheless, Mr Alemán manages to remain in control of the PLC, leaving Mr Bolaños in a weak position with the firm support of only eight members in the National Assembly and the uncertain support of the FSLN.

February 2003 The PLC, on whose platform Mr Bolaños was elected president in November 2001, announces that it will join the opposition bench following its failure to link their support for the government with their efforts to free Mr Alemán from house arrest.

December 2003 Mr Alemán is found guilty of corruption and money-laundering and sentenced to 20 years’ imprisonment.

November 2004 After winning municipal elections, a strengthened FSLN joins with the PLC to revise and expand the 2000 political pact. Constitutional amendments and new ordinary laws are passed to curb the powers of the executive branch and extend the powers of the legislature.

January 2005 Mr Bolaños threatens to declare a state of emergency to thwart the constitutional reforms. A National Dialogue forum, under the auspices of the UN, begins to seek a way to avert a crisis.

March 2005 The Corte Centroamericana de Justicia (CCJ, the Central American Court of Justice) rules that the constitutional reforms violate the separation of powers. The PLC and FSLN respond by having the Supreme Court, which they control, repeat its refusal to recognise the CCJ’s jurisdiction over Nicaragua’s domestic affairs.

Constitution, institutions and administration The Sandinista constitution is retained with modifications

Nicaragua’s current constitution, which dates from 1987, was the country’s first since the overthrow of the Somoza regime. It provided a legal foundation for the Sandinista reforms and established a democratic system of government with elections every six years, and a mixed economy. It also established the formal separation of powers between the executive, the National Assembly (the legislature), the judiciary and the Consejo Supremo Electoral (CSE, the electoral council). It also created two new levels of elected government: 131 municipal councils (which now number 153) and two autonomous Atlantic coast regional councils. Reforms designed to reduce the power of the executive branch and to shift more responsibility to the National Assembly were passed in 1995. These

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changes also reduced the legislature’s and the president’s terms in office to five years and provided for two rounds of voting in presidential elections. Further reforms in January 2000 enlarged the Supreme Court and the electoral council, as well as expanding the Controlaría General de la República (the comptrollergeneral’s office) as a device to facilitate shared party control of these bodies.

The 2000 reforms: main elements of the PLC-Sandinista pact Changes to the constitution • The number of judges in the Supreme Court increased from 12 to 16. • The Controlaría General de la República (the comptroller-general’s office) becomes a five-person collegial body. • The electoral council is expanded from five to seven members. • The percentage of the vote needed to win a presidential election in the first round is reduced from 45% to 40%, and further, to 35%, if the gap between the first and second places exceeds 5%.

Changes to electoral law • New parties seeking registration must submit valid voters’ signatures equivalent to 3% of those voting in the previous national election and must form party candidate lists in all 150 municipalities. • Any party that fails to gain 4% of the vote in municipal or national elections loses its registration.

A Supreme Court ruling in October 2002 struck down some of the election law changes mentioned above, allowing a more open contest in the November 2004 municipal voting, when ten parties participated. In the same month, the FSLN and PLC initiated further constitutional reforms that, if completed, will force the president to gain the approval of 60% of the National Assembly for cabinet appointments. Mr Bolaños has denounced the amendments as an illegal attempt to change to a semi-parliamentary system of government without calling a constituent assembly to legitimise the transformation. The amendments have not yet gone into effect. The executive

The president is the head of state. Directly elected by adult suffrage for a fiveyear term, he is supreme commander of the armed forces and has the power to appoint ministers and vice-ministers, and to propose the national budget. However, the president’s powers to issue economic and tax decrees were curtailed under the 1995 constitutional reforms; all tax legislation must be approved by the National Assembly. The president appoints the head of the Banco Central de Nicaragua (BCN, the Central Bank), which is not an autonomous institution. The presidency also contains a secretariat for strategy and co-ordination as well as several social investment funds. The Ministry of Foreign Affairs is responsible for managing relations with donors. The minister of public credit (finance) and the president

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of the Central Bank are normally the most powerful officials. An independent comptroller-general theoretically oversees the probity of government operations but in effect this institution has become politicised and ineffective. The 153 mayors and mayoral councils are directly elected and in theory enjoy autonomy from the central government. Real autonomy has so far been slight owing to the limited tax base of local governments, but it is destined to grow as the result of a 2003 law that provides for a staggered transfer of 10% of the national budget to the municipalities. The legislature

The legislature, a 92-seat unicameral National Assembly, is directly elected by adult suffrage for a period of five years. Of those elected, 90 are elected by proportional representation, 20 of them to serve nationally and 70 to represent the provinces, known as departments. By virtue of the PLC-Sandinista pact, of the two remaining seats, one was given to Mr Alemán, and the other to the runner-up in the 2001 presidential election, Mr Ortega. Efforts to remove Mr Alemán from his seat following his corruption conviction failed after a court ruled that this cannot occur until all appeals have come to pass. Regional councils, consisting of 45 members, serve as mini-legislatures on the Atlantic coast.

The judiciary

The Supreme Court is an independent branch of government whose 16 members are selected for five years by the National Assembly from lists submitted by the president and by the parties in the legislature. The magistrates elect the court’s president and vice-president from within their own ranks. The court appoints judges to the lower courts. The selection of magistrates and judges has always been political, and judicial independence from executive and legislative pressures is slight. A judicial career system based on merit was legislated in 2004 but has yet to be tested. The training of judges is highly deficient, and public confidence in the fairness of judicial processes is extremely low. Corruption and influence-peddling in the judicial branch put foreign investors at a sharp disadvantage in any litigation or dispute, and legal security for business in general is among the lowest in Latin America.

The electoral council

The main function of the electoral council is to organise elections, plebiscites and referendums freely and fairly. It is a formally independent branch of government. The 2000 pact politicised the council, leading to widespread charges that it acted unfairly to exclude certain parties and candidates from running for office in 2000 and again in 2001.

Political forces The PLC moves into opposition against the government

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Although constitutionally barred from immediate re-election, Mr Alemán has successfully maintained his influence over the PLC during the Bolaños presidency. At first, as president of the National Assembly, he sought to undermine Mr Bolaños, who pursued a campaign against corruption. A split in the 53member PLC bench ensued, with five legislators forming the separate Azul y Blanco bench to support Mr Bolaños against Mr Alemán. This grouping subsequently stabilised at eight to ten members, while the PLC went into opposition www.eiu.com

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against the government in February 2003. Despite his conviction on corruption charges, Mr Alemán managed to retain control over most of the PLC’s bench of Assembly deputies and the party generally. But in late 2004, a former minister in his cabinet, Eduardo Montealegre, challenged Mr Alemán’s dominance over the PLC and demanded a primary election to choose the party’s next presidential candidate. Mr Alemán expects to appoint a loyal candidate. FSLN constitutes the main opposition

The left-wing FSLN, which originated in the guerrilla force that overthrew the Somoza dictatorship in 1979, supported the Bolaños government on important issues until the end of 2003, but has since adopted a stance of truculent opposition and sabotage. Mr Ortega continues to be the most powerful Sandinista figure, despite defeats in the 1990, 1996 and 2001 presidential elections and allegations of child abuse made against him. The FSLN made major advances in the November 2004 local elections, when the centre-right was divided among the PLC, liberal splinter parties, and the Alianza por la República (APRE). In early 2005, the outgoing Sandinista mayor of Managua, Herty Lewites, began challenging Mr Ortega for control of the party. Like Mr Montealegre of the PLC, he demanded that an internal election be organised to decide on the party’s nomination for the presidential election.

A third force has arisen to challenge the caudillos

Formed in May 2004, the APRE emerged as a third contender and won 9% of the vote in the November 2004 municipal elections. The alliance is composed of the Partido Conservador (PC), pro-Bolaños liberals and other minor parties. It portrays itself as a modern alternative to the dominant FSLN and PLC parties and their leaders. However, it is not certain that APRE will manage to stay together for the 2006 election. Recent national election results % of the vote 1984 Frente Sandinista de Liberación Nacional (FSLN) Partido Conservador Democrática (PCD) Partido Liberal Independiente (PLI) Others 1990 Unión Nacional Opositora (UNO, 14 parties) Frente Sandinista de Liberación Nacional (FSLN) Others 1996 Alianza Liberal (AL) Frente Sandinista de Liberación Nacional (FSLN) Others 2001 Partido Liberal Constitucionalista (PLC) Frente Sandinista de Liberación Nacional (FSLN) Partido Conservador de Nicaragua (PCN)

The PLC and FSLN unite to impede institutional reforms

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Mr Bolaños has consistently vowed to dismantle the 2000 constitutional pact between the PLC and FSLN, in order to boost political competition and transparency. However, between them Mr Alemán and Mr Ortega still control the National Assembly votes needed to pass constitutional reform initiatives

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(for which a 60% majority is needed), and have thwarted all attempts to overturn their pacts. In early 2005, the National Assembly reconfirmed many of the party representatives chosen in 2000 (or replaced outgoing staff with party stalwarts) to the Supreme Court, the Supreme Electoral Council and as comptrollersgeneral when their terms expired. As a result of the renewed pact, prospects for institutional reform during the remainder of Mr Bolaños’s term are poor.

Main political figures Enrique Bolaños Geyer President of Nicaragua since January 2002. He was a driving force in the arrest and conviction of Arnoldo Alemán, his predecessor, on corruption charges. He was vicepresident under Mr Alemán until October 2000 for the Partido Liberal Constitucionalista (PLC). Mr Bolaños was president of the Consejo Superior de la Empresa Privada (Cosep, the higher council for private enterprise) during much of the Sandinista revolution (1979-1990).

Arnoldo Alemán Lacayo Leader of the PLC, president of the National Assembly for most of 2002, and the former president of Nicaragua (1997-2002). Following widespread corruption during his presidency, charges were instigated against him. Stripped of his immunity as a deputy and put under house arrest pending trial on corruption charges in December 2002, he was sentenced to 20 years’ imprisonment a year later. Although discredited internationally, he remains a major figure at home.

Daniel Ortega Leader of the Frente Sandinista de Liberación Nacional (FSLN, known as the Sandinistas) and former president of Nicaragua (1985-90). Mr Ortega successively lost the presidential elections in 1990, 1996 and 2001. but he has maintained his party’s vote share and increased its quotas of power in key institutions of state since his 2000 pact with Mr Alemán, leading many Nicaraguans to view him as the country’s most powerful figure. In Latin America, he is an ally of the presidents of Cuba and Venezuela, Fidel Castro and Hugo Chávez Frías respectively. He is set to run again for the presidency in 2006.

Herty Lewites Elected mayor of the capital, Managua, in November 2000 on the FSLN ticket. Mr Lewites was minister of tourism under the Sandinista regime during the 1980s, when he developed vacation facilities for the masses. A moderate Sandinista, Mr Lewites conducted an effective, non-partisan and reasonably transparent municipal administration until his exit from office in January 2005. This performance gained him wide popularity across party lines. Although he is keen to run for the presidency in 2006, Mr Ortega will endeavour to stop him from running and dividing the Sandinista vote.

Eduardo Montealegre Minister of finance in the Bolaños government from January 2002 to March 2004. He was minister to the presidency and minister of foreign affairs under Mr Alemán. After losing to Mr Bolaños in the party primaries in December 2001, Mr Montealegre ran his presidential campaign. The US-educated Mr Montealegre is a member of a

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traditional banking family and is also widely tipped to be a contender for the presidential race in 2006.

International relations and defence Relations are re-established with the US and Taiwan

During the 1980s, Nicaragua’s most important international links were with the Soviet Union, the rest of the Eastern bloc countries, and Cuba. Relations with the US resumed after 1990 with the defeat of the Sandinistas in elections, leading to generous aid inflows (albeit dependent on political reform), improvements to the country’s human rights record and a satisfactory resolution of disputes arising from the expropriation of US citizens’ property. The US government has exercised periodic tutelage over Nicaragua’s internal affairs to resolve impasses and protect its own interests, which it defines as guarding against the Sandinistas’ return to power, and, more recently, ensuring that Mr Alemán does not return to power either. After the US, Nicaragua’s most important external ties are with Taiwan, to which it provides political support internationally in return for aid and investment.

