Trade Note on Nicaragua

Trade Note on Nicaragua is yet another first ever attempt of this Embassy aimed at diversification and increase in the bilateral trade between India and Nicaragua. While giving outlines of the agricultural, mineral, forestry, industrial, etc., sectors, old data are given in order to give an idea of the growth of economy of Nicaragua. However, in the Annexures to this Trade Note, the data are updated and a serious reader is requested to look at these latest data on the economy of Nicaragua. These annexures would also provide a glimpse into latest economic scenario of Nicaragua and at the same time, the major import and export items of Nicaragua. The main Note would give an idea to the interested parties to identify their import/export items and in case they need further information, they are welcome to write to this mission. This Note would be updated periodically and sent to the concerned officers in the Ministry of External Affairs, Ministry of Commerce, major export promotion councils, etc., so that the information is disseminated for the benefit of Indian business community to enable them to find out business opportunities in Nicaragua.

I am grateful to the officers in the Ministry of External Relations of Nicaragua who have given us some useful information without which this Note could not have been completed. Also I would like to mention here the patience and dedication shown by my P.A Mr. S. Ramakrishnan, who has devoted lot of time for preparing this Note.

(Tara Singh)
Ambassador
11.04.01

Overview of Nicaraguan Economy

Nicaragua’s economy is based mainly on agricultural production, although there is much untapped economic potential - minerals, land and other resources - yet to be exploited. The country’s principal export crops are coffee, sugar cane, sesame seed, meat and bananas. A variety of grains, such as corn, rice, beans and abundant varieties of tropical fruits are grown for domestic consumption. Cattle production has declined considerably in recent years. However, the government has established new incentives for cattle producers.

Following the 1979 revolution the Sandinista government pursued ambitious policies, attempting to meet broad social goals within the framework of a mixed economy. The banking and insurance sectors and many farms and companies were nationalized and the government also took control of the traditional export sector. Government investment averaged 20% of GDP in 1980-1984, much higher than the Central American average.

By 1988 Nicaragua was in a desperate economic and financial crisis. In February 1990, the United States resumed trade with Nicaragua and restored its financial aid. The previously nationalized farms, using the revenue for the Nicaraguan government began the privatization of repayment of debt and to encourage foreign investment. The new government regained fiscal discipline, stabilized the currency and restored links with the international financial community. During this period, inflation declined dramatically from 33,657% in 1988 to 12% in 1993, 18.46% in 1998 and 7.19% in 1999; private investment increased to 10% of GDP and exports increased significantly. The government also unified the exchange rates and adjusted most import tariffs to a range of 10% to 40%, reactivated the free trade zone and reduced 90% of its debt owed to the Soviet Union and some Latin American countries.

The present government has promised that getting the economy moving is its top priority. Fortunately, the economy that was inherited was already expanding strongly. President Aleman has emphasized the reform of the judicial system and measures to improve the tax and investment laws in order to attract foreign investment. Reports from the Inter-American Development Bank (IADB) indicated that Nicaragua has complied in general terms the commitments to enter the Initiative of Highly Indebted Poor Countries (HIPC). The HIPC would enable this Central American country to reduce 80% of its foreign debt of US$ 5.5 billion. It was reported that Nicaragua had advanced very much in its commitments of the macro-economical indicators, the Structural Adjustment Programme and the reforms of the State in the financial system and the electrical sector, among others.

A comparison of the relative contribution by different economic sectors to the GDP, for the period 1993 -1996, is presented below:

Comparison of Annual GDP contributions, by sector

¹ In US billions of Dollars.

Source for 1993-95 figures: Central Bank; Inter-American Development Bank, Annual Report on Latin American Economic and Social Progress, 1996.

Source for 1996-97 figures: Central Bank statistics released in January 1998.

Source: Central Bank of Nicaragua

According to a report attributed to President Aleman, Nicaragua’s GDP registered an increase of 5% in the year 2000 to US$ 2.27 billion despite the increase in the prices of petroleum products and fall in the prices of Nicaraguan exports in the world.

Nicaragua's economy grew by 4.0 percent in 1998, down from 5.0 percent in 1997, and short of the 6.0 percent expected before Hurricane Mitch took its toll in production, infrastructure, and human lives. The primary sector (agriculture, livestock and fishing) was the most affected, with the growth rate falling from 8.3 in 1997 to 4.2 in 1998. The secondary sector (manufacturing, construction and mining) also saw its growth rate slow from 5.7 to 4.0 percent from 1997 to 1998. Private investment, from both domestic and foreign sources, is rising. Nevertheless, GDP per capita is only an estimated $441, the second lowest in the hemisphere. The unemployment rate fell from 14.3 percent in 1997 to 12.3 percent in 1998. The combined rate of unemployment and underemployment was 25.5 percent.

