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World > North America > Nicaragua > Economy (Notes)

Nicaragua - Economy (Notes)


ECONOMY
For the 16 years between Ortega administrations (1991-2006), three successive Liberal Party administrations focused on free market reform as path to recovery from 12 years of economic free-fall under the Sandinista regime and civil war. During this 16-year period, characterized by steady GDP growth, the government made dramatic economic progress. It privatized more than 350 state enterprises, reduced inflation from 33,500% in 1988 to 9.45% in 2006, and cut the foreign debt by more than half. In 2006, the economy expanded by 3.7% as GDP reached $5.3 billion.

Nonetheless, Nicaragua remains the second-poorest nation in the hemisphere. Unemployment is officially estimated at 5% of the economically active population; however, an estimated 60% of workers belong to the informal sector. Nicaragua suffers from persistent trade and budget deficits and a high internal debt-service burden. Foreign assistance totaled 26% of the budget in 2006. Nicaragua also depends heavily on remittances from Nicaraguans living abroad, which totaled $655.5 million in 2006.

Exports have been one of the key engines of economic growth. In 2006 exports topped $1 billion. Although traditional export products such as coffee, meat, and sugar continue to lead the list, shipments of non-traditional exports such as vegetables, tobacco products, gold, and free trade zone products (textiles and electrical harnesses) increased markedly in recent years.

The U.S. is Nicaragua's largest trading partner, accounting for one-fifth of Nicaragua's imports and almost two-thirds of its total exports. Nicaragua formally entered the Central American Free Trade Agreement (CAFTA) on April 1, 2006. Nicaraguan exports to the U.S. grew 17.4% during the agreement's first 12 months. Although volumes are still low, over the same period, Nicaragua exported 237 new products to the U.S. Imports increased almost 21%, centering around machinery, cereals, vehicles, fats and oils, and plastic products.

Nicaragua is primarily an agricultural country, but light industry (maquila), tourism, banking, mining, fisheries, and general commerce are expanding. Foreign capital inflows reached $282.3 million in 2006. Strong anti-capitalist rhetoric from President Ortega may discourage prospective investors and slow foreign direct investment. The lack of clarity on the Ortega government's economic policies has created particular uncertainty in the power, fuel, tourism, and real estate sectors.

Tourism is the nation's third-largest source of foreign exchange. More than 60,000 Americans visit Nicaragua yearly, primarily business people, tourists, and Nicaraguan-Americans visiting relatives. An estimated 7,000 U.S. citizens reside in the country. The U.S. Embassy's consular section provides a full range of consular services--from passport replacement and veteran's assistance to prison visitation and repatriation assistance.

Nicaragua faces a number of political and infrastructure challenges in achieving sustainable economic growth. Long-term success at attracting investment, creating jobs, and reducing poverty depend on its ability to comply with a new International Monetary Fund (IMF) program, resolve the thousands of Sandinista-era property confiscation cases, promote a positive investment climate, and keep its economy open to foreign trade. Nicaragua achieved extensive debt relief under the Heavily Indebted Poor Countries (HIPC) initiative and successfully completed its first IMF Poverty Reduction and Growth Facility (PRGF) in 2006. During the Bolaņos administration (2001-2006), fiscal deficits were reduced through increased tax collection and limits placed on consolidated public sector expenditures; international reserves increased from U.S. $274 million in 2001 to U.S. $924 million in 2006.

While the Sandinista economic team has promised to continue stable macro-economic policies, President Ortega's public statements often challenge market economics. In July 2007 the government successfully negotiated a new IMF agreement which requires implementation of free-market policies and includes targets linked to energy, pensions, fiscal discipline, and spending on poverty.

There are 121 companies operating in Nicaragua associated with a U.S. firm, either as subsidiaries, franchises, or exclusive distributors. The largest are in the energy, financial services, apparel, manufacturing, and fisheries sectors.

The U.S. Embassy's economic and commercial section advances American economic and business interests by briefing U.S. firms on opportunities and stumbling blocks to trade and investment in Nicaragua; encouraging key Nicaraguan decision-makers to work with American firms; helping to resolve problems that affect U.S. commercial interests; and working to change local economic and trade ground rules in order to afford U.S. firms a level playing field on which to compete. U.S. businesses may access key Embassy economic reports via the mission's Internet home page at http://managua.usembassy.gov/.


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