There is participation in regional integration

Nicaragua participates fully in Central American integration. In December 2003 the country concluded negotiations with the US over its participation in the Dominican Republic and Central American Free-Trade Agreement (DR-CAFTA), which comprises four other countries in the region (Costa Rica, El Salvador, Guatemala, and Honduras) and the Dominican Republic. The treaty will not come into effect until the US Congress ratifies it. Nicaragua’s national Assembly also still needs to vote on it. Nicaragua’s relationship with its southern neighbour, Costa Rica, is uneasy on account of Costa Rican concerns about Nicaraguan immigration. Costa Rica and Nicaragua have disputed the access rights to the San Juan River, which borders the two countries, since mid-1998. If not resolved by September 2005, the dispute will proceed to the International Court of Justice (ICJ) in The Hague. Tensions with Honduras have flared recurrently, as both countries claim fishing rights in the Gulf of Fonseca. In 2000 Nicaragua and Honduras took their disputes over maritime claims in the Atlantic Ocean to the International Court of Justice in The Hague. Since the election of Mr Bolaños in Nicaragua and of Ricardo Maduro in Honduras, relations have improved.

The army undergoes rationalisation

The armed forces have always been closely associated with Nicaraguan politics. The country has experienced frequent internal armed conflicts resulting from political disputes, which have led to military occupation by the US on two occasions. In the 1990s the army underwent a process of contraction and reform to subordinate it to the civilian government. However, the institution retains significant autonomy from the executive branch. Armed forces, 2004 Army Navy Air force Total armed forces

12,000 800 1,200 14,000

Source: International Institute for Strategic Studies, The Military Balance, 2004-2005.

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Security risk in Nicaragua Armed conflict The risk of armed conflict in Nicaragua is small, and poses virtually no threat to business. Given the level of rural poverty and uncertainty over land rights, the resurgence of armed bands formed by ex-soldiers from the contra war—either Contras or Sandinistas—remains a possibility but should not affect business. However, violent conflict is currently limited to localised land disputes and occasional social protest in the cities. Nicaragua has a long-running maritime boundary dispute with its neighbour Honduras but the two countries are seeking an amicable solution through arbitration by the International Court of Justice (ICJ) in The Hague. The latest round of the dispute began in 1999 after Honduras ratified a maritime treaty granting Colombia rights to areas of ocean that Nicaragua claims as its own. Nicaragua retaliated by imposing a 35% surcharge on imports from Honduras, and there were accusations of military movements along the border. The Organisation of American States (OAS) mediated an agreement between the two countries early in 2001. After the election of Mr Bolaños in Nicaragua and of Ricardo Maduro as president in Honduras, relations improved and the 35% import surcharge was suspended in early 2003.

Unrest/demonstrations Mass demonstrations, and both civil and labour unrest, take place occasionally, usually in protest at the national government and poor living conditions. These activities may interrupt business operations as roadblocks, for example, preventing the movement of people and goods. However, activists do not specifically target foreign businesses.

Crime Poor law enforcement and high poverty rates make crime a growing problem in Nicaraguan urban areas. Although crime is not a major concern for business or foreign enterprises, its existence poses a threat to personnel and property. The most commonly occurring crimes are robbery and pick-pocketing—sometimes employing violence—and burglary. A hangover of the violence of the civil conflict in the 1980s is the frequent use of guns by criminals of all types. Although not as common as in most other Central American countries, gang activity and car-jackings are on the increase. Gang violence tends to be confined to poor neighbourhoods.

Organised crime There is a small amount of organised crime, mainly centred on the trafficking of arms, people and narcotics. It poses little risk to foreign business.

Kidnapping/extortion Kidnapping tends to be perpetrated in rural areas against wealthy landowners and their families. It has rarely affected foreigners.

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Resources and infrastructure Population Population by department, 2003 (% of population) Urban 93.1 37.6 62.4 59.2 60.9 21.9 58.4 64.8 50.2 61.7 36.6 56.1 32.9 28.5 28.5 43.2 24.5 58.6

Managua Matagalpa Chinandega León Masaya Jinotega Estelí Granada Nueva Segovia Carazo Rivas Chontales Boaco Madriz RAAN RAAS Río San Juan Total population

Rural 6.9 62.4 37.6 40.8 39.1 78.1 41.6 35.2 49.8 38.3 63.4 43.9 67.1 71.5 61.5 56.8 75.5 41.4

Source: Instituto Nacional de Estadísticas y Censos.

Population estimates are revised

By 2004 the population reached an estimated 5.63m according to the Instituto Nacional de Estadísticas y Censos (the national census and statistics institute). A growing number of Nicaraguans have migrated from rural to urban areas over the last decade. In 2004 41% of Nicaraguans were living in rural areas, and about 25% of the population lived in the department of Managua. Population growth is estimated at 2.6% a year. Fertility rates, although declining, are twice the Latin American average. As a result, the population is young, with a median age of just 17 years. In the 2001 elections, 55% of the total population was of voting age, at 16 years or above. Most Nicaraguans are mestizo (of mixed Spanish and Amerindian ancestry). The Atlantic coastal region is home to indigenous minorities made up of Miskitos and Mayangnas (Sumos), of Chibcha origin, in the north, and blacks and Garifunas in the south. An estimated 2-3% of the total population does not have Spanish as a native language. Traces of indigenous social organisation, but not languages, survive in the Pacific region. Over the last 20 years, in-migration from the Pacific has slowly changed the ethnic balance on the Atlantic coast in favour of mestizos. Emigration to Costa Rica is known to be high, but precise statistics are lacking.

Poverty remains widespread

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Standard-of-living surveys carried out in 1998 and 2001 indicated that despite a slight decline, overall poverty levels remain high and the poor continue to increase in number. Judged according to indicators of unmet basic needs, 74.8% of households were classified as poor in 2001, compared with 76.7% in 1998. www.eiu.com

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Using the World Bank’s poverty-line measure, which is based on the cost of a minimum diet, the 2001 poverty level was 45.8% of the population, compared with 50.3% three years earlier. Most of the decline was recorded in rural areas and in the capital, Managua. However, the total number of poor people rose by nearly 35,000 during the period surveyed. Previous surveys have also showed the distribution of national income becoming more unequal, with the top 10% of income earners receiving 44.7% of total income in 1998, compared with 44.6% in 1993. At 0.50, the Gini coefficient of income inequality (1998) in Nicaragua is high and matches the Latin American average. National income distribution (%) Decile 1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th Wealthiest 1%

Sep 1993 0.4 1.9 3.0 4.0 5.3 6.7 8.8 11.5 16.0 42.4 13.2

Sep 1998 0.8 2.0 2.9 3.8 5.0 6.3 8.1 10.7 15.8 44.6 15.6

Source: UN Development Programme, El Desarrollo Humano en Nicaragua 2000.

Education According to the Instituto Nacional de Estadísticas y Censos (INEC, the National Institute of Statistics and Census), the literacy rate in Nicaragua was 81.9% in 2001 and average school attainment among adults is 4.6 years. Underfunded and badly managed, Nicaragua’s basic education system is both fragmented and inadequate in coverage, with nearly 850,000 children aged 3-18 outside the system altogether. Rural poverty, which continues to promote early schoolleaving, has made it difficult to improve net primary enrolments, which stood at just 83% in 2004. Reflecting in addition the shortage of well-trained teachers, only 41% of those who initially enroll complete primary school during the six years allotted, although 70% finish eventually. Although it is increasing, net enrolment in secondary schools was only 40% in 2004. The secondary curriculum is heavily oriented towards preparation for university, yet prepares students poorly for higher learning. In part, this reflects gross misallocation of the national education budget, which in 2002 provided a scant US$40 per secondary school pupil, whereas US$763 was spent on each university student. Reflecting a cultural bias against manual labour, formal technical and vocational education is scarce, although supply is now increasing. A long–term Plan Nacional de Educación (National Education Plan) drafted in 2000 is attempting to address the system’s lack of relevance to changing economic circumstances. New priorities drafted in 2003 stress the need to

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bolster basic skills at primary level, increase teacher quality and motivation across the system, and expand technical training for youth.

Health Health services are badly organised

The provision of public health services is inadequately distributed, favouring urban areas and hospital care over rural areas and the kind of primary level attention needed to cope with a high incidence of diarrhoea and acute respiratory ailments among poor children. Foreign aid has helped maintain real levels of health spending despite inadequate budgetary allocations, but on a per head basis spending is still the lowest in Central America. Better prenatal care and physician attendance at births helped drive the infant mortality rate down from 121 deaths per 1,000 live births in 1979 to 31 per 1,000 in 2002—but this is still one of the highest rates in the hemisphere. The Ministry of Health claims to have vaccinated 93% of children against measles and 86% against a broad spectrum of other infectious diseases in 2003. Malaria and dengue fever are endemic. Health services are provided by state and private institutions. However, the public provision of health services is badly managed, and state hospitals lack medicines for the treatment of patients, who often have to buy them from private pharmacies. Chronic malnutrition—defined as stunting, where a child’s height is inadequate for its age—affects 20% of children, while anaemia afflicts one-third. Health indicators Life expectancy at birth (2003, years) Men Women Child mortality (2003, under-five mortality/1,000) Maternal mortality (2002, per 100,000 live births)a Births attended by skilled staff (2001, % of total) Prevalence of under-nourishment (2000, % of population) Access to clean water (2002, % of population) Access to sanitation (2002, % of population)

69 66 71 38 97 67 29 81 78

a Ministry of Health. Source: The World Bank, World Development Indicators 2004, unless otherwise indicated.

Natural resources and the environment There is a wide variety of ecosystems

Nicaragua has a variety of tropical ecosystems ranging from tropical rainforest on the Atlantic coast to dry tropics on the Pacific coast. Owing to the offshore confluence of tectonic plates and six active volcanoes, Nicaragua is highly vulnerable to earthquakes, flooding and hurricanes. Conditions in the mountainous regions in the centre and north of the country are fresher and wetter. The country has two large freshwater lakes, the Lago de Nicaragua and the Lago de Managua. Both are polluted. The continental shelf off the Atlantic coast is a rich source of fish, lobster and shrimp, and both the Atlantic and Pacific coasts have underfished reserves of grouper, tuna, clams and mackerel. Commercial shrimp farming has also flourished in estuaries along the Pacific Coast. According to official sources,

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there are 37,880 ha suitable for shrimp farming. However, overexploitation is depleting the Atlantic lobster beds. Forest reserves are fairly abundant compared with the rest of Central America. The main commercially viable species are mahogany, cedar, pine, rosewood and oak. Official sources put the forested area, including rainforest under official conservation, at 4.8m ha in 1992. Protected areas covered 2.2m ha. The two largest nature reserves are Bosawás on the north Atlantic coast and Sí-a-Paz near the border with Costa Rica. Both are subject to encroachment by illegal settlers. Deforestation is a serious problem, resulting in soil erosion, the decay of watersheds and aquifers, and an increasing tendency towards drought.

Transport, communications and the Internet Highways, ports and airports

Internal transport relies almost entirely on the road network. The railway network was closed in 1994 after falling into disrepair. Although the road network has recovered from wartime damage, it was no more extensive in 2002 than before the 1979 revolution. Of a total of 18,711 km of roads, only 6,165 km are all-weather roads and a mere 1,957 km are paved. By contrast, motor vehicle traffic has grown rapidly, with passenger cars virtually doubling in number between 1996 and 2002, when they reached more than 80,000. The PanAmerican Highway crosses the country from north to south. It is the main road link with other countries in Central America. Although improvements to major roads were made in the 1990s, secondary and rural roads remain in a poor condition. Traffic congestion is a minor problem in Managua. The Pan-American Highway gives Nicaragua access to seaports on the Atlantic Coast of the isthmus, principally Puerto Cortés in Honduras and Puerto Limón in Costa Rica. As paved roads linking the Pacific and the Atlantic coasts are still lacking, most of the country’s agricultural exports must be shipped through these ports at a significant cost. Recent investments have rehabilitated the Pacific port of Corinto but it still cannot handle enough volume to attract major shipping lines to use it as a port of call. The country’s main international airport, Managua International Airport, handles most air-passenger traffic, which grew by two-thirds between 2000 and 2004. The Atlantic coastal region’s three airports are able to accommodate international cargo flights.

Telecoms modernisation

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Almost all installed telecommunications capacity uses digital technology, owing to investments since privatisation of the formerly state-owned telecoms company, the Empresa Nicaragüense de Telecomunicaciones (Enitel). With the purchase in February 2004 of the 40% share belonging to a Honduran firm Megatel, Mexico’s Telmex-América Móvil group now completely controls Enitel and is rapidly expanding both fixed and cellular services. Nevertheless, with 214,000 fixed lines at the end of 2004, coverage of fixed telephony is still the lowest in Central America. As owner of both Enitel and PCS Aló, América Móvil also enjoys a dominant position in the cellular market where it competes with Telefónica de España (Spain), which in late 2004 bought the mobile phone holdings of BellSouth International (US). With over 738,000 subscribers

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at the end of 2004, cellular coverage outstrips fixed-line telephony. In recent years, mobile phone charges have fallen by around 25% owing to competition. Media

Nicaragua has 11 privately-owned television stations, two daily newspapers—La Prensa and El Nuevo Diario—and 187 radio stations.

