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Nicaragua Economy

Flag of Nicaragua

With a gross domestic product (GDP) of $6.37 billion and a per capita income of $1,123 in 2008, Nicaragua is the second-poorest country in the Western Hemisphere. From 1991 to 2006, three successive administrations focused on free market reform as the path to recovery from 12 years of economic freefall under the Sandinista regime and civil war of the 1980s. They achieved macroeconomic stability, cutting inflation from 33,500% in 1988 to 9.45% in 2006, and dramatic debt reduction through the Heavily Indebted Poor Countries Initiative, the Multilateral Debt Reduction Initiative, and a $1 billion commercial debt buyback led by the World Bank. By the end of 2007, external debt as a percentage of GDP was 59.1%, down from more than 400% in 1990. Since 1995, real economic growth averaged 4.0%.

The pace of economic growth slowed to 3.2% in 2008, as an above-average agricultural harvest was offset by rising wages, food prices, and energy costs. Inflation, which had been in the single digits for several years, was 13.8% in 2008. Official unemployment was 4.9% in 2007, but most do not believe this reflects reality. Sixty percent of all workers earn a living in the informal sector, where underemployment is high and the data is not clear. In 2008, Nicaraguans received $818 million in remittances from abroad, the majority from the United States. This equals almost 13% of GDP.

Because Nicaragua has abundant arable land and water resources, agriculture will always be an important component of the economy. About a third of GDP revolves around agriculture, timber, and fishing. Opportunities exist in food and timber processing and preparation for export. Currently, most agriculture is small-scale and labor intensive. Livestock and dairy production have seen steady growth over the past decade and have taken the greatest advantage of free trade agreements. Many export products, especially coffee, have benefited from the recent rise in international commodity prices. Manufacturing accounts for about 10% of GDP and the construction sector another 4%. Services (banking, transportation, trade, retailing, and tourism) account for about half of GDP.

Social indicators for Nicaragua have improved since 1991. The current population of Nicaragua is 5.8 million; life expectancy at birth is 72.9 years. Nicaragua has steadily improved prenatal care coverage and made impressive gains in infant mortality, dropping from 52 deaths per 1,000 live births in 1991 to 25 per 1,000. The country has successfully controlled the spread of many diseases by achieving and maintaining high vaccination coverage (85%) and introducing vaccines, for example, the MMR vaccine in 1998, the pentavalent vaccine in 1999, and the rotavirus vaccine in 2006. Since 2004, infectious disease has fallen from fourth to fifth place among the leading causes of death, with the number of such deaths down nearly 50% since 1996.

In 2007, the Minister of Education reported school enrollment as 86.5%. Nicaragua's score on the United Nations Human Development Index rose by 40% from 1990 to 2004 (from 0.496 to 0.698). Despite these statistical gains, the benefits of economic development have been uneven. Blackouts, water shortages, and high energy prices disproportionately affect the poorest in the population. Over 50% of Nicaraguans fall below the poverty line and poverty reduction, including advances in health education in rural areas, has been slow.

Since taking office again in January 2007, President Daniel Ortega has maintained the legal and regulatory underpinnings of the market-based economic model of his predecessors, but has rejected what he terms the "neo-liberal economic model," and along with it capitalism and the United States, which he refers to as the imperial power. Instead, he has allied himself with the Bolivarian Alliance for the Americas (ALBA), whose other members include Bolivia, Cuba, Ecuador, Honduras, Venezuela, and several Caribbean island nations. In 2008, Ortega declared publicly that socialism was the only path for Nicaragua if the country wanted to alleviate poverty. During an April 2009 television appearance in Cuba, he declared that multi-party systems were “destructive” to a country’s social fabric.

Nicaragua signed a 3-year Poverty Reduction and Growth Facility (PRGF) with the International Monetary Fund (IMF) in October 2007. As part of the IMF program, the Government of Nicaragua agreed to implement free market policies linked to targets on fiscal discipline, poverty spending, and energy regulation. The lack of transparency surrounding Venezuelan bilateral assistance, channeled through state-run enterprises rather than the official budget, has become a serious issue for the IMF and international donors. On September 10, 2008, with misgivings about fiscal transparency, the IMF released an additional $30 million to Nicaragua, the second tranche of its $110 million PRGF. The flawed municipal elections of November 2008 prompted a number of European donors to suspend direct budget support to Nicaragua, a move that created a severe budget shortfall for the government. This shortfall, in turn, caused the Government of Nicaragua to fall out of compliance with its PRGF obligations and led to a suspension of PRGF disbursements. The IMF is currently in negotiations with the Government of Nicaragua to reinstate disbursements.

Under Ortega, Nicaragua has stayed current with the U.S.-Central America-Dominican Republic Free Trade Agreement (CAFTA-DR), which entered into force for Nicaragua on April 1, 2006. Nicaraguan exports to the United States, which account for 59% of Nicaragua’s total exports, were $1.7 billion in 2008, up 45% from 2005. Textiles and apparel account for 55% of exports to the United States, while automobile wiring harnesses add another 11%. Other leading export products are coffee, meat, cigars, sugar, ethanol, and fresh fruit and vegetables, all of which have seen remarkable growth since CAFTA-DR went into effect. Leading Nicaraguan exports also demonstrated increased diversity, with 274 new products shipped to the United States in the first year. U.S. exports to Nicaragua, meanwhile, were $1.1 billion in 2008, up 23% from 2005. Other important trading partners for Nicaragua are its Central American neighbors, Mexico, and the European Union (EU). Nicaragua is negotiating a trade agreement with the EU as part of a Central American bloc.

Despite important protections for investment included in CAFTA-DR, the investment climate has steadily worsened since Ortega took office. President Ortega's decision to support radical regimes such as Iran and Cuba, his harsh rhetoric against the United States and capitalism, and his use of government institutions to persecute political enemies and their businesses, has had a negative effect on perceptions of country risk, which by some accounts has quadrupled since he assumed office. The government reports foreign investment inflows totaled $506 million in 2008, including $123 million in telecommunications infrastructure and $120 million in energy generation. There are over 100 companies operating in Nicaragua with some relation to a U.S. company, either as wholly or partly-owned subsidiaries, franchisees, or exclusive distributors of U.S. products. The largest are in energy, financial services, textiles/apparel, manufacturing, and fisheries. However, many companies in the textile/apparel sector, including a $100 million U.S.-owned denim mill, have shuttered during the past 12 months due to falling demand for these goods in the United States.

Poor enforcement of property rights deters both foreign and domestic investment, especially in real estate development and tourism. Conflicting claims and weak enforcement of property rights has invited property disputes and litigation. Establishing verifiable title history is often entangled in legalities relating to the expropriation of 28,000 properties by the revolutionary government that Ortega led in the 1980s. The situation is not helped by a court system that is widely believed to be corrupt and subject to political influence. Illegal property seizures by private parties, occasionally in collaboration with corrupt municipal officials, often go unchallenged by the authorities, especially in the Atlantic regions and interior regions of the north, where property rights are poorly defined and rule of law is weak. Foreign investor interest along the Pacific Coast has motivated some unscrupulous people to challenge ownership rights in the Departments of Rivas and Chinandega, with the hope of achieving some sort of cash settlement.

Information by U.S. Department of State

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