Nicaragua Country Profile

General Information

The Political Climate


Nicaragua is among the poorest nations in the Americas. TThe country experienced economic growth in the 1990s with inflation contained and a reduced budget deficit, but as Hurricane Mitch hit Nicaragua in 1998 economic development was set back by several years. Poor governance and corruption have contributed to further deterioration of living conditions and to the high percentage of public distrust of the government revealed by the Latinobarómetro 2008 (see English version) public opinion poll, where the population estimates that 69% of the country's civil servants are corrupt. Corruption, embezzlement and nepotism have thrived in Nicaraguan politics for decades. Former President Enrique Bolaños (2002-2007) received widespread recognition for putting the fight against corruption on the political agenda and some high-profile convictions took place during his term in office - most notably the 2003 conviction of former President Arnoldo Alemán (1997-2002) who received a sentence of 20 years for money laundering, fraud and embezzlement. However, Bolaños struggled with implementing and enforcing anti-corruption reforms in a political space occupied primarily by supporters of Ortega and Alemán. Bolaños has also struggled himself to remain free of allegations of corruption related to his past as Vice President under Alemán.

Current President Daniel Ortega, leader of the Sandinista National Liberation Front (FSLN), also headed the Sandinista government during the Nicaraguan Revolution of 1978-1990. After his election, President Ortega declared that he would not return to the hardline socialist policies of the 1980s, and has indeed pursued a moderate economic policy. The fight against corruption and wasteful government spending were featured prominently on President Ortega's electoral platform. However, several observers, including Global Integrity 2008, report that since his election, President Ortega has failed to show satisfactory results in relation to these problems and that the situation has actually worsened. As one of the most visible setbacks, the Supreme Court overturned Alemán's conviction in January 2009 - a decision labelled as politically biased by opposition parties. Alemán's release from house arrest is in fact seen as a consequence of the Pacto Político (Political Pact), a power-sharing agreement between ex-President Alemán and President Ortega. The Pacto Político divides control over key governmental institutions between their respective political parties, the Liberal Party (PLC) and the Sandinistas (FSLN). Several observers agree that this institutional logjam has led to poor performances among formally independent institutions. Corruption and embezzlement is also fuelled by the immunity from prosecution enjoyed by members of the National Assembly, who also belong to the Pacto Político. Furthermore, the Pacto Político gives outgoing Presidents an automatic seat in the legislature, thus securing their immunity from prosecution.

Lack of integrity is reportedly a huge problem at the lower levels of public administration. Global Integrity 2008 highlights how nepotism and political affiliation play a major role in the appointment of civil servants and how those accused of corruption enjoy immunity from these charges in practice. Although never a threat to the formal existence of democracy, the efficiency losses caused by dysfunctional public institutions, self-interested politicians, a cumbersome bureaucracy and politicisation of the civil service have led the World Bank GRICS 2008 to rank Nicaragua lowest among Central American countries in government effectiveness. Moreover, political freedom has been further restricted under Ortega's presidency and critical NGOs have suffered attacks by members of the FSLN-controlled Citizen Power Councils. The November 2008 local elections offered additional proof of the ongoing restriction of political rights, as international observers were not allowed to attend the elections and local observers reported irregularities, both in the run-up phase and during the elections.

Business and Corruption

Since the 1990s, the Nicaraguan business environment has been substantially liberalised, and despite President Ortega's occasional harsh rhetoric against capitalism and free trade, he has largely continued the free market policies of his predecessors. For instance, Nicaragua has abolished all WTO-inconsistent non-tariff barriers and has no commercially-based import prohibitions. Furthermore, the country has signed the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) which provides a framework for further market improvements and transparency, as it requires each participating government to ensure that bribery affecting trade and investment is treated as a criminal offence. Joining the agreement has brought tangible improvement in the economy with a 20% surge in Nicaraguan exports, according to Freedom House 2008. However, the Nicaraguan business environment still suffers from several deficiencies and, as stated by the Bertelsmann Foundation 2008, corruption and a weak legal system pose the greatest threats to the free market economy of Nicaragua.

According to the World Economic Forum Global Competitiveness Report 2008-2009, companies cite corruption as the second largest constraint to doing business in Nicaragua after policy instability. According to the same report, business executives report that the diversion of public funds to companies, individuals or groups due to corruption is quite common. The World Bank & IFC's Enterprise Surveys 2006 report that 70% of companies list corruption as a major constraint, which is well above the regional average. However, it must be noted that fewer companies (17%) report that they pay informal payments 'to get things done' compared to the regional average of 23.5%. The same survey indicates that corruption is affecting small and medium-sized companies more than large ones. Operating in an environment of inefficient and corrupt public institutions and services poses a challenge to both foreign and Nicaraguan companies. Business operations are complicated and investment is discouraged by a corrupt judicial system that is widely perceived as serving narrow political interests. Foreign investors considering to establish themselves in Nicaragua are generally advised to consult with experienced attorneys, to develop, implement and strengthen integrity systems, and to carry out extensive due diligence before committing funds and when already doing business in the country.