The administration of President Arnoldo Aleman signed an ESAF (Enhanced Structural Adjustment Facility) program with the International Monetary Fund in January 1998 and continues its concerted drive to modernize the economy and open it to foreign trade and investment. Accomplishments over the past year include passage of an austerity government budget, streamlining the government, signing of a market-opening free trade agreement with the Dominican Republic, and passage of a modern copyright law.

Prospects look good for sustained rapid economic growth beyond 1999. However, success depends on the government's ability to stay on track with its ESAF, make significant progress in resolving property disputes, strengthen the rule of law, and take other steps to remove obstacles to private investment. The National Assembly passed in May 1999 a Tourism Incentives Law that may generate increased interest on the part of potential investors, especially Japanese, Taiwanese and Europeans.

It is expected that GDP growth will slow in 2001 primarily owing to the un­certainty surrounding the presidential election. A degree of crowding out of the private sector is also likely to continue to flatten growth. However, exports should continue to perform well, which will help to offset sluggish domestic demand. Once the presidential election is decided there should be a rebound in 2002, fuelled by continued export growth and an increase in domestic demand. The budget for Nicaragua for 2001 has been approved at US$ 2.11 billions – an increase of 5% over the 2000 budget (US$ 2.01 billion) with a deficit of US$ 1.29 billion that would need to be covered by internal and external debt. The main priority areas of budget spending would be health, education and public security. Inclusion of Nicaragua in the HIPC would allow reduction of 80% of the external debt of US$ 6.5 billion – whose interest itself consumes more than 40% of the annual export earnings of the country. IMF & IADB have set up a new list of requirements for economic and social austerity measures to be met by the government by end 2001 which include combating government corruption and strengthening banking and financial sectors.

MACRO ECONOMIC DATA AND FORECASTS

(e) = estimate (f) = forecast

Forecast summary
(% unless otherwise indicated)

	1999ª	2000 b	2001 c	2002 c
Real GDP growth	7.0	4.9	4.5	5.5
Oil exports (US$ bn)	135.3	164.0	153.1	143.6
Unemployment rate (av)	23.0	19.6	16.7	13.3
Consumer price inflation
Average	11.3	11.1	11.0	10.9
Year-end	7.2	11.1	11.0	10.9
Short-term interbank rate	22.1	21.1	20.7	20.4
Government balance (% of GDP)	-11.7	-9.2	-7.0	-3.8
Exports of goods fob (US$ bn)	0.6 b	0.6	0.7	0.8
Imports of goods fob (US$ bn)	1.7 b	1.9	1.8	1.9
Current-account balance
(US$ bn)	- 0.7 b	-0.9	-0.9	-0.9
% of GDP	-28.8 b	-29.7	-25.7	-24.5
External debt (year-end; US$ bn)	6.2 b	6.4	6.6	6.7
Exchange rates
C:US$(av)	11.81	12.69	13.45	14.26
C:¥100(av)	10.37	11.85	12.93	13.98
C: (year-end)	12.37	11.62	13.98	15.99
C:SDR(year-end)	16.91	16.38	18.43	20.21

a:Actual. b: estimates. c: forecasts.

Comparative Indicators of the Regional countries vis-à-vis Nicaragua

e = estimates f = forecasts

Source: Latin America Monitor – April 2001

Inflation and exchange rates

Barring external shocks or a recurrence of natural disaster, it is expected that the rate of inflation to remain almost unchanged in 2001-02. Inflation remained under control at a level below 10% while devaluation of the currency was restricted to 6% even though the State had to pay more than US$ 100 million to guarantee refund of public deposits in two failed private banks.

PRINCIPAL GROWTH SECTORS OF NICARAGUAN ECONOMY

Agriculture, fishing, manufacturing, mining, telecommunications, tourism and construction are the principal sectors that promise significant short term growth. The primary sector (agriculture, fishing and forestry) represents 26.7% of GDP, 40% of employment and two-thirds of the exports. The primary sector grew 8.5% in real terms in 1997. The secondary sector (manufacturing, construction and mining) comprising 20% of GDP, grew an estimated 4.8% during 1997. Each category of the tertiary sector (commerce, transportation, housing, government) grew at least 4% in 1997, except for government, which contracted by 5%.

