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Country Report Nicaragua

Country Report

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Nicaragua’s economy performed rather well in 2013 and the economic outlook remains favourable. However, its institutional framework has weakened further and the president can now be re-elected and be elected for more than two times. 

Strengths (+) and weaknesses (-)

(+) Significant and stable workers' remittance inflows

Workers' remittances accounted for 9.6% of GDP in 2013. Although the inflow of remittances showed a dip in 2009, it is rather constant overall. The strong inflow of remittances has a positive effect on the balance of payments, while it also supports domestic demand.

(-) Weak institutions

President Ortega and his followers control large parts of the bureaucracy, the judiciary and the economy. This has a negative impact on foreign investment and reduces the predictability of government policies.

(-) Large current account deficit

Nicaragua’s current account deficit has fluctuated around 13% of GDP in recent years and has largely been financed by FDI and loans from Venezuela. If Venezuela stops its support, a balance of payments crisis looms.

(-) Low level of household income

With an income of USD 1,584 per head in 2013, Nicaragua is one of the poorest countries on the continent. Nicaragua’s real income level is still more than 30% below its pre-civil war peak of the late seventies.

Key developments

1. Economy is performing well and public finances have improved

Over the past few years, Nicaragua’s economy has performed rather well, as the average growth rate amounted to more than 4.5% in the last four years. In 2013, the economy grew by 4.6%, which could mainly be attributed to the positive contributions of external demand and private consumption (figure 1). Nicaragua’s economic outlook is also quiet favourable, as some major infrastructure projects are getting underway. The most important of these is the construction of a canal that will link the Pacific Ocean with the Caribbean Sea. In addition, the business environment has improved somewhat, as the government and the private sector reached an agreement on wage increases and fiscal reforms. The improved business climate could have a positive impact of FDI. Nicaragua’s public finances have also improved on the back economic growth and fiscal measures taken by government, such as improvements in tax collection (figure 2).

Figure 1: Economic growth
Figure 1: Economic growthSource: EIU
Figure 2: Public finances
Figure 2: Balance of paymentsSource: EIU

2. A weakening of institutions

New laws have further undermined Nicaragua’s already weak institution. On 29 January 2014, Nicaragua’s parliament approved a proposal of president Ortega to change the constitution and lift the restrictions of re-election and a maximum of two presidential terms. The outcome did not come as a surprise, as Ortega’s party - Frente Sandinista de Liberación Nacional (FSLN) - has a two-third majority in parliament. In 2011, Ortega’s third term was made possible through a controversial ruling by Supreme Court. Whether Ortega will use this option and run for a fourth term in 2016 is still unclear. On 30 January, lawmakers also approved laws that increase the power of the president on the military, one of the last independent institutions in the country. At the end of last year there were already indications that Ortega was increasing his leverage over the army, as it seemed that he had a role in the resignation of Oscar Balladares, the chief of general staff and second-in-command over the army. Until then, the president had limited influence on the appointment of top posts in the military. Due to the changes made in the law; the commander in chief of the army can now hold his position for more than five years. The maximum length of a military career was also extended; from 35 to 40 years. Both changes have fuelled speculations that Ortega distrusts the new generation of officers. Due to the new laws, his confidents can now remain in power longer. In order to prevent discontent among the younger officers, the new law allows the president to appoint military personal to civilian government posts. Meanwhile, a significant amount of new roles will be created for building a ‘second Panama canal’, as the military will participate in the control over ports, airports and telecom facilities that will be built together with the canal. All in all, the removal of a maximum number of presidential terms and the extension of president’s power over the military further undermine Nicaragua already weak institutions.

3. Second Panama Canal

In July this year, the government of Nicaragua and a China-based consortium, HKND Group, revealed the route of a new canal that will link the Pacific Ocean with the Caribbean Sea. The construction of the canal should start in December 2014, will take 5 years to complete and will cost an estimated USD 40bn to 50bn. The announcement marks a new step in the process and signals that the government is determined to build the canal. Plans to build a second Panama Canal in Nicaragua go far back, but in June 2013 these plans got a new impulse when the Nicaraguan government awarded a 50-year concession to the HKND Group. The company is controversial, as it is unclear if the Chinese government has a stake in the company or not. A second canal would ensure China’s access to Latin America and increase its leverage over the region.

The project is expected to have both short and long term economic gains for Nicaragua. But, the project has also generated opposition in Nicaragua. The critic mainly focus on the ownership ration between the government and the company, the employment opportunities for Nicaraguans, since Chinese companies often prefer to hire Chinese workers, and environmental issues, as Lake Nicaragua – which will be part of the canal - is currently an important source of fresh water. With regards to the environment, the commission responsible for the project said that the route could still be diverted, if it turns out that the environmental impact is too large. The project has also generated scepticism among foreign experts. They question whether the project is economically viable. First, although world trade is expected to rise, it is questioned whether trade between Asia and the Western Hemisphere will increase enough to justify a second canal. Second, due to global warming an Arctic passage may become an alternative route. Third, as the canal through Nicaragua will be three times longer than Panama’s, the shipping time will be prolonged, which results in a natural disadvantage.

Factsheet of Nicaragua
Factsheet of NicaraguaSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Structural overview

Nicaragua’s political structure is weak, as political power is in the hands of a small group. Current President Ortega (one-time rebel leader and former president from 1979 to 1990) and his followers control large parts of the bureaucracy, the judiciary and the economy. Furthermore, both the presidential elections in 2011 and the municipal elections in 2008 and 2012 can be qualified as unfair. In addition, the quality of institutions is low and the level of corruption is high.

Nicaragua’s economic structure can also be qualified as weak, as its economic base is narrow and mainly consists of agriculture, manufacturing and tourism. Nicaragua’s export structure is vulnerable, as 50% of its exports goes to the US and mainly consists of coffee, clothing and fiber cables. Other weaknesses are the small size of the overall economy and the low income per head.

Although Nicaragua’s public debt level is relatively high for a country with this level of development, it is positive that its budget has been balanced for quiet some years now. Another positive development is that President Ortega’s policies have become more business-friendly in recent years, even as his domestic rhetoric remains left-wing. In case Venezuela stops its favourable oil program Nicaragua’s trade balance deficit would worsen considerably, while the inflow of FDI would probably be roughly halved.

Economic indicators of Nicaragua
Economic indicators of NicaraguaSource: EIU
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Author(s)
Maarten van der Molen
Rabobank KEO
+31 30 21 62666

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