Companies should be prepared to deal with corruption when interacting with the registry and permit services, for example, when applying for construction and operating permits and when obtaining access to public utilities, such as electricity, water and telephone connections. The tourism industry is also reportedly rife with corruption. Furthermore, the absence of effective anti-corruption agencies and whistleblower mechanisms is a challenge for companies operating in Nicaragua, as it limits the options for reporting cases of corruption. The 'Tola case' from 2007 offers an example of the above. Investor Armel González recorded on tape a high-ranking member of the ruling party, the FSLN, soliciting a bribe of USD 4 million. Instead of charging the party member with corruption, the government-controlled Department of Justice dismissed the case and González was eventually condemned to pay a fine for slandering the civil servant. The combination of inefficient anti-corruption measures with a weak and corrupt judiciary means that companies can face difficulties if they choose to move forward with potential allegations of corruption.

Regulatory Environment

Formally, Nicaragua's anti-corruption legislative framework is in place. However, many problems still remain regarding its actual implementation. Checks and balances of powerful politicians are reportedly inadequate, making it a fertile ground for grand corruption. The judicial system is also widely perceived to be corrupt and controlled by subjective political interests. Moreover, political connections and nepotism affect regulatory and procurement decisions and regulators are reported to have personal business interests within the sectors they regulate.

According to Global Integrity 2008, there is no such thing as a 'business licence' in Nicaragua, but instead different procedures and permits are required depending on the type of business. The World Bank & IFC Doing Business 2009 shows that the overall start-up process is costly, amounting to 121% of GNI per capita - a little more than 3 times the regional average. On the other hand it takes 6 procedures and 39 days to start a business, which is less than the regional average for these indicators. Filing business taxes is reportedly extremely time-consuming, forming a clear competitive disadvantage as the procedure is unpredictable. The time spent obtaining required documents and permits to build a warehouse corresponds with the regional average, but is much more expensive, amounting to 899% of the GNI per capita versus a regional average of 249%. Global Integrity 2008 states that rules governing building permits are clear and available to the interested parties. Foreign companies interested in investing in Nicaragua may find useful information on investment opportunities and commercial partners through ProNicaragua, an investment promotion agency established by the Government of Nicaragua, or NicaExport, hosted by the Nicaraguan Centre for Export Promotion. Access the Lexadin World Law Guide for a collection of legislation in Nicaragua.

Public procurement is adequately regulated and aims to secure fair competition in the awarding of public contracts. Cronyism and nepotism are banned as well as the payment of kickbacks for winning contracts. According to Global Integrity 2008, a procedure for blacklisting companies indulging in anti-competitive and corrupt practices is provided for, but it is reportedly not adequately enforced in practice. The report also highlights that labelling a contract as 'urgent' or making technical requirements that only an already selected company can comply with, are all usual practices used to avoid a normal bidding process. Moreover, business executives in the World Economic Forum Global Competitiveness Report 2008-2009 indicate that the degree of favouritism in decisions of government officials relating to policies and contracts is high.

According to the US Department of State 2009, resolving commercial disputes, particularly contract enforcement disputes, is one of the largest constraints to investment in Nicaragua. Resolving a dispute is very time-consuming, with the World Bank & IFC Doing Business 2009 reporting that it takes an average of 540 days to enforce a commercial contract dispute at a cost of nearly 27% of the claim. Moreover, Global Integrity 2008 reports that political motivations or the interests of the members of the two major political parties are often behind the reasoning of a sentence. Foreign investors will therefore find themselves at a disadvantage in disputes against nationals with political or personal ties to court officials. Business executives in the World Economic Forum Global Competitiveness Report 2008-2009 rate the independence of the judiciary very low. Furthermore, in relation to commercial dispute resolution, investors should note that local courts, especially in the Atlantic regions, frequently act without effective central government oversight. Investors can consult with ProNicaragua which seeks to facilitate resolution of investment disputes. Nicaragua is a member of the International Centre for the Settlement of Investment Disputes (ICSID), and signatory of the New York Convention of 1958 and Inter-American Convention on International Commercial Arbitration, while the DR-CAFTA establishes an investor-state dispute settlement mechanism. Companies are generally advised to include international arbitration clauses in their business contracts in light of the uncertainties posed by the Nicaraguan judicial system.