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Doing Business in Nicaragua

By on January 9, 2013

Market Overview

  •    Nicaragua’s gross domestic product (GDP) increased by an estimated 4.0% in 2011, due largely to a rapid increase in prices for Nicaraguan exports and increased consumer spending at home.  Inflation in 2011 was 7.95%. The Central Bank of Nicaragua forecasts GDP growth of 3.5 to 4% in 2012 with inflation of 8 to 9%.
  •    On April 1, 2006, the United States – Central America – Dominican Republic Free Trade Agreement (CAFTA-DR) entered into force for the United States and Nicaragua. 80% of U.S. exports of consumer and industrial goods now enter Nicaragua duty-free, with remaining tariffs to be phased out by 2016. Tariffs on most U.S. agricultural products will be phased out within 15 years, with all tariffs eliminated in 20 years.
  •    With CAFTA-DR, Nicaragua also offers substantial market access for U.S. firms across the entire services spectrum, including telecommunications, express delivery, computer and related services, tourism, energy, transport, construction and engineering, financial services, insurance, audio/visual and entertainment, and professional services. The agreement features key protections for U.S. investments and intellectual property. It also includes commitments on environmental standards, labor rights, government procurement, and corruption.
  •    The United States is Nicaragua’s largest trading partner, the source of roughly a quarter of Nicaragua’s imports and the destination for approximately two-thirds of its exports (including free zone exports). U.S. exports to Nicaragua totaled $1.1 billion in 2011, including cereals, donated goods, mechanical machinery, textiles and apparel, oils and fats, medical and dental equipment, electrical machinery, vehicles, and plastics. Nicaraguan exports to the United States were $2.6 billion in 2011, including textiles and apparel, automobile wiring harnesses, coffee, meat, fish, tobacco, gold, fruits, vegetables, and sugar. Other important trading partners for Nicaragua are Venezuela, El Salvador, Costa Rica, Mexico, and the European Union.
  •    The Nicaraguan Government estimates that foreign investment inflows were $880.6 million in 2011, up from $508 million in 2010. There are more than 125 wholly- or partly- U.S-owned subsidiaries of U.S. companies currently operating in Nicaragua. The largest of these investments are in textiles and apparel, energy, financial services, light manufacturing, tourism, fisheries, and shrimp farming. Other major investors include Venezuelan, Mexican, Canadian, and other Central American firms.

Market Challenges

  •     Poor infrastructure increases costs for many businesses. Because oil is the fuel used by most power plants, electricity service in Nicaragua is the most expensive in Central America. With the exception of a few major intercity links, roads are poorly maintained and sometimes impassable. Seaport infrastructure is limited, and costs are high.
  •     The Nicaraguan economy is small and purchasing power is limited for many consumers. Of the total population of 5.89 million, 46% live below the poverty line. Family remittances, $911.6 million in 2011 significantly, augment incomes for many Nicaraguans, as do transfers provided by the Sandinista National Liberation Front (FSLN) with Venezuelan funding.
  •     Several factors contribute to an uncertain policy environment for foreign investors. Harsh rhetoric by the Government of Nicaragua against the United States, capitalism, and free trade has had a negative effect on foreign investor perceptions of risk. Government officials frequently deride neoliberal policies and the “tyranny of capitalism” and criticize foreign investors for paying “slave wages.”
  •     Nicaragua’s political situation impedes the development of institutions and policies that would strengthen the private sector in the face of global competition. The World Economic Forum’s Global Competitive Index for 2011-12 ranked Nicaragua 115th of 142 countries.
  •     The legal environment is among the weakest in Latin America. Property rights, including intellectual property rights, are especially difficult to defend. Nicaraguans commonly believe that the judicial system is controlled by political interests and is corrupt. Investors regularly complain that regulatory authorities are arbitrary, negligent, slow to apply existing laws and often favor one competitor over another. Lack of a reliable means to quickly resolve disputes with administrative authorities or business associates has resulted in disputes becoming intractable.
  •     The Nicaraguan Customs Authority regularly subjects shipments of commercial and even donated goods to bureaucratic delays and arbitrary valuation. Importers and exporters alike accuse the Nicaraguan Customs Authority of regularly assessing exorbitant fines for minor administrative discrepancies. In some cases, shipments are illegally held for days, weeks, or months, with no justification provided by customs agents.
  •     Business associations, religious organizations, and civil society question the manner in which the Supreme Court overturned a constitutional prohibition against reelection to allow President Ortega to compete, and be reelected, in the November 2011 elections.
  •     The 2011 presidential elections were not conducted in a transparent and impartial manner, and the electoral process was marred by significant irregularities, as reflected in public statements by international observers and Nicaraguan civil society groups.  These elections mark a setback to democracy in Nicaragua that undermines the ability of Nicaraguans to hold their government accountable.  The voting results, in which over 100,000 more votes were cast for the National Assembly than for the presidency, cast doubt on the outcomes.  Furthermore, as of the end of 2011, the Supreme Electoral Council (CSE) has yet to publish results by voting table as required by Nicaraguan law.  Opposition parties have rejected the results of the election and one independent domestic election group says that roughly 150,000 votes were manipulated in the election.
  •     President Ortega has trumpeted the concept of a mixed economy, in which economic power is divided between the state and private sector. He has used funds provided by Venezuela through the Bolivarian Alliance for the Americas (ALBA) to increase the role of the state in the economy.

Market Opportunities

  •     CAFTA-DR has provided new market opportunities for U.S. exports to Nicaragua. The treaty has also provided new opportunities for Nicaraguan exports to the United States, especially for meat, dairy, seafood, agricultural produce and processed foods.
  •     Nicaragua offers business opportunities in the tourism sector that are enhanced by attractive tax incentives. Nicaragua’s emerging tourism industry allows for opportunities to those entrepreneurs who fully accept the risk of investing in Nicaragua, especially with regard to disputes over land title and lack of supportive infrastructure.
  •     Market opportunities exist in the following sectors: renewable energy; vehicles, auto parts, and equipment; consumer goods; computer equipment and peripherals; telecommunication equipment and services; medical, optical and dental equipment; plastics; agricultural inputs; food processing and refrigeration equipment; construction and hardware equipment; wheat; yellow corn; soybean oil; soybean meal; and rice.

Market Entry Strategy

  •     The use of agents and distributors is the most common way to export U.S products and services.
  •     The Nicaraguan retail market is relatively small, but identifying one representative for the Pacific and central regions and another for the Atlantic coast is often required to ensure nationwide coverage.
  •     A local lawyer should be consulted to determine the pros and cons of various agency or representation agreements.
  •     U.S. companies should visit potential partners or agents prior to entering into a relationship.
  •     U.S. firms should check the bona fides of potential partners before establishing a formal business relationship.

 

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