The Internet

A total of 20 Internet providers operate in Nicaragua, but private use of e-mail and the Internet remains low—at about 20,000 subscribers—owing to the high cost of the service relative to local incomes.

Energy provision Privatisation makes slow progress

Private suppliers now generate the majority of electric energy, with the Empresa Nicaragüense de Electricidad (Enel, the state-owned electricity company) playing a diminishing role as it undergoes slow privatisation. Nicaragua’s effective generating capacity in 2003 was 601 mw, with daily demand reaching up to 441 mw. A system of energy-swapping with Panama and Honduras contributes slightly to consumption. Enel supplied 583 gwh of power in 2004, around 20% of total output, down from 44% in 2000. In 2000-04, electricity output grew by 7.2% per year, while consumption expanded by only 3.3%. Power blackouts, frequent during the administration of Violeta Barrios de Chamorro (1990-97), have declined notably. Although hydroelectric installations in the north and geothermal output from a plant at the Momotombo volcano have recovered to a degree since 2000, the country depends on oil-fired thermal plants for two-thirds of its electricity. All of Enel’s distribution network was privatised in September 2000. Investments are under way to improve the distribution system, which loses nearly one-third of all power generated. After repeated delays, two of six Enel generating plants were sold in 2002 and 2003. The sale of Enel’s two hydroelectric generating plants was originally a condition set by the poverty reduction and growth facility (PRGF) agreement with the IMF in order to reach completion point under the heavily indebted poor countries (HIPC) initiative. However, this plank was dropped as a result of strong political opposition, and the hydro generators remain in state hands. Energy demand by type of usera 2003 gwh 519.5 486.7 354.1 64.1 53.9 157.5 1,635.8

Household Commercial Industrial Irrigation Street lighting Water pumping Total

% of total 31.8 29.8 21.6 3.9 3.3 9.6 100.0

2004 gwh 558.4 515.4 337.0 66.8 67.5 156.1 1,701.0

% of total 32.8 30.3 19.8 3.9 4.0 9.2 100.0

a Official estimates. Source: Banco Central de Nicaragua, Indicadores Económicos.

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The economy Economic structure Main economic indicators, 2004 Real GDP growth (%) Consumer price inflation (av; %) Current-account balance (US$ m) Exchange rate (av; C:US$) Population (m) External debt (year-end; US$m)

5.1 8.5 -795 a 15.94 5.63 a 3,362 a

a Economist Intelligence Unit estimates. Sources: Banco Central de Nicaragua, Indicadores Económicos; IMF, International Financial Statistics.

GDP data based on 1980 were severely underestimated

Nicaragua is an impoverished country still struggling to recover from a political and economic upheaval in 1979-90 that destroyed infrastructure, reduced productivity and increased poverty levels. In 2004 the country’s GDP was estimated at US$4.6bn, giving per head GDP of around US$810. In May 2003 the Banco Central de Nicaragua (BCN, the Central Bank) published new national accounts based on a 1994 base rather than the previous base of 1980. It showed how GDP had been severely underestimated and the tax and debt burdens conversely overstated. The new accounts presented major corrections in these and other variables and incorporated a host of new survey and census information. Through the new accounts it has become obvious that the statistical profile of the Nicaraguan economy has changed radically. For 2002 the new data raised GDP to US$3.95bn, compared with US$2.5bn under the old accounting system, while GDP per head rose from US$480 to US$754. However, the rate of growth of real GDP during the administration of the former president, Arnoldo Alemán (1997-2001), previously calculated at an average of 4.9%, was revised down to 4.4% per year. The higher GDP level has also substantially changed statistical ratios. Whereas Nicaragua’s national tax coefficient as a percentage of GDP had long been considered the highest in Central America (22-23% under the old system), the corrected figure of 16.3% for 2004 places it squarely in the subregional mainstream. By contrast, gross fixed investment remains relatively constant under both systems, at 26-28% of GDP.

The importance of agriculture rises slightly

Between 2000 and 2004 the weight of the primary sector in GDP increased slightly, from 18.3% to 20.1% of GDP, in spite of a fall in the importance of fishing. It was largely owing to growth in livestock farming and the production of basic foodstuffs. Agriculture remains by far the country’s largest employer, accounting for about 40% of all employment. Most agricultural jobs are in the informal sector. Manufacturing grew from 16.9% to 18.1%, owing to a sharp expansion in food products and garment output, while the weight of the construction sector fell slightly. Services fell from 59.7% to 56.3% of GDP, and the government also saw its share of GDP marginally diminished. The cultivation of basic food crops is concentrated in the central and Pacific coast regions, while coffee is grown in the uplands north of Matagalpa. Livestock farming, mainly cattle ranching, is most prevalent in Boaco and

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Chontales and in the southern provinces near the border with Costa Rica. Commerce and manufacturing are concentrated in the capital, Managua, and in the cities of Matagalpa, Chinandega, León, Masaya and Estelí. Comparative economic indicators, 2004 GDP (US$ bn) GDP per head (US$) GDP per head (US$ at PPP) Consumer price inflation (av; %) Current-account balance (US$ bn) Current-account balance (% of GDP) Exports of goods fob (US$ bn) Imports of goods fob (US$ bn) External debt (US$ bn) Debt-service ratio, paid (%)

Nicaragua a 4.6 b 810 2,577 8.5 b -0.8 -17.5 1.2 -2.4 3.4 16.8

Guatemala a 26.7 2,109 4,988 7.5 b -1.1 -4.1 3.4 -6.9 4.7 8.6

El Salvador a 15.8 b 2,390 3,627 4.5 b -0.6 -4.0 3.3 b -5.9 7.7 9.3

Honduras b 7.5 1,060 a 2,696 a 8.1 -0.4 -5.2 1.6 -3.7 6.0 a 10.3 a

Mexico b 676.5 6,445 9,711 a 4.7 -8.8 -1.3 188.6 -197.2 143.3 a 17.0 a

2004 16,099 -19,174 -3,075 2,378 -697

% change 20.0 14.5 -7.6 14.4 -44.1

a Economist Intelligence Unit estimates. b Actual. Source: Economist Intelligence Unit, CountryData.

Economic policy Central government finances (C m; Jan-Dec) Revenue Expenditure Balance before grants Grants received Balance incl grants

2003 13,413 -16,739 -3,326 2079 -1,247

Source: Banco Central de Nicaragua.

IMF agreement commits the Alemán government to reform

Following the hyperinflation and economic decline of the 1980s, Nicaragua pursued a policy of stabilisation and structural adjustment in the 1990s, complemented in 1997 by the pursuit of great foreign debt relief. Under the current president, Enrique Bolaños Geyer, debt relief has been obtained under the heavily indebted poor countries (HIPC) initiative. Mr Bolaños’s macroeconomic policy has been framed within an overarching design for development known as the Plan Nacional de Desarollo (PND, National Development Plan). In March 1998 the Alemán government signed a second three-year enhanced structural adjustment facility (ESAF) agreement with the IMF—the first was signed in April 1994. It committed the government to pursue further fiscal adjustments and to privatise public utility companies. The public finances improved in 1997-98, although they remained heavily dependent on foreign grants. Fiscal targets were revised after Hurricane Mitch, which created the need for vastly increased public spending on reconstruction. With the agreement of the IMF, public capital spending almost doubled in 1999, to 20.6% of GDP, and the nonfinancial public-sector (NFPS) deficit (before grants) reached 12% of GDP.

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Hurricane Mitch Hurricane Mitch struck Nicaragua with devastating force in late October 1998. The storm killed at least 3,000 people and left 400,000 temporarily homeless or displaced. It also caused massive material losses estimated by the government at US$1.5bn, including damage to 8,000 km of roads and 71 bridges. By March 1999 the country had received US$250m in emergency assistance, including debt relief from many bilateral donors. A further US$1.4bn was pledged by the donor community at a meeting in Stockholm in May, covering reconstruction efforts through to 2002. Coping with the aftermath of Hurricane Mitch was a prime policy objective in 19992001, and some reconstruction efforts continue.

Reducing poverty is a major goal

Although market-oriented reforms in the early 1990s were successful in jumpstarting the economy, by 1998 concern had emerged among donors that renewed economic growth was not benefiting the poor. In October 1999, the ESAF was renamed the poverty reduction and growth facility (PRGF). Meanwhile, the Alemán administration began seeking access to the HIPC initiative to gain foreign debt relief. As a prerequisite, in consultation with civil society, the government began formulating a poverty reduction strategy, which was completed in mid-2001. Interim reductions in foreign debt service under the HIPC programme were applied to fighting poverty within the strategy’s guidelines beginning in 2001. Nicaragua reached completion point under HIPC in January 2004 (see The external sector, Capital flows and foreign debt).

Fiscal reform and privatisation stall

Fiscal reform and privatisation stalled in the latter years of the Alemán administration. After 1999 the budget gap was supposed to decline, but election-year spending in 2000 and 2001 kept the NFPS deficit extremely high, resulting in PRGF fiscal targets being missed by an increasingly wide margin. Progress in privatising public utilities was also inadequate. A social security reform introducing private pension funds was passed by the National Assembly in March 2000 but was not implemented. In view of these fulfilment shortfalls, the 1998 PRGF was allowed to lapse in mid-2001.

Mr Bolaños agrees a new PRGF with the IMF

In December 2002 Mr Bolaños signed a new three-year PRGF covering 2002-05. The primary goal of the agreement is fiscal sustainability, through the broadening of the tax base, the elimination of tax exemptions, improved revenue collection and more effective budgeting. A modest tax reform was approved in April 2003. The PRGF has also aimed to rebuild reserves after their depletion in 2001 and improve the financial position of the Central Bank through a significant net redemption of internal debt. These goals were met to a large extent, but by early 2005 lack of progress on the fiscal front put the continuation of the PRGF in jeopardy.

Major economic policy events December 2002: The Bolaños government signs a new three-year poverty reduction and growth facility (PRGF) with the IMF. April 2003: The National Assembly approves a tax reform, the Tax Equity Law, a PRGF condition.

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December 2003: Along with other Central American countries, Nicaragua signs the Dominican Republic-Central American Free-Trade Agreement (DR-CAFTA) with the US. January 2004: The IMF and World Bank announce that Nicaragua has reached completion point under the heavily indebted poor countries (HIPC) initiative. January 2005: The IMF suspends the three-year PRGF programme informally.

Privatisation has ground to a halt. In December 2003 the government sold its remaining 49% stake in the Empresa Nicaragüense de Telecomunicaciones (Enitel) to América Móvil (the mobile telephone arm of Telmex) of Mexico. However, it has all but abandoned attempts to introduce private pension funds or sell the ageing thermal generating plants, while political opposition has blocked the sale of the hydro plants or the process to offer concessions to operate parts of the national water company. Although some of these steps were pre-conditions for HIPC debt relief, they were mostly abandoned before HIPC completion was declared in January 2004. Building of reserves is mixed with inflation control

Since 1997 monetary policy aimed to combine inflation control with a strengthening of foreign reserves. The 1998 ESAF II agreement established targets for further reserve growth and limitations on domestic NFPS borrowing, and committed the government to redeeming certificados negociables de inversión (Cenis, negotiable investment certificates) to control quasi-fiscal losses of the Central Bank, which were expanding the money supply. The economy’s extensive dollarisation, and the effective indexation of most domestic prices to the crawling-peg exchange rate, convinced authorities to adopt the nominal exchange rate as an inflation anchor in 1998. In 1999 the government slowed the crawling-peg devaluation from 12% to 9% annually, and then further, to 6%, in an effort to keep price increases to single-digit levels. The policy was successful, as prices rose by just 4.8% year on year in 2001 as domestic demand levelled off, reflecting election-year nervousness and a fall in imported oil prices.

Key economic policy figures Marco Arana: Minister of finance and public credit. Mario Alonso: President of the Banco Central de Nicaragua. Azucena Castillo: Minister of development, industry and commerce. Juan Sebastián Chamorro: Secretary for strategy and co-ordination.

