Chapter 2 – Economy of Nicaragua
2.1. Economic Overview
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Chapter 2 – Economy of Nicaragua.
The purpose of this chapter is to revise the economic trends and indicators of Nicaragua under the Ortega administration. In order to capture the patterns of economic trends created by President Daniel Ortega, it is necessary to interpret the main reasons why he maintained the free market reforms previously pursued by his opposition from the rightwing democratic party in contrast to his more radical, anti-free market rhetoric, and socialist approach in the 1980s.
2.1. Economic Overview
One of the first economic affairs President Ortega took care of in the beginning of his second term was the assurance to investors and businesses in respect to the private sector that the country will remain opened.11 He promised to work for and put the Nicaraguan poor people first, reassuring increased job opportunities, while the lawmakers from the opposition would ensure that the government is on track with continuation of the free market reforms and the promotion of free press. In order to help lift extreme poverty and hunger coupled with the attraction of foreign investments, President Ortega required assistance from the IMF, which in turn requested that the government maintain an open market, minimize fiscal expenditures, and promote fiscal transparency for as long as it receives its economic assistance.
When Daniel Ortega was elected president at the end of 2006, an IMF representative paid the transitioning government a visit in December. The meeting discussed the successful macroeconomic stability and economic progress created under the exiting President Bolaños
11 Ortega wins Nicaraguan presidency. The Guardian Press, November, 8, 2006. Retrieved February 2018.
https://www.theguardian.com/world/2006/nov/08/1
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with the support of the IMF and international community, including the debt relief of MDRI, and further extended to dialogues of reconciliation with the President-elect Ortega. The following statement was officially given by Anoop Singh, Director of the Western Hemisphere Department of the IMF:12
―President-elect Ortega has emphasized to me his commitment to prudent macroeconomic policies and intensifying poverty reduction. In particular, […] his intention to work with the Fund towards an early new economic program that would entrench stability in Nicaragua, and move ahead with reforms critical for raising investment and sustainable growth, and accelerating employment creation and poverty reduction.‖
Through the negotiations between President Ortega and the IMF in May and July 2007, the government was able to attained debt relief and a medium-term loan through the Poverty Reduction and Growth Facility (PRGF). The Nicaraguan government signed a 3-year deal in October 2007 that approved about $111.3 million to support the anti-poverty programs and sustain the level of macroeconomic performance. The government was required to retain a sustainable amount of public debt through fiscal discipline in order to prioritize on social programs and infrastructure. Under the IMF supervision, transparency of fiscal management and spending was essential to strengthen investor confidence and achieve the MDGs that aimed to improve ―access to health, education, water and sanitation, food security, housing and training opportunities for the poorest‖.13
Since the defeat of President Ortega in the 1990 election, U.S. capital inflows to
12 Press Release: Statement by Anoop Singh, Director of the IMF's Western Hemisphere Department, in Nicaragua. December 20, 2006. https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr06292
13 Press Release: IMF Executive Board Approves US$111.3 Million PRGF Arrangement for Nicaragua.
October 5, 2007. https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr07224
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Therefore, the Ortega administration maintained the business-welcoming atmosphere since 2007 and worked to meet the terms of the IMF and the CAFTA-DR agreement to strengthen the overall economic performance.
Table 1. Nicaragua: Selected Economic Indicators from 2007 to 2018.
Year
By the end of 2007, the GDP growth has risen above 5 percent, amounting about US$7.3
14 Does not include the imports made in Free Trade Zones
15 Does not include the exports made in Free Trade Zones.
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billion (see table 1). The sudden economic boost was due to President Ortega reaching out to join the socialist coalitions of ALBA during his inauguration in January 2007 to cooperate with major partners, such as Venezuela, Cuba, and Iran, on the development schemes and establish economic relations that would attract more financial and investment opportunities to improve the infrastructure of the energy and agricultural sectors of Nicaragua.
In 2008, the IMF granted an additional US$10 million16 in financial support via the PRGF to offset the negative effects of the Category 5 status Hurricane Felix in September 2007, estimating a total amount of about US$716 million in damages,17 where FAO evaluated more than US$46.7 million in damages to the agricultural sector.18 By the end of 2008, GDP growth maintained a positive growth of 3.4 percent. Nevertheless, due the state of recovery from the natural disaster plus the external factor of the global financial crisis in 2008, the GDP growth rate in 2009 contracted by minus 3.3 percent, entering its first recession in which exports also declined due to lower demands of the international market. By late 2009, the Nicaraguan government had about US$37.9 million from the PRGF to distribute over the course of 2010.