Agriculture: Nicaragua is essentially an agricultural country with a land area of 11.88 million hectares, of which 888.7 thousand are dedicated to agriculture. The country’s principal export is coffee, followed by sugar cane, cotton, meat, sesame seed, peanuts, bananas, and tobacco. However, during 1996, lower world prices for coffee and meat led to the decline of their contribution to the primary sector. The principal agricultural products for national consumption are rice, beans, corn, and fruits. In the early 1990s efforts to diversify showed few results, although renewed access to the U. S. market and USAID

Source: Central Bank of Nicaragua

funding encouraged melon and citrus producers. Nicaragua’s efforts to diversify started to pay off in 1996, when non-traditional exports (such as tobacco, lobster and shrimp, peanuts, wood, and powdered milk) exceeded traditional exports for the first time. The agricultural production has shown significant growth in the period 1990 - 2000 due to commercial liberalization, deregulation and privatization trends, expansion of the cultivated area, and rising demand for non-traditional products.

Agricultural production (including farming, livestock, fisheries and forestry) accounts for 26.7 percent of Nicaragua's GDP and two-thirds of exports. The sector grew 4.2 percent in 1998, down from 8.3 percent in 1997, as a consequence of the passage of Hurricane Mitch. The Nicaraguan government, as well as the international donor community, is placing great emphasis on agricultural reactivation. Farming grew 7.2 percent in 1998, down from 9.7 percent in 1998. Fishing grew only 1.5 percent, down from 6.5 percent in 1997. In 1998, the livestock industry shrunk 1.8 percent, due to factors such as international beef prices, Hurricane Mitch damage, limited credit and other factors. Over the long term, Nicaragua's low population density and ample grazing land offer potential for further expansion of the livestock sector.

Potential Use of National Territory:

Source: Think quest Team 17749

Coffee growers in difficulties

The Union Nicaraguense de Cafetaleros (Unicafé, the coffee growers’ union) has reduced its forecast for 2000/01’s coffee output in light of drought in the Pacific growing areas of Managua and Carazo, and financing difficulties caused by the collapse of the Banco Internacional (Interbank). In mid-October 2000 Unicafé estimated that the total harvest produced for the 2000/01 crop year was about 1.5m quintales (one quintal = 46 kg), well below the record crop of 2m quintales harvested in 1999/2000.

Fishing

The fishing industry is one of the most promising areas for non-traditional exports. Potential exists for continued growth of the fishing industry; especially cultivated shrimp and lobster, due to the extensive coastlines and excellent aquaculture areas in the “Estero Real” near the Gulf of Fonseca.

Manufacturing: Major manufacturing industries include agro-industry, food processing, and textiles. Manufacturing growth has been modest for the past four years. However, maquilas have continued to boom. Las Mercedes free-trade zone is expanding rapidly, and planned investment by Taiwan, South Korean and U. S. firms further increased job opportunities in 1998. The total amount invested in Las Mercedes zone by the end of 1996 was 45 million dollars; an additional $21 million of investment in maquila operations in1998 with 18 maquila plants in operation. The firms operating in the free-trade zone are attracted by the low wages and quota-free status for textiles and clothing exports to the U. S., in addition to other export incentives. It is believed that there is a potential for expansion of traditionally manufactured products, subject to the success of the basic economic changes being implemented. Export-oriented manufacturing at Nicaragua's Free Trade Zone in 1998 was $172.8 million.

Service Industries

Business services (advertising, computer services, restaurants, management and consulting, etc.) are efficient and have been developing over the last few years. However, there is no significant foreign participation in this area. Most business advertising and trade promotion in Nicaragua is conducted through the print media and radio. The most commonly utilized publications are daily newspapers and business journals. Television advertising is being used with greater frequency. Direct marketing is not as heavily used because of the unreliability of the postal service. The Nicaragua retail market is relatively small, with no truly large-scale department stores or other retail operations. In recent years, shopping centers and supermarket chains have developed in Managua. Most of these projects are financed with foreign capital.

Minerals and Mining: The principal minerals are gold and silver. Gypsum, calcium, antimony, bentonite, rock and marble are also mined. All mines have been under state control since 1979, but currently foreign investors are very active in Nicaragua’s mines, as several companies have been awarded concessions for new exploration. Gold production rose 26% in 1996, whereas silver dropped 55%. Since 1994 the mining industry has grown by 66%, led mainly by gold extraction. A minimum of one hundred thousand ounces of gold was extracted by the end of 1997. Foreign investors are very active in Nicaragua's mines. In addition, several companies have won concessions for new exploration. Some 124,100 troy ounces of gold were produced in 1998; a 54 percent increase over 1997 and 67,300 troy ounces of silver were produced in 1998, which represents a 98 percent increase over 1997.