Excessive public spending in 2001 forced the BCN to extend large credits to the non-financial public sector, resulting in a fall in net foreign reserves held by the BCN, which closed the year at just US$211m. In 2002-03, Mr Bolaños’s first two years in office, fiscal spending was cut sharply to produce a large resource transfer from the government to the Central Bank, helping net reserves rebound. A development policy is inaugurated

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In September 2003 the Bolaños government unveiled a draft version of a Plan Nacional de Desarollo (PND, National Development Plan). The PND is the first serious effort since the 1980s to provide an overarching framework for both national and international development efforts. The Plan envisions ways in which government can act to spur private investment in clusters of economic

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activity in geographic areas of the country thought to have significant potential for development. The thinking behind the plan guided the government’s strategy in negotiating the 2003 free-trade agreement (FTA) between the Central American countries and the US. Trade is opened and investment promoted

Openness to trade and foreign investment has been a cornerstone of economic policy since 1990. In May 1997 the Tax Justice Law introduced timetables for reducing all customs tariffs on goods from outside Central America to 10% by mid-2001. In 2000 the government radically simplified foreign investment regulations without adding new enticements. Despite this stance, the government continued to use incentives to try to turn the country into a haven for maquila (in-bond assembly for re-export) operations and tourism. Because Nicaragua remains a low-income country, World Trade Organisation (WTO) rules have allowed it to continue offering tax breaks to free-zone companies after 2003, giving the country an advantage as a site for maquila relocation. The Bolaños government has built on this base, and seeks to attract greater investment from the US through an FTA between the US, five Central American countries (Nicaragua, El Salvador, Honduras, Guatemala and Costa Rica) and the Dominican Republic (see Regional overview, Membership of Organisations). The agreement was signed in December 2003, but it cannot go into effect until the US Congress ratifies it. El Salvador, Honduras and Guatemala have ratified the treaty.

Economic performance Growth returns in the 1990s

In 2000-04, according to official figures (using 1994 as a base year), average annual GDP growth was 3.1%. Continued growth in agricultural output and manufacturing led the modest advance, whereas government services were cut back as part of the austerity imposed by the PRGF. Although quantitatively less important, livestock raising, financial services and utilities outperformed all sectors. Powered by post-hurricane reconstruction, real growth in 1999 reached 7%, but it fell back to just 3% in 2001, owing in part to uncertainty about the outcome of the elections. It slowed further in 2002, to just 1%, as a result of weak external demand for agricultural exports and the severe fiscal adjustment the Bolaños government implemented during its first year in office. A significant recovery of GDP occurred only in 2004, when it increased by 5.1% driven by higher prices for exports and a surge in public capital spending.

Private investment remains inadequate

Since 1997 an influx of foreign direct investment (FDI) has boosted private investment spending. FDI inflows peaked at US$337m in 1999 before falling back to US$150m in 2001. In 2002-04, FDI averaged US$243m per year. It was concentrated in cellular communications, maquila operations and tourist projects. Private investment, which amounted to 22-23% of GDP in 2004, is still too low to spur rapid growth rates, while public investment, which accounts for 20% of all investment, will inevitably decline in the coming years as foreign assistance wanes. Factors deterring higher investment levels include weak financial intermediation, lingering property disputes, a corrupt judiciary and periodic political unease, and the low skill levels of the workforce.

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Inflation is increasingly controlled

Despite significant oil shocks in recent years, average inflation in 2000-04 was 7.3% a year, down from 11.2% in 1995-1999. The decline is largely owing to improved fiscal and monetary discipline. Reductions in the crawling-peg devaluation of the córdoba further helped reduce year-end inflation, which rose by just 3.9% in 2002. Price rises picked up in 2004, to 9.3%, owing to higher oil prices. Although dollarisation is not an official policy goal, US dollars are accepted in almost all transactions, and the public prefers to keep more than 70% of its bank deposits in US dollar-denominated accounts. The return of domestic savings from abroad and the removal of foreign-exchange controls has encouraged this trend.

Wage levels start to keep pace with inflation

Real wage levels have increased since 1997 owing to more rapid economic growth, the reduction in inflation, and pay rises for government workers. Partly spurred by hikes in official minimum wage rates, nominal wages increased by 8.2% in 2002; this translated into a 4.3% rise in average real wages. However, since then real wage increases have averaged just 1.5% owing to the increase in inflation which eroded nominal wage hikes of over 8% per year. Inflation and wages (% change, year on year) Consumer price inflation (av) Nominal wages Real wages

2000-04 7.3 10.1 2.6

2004 8.5 8.8 0.3

Sources: Banco Central de Nicaragua, Informe Anual 2004; Indicadores Económicos.

Underemployment and a large informal sector

Given that labour force participation has declined modestly in recent years, open unemployment, which stood at 6.5% in 2004, has continued to drop in spite of relatively slow growth. But underemployment, reflecting in part the low level of skills, is a massive problem, and affected around 45% of the workforce in 2004. Much new job creation is in the informal sector. According to the Central Bank, the informal sector accounted for 63% of all jobs in 2004.

Regional trends The Atlantic coast is especially disadvantaged

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Although poverty levels declined in the Pacific region in the 1990s, they increased on the Atlantic Coast. Regional GDP figures are not available, but growth is likely to have been well below the national average on the Atlantic coast as the area’s traditional mining and timber industries are in decline, leaving lobster and shrimp fishing as the main growth sector. In-migration has slowly altered the Atlantic region’s ethnic balance in favour of mestizos (people of mixed Spanish and Amerindian ancestry) from the Pacific, rather than indigenous people, putting pressure on the land base and fomenting tension over land titles and demarcation. Sparsely populated and poorly policed, the Atlantic coast has also become a transshipment route for Colombian drugs moving north, and local drug addiction is a serious problem. The North and South Autonomous Regions are officially self-governing, and 45-member governing councils are chosen every four years. But the 1987 Autonomy Law remains

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largely unenforced, and the regional governments are dependent on the central government for what is an inadequate level of financial support. Although tension between the indigenous and mestizo populations is slight, central government neglect of the region has begun to stir up some separatist feeling.

Economic sectors Agriculture Poor agricultural yields

Agricultural yields in Nicaragua are abysmally low by regional standards, and less land is irrigated now than 25 years ago. Although white corn yields have grown since 2000, red bean and rice yields are no higher than they were in the late 1970s. This poor performance has resulted from a plethora of problems. One is the lack of secure land tenure, as more than one-third of all landholders lack registered land titles. A World Bank-sponsored programme begun in 1992 resulted in the award of 40,000 agrarian reform titles by 2000, but most of these have not been registered and holders have not felt secure enough to make investments. Access to credit is woefully inadequate, as only 6% of all farmers receive formal bank financing. A mere 8% of small and medium-scale producers enjoy the benefit of technical assistance programmes. The rural road network is largely unpaved and in poor condition; the average farmer’s holding lies 82 km from the nearest paved road. Other infrastructure bottlenecks include the lack of an Atlantic port and the high cost of electricity to run irrigation equipment, which is used mainly in sugar-cane and rice fields.

Export agriculture has grown

The most important export goods are coffee, meat, seafood and sugar, which together accounted for 35% of all export earnings in 2004. Owing to a renovation of plantations in the early 1990s, the coffee-harvest area grew by 39% between 1996 and 2004, with output peaking in 2000 at just over 2m quintals (1 quintal=46 kg). The collapse of world prices that year, aggravated by financing difficulties, caused production to plummet, but it recovered to 1.8m quintals in 2004. The production of raw sugar has been rationalised since 2000, with harvested area reduced by 24% as mill ownership became concentrated. Increased yields have nevertheless maintained output at an average of just under 4m tonnes per year. Cattle-raising, together with milk and cheese production, has been the most dynamic part of the agrarian economy in recent years. From 1999-2004, the dollar value of meat exports grew from US$15.7m to US$35.8m, while live cattle exports grew from 54,700 head to 103,600 head. Domestic sales of raw milk also doubled. Much of this output is turned into cheese for export to regional markets in Central America. The government’s Plan Nacional de Desarollo (National Development Plan) has singled out the meat and milk products sector for special attention as a “cluster” with high potential for future development.

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Nicaragua

Area harvested by major crop (‘000 manzanas) a

Domestic agriculture Maize Beans Rice Sorghum Export agriculture Coffee Sugarcane Sesame Bananas

2002/03

2003/04

% change

526.0 351.8 84.3 33.5

502.1 409.4 115.8 36.6

-4.5 16.4 37.4 9.3

154.7 58.5 4.5 1.7

165.2 58.7 9.2 1.4

6.6 0.3 104.4 -37.8

a One manzana equals 0.7 ha. Source: Banco Central de Nicaragua, Indicadores Economicos.

Efforts to diversify Nicaragua’s export crops are enjoying increasing success. Easier access to the US market and expanded sales to Central America have encouraged production of exports such as peanuts, fruits, red beans and cheese, formerly regarded as “non-traditional” goods. A 1998 free-trade agreement (FTA) with Mexico has also spurred exports of live cattle and black beans. The prospect of the implementation of Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) with the US will also spur agricultural investment and growth. Forest development stalls

Forested areas account for 38% of the national territory. The country has an enormous diversity of flora, with at least 65 commercially-viable species of tree. Among these are mahogany, cedar, pine, rosewood and oak. However, the country is losing an estimated 120,000 ha each year, owing to both illegal logging and the cutting of trees for firewood. The government also forbade the export of caoba (a variety of mahogany) and royal cedar in 1997, but it replaced the ban with a 7.5% tax in 1999. Underscoring the need for action, an infestation of the pine borer insect in 2000 decimated 30,000 ha of pine forest near the Honduran border. The country is belatedly moving toward a coherent policy of reforestation incentives with the passage of forestry legislation in June 2003. The new framework covers the regulation of timber activity as well as the promotion of sustainable management of the nation’s dwindling forest.

Fishing is levelling off

Fishing, which was a promising area of primary-sector exports in the 1990s, faces an uncertain future owing to over-exploitation and the entry of new producers in world markets, which has depressed prices. Although pondshrimp output has rebounded strongly after being hit hard by Hurricane Mitch, the ocean catch has declined precipitously since 1999. Shrimp earnings peaked in 2000 at US$54m but fell back to US$37m in 2004 owing to declining world prices. Lobster exports similarly hit a high of US$57.5m in 2000 but have since fallen sharply, to US$43m in 2004, compromised by overfishing of the Atlantic zone beds.

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Mining and semi-processing The importance of mining declines further

Between 1998 and 2002 mining activity, which was substantial prior to 1970, dropped further, from 1% of GDP to 0.8%. The mining industry comprises five sectors: gold and silver, salt, marble, quarried stone and sand. Nicaragua has three gold and silver mines in operation. With the fall in world prices, significant gold production now occurs only at the El Limón mine. Gold reserves were estimated in 1998 at 3.8m ounces. Mining output increased by around 16.8% in 2002, as gold production stabilised with the reopening of the El Mojón mine in Chontales. An estimated US$60m-70m of private investment was made in exploration and technological modernisation of production plants in the 1990s.

Manufacturing Declining importance of light manufacture industry

The contribution of manufacturing to GDP increased from 16.9% in 2004 to 18.1% in 2004. Industrial activity in Nicaragua has never progressed much beyond the stage of light manufacture. Outside the maquila sector (in-bond assembly for re-export) few new industries have appeared, and during the latter part of the 1990s foreign companies purchased many of the traditional industrial plants that survived the sector’s reorganisation in the early 1990s. When free-zone output is included, average real manufacturing growth in 2000-2004 was 4.6% a year, down from 5.3% during the previous five years. Aside from clothing, much of the growth is concentrated in the food and beverage industries. About 80% of traditional manufactures are destined for the domestic market. Growth of manufacturing value added (%) 2003 a 2.5 2.0 9.0 2.0 3.3 -1.7 0.7 20.7

Total Food-processing Beverages Tobacco Textiles Wood & cork Chemicals Free zones

2004 b 6.6 9.4 4.4 2.7 7.3 0.5 9.8 34.3

a Preliminary. b Official estimates. Sources: Banco Central de Nicaragua, Informe Anual, 2004; Comisión Nacional de Zonas Francas.

Official policy designed to encourage manufacturing is currently focused on: • promoting more free-trade zones, thus stimulating competitiveness by encouraging investment by foreign manufacturing firms; • supporting programmes for small and medium-sized enterprises (SMEs) under the National Competitiveness Programme; and • simplifying bureaucratic requirements for investors and exporters and introducing measures to raise product standards.

