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U.S. DEPARTMENT OF STATE NICARAGUA: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES BUREAU OF ECONOMIC AND BUSINESS AFFAIRS NICARAGUA Key Economic Indicators (Millions of U.S. dollars unless otherwise noted) 1992 1993 1994 1/ Income, Production and Employment: Real GDP (1991 dollars) 1,781.2 1,765.2 1,800.5 Real GDP Growth (pct.) 0.4 -0.9 2.0 GDP by Sector: Agriculture 2/ 434.6 437.8 448.3 Energy/Water 55.2 56.5 57.6 Manufacturing 399.0 391.9 397.9 Construction 53.4 54.7 55.8 Rents 74.8 74.1 75.6 Financial Services 57.0 56.5 59.4 Other Services 78.4 79.4 81.0 Government/Health/Education 199.5 195.9 198.0 Net Exports of Goods & Services 3/ -567.0 -430.0 -426.1 Real Per Capita GDP (USD) 430.4 414.4 410.1 Labor Force (000s) 4/ 1,445.4 1,489.5 1,543.7 Unemployment Rate (pct.) 17.8 21.8 23.5 Money and Prices: (annual percentage growth unless otherwise noted) Money Supply (M2) 21.1 8.0 16.5 Rediscount Rate (pct.) 5/ 13.0 13.0 10.5 Personal Saving Rate (pct. of GDP) 6/ -15.2 -14.6 -13.3 Retail Inflation N/A N/A N/A Wholesale Inflation N/A N/A N/A Consumer Price Index 3.5 19.5 13.5 Exchange Rate (cordobas:USD) Official 5.00 6.32 7.08 Parallel 5.34 6.42 7.43 Balance of Payments and Trade: Total Exports (FOB) 223.1 226.9 328.9 Exports to U.S. (FOB) 52.0 125.9 121.1 Total Imports (CIF) 855.0 727.7 786.0 Imports from U.S. (CIF) 220.0 149.8 164.5 AID from U.S. 7/ 114.7 80.5 80.9 AID from Other Countries 8/ 644.8 306.2 482.1 External Public Debt 10,808.2 10,987.0 11,553.0 Debt Service Payment (paid) 194.0 178.0 272.0 Gold and FOREX Reserves (gross) 179.1 87.7 109.1 Trade Balance 9/ -551.2 -390.0 -389.1 Trade Balance with U.S. 9/ -147.2 -23.2 -28.6 N/A--Not available. 1/ Figures are all annual projections based upon 8-9 months of data. 2/ Agriculture does not include livestock and fisheries. 3/ Does not include interest payments or debt service. 4/ Defined as working age population as reported by the Nicaraguan Ministry of Labor. 5/ Central Bank rediscount rate. 6/ Based upon IMF figures. 7/ Includes all non-military aid granted. 8/ Includes total grants and credits received minus U.S. aid. 9/ Trade balance is calculated on FOB basis. Sources: International Monetary Fund (IMF), the World Bank, and the Central Bank of Nicaragua unless otherwise noted. 1. General Policy Framework Over the period 1990-93, the Government of Nicaragua focused on making the transition from a centralized to a market-oriented economy, and on reversing the severe mismanagement of the economy during the Sandinista era, which had resulted in a 25 percent drop in real GDP and 50 percent drop in GDP per capita during the 1980's. During the first four years of the Chamorro Administration, the currency was stabilized and inflation brought under control. The cordoba is presently devalued against the dollar on a crawling-peg basis of 12 percent per annum, and inflation has fallen from 13,490 percent in 1990 to an estimated 13.5 percent in 1994. The executive implemented various structural adjustment measures, including the successful privatization of more than 300 of the 350 non-financial public sector companies it inherited from the previous government. A Superintendency was created to supervise the banking sector, which now includes nine private banks and three state-owned institutions. The Government of Nicaragua has also reduced tariffs, eliminated most non-tariff trade barriers, and greatly relaxed foreign exchange controls. All of these measures were designed to pave the way for economic expansion. To date, however, the anticipated growth has failed to materialize, as real GDP growth has remained stagnant, registering rates of 0.4 percent in 1992 and -0.9 percent in 1993. Estimated growth of 4 percent in 1994 has been revised downward to 2 percent due to a drought which damaged the first agricultural planting cycle and an accompanying energy shortage which has resulted in mid-1994 in power cutoffs of 4 hours per day. The lack of credit to the productive sector continues to be a major stumbling block to growth, and private investment flows remain limited as concerns over property rights and political stability persist. In June 1994, the Government came to agreement with the IMF on an Enhanced Structural Adjustment Facility (ESAF) -- a 3-year program designed to maintain stability and generate growth. Consequently, the stage has been set for continued lending from international financial institutions and other bilateral donors, including an Economic Recovery Credit from the World Bank. These credit sources represent critical elements for the nation@s economic stability, as Nicaragua continues to suffer from a chronic balance-of-payments gap estimated at 1.1 billion dollars for 1994. 2. Exchange Rate Policy In January 1993, the Government of Nicaragua modified its fixed official exchange rate system which since September 1991 had pegged the cordoba to the dollar at 5:1. With its devaluation, the Government set the cordoba at 6:1, with a crawling-peg schedule adjusted daily, at an annual rate of 5 percent. This schedule was accelerated in November 1993 to an annual rate of 12 percent. A parallel exchange market, legalized in September 1991, continues to operate, supplying foreign currency for virtually all types of exchange transactions. The spread between the official and parallel markets has been generally maintained at 2-4 percent. Foreign exchange generated from the export of most traditional products (e.g., beef, coffee, sugar, cotton) must be surrendered to the Central Bank, although private banks can accept the dollars as agents of the Central Bank. Remittance of profits generated through foreign investments, as well as original capital 3 years following investment, is guaranteed through the Central Bank at the official exchange rate for those investments registered under the Foreign Investment Law. Investors who do not register their capital may still make remittances through the parallel market, although these transactions are not guaranteed by law. Embassy is aware of no investor who has encountered remittance difficulties since the inception of the Foreign Investment Law in 1991. 