Energy Resources: Nicaragua is heavily dependent on oil imports for its energy needs, and the acute shortage of foreign exchange has meant strict controls over domestic fuel supplies. The new government has promised to introduce a new hydrocarbons law to encourage foreign investment and exploration. There have been ambitious attempts for alternative energy production. In 1997, the Interamerican Development Bank (1DB) offered to finance projects of up to 300 million dollars for electric power generation by private investors.

Telecommunications: The government has failed to privatize ENITEL for a second time. However, the government plans to initiate a capitalization process, which entails a re-engineering process, and the seeking of additional capital through stock offerings. Cellular telephone service, private leased-line services, paging and trunked radio service are all presently offered in Nicaragua by private companies under license from ENITEL.

Tourism: For the foreign visitor, Nicaragua’s reputation as a hospitable country is well deserved. Nicaragua is not only blessed with its friendly citizens but with sunny beaches on both coasts and impressive natural attractions not very far from Managua. The nation has lakes, attractive mountains and volcanic scenery, extensive forests and long coastlines with virgin tropical beaches. The Nicaraguan Tourism Institute (Instituto Nicaraguense de Turismo - INTURISMO) is the main official entity in the sector. Tourism represents an area of attractive investment projects to foreigners because the rapid growth in this industry generated US$80 million in 1997. Foreign investors have begun work on several large hotels, shopping, and recreational complexes in Managua. Some local investors are expected to open small hotels in Granada, Masachapa, and Ometepe Island. 381,600 tourists visited Nicaragua in 1998, up 13.2 percent over 1997. This industry offers good opportunities for foreign investment (especially in eco-tourism and beach-related projects). Several major projects, including three first-class hotels in Managua, are under construction. The Hotel Princess opened its doors in late 1998. An expansion has also been completed at Nicaragua's world-class Pacific Ocean beach resort at Montelimar (including a recently upgraded airfield). Even though a bright future for tourism is foreseen, the inadequate infrastructure (roadways, electric network, and recreational tourist facilities) presents an obstacle to the expansion of the tourism sector.

Construction: Construction saw strong growth (8.6 percent) in 1998 for the fifth year running. Business and residential construction are expected to continue to rebound in the coming years after two decades of relative stagnation.

INFRASTRUCTURE SITUATION:

Ports: Because of poor infrastructure and high operating expenses, most containerized sea cargo and fresh fruit are shipped by highway to and from Puerto Limon in Costa Rica and Puerto Cortes in Honduras. Nicaragua has six seaports, all of which are operated by the Government-run Port Authority (ENAP). The most suitable for commercial shipping is the Port of Corinto located on the Pacific coast, 110 miles northwest of Managua. The Port Authority is improving Corinto's facilities and hopes that the result will sharply increase the port's competitiveness. The government has reduced port tariffs in order to encourage their use. The National Port Enterprise stated that the fees have been reduced from $ 5,800/- in some ports to $ 3,000/-, making the Nicaraguan ports the least expensive in Central America. Authorities are also investing in improvements at the ports, installing new machinery and lighting to make navigation by night possible.

Airport: Managua International Airport (located 7 miles east of the city center) has separate cargo facilities constructed in 1995. On average, there are six scheduled all-cargo flights per week to and from Managua, which primarily carry cargo to and from the U.S. and Central America. The main cargo carriers are Fine Airlines (based in Miami) and TACA Airlines. In addition, most passenger airlines, including American and Continental, maintain some cargo capacity. A 3,500 cubic foot cold storage facility at the airport opened in 1996.

Highways: Nicaragua’s highway network of 10,655 miles, according to the Ministry of Construction and Transportation, is made out as follows: 1,068 miles of paved highways; 1,336 miles of paved roads; 3,108 miles of all-season roads; and 5,143 miles of dry-season roads. Most of the better roads serve the heavily populated Pacific coast regions. The 230 miles north-south Pan-American Highway links Nicaragua with Honduras and Costa Rica.

IMPORTANT NATIONAL PROJECTS:

There are some important projects which the Government of Nicaragua would be undertaking in the near future, that is to say the Saratoga Free Trade Zone, the Humid Canal of Nicaragua as well as many rehabilitation projects to be carried on by the European Commission due to the destruction caused by the Hurricane Mitch of 1998, which could provide us valuable opportunities of entering into commercial dealings with the bilateral as well as the multilateral agencies in Nicaragua.

The Saratoga Free Trade Zone comprises an open area of 70.6 hectares and a roofed area of about 2 lakh sq. mts for industrial use. The full development of this Free Trade Zone is expected to be completed within a maximum of 5 years, i.e. by end 2005. Taking into account the existing laws and regulations that guarantee the normal operation of an industrial free trade zone, the possibility of operating in this free trade zone are highly favourable. Additionally, there is a quota-free status for textiles and clothing exports from Nicaragua to the United States market. I will be sending more material on this project for circulation among the interested parties for appropriate action on their part.