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Nicaragua

The government encourages maquila investment

In contrast with most other forms of manufacturing, maquila production expanded rapidly after 1997, taking advantage of extremely cheap labour costs. There are now fifteen operative free zones, most of them privately owned, in which 43 separate plants operate, mainly from Taiwan and the US. Forty other plants are run individually under the free-zone benefit regime. The sector employed 66,000 people in December 2004, up from 28,000 at the end of 2000. The maquila sector is shifting away from an exclusive emphasis on garments. Factories designed to produce electrical wiring for automobiles are operating and a plant to produce cotton fabric for use in other free-zone plants is under construction. Maquila plants are increasingly located in the interior of the country. Free-zone output and employment Gross sales (US$ m) Export value added (US$ m) Direct employment (‘000)

2000 250 75 28

2001 296 94 36

2002 347 111 46

2003 403 134 60

2004 600 180 66

Source: Comisión Nacional de Zonas Francas.

The main free-trade zone, Las Mercedes, which is owned by the government, is located next to the international airport in the capital, Managua. It houses firms that produce garments, shoes and aluminium products. Firms exporting textiles to the US take advantage of Nicaragua’s duty-free status with the US. Companies operating under free-trade-zone rules take advantage of tax incentives provided by the Ley de Zonas Francas Industriales y su Reglamento (the Free-Zones Law and Regulations). These include: • a 100% exemption from corporate income tax in the first 15 years of operation; •

exemptions from capital gains tax on real estate;

• exemptions from taxes, including stamp duty, on the reconstitution of a company; • exemptions from all import duties on machinery, equipment and inputs to production, as well as equipment imported to satisfy the needs of personnel settled in the zones;

Liberal legislation and incentives for FDI are approved

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exemption from import duties on transport equipment;

•

exemption from excise, sales and selective consumption taxes; and

•

exemption from municipal taxes.

The Ley de Inversiones Extranjeras (the Foreign Investment Law), approved in April 2000 to replace legislation passed under the administration of a former president, Violeta Barrios de Chamorro (1990-97), offers foreign investors the following guarantees: •

a 100% repatriation of foreign capital at any time;

•

100% remittance of profit, dividends and interest; and

•

free access to foreign currency with which to repatriate capital and profit.

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In addition, the Ley de Admisión Temporal para el Perfeccionamiento de las Importaciones (the Temporary Admissions Law), which was passed in March 2001, permits all firms, both foreign and national, to import raw materials and capital goods for use in production free of duty, in exchange for exporting 25% of their output. It also exempts such exports from all municipal levies. The Temporary Admissions Law replaced the 1992 Export Promotion Law, the benefits of which lapsed at the end of 1997. The 2003 Ley de Equidad Fiscal (the Fiscal Equity Law) expanded the benefits of the temporary admissions laws to smaller companies. Nicaragua subscribes to the rules of the Multilateral Investment Guarantee Agency (MIGA), the International Conference on the Settlement of Investment Disputes (ICSID) and the US Overseas Private Investment Corporation (OPIC). It has also signed and ratified bilateral investment protection agreements with Canada, Taiwan, South Korea, Mexico, Spain, Denmark, the UK, the US, the Netherlands, the Dominican Republic and Ecuador.

Construction The importance of construction activity rises

In the past five years construction activity has declined in importance in GDP terms, falling from 4.7% to 4.2%. Reconstruction work associated with Hurricane Mitch gave the sector a massive boost in 1999, but it has stagnated since owing to slower growth and the contraction of public-sector capital spending. The turnaround in 2004, when activity grew by 8% in real terms, was a result of a large increase in spending on public works. The quality of much of the domestic construction and the materials used is low, leading the government to favour foreign construction firms in public works contracts.

Financial services Liberalisation of the banking sector takes place

The banking system, consisting of six commercial banks and three finance companies, is the main source of credit for the public and private sectors. A small stockmarket began operation in 1993. Despite marked growth in the 1990s, the banking system remains the smallest in Central America. Following the demise of the Banco Nacional de Desarrollo (Banades, the National Development Bank) in 1998, the Banco de Crédito Popular in 2000, and the Banco Nicaragüense de Industria y Comercio (Banic, state industrial development bank) in 2001, the state no longer has any holdings in the banking sector. Over 70% of the deposits are in US dollars.

Intermediation is weak

The banking system’s small size has kept financial intermediation weak. The lack of bank finance is a major hindrance to growth in most areas of economic endeavour. Bank finance is overwhelmingly concentrated in household and commercial loans, and bank branches are absent from most of the countryside. Rural lending is offered primarily by non-bank intermediaries including nongovernmental organisations (NGOs) and local usurers. Mortgage finance is underdeveloped but has begun to grow vigorously, with more banks expanding their lending.

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Nicaragua

Regulatory reform

Reforms agreed with the IMF under the poverty reduction and growth facility (PRGF) have regulated the system more strictly and shored up its capital base. Changes in September 1999 to the Ley General de Bancos (the General Banking Law) established US$10m as the minimum capital needed to found a private bank and limited private bank shareholders to a maximum share of 20% each. The reforms also curbed the practice of lending to related companies and set a limit on loans to a single borrower of 15% of a bank’s capital. According to figures from the Superintendencia de Bancos y Otras Instituciones Financieras (SIB, the banking watchdog), the capital base of private banks at the end of 2004 was C3,178m (US$199m), giving a capital/risk-weighted asset ratio of 14.3%. Despite these cautious reforms, a series of banking scandals involving fraud and mismanagement occurred in 2000 and 2001. Consequently, and as part of Nicaragua’s accession to the heavily indebted poor countries (HIPC) initiative in December 2000, the government agreed to implement reforms to strengthen the banking watchdog, tighten rules for asset valuation and loan provisioning, and provide safeguards against fraud through the publication of audited balance sheets along with the names of bank directors and related shareholders. A law providing deposit insurance up to US$20,000 per account-holder was passed in December 2000. Total credit outstanding

Agriculture & livestock Industry Commerce Personal Housing Total plus others

Cm 2003 2,179 1,705 3,641 1,884 1,498 14,725

2004 2,308 1,943 5,322 2,179 2,281 18,776

% of GDP 2003 3.5 2.7 5.8 3.0 2.4 23.6

2004 3.2 2.7 7.3 3.0 3.1 25.9

Source: Superintendencia de Bancos y Otras Instituciones Financieras, Informes Anuales 2003-04.

The stock exchange trades mostly government paper

Opened in 1993, the Bolsa de Valores de Nicaragua (BVN, the stock exchange) listed nine firms authorised to issue securities. A total of C7.75bn (US$486m) was traded in 2004, but the bulk of trading is made up of certificados negociables de inversión (Cenis, negotiable investment certificates) issued by the Banco Central de Nicaragua (BCN, the Central Bank). There are fourteen investment houses currently trading on the exchange. The first, extremely small, stock offerings were introduced on the exchange in 2001.

The insurance sector is opening up

As of 2001 the small but growing insurance market ceased to be dominated by the Instituto Nicaragüense de Seguros y Reaseguros (Iniser, the state insurance institute). Insurance company income from premiums, calculated in 2004 at US$72m, derives mainly from policies insuring goods and property. Domestic insurance brokers also provide insurance policies from foreign insurers in an unregulated grey market permitted to exist, albeit unofficially.

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Other services Tourism has potential

Nicaragua’s tourism potential is underexploited. The majority of visitors classified as tourists are business travellers, mainly from Central America, whose stays are brief and whose spending is limited. Cultural, recreational and eco-tourism geared toward foreigners is still largely undeveloped, although the city of Granada has attracted a large trade in recent years. In 2004 614,782 tourists entered Nicaragua, 17% more than in the previous year, according to the Instituto Nicaragüense de Turismo (Intur, the national tourism agency). Of these, 36% listed “vacation” as the reason for their visit. Following the inauguration of four new hotels in the capital in 1999-2001, there are now eight premium-class hotels, seven of which are in Managua. The newcomers have brought a measure of much-needed competition to the sector. In 2003 the country had 108 hotels of widely varying size and standard, with a total of 5,161 beds. The national hotel occupancy rate was estimated at 50% in 2003, in the larger cities such as Managua and Granada it averaged 65%. Over 280 other tourist projects involving potential investments of US$234m were approved under the 1999 Ley de Incentivos Turísticos (the Tourism Incentives Law), which has spurred the industry’s development by providing a series of tax breaks. But the 2003 Tax Equity Law revoked many of these exemptions, putting many investments on hold. The southern Pacific Coast nevertheless continues to see new ventures spring up, with a notable recent trend toward investments in retirement homes. A resident pensioners law, passed in early 2002, aimed at attracting retired foreigners and Nicaraguans who have lived outside the country for at least ten years, appears to have helped this development. The southern port of San Juan del Sur also attracts a small number of foreign cruise ships. Tourism arrivals by region of origin, 2004 Arrivals 377,674 157,782 79,326 614,782

Central America North America Other Total

% of total 61.4 25.7 12.9 100.0

Source: Ministerio de Turismo.

The retail sector has mushroomed

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Rapid growth of consumer imports financed by remittances and other inflows has sparked major foreign investments in commercial establishments. In Managua, investors from Taiwan and El Salvador have built modern shopping centres and Costa Rican retailers are slowly extending their control over the supermarket business. The growth potential of formal commerce continues to be limited by low income levels and contraband goods in Managua’s Eastern Market. Fast-food franchises from the US have also proliferated, although many are in the hands of a single franchise holder. Car lots offering used imported vehicles from Asia have multiplied since 1999, taking business away from established new-vehicle importers.

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Nicaragua

The external sector Trade in goods Adverse terms of trade affect export earnings

The dollar value of merchandise exports (excluding free-zone assembly) in 2004 reached US$756m, the highest level since the late 1970s. After growing rapidly in the mid-1990s, exports stagnated in 1998-2002, when they averaged a disappointing US$583m per year. This was caused in part by the appreciation of the real exchange rate, making conditions more difficult for exporters, but adverse terms of trade for traditional products, especially coffee, played a more significant role. More favourable terms of trade since 2003, and some gains in export diversity, helped export earnings to rebound strongly in 2003-04. By contrast, growth in maquila (in-bond assembly for re-export) value added has steadily increased in the last five years. Between 1999-2004 growth averaged over 20% per year. This suggests that the economy’s inability to shift resources out of the traditional export lines into non-traditional sectors is a problem. Factors bearing on the problem include the high cost of finance, uncertainty over property rights, infrastructure bottlenecks (particularly the lack of a port on the Atlantic coast), low labour skills and insufficient government promotion of exports.

Import spending expands steadily

Import spending grew by 24.8% in 1999 to just under US$1.9bn as reconstruction work following Hurricane Mitch pulled in imports—it did not surpass this level again until 2003. The trade deficit narrowed in 2000-01 but it has steadily expanded since. The share of consumer goods in the total import bill has risen despite sharply higher bills for imported oil in recent years. Higher economic growth in 2004, accompanied by larger outlays on oil, caused the deficit (fob-cif) to widen to US$1.5bn.

Trade with Central American countries rises sharply

Although the US remains by far Nicaragua’s most important trading partner, accounting for 35% of exports and 22% of imports in 2004, its importance has declined since 2000 in favour of Nicaragua’s Central American neighbours. Exports to the US dropped from 38% of the total in 2000 to 35% in 2004, while exports to Guatemala, Costa Rica, Honduras and El Salvador grew from 25% of the total to 33%. Although import spending on US goods (as a percentage of the total) also fell in 2000-04, Nicaragua did not import more goods from its neighbouring countries. The shift can be linked to rising oil prices, which inflated the importance of spending on Mexican and Venezuelan goods over the period. Main trading partners, 2004 (% of total; Jan-Dec) Exports to: US El Salvador Honduras Costa Rica Mexico Guatemala

34.9 14.5 7.5 6.7 5.3 4.3

Imports from: US Venezuela Costa Rica Mexico Guatemala El Salvador

22.2 14.5 8.6 7.4 7.1 5.0

Source: Banco Central de Nicaragua.

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Trade relations

Nicaragua is committed to reducing trade barriers. After several years of unilateral tariff reductions, it raised external tariffs on a range of items to 15% in May 2001 in an effort to harmonise tariffs and spur integration with its neighbours. A further move occurred in May 2003, in an effort to accelerate the negotiations towards the Dominican Republic-Central American Free-Trade Agreement (DR-CAFTA) with the US. As a member of the Sistema de Integración Centroamericana (SICA, the Central American Integration System, formerly called the Central American Common Market) the country has been active in efforts to strengthen regional trade integration. In 1998 Nicaragua signed a free-trade agreement (FTA) with Mexico and in 1999-2000 joined other Central American countries in trade accords with the Dominican Republic and Chile. Trade and investment links with Taiwan have also been developed. Nicaragua, Costa Rica, El Salvador, Honduras and Guatemala negotiated the establishment of DR-CAFTA with the US in 2003. Negotiations were concluded at the end of that year without the adherence of Costa Rica, which later joined along with the Dominican Republic. Although El Salvador, Honduras and Guatemala have ratified the treaty, the Nicaraguan and the US legislatures had not approved it by mid-2005.