3. Structural Policies Pricing Policies: Since taking office in April 1990, the Chamorro Administration has lifted price controls with the exception of those imposed upon "fiscal" goods (e.g., tobacco, soft drinks, alcoholic beverages), pharmaceuticals and medical goods, petroleum products, and public utility charges. However, the Central Government (i.e., the Ministry of Economy and Development) commonly negotiates with domestic producers of important consumer goods to establish voluntary price restraints and, on several occasions, has purchased emergency stores of important basic foods (sugar, beans, basic grains, etc.) during periods of shortages to maintain domestic supplies and moderate prices. Tax Policies: Nicaragua maintains a maximum tariff level (DAI) on virtually all imports of 20 percent of CIF value. An additional Temporary Protection Tariff (ATP) of 5-15 percent of CIF value is levied on some 900 imported items, largely goods also produced in Nicaragua. Some 750 other products (whether imported or locally produced) are assessed a Specific Consumption Tax (IEC), generally limited to 15 percent of CIF value. A stamp tax of 5 percent (ITF) is levied on all imports. The country@s 15 percent sales tax (IGV) is charged (in a cascading fashion) on entry of all imported goods that are not categorized as basic food basket items. Overall import taxation levels on "fiscal" goods are particularly high. The highest income tax rate is 30 percent (for taxpayers earning more than 180,000 cordobas yearly -- or about 25,000 dollars at the official exchange rate. Individuals earning between 100,000 and 180,000 cordobas are taxed at a rate of 26 percent; between 60,000 and 100,000 -- 20 percent; between 40,000 and 60,000 - 12 percent; and between 25,000 and 40,000 -- 7 percent. Individuals earning less than 25,000 cordobas yearly are exempt from income tax. Corporations are levied taxes at a flat rate of 30 percent. In addition, busines income is subject to a series of municipal and special taxes, such as the 2 percent tax on sales charged by the Municipality of Managua. 4. Debt Management Policies Although it inherited an enormous foreign debt burden from the previous government, the Chamorro Administration succeeded in clearing its total arrears to the World Bank and IDB in 1991 with the assistance of grant contributions from the international community. This made Nicaragua eligible to receive new credits from the multilateral development banks, and the country began to renegotiate its bilateral debt. Nicaragua entered into agreements with Mexico, the United States, Venezuela, Colombia, and Argentina for rescheduling, debt swaps, and/or debt forgiveness. Over the past 2 years, Nicaragua has held discussions with Russia over the large debt owed to the former Soviet Union. Similarly, Nicaragua continues to seek renegotiation of its debt of roughly 1.7 billion dollars to private foreign banks, via a buy-back mechanism. However, Nicaragua's foreign debt still totals more than six times its GDP and more than 35 times its annual merchandise exports. In December 1991, the Paris Club creditors agreed to grant Nicaragua the most favorable rescheduling terms offered by the club to date. In April 1993, Paris Club members made new pledges of 46.8 million dollars, which, although significant, still left Nicaragua with a substantial financing gap. That gap was closed by additional sources of assistance, new austerity measures, and the suspension, beginning September 1993, of pre-cutoff day (October 31, 1988) Paris Club obligations. In August 1994, Germany and Nicaragua reached agreement for an overall 70 percent forgiveness of the 180 million dollars subject to the 1991 Paris Club agreement. This set the stage for a second round of Paris Club talks to beheld in early 1995 to deal with the remaining bilateral debt, the majority of which (approximately 500 million dollars) consisting of debts to the former German Democratic Republic (East Germany). It is anticipated that Nicaragua will seek even more favorable treatment ("enhanced Toronto Terms") at the talks, requesting up to two-thirds forgiveness of its remaining debt. 5. Significant Barriers to U.S. Exports Import Licenses: In most cases the issuance of import licenses is a formality, or at worst an inconvenience. U.S. pharmaceutical importers, however, continue to complain that licensing procedures, continually under review due to a process of regional harmonization of such regulations, can continue to delay the entry of some U.S. pharmaceutical products. Service Barriers: 1991 legislation allowed the establishment of the first private banks in Nicaragua in a decade. Nine private banks are now in operation in a competitive financial market. Although current banking law does allow