The Ministry of External Relations invited all the Heads of Missions in Managua to see for themselves the opportunities of investments, which this Humid Canal could offer to their respective countries. The funds would be raised from the investments by international community in this canal. During my next visit, I would hold further discussions to know the details for investments from India. However, it may be pertinent to mention here that the Nicaraguan National Assembly, on March 29, authorized a plan to study the feasibility of construction of a “dry inter-oceanic canal” which would compete with the Panama Canal. The project, one of the aged dreams of the Central American country, would join the roads and high-speed trains of the Pacific coast and the Caribbean of Nicaragua. According to the initial estimates, the construction of the dry canal between the Caribbean community of Monkey Point and the Port of Corinto or one that would be equipped in the Department of Rivas, in the Pacific Coast, would cost approximately US$ 3,000 million.

Source: Information given by the Foreign Investment Division of the Ministry of

External Relations of Nicaragua

GOVERNMENT’S ROLE IN THE ECONOMY

Since 1990, all state monopolies except for public utilities have been eliminated, virtually all price controls have been phased out, and more than 300 state enterprises have been privatized. The Government retains a handful of state enterprises in non-utility areas, such as banking, insurance, a cement company, and others. Nicaragua's legal and regulatory framework remains cumbersome and an impediment to investment.

BALANCE OF PAYMENTS SITUATION

Nicaragua suffers from a chronic external accounts deficit. Despite growing export and tourism earnings and government progress on structural adjustment measures and foreign debt reduction, the country remains highly dependent upon donor assistance to balance its accounts. This dependence will continue for the foreseeable future. The current account deficit in 1998 was $804 million (out of a GDP of $2.1 billion). That deficit was covered by net official capital transfers of $328 million and net private capital transfers of $325.3 million.

Nicaragua has foreign debt totaling US$6.4bn. Under the terms of debt relief recently approved by the international financial community more than US$ 4.5 mn in debt will be cancelled. The IDB members alone will pardon US$ 360 mn, and the Australian government announced that it would waive Nicaragua’s repayments on an outstanding AUD 6.3 mn (US$3.5mn) debt, in line with a decision by international agencies to reduce the country’s debt burden. The interim debt relief follows a two-year moratorium on debt repayments granted to Nicaragua by Australia in 1999 in the aftermath of Hurricane Mitch. The moratorium has already expired.

Foreign trade and payments

FOREIGN TRADE (US$ m)

The trade balance improves

According to official figures for the first nine months of 2000, the trade deficit has begun to narrow. The deficit stood at US$877m compared with US$967m in the year-earlier period. The figures also confirm that the recovery in traditional exports earnings has continued. They grew by 20%, led by coffee, lobster and meat, while non-traditional exports grew by a more modest 6% year on year.

Nicaragua: exports, Jan-Sep, 2000
(US$ m; fob)

	1999	2000	% change
Traditional exports	267.5	320.2	19.7
Coffee	116.8	152.5	30.6
Cotton	0.2	0.1	-50.0
Sesame	3.1	2.9	- 6.5
Sugar & molasses	26.3	24.0	-8.7
Meat	29.2	36.4	24.7
Shrimp	28.6	30.9	8.0
Lobster	26.6	44.4	66.9
Bananas	10.1	7.4	-26.7
Gold & silver	26.6	21.6	-18.8
Non-traditional exports	156.0	165.3	6.0
Agricultural	68.6	63.6	- 7.3
Fishing	7.5	7.2	- 4.0
Manufactures	79.9	94.5	18.3
Total exports	423.5	485.5	14.6

* Excludes maquila (offshore assembly for re-export)

Import spending continued to fall in the third quarter of 2000, contracting by 2% in the first nine months of the year compared with the year-earlier period. In addition to the stagnation of consumer goods and intermediates imports, capital goods have fallen sharply, depressing overall import levels despite much higher spending on imported oil and lubricants. However, a recorded decline in capital imports for industry of 36.6% overstates the underlying downturn, having been skewed in 1999 by a large energy investment from a US oil com­pany, Enron. A 8.9% fall in spending on capital imports for agriculture appears to correspond to lower growth expectations in 2001.

Nicaragua: imports, Jan-Sep
(US$ m; cif)

	1999	2000	% change
Consumer goods	389.2	384.5	-1.2
Oil & derivatives	119.5	204.9	71.5
Other intermediate goods	410.6	411.1	0.1
Capital goods	469.6	361.3	-23.1
Total Imports including others	1,390.5	1,362.7	-2.0