Invisibles and the current account The trade deficit amplifies the current-account imbalance

The large current-account deficit, which ended 2004 at 17.5% of GDP, is one of the economy’s main structural weaknesses. Calculated at 35-40% of GDP under the old national accounts system, under the new accounts it averaged 19% in 2000-04. The trade deficit is by far the largest item in the balance of payments, registering an average of more than 23% of GDP in 2000-04. Nicaragua also has a deficit on its services and income accounts. Current-account balance (US$ m) Trade balance Services balance Income balance Current transfers balance Current-account balance

2003 -971.5 -105.8 -190.7 518.9 -749.1

2004 -1,111.9 -109.6 -192.3 618.8 -795.0

% change -14.5 -0.8 -0.8 19.3 -6.1

Source: Banco Central de Nicaragua.

The major non-merchandise debit item is income, mainly comprising contracted interest payments on external debt, which in 2004 amounted to almost US$122m, of which US$27m was actually paid. The interest burden has fallen since 1998, after several bilateral creditors provided substantial debt relief in 1995-96 (see The external sector, Capital flows and foreign debt). In 2001-02 the country began receiving interest rebates as the Inter-American Development Bank (IDB), the World Bank and bilateral debtors extended interim relief under the IMF-World Bank heavily indebted poor countries (HIPC) initiative. In 2001-03 this relief averaged US$186m per year. With HIPC completion, the debt-interest burden has now been greatly reduced. But the current-account deficit will not narrow significantly until there is a major improvement in the trade account.

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Nicaragua

Capital flows and foreign debt Foreign aid and remittances finance the balance of payments

High levels of foreign aid, growing workers’ remittances and fluctuating foreign investment flows finance the current-account deficit. In 2004 the sum of these inflows plus revenue from privatisation was estimated at US$1.38bn, compared with US$1.13bn in 1999. Once understated, official figures on worker remittances have increasingly come into line with reality, but the 2004 figure of US$518m is probably still too low.

Debt-restructuring and forgiveness December 2000 The IMF and World Bank declare that Nicaragua has reached the start-up (“decision”) point under the heavily indebted poor countries (HIPC) initiative.

March 2001 Spain agrees to assume the bulk of Nicaragua’s US$500m debt to Guatemala, pardoning US$399m.

December 2002-June 2003 Bilateral creditors forgive an additional US$575m in official debt.

January 2004 The IMF announces that Nicaragua has reached “completion point” in the HIPC process

March 2004 In its fifth negotiation with Nicaragua, the Paris Club finalises the pardon of US$1.2bn in bilateral debt.

A heavy debt burden is likely to be alleviated

The administration of Arnoldo Alemán (1997-2002) made little progress in reducing the stock of foreign debt, which, according to World Bank data, was higher at the end of 2001 than in 1996, and reached 250% of GDP. However, the current president, Enrique Bolaños Geyer, has made sufficient progress in fulfilling new targets under the IMF’s poverty reduction and growth facility (PRGF), completing structural reforms and improving governmental transparency, for the IMF and World Bank to decide, in early 2004, that Nicaragua had reached completion point under the HIPC initiative. The eventual reduction in net present value of debt under the HIPC initiative is calculated by the Banco Central de Nicaragua (the Central Bank) at US$5.1bn, from a total of US$6.1bn owed in December 1999. During negotiations with creditors in 2004 a US$3.1bn reduction (in net present value terms) was formalised. In real terms, HIPC completion point has left the country with an outstanding debt stock of around US$2.7bn. But as multilateral creditors have opted to write the debt down gradually as loan payments fall due, the official debt stock registered at end-2004 was still US$5.4bn. The foreign debt service paid in 2004 amounted to US$76m, down from US$183m in 2000, and the equivalent of 10.1% of exports.

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External debt stock, 2003 (US$ m unless otherwise indicated) Total external debt Medium & long term external debt Short-term debt Use of IMF credit External debt/GDP (%) Total debt service, paid Debt-service ratio, paid (%)a

6,917 5,900 595 213 167 225 30.1

a Debt service as a percentage of earnings from exports of goods and services. Source: World Bank, Global Development Finance.

Foreign reserves and the exchange rate The foreign reserves position is weak

Owing to the weakness of the external accounts, the country’s gross foreign reserves remain dependent on foreign assistance. Nicaragua’s import cover in 2000-04 averaged 2.5 months, up from 2.2 months in the preceding five-year period. Since 2000 gross reserves have averaged US$497m, owing largely to increased aid flows, some current savings and borrowing from the IMF. The cost of several bank failures caused reserves to fall modestly in 2001, but excessive public spending and election uncertainty caused reserves to drop below US$400m in 2001. Fiscal retrenchment in 2002 and progress on the PRGF conditions in 2003 underpinned a rebound in gross reserves. Increased foreign aid and privatisation receipts powered a massive rise in gross reserves in 2004, when they reached US$668m, equal to nearly three months of imports.

Exchange-rate stabilisation is successful

In 1997 the monetary authorities became concerned that the rate of nominal depreciation of the córdoba was preventing the reduction of inflation to singledigit levels. In mid-1999, against a backdrop of negligible first-half inflation, the monetary authorities slowed the depreciation schedule to 9% and, several months later, to 6%. At the start of 2004 the rate of crawl was dropped to 5%. The overall trend has been for the córdoba to appreciate against the US dollar, increasingly so in the late 1990s as aid related to Hurricane Mitch stimulated higher flows of official and foreign capital. The country has thus sacrificed some export stimulus to achieve lower inflation and higher real wages.

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Nicaragua

Regional overview Membership of organisations Nicaragua is a member of many international organisations including the UN and related agencies, the IMF, the World Bank and the World Trade Organisation (WTO). It is a member of the following Latin American regional organisations: the Inter-American Development Bank (IDB); the Organisation of American States (OAS); Group of 77; the Mercado Común Centroamericano (MCCA, the Central American Common Market) which includes Nicaragua, Guatemala, El Salvador, Costa Rica and Honduras. Nicaragua is also a member of the Sistema de Integración Centroamericana (SICA, the Central American Integration System which includes MCCA countries and Panama and Belize) and the Central American Group of Four (CA-4) which includes Nicaragua, El Salvador, Guatemala, and Honduras. MCCA and BCIE

Nicaragua, Guatemala, El Salvador, Honduras and Costa Rica established the Mercado Común Centroamericano (MCCA, the Central American Common Market) in December 1960. Several institutions were created subsequently to help to promote regional integration and development. The most important of these bodies was the Banco Centroamericano de Integración Económica (BCIE, the Central American Bank for Economic Integration), a development bank that has served as the financial arm of integration. The bank has grown with the incorporation of Mexico, Taiwan, Argentina and, more recently, Colombia as extra-regional partners. In the past 40 years BCIE has provided nearly 30% of total multilateral lending to its members. The BCIE’s long-term foreign-currency debt is rated “investment grade” by international credit rating agencies.

Parlacen and SICA

Another institution set up to promote regional integration was the Parlamento Centroamericano (Parlacen, the Central American parliament), established in 1987. However, member countries have been unwilling to cede jurisdiction and authority to Parlacen. Ex-presidents of member states automatically become members, and enjoy immunity from prosecution. This was waived in 2003 to enable Nicaragua to prosecute its former president, Arnoldo Alemán, for corruption. In February 2004 the Constitutional Court waived it again for former president Alfonso Portillo (2000-04) who is wanted in Guatemala for alleged fraud and corruption. In December 2004 Parlacen enacted reforms that denied former presidents the automatic right to a seat in the parliament, a much-criticised feature that had previously afforded former heads of state immunity from prosecution. It was also decided to reduce the Parlacen budget and that each state should determine the number of its representatives and the approach to their election. In 1993 the Sistema de la Integración Centroamericana (SICA, the System for Integration in Central America), which includes MCCA member countries and Panama, came into force. SICA co-ordinates and implements agreements made at regional presidential summits and by the council of foreign ministers of participating countries. Belize joined SICA in 2000, despite diplomatic tensions

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with Guatemala over an unresolved territorial dispute. A separate body, the Secretaría de Integración Económica Centroamericana (SIECA), handles the technical aspects of regional economic integration promoted by SICA and publishes statistics on intra-regional trade. Protocol of Guatemala

In 1993 the Protocol of Guatemala to the General Treaty on Central American Economic Integration (Protocol of Guatemala) modified the original MCCA treaty. Member countries adopted a strategy of “open regionalism” to further integrate the region within the global economy and to increase international competitiveness. Maintaining the goals of a customs union and common market, agreement was reached to implement a lower common external tariff (CET) and to expand the liberalisation of intra-regional trade, including trade of agricultural products. The target of a 0% floor and 15% ceiling for the CET was achieved in 2000. The Protocol of Guatemala provided the flexibility to allow members to negotiate trade agreements as a group or individually. MCCA member countries negotiated free-trade agreements with the Dominican Republic in 1998 (ratified by El Salvador in 2001 and by Costa Rica in 2002); with Chile in 1999 (ratified by both Costa Rica and El Salvador in 2002); and with Panama in 2002 (ratified by El Salvador in 2002). Costa Rica ratified an FTA with Mexico in 1995 and Nicaragua in 1998.

DR-CAFTA

The last round of negotiations between the US and four Central American countries (Guatemala, El Salvador, Nicaragua and Honduras) to establish a Central American Free-Trade Agreement (CAFTA) concluded in Washington DC in December 2003 and the parties signed the agreement. Costa Rica, which also participated in the process, signed the deal after it had held an additional round of negotiations with the US in January 2004. In April 2004 the Dominican Republic joined the treaty, which thereafter became known as the Dominican Republic-Central American Free-Trade Agreement (DR-CAFTA). The agreement formalises the trade benefits already enjoyed under the Caribbean Basin Initiative (CBI), as well as improving access for several agricultural and manufactured products. Gains were made in the maquila (offshore assembly for re-export) sector in particular, with immediate tariff-free access to all products made with regional inputs, as well as certain products made from regional or extra-regional inputs, which show “substantial transformation” in their manufacture. Concessions were made on both sides to protect economically sensitive sectors. Tariffs will remain on sugar, although Central American sugar producers will see a steady opening of the US market through an increase in quotas of 2% per year. The treaty is expected to come into effect in 2006 after the Congresses of the US and at least two signatory countries have ratified it. El Salvador’s Congress ratified DR-CAFTA in December 2004, the Congress of Honduras at the beginning of March 2005 and Guatemala on March 10th. Nicaragua and the US Congress have still to ratify the treaty.

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Nicaragua

Nicaragua and DR-CAFTA The Nicaraguan negotiating team considered the outcome of the talks highly positive for the country because it gained expanded access to the US for agricultural commodities and textiles, along with significant protection for domestic farmers against US imports. Expanded access to the US for agricultural goods is in the form of quotas for most traditional exports, which are significantly higher than existing export levels and which are scheduled to rise over time. Protection for local farmers will involve lengthy periods for tariff reduction—from 15 years and upwards—as well as additional grace periods for certain products. These protections start from pre-existing (and relatively high) levels. For most non-traditional products there were no changes as these already had tariff free access to the US under the Caribbean Basin Initiative (CBI), except that the Dominican Republic-Central American Free-Trade Agreement (DR-CAFTA) will give the privilege a permanent status. In access terms, Nicaragua’s most significant achievement is probably in the textile sector, with permission for garment companies in Nicaragua to use up to 100m sq metres per year of cloth from non-US, non-Central American suppliers to make garments and sell these duty-free in the US. Nicaragua was the only one of the five Central American countries (Guatemala, El Salvador, Nicaragua, Honduras and Costa Rica) to receive this concession. It should help Nicaragua resist Chinese competition in the US after 2005, which increased markedly at the start of 2005 when the US lifted quotas. Other sectors expressing satisfaction were sugar producers, whose current 22,000tonnes quota to the US market will gradually double, and peanut farmers who achieved a quota of 10,000 tonnes when they had none before. More important in the eventual growth of export earnings will be the quota for Nicaraguan beef, which was set at an initial level of 10,000 tonnes above and beyond existing export volume. The US will enjoy relatively limited quotas for the export to Nicaragua of corn, red beans, chicken parts and dairy products. There is only a small quota and no tariff reduction for white corn, a staple crop grown by peasant farmers that the government officially wanted to protect even though the US does not produce this corn variety. By contrast, American yellow corn will compete with domesticallyproduced sorghum for use as chicken feed, and the importation of US powdered milk may have some impact on local raw milk output. The relatively large rice quota granted to American producers will initially do no more than make up for shortfalls in local production—the country produces only about half of its yearly consumption. Nicaragua’s rice farmers will enjoy a long period of adjustment—28 years—before their crop is subjected to total free trade.