foreign banks to open and operate branches in Nicaragua, no U.S. bank has initiated the necessary paperwork. Insurance activities are currently in the hands of a state monopoly. However, legislation is pending in the National Assembly that would allow private sector participation in the insurance sector. Investment Barriers: An investment law, passed in June 1991, allows 100 percent foreign ownership in virtually all sectors of the economy, guaranteed repatriation of profits, and repatriation of original capital 3 years after the initial investment. However, to benefit from this law, investments must be approved by the Foreign Investment Committee which analyzes the proposal based upon various criteria. The fishing industry remains protected by requirements involving the nationality and composition of vessel crews and a requirement for repatriation of 100 percent of the catch (i.e., domestic processing for eventual export). In early 1993, the Government of Nicaragua lifted its moratorium on lumbering in state forests (representing over 50 percent of the country@s forest area); but authorities painstakingly review all project proposals in this sector. The Government continues to move forward with privatizing state-owned companies in government-dominated sectors. In the mining sector, a private worker-owned consortium is active, and several foreign companies have initiated operations. In October 1993, the Government began the pre-qualification bid process for privatization of the national telecommunications company, which was scheduled to be finalized by October 1994. However, the privatization still awaits National Assembly approval and at this writing it is unclear when such approval will be granted. The Government also is in the process of drafting legislation which would allow for the liberalization of petroleum imports, establish an oil exploration regime, and explicitly grant the private sector the right to generate electrical power. At this time, the legislation is still under executive review. Definition of property rights continues to remain an obstacle to both domestic and foreign investment. Claims for thousands of homes and businesses, as well as large tracts of land, confiscated without compensation by the Sandinista government of Nicaragua have yet to be resolved. In early 1993, the Chamorro government's administrative property claim resolution mechanism began to process claims for some 16,000-18,000 individual pieces of property. A small number of properties have been returned to original owners; other cases have been settled through the issuance of long-term compensation bonds. The current market value of these bonds remains a matter of concern. Trades of the securities on the stock market have ranged from 17-28 percent of face value. As of November 1994, informal trading on the secondary market has settled at 19-21 percent of face value. The bond compensation program remains controversial, as the majority of U.S. citizen and Nicaraguan claims have not been resolved, and most claimants believe their properties should be more fully compensated. Customs Procedures: Importers commonly complain of steep "secondary" customs costs including custom declaration form charges and consular fees. In addition, importers are required to utilize the services of licensed custom agents, adding yet another layer of costs. Legitimate importers also complain that "black market" firms are able to bring in the same goods at greatly reduced tariff rates and then offer these under-priced goods on the open market. 6. Export Subsidies Policies An export promotion decree, signed in August 1991, established a package of fiscal exonerations and incentives for exporters of non-traditional goods (for this purpose, goods other than coffee, cotton, sugar, wood, beer, lobster, and sea-harvested shrimp). Export operations for such products receive exemption on payment of 80 to 60 percent of income tax liabilities on a sliding scale from 1991 to 1996, after which the benefit will be eliminated. In addition, exporters of both traditional and non-traditional goods are allowed to import inputs (used to produce exports goods) duty-free and are exempt from paying the current 15 percent value-added tax on this merchandise. The decree also allows for preferential access to foreign exchange at the official rate for exporters of non-traditional goods. One of the more attractive benefits of the export promotion law is the right to a Tax Benefit Certificate equivalent to 15 percent of the FOB value of exported non-traditional goods. (The percent of FOB value eligible decreases to 5 percent in 1996.) In May 1993, the first group of Nicaraguan exporters received the certificates, valid for payment of tax and duties, or payable 24 months from the date of issue. 7. Protection of U.S. Intellectual Property In 1990, the Nicaraguan government committed itself to "provide adequate and effective protection for the right to intellectual properties of foreign nationals" in the context of requesting designation as a beneficiary of the Caribbean Basin Initiative Recovery Act. Current levels of protection, however, still do not meet modern international standards. Although unfortunately unable to dedicate extensive resources to the protection of intellectual property rights, the Government of Nicaragua is in the process of evaluating and modernizing its intellectual property rights regime. Drafts of a new patent law and a new copyright law are under review. The trademark law in Nicaragua, codified in the Central American Convention for the Protection of Industrial Property, is currently undergoing revision by the four signatory countries (Nicaragua, Costa Rica, Guatemala, and El Salvador). The Government has publicly committed itself to accede to the Paris Convention for the Protection of Industrial Property, and to the Bern Convention on Copyrights. As of this writing, the Government has acceded to neither convention. However, Nicaragua is a signatory to the following copyright conventions: --Mexico Convention on Literary and Artistic Copyrights (1902) --Buenos Aires Convention on Literary and Artistic Copyrights (1910) --Inter-American Copyrights Convention (1946) --Universal Copyright Convention (Geneva 1952 and Paris 1971) Brussels Convention on Satellites (1974) Trademarks: Notorious trademarks represent a problem area for Nicaragua. Current Nicaraguan procedures allow individuals to register a trademark without restriction, at a low fee, for a period of 15 years. Copyrights/New Technology: Pirated videos are readily available in nation-wide video rental stores, as are pirated audio cassettes. In addition, cable television operators are known to intercept and retransmit U.S. satellite signals -- a practice which continues despite a limited trend of negotiating contracts with U.S. sports and news satellite programmers. One of Managua's private television stations similarly transmits (often from video cassettes) pirated U.S. films. A report prepared in September 1992 by the International Intellectual Property Alliance estimated that losses in Nicaragua due to copyright infringements involving books and the motion picture industry cost U.S. firms 1.3 million dollars annually. 8. Worker Rights a. The Right of Association Legally, all public and private sector workers, with the exception of the military and the police, are entitled to form and join unions of their own choosing; they exercise this right extensively. New unions must register with the Ministry of Labor and be granted legal status before they may engage in collective bargaining with management. Some labor groups report occasional delays in obtaining legal status. Nearly half of Nicaragua's workforce, including agricultural workers, is unionized. Unions may freely form or join federations or confederations and affiliate with, and participate in, international bodies. b. The Right to Organize and Bargain Collectively The Constitution provides for the right to bargain collectively, and, despite unfamiliarity with the practice following 10 years of central planning under the Sandinista regime, collective bargaining is becoming more common in the private sector. The International Labor Organization@s Committee of Experts on the Application of Conventions and Recommendations issued a report in 1992 asserting that the Nicaraguan law which requires collective agreements to be approved by the Ministry of Labor before they come into force violates the Convention on the Right to Organize and Bargain Collectively, ratified by Nicaraguan in 1967. No action has been taken to modify this provision, although the Labor Code is currently being revised by the National Assembly. c. Prohibition of Forced or Compulsory Labor The Constitution prohibits forced or compulsory labor, and there is no evidence that it is practiced. d. Minimum Age for Employment of Children The Constitution prohibits child labor that can affect normal childhood development or interfere with the obligatory school year. Education is compulsory to age 12, and children under the age of 14 are legally not permitted to work. Nevertheless, because of the prevailing economic difficulties in Nicaragua, reportedly more than 100,000 children are members of the workforce, particularly in the agricultural and informal commercial sectors of the economy. The child labor law is, however, generally observed in the modern, formal segment of the economy. e. Acceptable Conditions of Work The standard legal work week is a maximum of 48 hours with one day of rest. Health and safety standards are extensive, but not strictly enforced due to an insufficient number of inspectors. Sectoral minimum wages were set in mid-1991, but, according to a study by the Government's National Commission on the Standard of Living, the minimum wage does not provide a family of four with the income to meet its basic needs. Minimum wage levels were not adjusted following the 20 percent devaluation of the cordoba in January 1993. However, Ministry of Labor surveys indicate that some 86 percent of urban area workers earn more than the minimum wage. f. Rights in Sectors with U.S. Investments The above rights are observed in sectors with U.S. investment and overall working conditions do not differ adversely from the general description above. Extent of U.S. Investment in Selected Industries.--U.S. Direct Investment Position Abroad on an Historical Cost Basis--1993 (Millions of U.S. dollars) Category Amount Petroleum (1) Total Manufacturing (1) Food & Kindred Products (1) Chemicals and Allied Products 0 Metals, Primary & Fabricated 0 Machinery, except Electrical 0 Electric & Electronic Equipment 0 Transportation Equipment 0 Other Manufacturing Wholesale Trade 2 Banking 0 Finance/Insurance/Real Estate 0 Services 3 Other Industries 0 TOTAL ALL INDUSTRIES (1) (1) Suppressed to avoid disclosing data of individual companies Source: U.S. Department of Commerce, Bureau of Economic Analysis (###)