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Appendices Sources of information National statistical sources

Banco Central de Nicaragua, Boletin Económico Trimestral (quarterly) Banco Central de Nicaragua, Indicadores Económicos (monthly) Banco Central de Nicaragua, Informe Anual (annual) Fundación Internacional para el Desafío Económico Global (FIDEG): El Observador Económico, Informe Económico Mensual (monthly) Instituto Nacional de Estadísticas y Censos (INEC), Informe General: Encuesta Nacional sobre Medición del Nivel de Vida, 2001 Ministerio de Cooperación Externa, Informe de la Cooperación Externa (annual) Ministerio de Hacienda y Crédito Público, Presupuesto General de la República (annual) Superintendencia de Bancos y de Otras Instituciones Financieras, Informe Anual del Sistema Financiero Año (annual)

International sources

IMF, Direction of Trade Statistics (annual) IMF, International Financial Statistics (monthly) UN Development Programme (UNDP), El Desarrollo Humano en Nicaragua 2002 UN Economic Commission for Latin America and the Caribbean (ECLAC), Nicaragua: Evolución Económica (annual) World Bank, Global Development Finance (annual)

Select bibliography

Teódulo and Julio Francisco Báez Cortés, Todo sobre impuestos en Nicaragua, 2001 Banco Central de Nicaragua, Nicaragua: Desafíos para la Modernización del Sistema Tributario, April 2002 Banco Central de Nicaragua, Nicaragua en la Iniciativa HIPC: Memoria y Perspectivas, January 2005 Cámara de Industrias de Nicaragua, Bases para la política industrial de Nicaragua, February, 2001 David Close and Kalowatie Deonandan, eds., Undoing Democracy: The Politics of Electoral Caudillismo, Lexington Books, 2004 Klaus Deininger and Juan Sebastián Chamorro, Investment and Income Effects of Land Regularization, World Bank Policy Research Working Paper, January 2002 Geske Dijkstra, Structural Adjustment and Poverty in Nicaragua, March 2000 David R. Dye, Democracy Adrift: Caudillo Politics in Nicaragua, November 2004

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Nicaragua

Government of Nicaragua, Estrategia Reforzada de Crecimiento y Reducción de la Pobreza, July 2001 Government of Nicaragua: Propuesta de Plan Nacional de Desarrollo, September, 2003 Instituto Centroamericano de Administración de Empresas (Incae), Programa Nacional de Competitividad, July 1999 Inter-American Development Bank, Nicaragua: Summary of international Assistance, Consultative Group Meeting, October 2003 Nitlapán-UCA, El campesino finquero, 2 volumes, 1996, 2001 Secretaría de Coordinación y Estrategias, Metas de Desarrollo: Seguimiento a la Cumbre del Milenio, Nicaragua, first report, December 2003 UN Economic Commission for Latin America and the Caribbean (ECLAC), Nicaragua: Uso Productivo de las Remesas Familiares, July 1999 Universidad Centroamericana, Revista Encuentro, “Economía y Sociedad en Nicaragua”, No. 59, 2001 Universidad Centroamericana, Revista Envío (monthly) Roberta Van Haeften, Food Security in Nicaragua, USAID, December 2000 Panos Varangis et al., Dealing with the Coffee Crisis in Central America: Impacts and Strategies, World Bank. 2002 World Bank, Agriculture in Nicaragua, June 2003 World Bank, Development Policy Review, December 2004 World Bank, Land Policy and Administration, October 2003 World Bank, Poverty Assessment, December 2003 Selected websites

Central Bank website, www.bcn.gob.ni Banking watchdog, www.superintendencia.gob.ni Foreign Co-operation Secretariat, www.srec.cancilleria.gob.ni Ministry of Finance and Credit, www.hacienda.gob.ni National Statistics and Census Institute, www.inec.gob.ni La Prensa newspaper, www.laprensa.com.ni

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Reference tables These reference tables provide the most up-to-date statistics available at the time of publication. Population (m; % change year on year in brackets) 2000 5.072 (2.6) 41.8

Total Population per sq km

2001 5.205 (2.6) 42.9

2002 5.342 (2.6) 44.6

2003 5.482 (2.6) 45.1

2004 5.626 (2.6) 46.3

Source: Instituto Nicaragüense de Estadísticas y Censos.

Education indicators Spending per student (US$/year) Primary Secondary Tertiary Education budget as % GDP Net enrolment ratiob Pre-school education Primary education Secondary education Complete primary c

2000

2001

2002

2003

2004 a

113.8 34.2 987.7 2.7

153.9 46.6 936.0 2.6

116.0 69.3 962.8 2.6

98.7 69.0 928.2 2.5

n/a n/a n/a n/a

26.8 80.7 34.7 35.4

26.1 81.3 36.3 36.3

27.9 85.5 38.0 38.5

28.4 83.5 38.8 40.8

30.8 82.6 40.1 n/a

a Preliminary. b Percentage of children enrolled in the grade corresponding to their age. c Percentage of children who finish six primary grades in six years. Source: Instituto Nacional de Estadísticas y Censos; UN Development Programme, El Desarrollo Humano en Nicaragua 2002.

Health indicators (per 1,000 inhabitants unless otherwise indicated) Medical appointments Mortality rate Infant mortality rate (per 1,000 live births) No. of doctors No. of hospital beds

1998 5,793 5.62

1999 7,348 5.62

2000 7,149 5.16

2001 7,099 5.16

2002 7,205 5.16

39.5 7.7 1.1

39.5 7.3 1.1

39.5 7.0 1.0

39.5 4.0 1.0

31.0 3.9 0.9

Source: Ministerio de Salud.

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Nicaragua

Transport statistics Passenger transport (m) By landa By water By air Loaded Unloaded Cargo transport ('000 tonnes) By land By water International National By airb Loaded Unloaded

2000

2001

2002

2003

2004

102.29 0.81

99.33 0.66

103.17 0.73

107.05 0.79

111.09 0.69

303.90 308.13

302.24 305.66

304.55 304.22

331.80 333.9

440.00 587.7

5,469

4,666

4,929

n/a

n/a

2,215 162

2,264 156

2,092 166

2,143 185

2,330 230

6.4 12.9

7.3 12.5

7.4 13.0

7.5 12.0

9.3 13.0

a After mid-1999 excludes data for urban buses and taxis. b Through Managua International Airport. Source: Ministerio de Transporte e Infraestructura.

Electricity generation by plant type (gwh) Hydroelectrica Geothermala Thermalb Total generation incl others

2000 209.5 134.2 1,826.0 2,262.7

2001 196.8 206.1 1,992.6 2,463.6

2002 303.3 210.3 1,946.4 2,619.9

2003 297.4 270.7 1,992.6 2,773.7

2004 320.9 254.9 2,069.6 2,915.3

a Plants owned by the Empresa Nicaragüense de Electricidad. b Includes privately and publicly

owned plants. Source: Empresa Nicaragüense de Electricidad.

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Central government finances (C m unless otherwise indicated) Total revenue Current revenue Tax Capital revenue Total expenditure Wages & salaries Goods & services Interest payments On internal debt On external debt Other spending Capital & current transfers Fixed capital formation Overall balance Grants Overall balance after grants Ratios (% of GDP): Tax revenue Total expenditure Interest payments on external debt Overall balance before grants Foreign grants Overall balance after grants

2000 7,540.9 7,537.4 7,264.3 3.5 1,1772.0 1,885.8 1,420.8 1,034.3 318.4 715.9 n/a 5,105.0 n/a -4,231.1 1,873.9 -2,357.2

2001 7,654.0 7,645.6 7,354.5 8.4 13,266.0 2,251.1 1,944.9 1,284.9 549.0 735.9 2,734.7 5,050.4 n/a -5,612.0 1,712.0 -3,900.0

2002 11,450.0 11,450.0 8,123.2 0.0 13,887.4 3,780.0 1993.2 1,287.0 934.0 353.0 1,782.1 2,504.2 2,540.9 -2,437.4 1,522.0 -915.4

2003 13,412.6 13,412.6 9,878.8 0.0 16,738.5 4,179.1 2,035.6 1,918.8 1,518.8 400.0 1,894.9 3,050.4 3,659.7 -3,325.9 2,079.0 -1,246.9

15.2 23.8 1.4 -8.5 3.8 -4.8

13.9 24.1 1.3 -10.2 3.1 -7.1

20.0 24.2 0.6 -4.2 2.7 -1.6

21.4 26.7 0.6 -5.3 3.3 -2.0

2004 a 16,098.9 16,098.9 11,815.3 0.0 19,173.5 4,562.4 2,440.3 1,482.0 1,196.0 286.0 2,083.0 4,240.3 4,365.5 -3,074.6 2,377.8 -696.8 22.2 26.4 0.4 -4.2 3.3 -1.0

a Preliminary. Source: Banco Central de Nicaragua.

Money supply (C m unless otherwise indicated; end-period) Money (M1) incl others % change, year on year Quasi-money Money (M2) % change, year on year

2000 3,412.0 8.3 16,101.0 19,513.0 9.4

2001 3,267.0 -4.2 17,046.0 20,313.0 4.1

2002 3,368.0 3.1 19,648.0 23,016.0 13.3

2003 4,208.0 24.9 21,717.0 25,925.0 12.6

2004 4,807.0 14.2 25,582.0 30,389.0 17.2

2001 18.6 11.6

2002 18.3 7.8

2003 15.6 5.6

2004 13.5 4.7

Source: Banco Central de Nicaragua.

Interest rates (%; period averages unless otherwise indicated) Lending interest rate (%) Deposit interest rate (%)

2000 18.1 10.8

Source: Banco Central de Nicaragua.

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Nicaragua

Gross domestic product (market prices) Total (US$ m) At current prices Total (C m) At current prices At constant (1994) prices % change, year on year Per head (C) At current prices At constant (1994) prices % change, year on year

2000

2001

2002

2003

2004

3,906.5

4,124.7

4,026.0

4,149.3

4,555.6

49,551.9 27,094.6 4.2

55,155.3 27,908.7 3.0

57,376.3 28,196.6 1.0

62,673.8 28,850.5 2.3

72,603.3 30,322.0 5.1

9,770.3 5,342.3 1.4

10,596.6 5,361.9 0.4

10,740.8 5,278.4 -1.6

11,432.0 5,262.5 -0.3

12,904.1 5,389.2 2.4

2002 51,384.8 (89.6) 6,124.0 (10.7) 14,261.8 (24.9) 12,846.4 (22.4) 27,936.4 (48.7) 57,376.3

2003 56,402.0 (90.0) 6,614.1 (10.6) 15,334.3 (24.5) 15,202.3 (24.3) 31,887.5 (50.9) 62,673.8

2004 64,343.8 (88.6) 7,575.2 (10.4) 18,870.4 (26.0) 19,120.9 (26.3) 39,059.6 (53.8) 72,603.3

2003 25,709.8 (3.7) 2,409.5 (3.0) 6,140.8 (-0.4) 7,571.0 (7.9) 13,149.3 (4.4) 28,850.5 (2.3)

2004 26,557.3 (3.3) 2,476.2 (2.8) 6,743.4 (9.8) 8,764.8 (15.8) 14,384.5 (9.4) 30,322.0 (5.1)

Source: Banco Central de Nicaragua.

Nominal gross domestic product by expenditure (C m at current prices; % of total in brackets) Private consumption Government consumption Gross fixed investment Exports of goods & services Imports of goods & services GDP

2000 41,960.1 (84.7) 6,113.9 (12.3) 15,073.3 (30.4) 11,932.4 (24.1) 25,527.7 (51.5) 49,551.9

2001 47,225.4 (85.6) 6,518.7 (11.8) 15,580.2 (28.2) 12,476.7 (22.6) 26,645.7 (48.3) 55,155.3

Source: Banco Central de Nicaragua.

Real gross domestic product by expenditure (C m at constant 1994 prices; % change year on year in brackets) Private consumption Government consumption Gross fixed investment Exports of goods & services Imports of goods & services GDP

2000 22,621.1 (5.3) 2,523.0 (4.8) 7,680.9 (-16.8) 6,776.9 (12.5) 12,526.2 (-4.7) 27,094.6 (4.2)

2001 23,729.7 (4.9) 2,449.8 (-2.9) 7,036.4 (-8.4) 7,275.0 (7.3) 12,613.5 (0.7) 27,908.7 (3.0)

2002 24,785.2 (4.4) 2,339.1 (-4.5) 6,165.5 (-12.4) 7,019.5 (-3.5) 12,593.4 (-0.2) 28,196.6 (1.0)

Source: Banco Central de Nicaragua..

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Prices and earnings Consumer price index annual (year-end; 1999=100) Inflation (year-end; %) Cost of basic needs basket (C)a Nominal wages (C)b Real wages (% change)b

2000

2001

2002

2003

2004

109.7 9.9 1,852 2,585 1.5

115.0 4.8 1,980 2,897 4.4

119.4 3.9 2,120 3,135 4.3

127.2 6.5 2,312 3,388 2.6

138.9 9.3 2,565 3,686 0.3

a Cost of basket of 53 goods in Managua. b Central government employees and those paying national

insurance contributions, in current córdobas. Sources: IMF, International Financial Statistics; Banco Central de Nicaragua, Indicadores Económicos; Informe Anual, 2000.

Labour force ('000 unless otherwise indicated) Economically active population (EAP) Open unemployment As % of EAP Underemployment as % of EAP

2000 1,924.3 114.7 6.0 42.2

2001 n/a n/a n/a n/a

2002 n/a n/a n/a n/a

2003 2,077.4 164.7 7.7 46.5

2004 2,111.1 138.0 6.5 45.5

Source: Banco Central, Informes Anuales 2003-2004

Production of staple food crops ('000 quintals; crop years) 1999/2000 1,995 2,959 6,397 948

Rice Beans Maize Sorghum

2000/01 3,723 3,801 9,053 989

2001/02 1,579 3,905 9,242 1,275

2002/03 1,919 4,289 10,887 1,363

2003/04 a 2,416 5,044 12,049 1,382

2001/02 153 3,349 1,272 3,460

2002/03 35 3,126 1,152 3,431

2003/04 a 81 3,090 1,796 4,566

a Preliminary. Source: Banco Central de Nicaragua, Indicadores Económicos.

Production of main export crops ('000 quintals unless otherwise indicated; crop years) Sesame Bananas ('000 42-lb boxes) Coffee Sugarcane ('000 short tons)

1999/2000 103 3,200 2.083 4,056

2000/01 115 2,533 1,809 3,877

a Preliminary. Source: Banco Central de Nicaragua, Indicadores Económicos.

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Nicaragua

Livestock production (C m at constant 1994 prices) 2000 1,844 127 1,057 3,028

Cattle Pigs Poultry Total

2001 1,952 131 1,192 3,274

2002 1,788 97 799 2,685

2003 1,905 99 854 2,858

2004 2,090 100 906 3,096

Source: Banco Central de Nicaragua, Informe Anual 2004.

Fisheries production ('000 lb) 2000 20,810 12,987 9,428

Shrimp Lobster Fish

2001 20,995 8,280 10,724

2002 21,762 9,083 11,828

2003 3,457 7,919 11,058

2001 123.5 81.4

2002 125.5 70.7

2003 108.3 65.7

2001 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

2002 4,324.6 1,290.8 2,119.1 240.7 112.7 159.0 402.3 2,518.5 668.5 1,850.0 6,843.1

2003 4,526.1 1,359.1 1,877.3 680.6 35.1 163.8 410.2 3,259.4 774.4 2,485.0 7,785.5

2004 23,964 8,836 10,751

Source: Banco Central de Nicaragua, Indicadores Económicos.

Gold and silver production ('000 troy oz) 2000 118.1 51.1

Gold Silver

2004 a 138.7 94.8

a Preliminary official estimates. Source: Banco Central de Nicaragua, Indicadores Económicos.

Construction: gross value of production (C m) Private construction Residential Commercial Service Industrial Civil engineering works Rural Public construction: Buildings Civil engineering works Total

2000 n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a

2004 5,459.4 1,461.4 2,259.7 1,077.9 15.7 168.7 476.0 4,600.0 1,162.9 3,437.1 10,059.4

Source: Banco Central de Nicaragua.

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Tourist arrivals and revenue 2000 485.9 3.8 111.3 3.9

Arrivals ('000) % change Revenue (US$ m) % change

2001 482.9 -0.6 109.0 -2.1

2002 471.6 -2.3 116.4 6.8

2003 525.8 11.5 151.8 30.4

2002 561.0 177.7 90.7 256.7 35.9 1,753.7 571.3 451.9 119.4 253.7 149.5 104.2 508.9 55.8 365.1 88.0 414.8 27.8 238.0 149.0 5.0 -1,192.7

2003 604.5 201.6 80.8 285.5 36.6 1,879.4 631.7 489.4 142.3 328.4 194.5 133.9 557.6 60.3 403.1 94.2 359.2 19.5 221.0 118.7 2.5 -1,274.9

2004 614.8 -16.9 166.7 9.8

Source: Instituto Nicaragüense de Turismo.

Main exports and imports (US$ m) Exports (fob) Agricultural Fisheries Manufacturing Minerals Imports (cif) Consumer goods Non durable Durable Oil & derivatives Oil Fuel & lubricants Intermediate goods Agriculture Industry Construction Capital goods Agriculture Industry Transport Other imports Merchandise trade balance (fob-cif)

2000 642.8 263.3 122.3 227.6 29.6 1,805.5 536.3 421.1 115.2 291.5 184.5 107.0 533.2 72.8 344.6 115.8 442.6 31.6 227.5 183.5 1.9 -1,162.7

2001 589.4 212.0 88.0 259.1 30.3 1,775.3 554.2 447.0 107.2 269.7 171.5 98.2 540.5 49.9 383.5 107.1 406.2 37.4 228.1 140.7 4.7 -1,185.9

2004 755.6 266.4 92.6 349.1 47.5 2,212.3 733.7 569.8 163.9 425.9 235.7 190.2 646.1 67.6 452.2 126.3 404.6 17.5 250.4 136.7 2.0 -1,456.7

Source: Banco Central de Nicaragua.

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Nicaragua

Main trading partners (US$ m) Exports fob to: US Germany El Salvador Honduras Costa Rica Guatemala UK Total exports incl others Imports cif from: US Central America Venezuela Japan Mexico Guatemala Costa Rica UK Total imports incl others

2000

2001

2002

2003

2004

246.0 53.4 70.8 34.3 37.7 19.7 13.1 642.8

186.5 30.2 75.8 39.6 36.3 22.9 16.1 589.4

205.2 13.0 86.7 38.4 48.4 23.2 15.3 561.0

202.0 9.5 104.4 43.5 49.2 25.9 19.0 604.5

263.4 14.1 109.3 56.6 50.6 32.3 3.8 755.6

450.0 423.1 197.3 133.5 126.1 126.9 164.2 7.1 1,805.5

493.1 414.8 195.2 88.2 130.0 130.0 158.6 5.9 1,775.3

475.1 400.5 196.1 93.8 112.2 136.8 151.3 6.4 1,753.7

462.5 429.2 183.2 81.9 158.8 137.3 167.6 8.7 1,879.4

491.9 507.7 320.1 95.5 163.0 157.4 189.2 9.0 2,212.3

Source: Banco Central de Nicaragua, Indicadores Económicos.

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Balance of payments, IMF series (US$ m) Goods: exports fob Goods: imports fob Trade balance Services: credit Services: debit Income: credit Income: debit Current transfers: credit Current transfers: debit Current-account balance Direct investment in Nicaragua Direct investment abroad Inward portfolio investment (incl bonds) Outward portfolio investment Other investment assets Other investment liabilities Financial balance Capital account nie credit Capital account nie debit Capital account nie balance Net errors & omissions Overall balance Financing (– indicates inflow) Movement of reserves Use of IMF credit & loans

1999 748.6 -1,819.8 -1,071.2 214.2 -334.7 30.7 -227.5 460.1 0.0 -928.4 337.3 0.0

2000 880.6 -1,801.5 -920.9 221.3 -343.4 30.7 -232.5 452.9 0.0 -791.9 266.9 0.0

2001 910.9 -1,808.2 -897.3 223.4 -353.1 14.7 -255.0 482.5 0.0 -784.8 150.2 0.0

2002 916.7 -1,853.1 -936.4 226.2 -335.5 9.2 -209.6 462.4 0.0 -783.7 203.9 0.0

2003 1,049.1 -2,021.2 -972.1 249.0 -372.1 6.7 -209.9 518.9 0.0 -779.5 201.3 0.0

0.0 0.0 55.2 -41.8 350.7 194.0 0.0 194.0 -141.3 -401.9

0.0 0.0 22.2 166.0 455.1 307.0 0.0 307.0 -299.5 -395.2

0.0 0.0 79.9 -284.1 -54.0 309.0 0.0 309.0 -35.5 -455.8

0.0 0.0 -60.4 -31.5 112.0 295.0 0.0 295.0 -61.2 -493.0

0.0 0.0 2.9 -220.6 -16.4 248.0 0.0 248.0 135.1 -414.2

27.5 22.8

-159.3 107.1

21.3 26.6

108.5 0.0

-68.2 9.0

Source: IMF

Balance of payments, national series (US$ m) Goods balance Services & income balance Transfers balance Current-account balance Capital & financial accounts Capital Financial Balance of payments

2000 -920.9 -323.7 452.9 -791.7 614.1 308.9 305.2 -177.6

2001 -909.8 -369.3 482.5 -796.6 524.8 294.7 230.1 -271.8

2002 -917.2 -312.0 462.4 -767.2 575.3 248.2 327.1 -191.9

2003 -971.5 -296.5 518.9 -749.1 574.6 286.0 288.6 -174.5

2004 -1,111.9 -301.9 618.8 -795.0 716.6 283.5 433.1 -78.4

Source: Banco Central de Nicaragua, Indicadores Económicos.

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Country Profile 2005

50

Nicaragua

External debt, World Bank series (US$ m unless otherwise indicated; debt stocks as at year-end) Public medium- & long-term Private medium- & long-term Total medium- & long-term debt Official creditors Bilateral Multilateral Private creditors Short-term debt Interest arrears Use of IMF credit Total external debt Principal repayments Interest payments Short-term debt Total debt service Ratios (%) Total external debt/GDP Debt-service ratio, paid a

1999 5,780.0 110.0 5,890.0 5,410.0 2,940.0 2,470.0 480.0 865.0 745.0 155.0 6,910.0 98.9 87.2 4.5 185.9

2000 5,490.0 281.0 5,771.0 5,140.0 3,020.0 2,120.0 631.0 911.0 789.0 169.0 6,851.0 189.3 97.7 6.5 286.5

2001 5,440.0 140.0 5,580.0 5,090.0 2,890.0 2,200.0 490.0 674.0 535.0 158.0 6,412.0 263.1 73.2 4.8 336.7

2002 5,580.0 181.0 5,761.0 5,230.0 2,810.0 2,420.0 531.0 554.0 420.0 174.0 6,489.0 103.8 47.5 4.1 151.2

2003 5,900.0 209.0 6,109.0 5,550.0 2,850.0 2,700.0 559.0 595.0 434.0 213.0 6,917.0 143.3 61.8 5.9 205.2

184.6 14.4

175.4 19.7

155.5 22.7

161.2 9.9

166.7 11.8

Note. Long-term debt is defined as having original maturity of more than one year.

a Debt service as a percentage of earnings from exports of goods and services. Source: World Bank.

Exchange rates (C per unit of currency unless otherwise indicated; annual averages) US$ £ MePs BrR c Bs

2000 12.7 19.2 1.34 6.93 0.041 0.0187

2001 13.4 19.2 1.43 5.69 0.041 0.0185

2002 14.3 21.4 1.48 4.88 0.040 0.0123

2003 15.1 24.7 1.40 4.91 0.038 0.0094

2004 15.9 29.2 1.41 5.45 0.036 0.0084

2000 488.5

2001 379.9

2002 448.1

2003 502.1

2004 668.2

488.5 0.0

379.9 0.0

448.1 0.0

502.1 0.0

668.2 0.0

Source: IMF.

Foreign reserves (US$ m; end-period) Total reserves incl gold Total international reserves excl gold Gold, national valuation Source: IMF.

Editors: Editorial closing date: All queries:

Country Profile 2005

Ondine Smulders (editor); Martin Pickering (consulting editor) June 7th 2005 Tel: (44.20) 7830 1007 E-mail: [email protected]

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© The Economist Intelligence Unit Limited 2005