In early 2010, from February to March, the Nicaraguan government would enter another round of negotiations with the IMF to discuss for an extension of the 3-year PRGF arrangement signed in 2007. The deal was revised and would replace the original PRGF by the Extended Credit Facility (ECF) to promote longer-term reforms. In November, the IMF approved the extension of the ECF to December 2011 with an immediate disbursement of US$8.95 million
16 Press Release: IMF Executive Board Completes First Review Under Nicaragua's PRGF Arrangement and Approves Increase in Financial Support by US$10 million. September 11, 2008. Retrieved May 2018.
https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr08204
17 Hurricane finished plunging them into poverty. January 29, 2008. Retrieved February 2018.
https://web.archive.org/web/20090122094329/http://impreso.elnuevodiario.com.ni/2007/01/29/especiales/84368
18 Assessment of Damage Caused by Hurricane Felix in the Caribbean of Nicaragua. FAO. 2007. Retrieved July 2018. http://www.fao.org/fileadmin/templates/tc/tce/pdf/Nicaragua_FAO_Evaluacion_2007.pdf
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to continue to support the strong consumption and investment levels in Nicaragua,19 which is reflected on its GDP growth of 4.4 percent in 2010. In the following years, the IMF would continue to oversee its economic activities, stating that the outlook for 2011 and subsequent years were ―favorable‖ and ―generally positive‖, indicated on its increased average of GDP growth from 2011 to 2017 by 5.2 percent, the highest compared to its neighboring countries.
In the past five years, the share of economic sectors in the GDP of Nicaragua has shifted toward the service sector. Regarding 2015, agriculture accounted for 18.8 percent of the GDP, industry accounted for 26.9 percent, and services for 54.3 percent (see table 2). As of 2018, agriculture sector dropped to 16.9 percent and industry 23.8 percent while the service sector grew to 59.3 percent. Services provided to the foreign investments, working on the agricultural products and livestock products at exporting industries in or out the free trade zones continued to grow as the manufacturing sector also supported the momentum of economic growth in the service sector of Nicaragua.
Table 2. Economic Sectors (% of GDP) from 2008 to 2018.
Year
Sector (% of GDP)
Agriculture Industry Manufacturing Service
2008 19.5 28.1 16.9 52.4
2009 19.2 29.3 21.7 51.5
2010 20.8 26.9 24.3 52.3
2011 23.1 28.4 24.5 48.5
2012 21.9 29.4 24.3 48.7
19 Press Release: IMF Executive Board Completes Sixth Review of Nicaragua‘s Extended Credit Facility and approves US$8.95 Million Disbursement. April 27, 2011. Retrieved May 2018.
https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr11148
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2013 22.9 26.9 25.6 50.2
2014 22.6 28.3 16.9 49.1
2015 18.8 26.9 14.7 54.3
2016 17.3 26.8 15.0 55.9
2017 17.2 26.2 15.2 56.6
2018 16.9 23.8 15.6 59.3
Source: BCN. Available at: taitraesource.com/total01.asp
However, due to the social and economic crisis that broke out in 2018, the economy was down and service industry declined. The Nicaraguan service sector accounted for about 60 percent of the GDP, employing more than half of its working population, has dropped in 2019 to about 50 percent in the preliminary data (World Bank).20 Its recovery is very important for medium and long-term economic growth of Nicaragua since the main contributors in services are in traditional activities, such as tourism, personal, social and business services, government services and transport and telecommunication,21 in addition to the growing services in the financial sector.22 Moreover, due to the recent COVID-19 pandemic in 2020, the economy of Nicaragua would suffer a recession on all aspects, not just mainly the services, but supply chains of imports and exports as well as the participation of the labor force.
Nicaragua has established production traditionally based on agriculture, forestry, fishery and animal, whereas the domestic development of industry and services are foreign-owned and labor intensive. The domestic job opportunities paid low wages, thus the labor force immigrate
20 Retrieved in May 2020. data.worldbank.org/indicator/NV.SRV.TOTL.ZS?locations=NI&view=chart
21 Services Policy Review. UN Conference on Trade and Development (UNCTAD), 2013. Retrieved March 2020. http://unctad.org/en/PublicationsLibrary/ditctncd2013d13_en.pdf
22 Financial Services: Business Potential in Central America. Central America Data. June 25, 2020.
https://www.centralamericadata.com/en/article/home/Financial_Services_Business_Potential_in_Central_Ameri ca
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to neighboring countries to earn remittances. In 2007, during President Ortega‘s second term, the remittances to Nicaragua from foreign countries were US$739.6 million, and by 2012 during his third term, that numbers increased by 37 percent, breaking the billion dollar mark to US$1.01 billion (see table 1). In the following years, the remittances to Nicaragua continued to grow, and in 2018 the total remittances to Nicaragua reached US$1.5 billion. For instance, most of labor force chose to work in Costa Rica at low-skilled occupations and sectors that paid better than the national wages, such as construction, domestic services and agriculture – 60 percent of coffee pickers were identified as immigrants in Costa Rica (OECD, 2018).
It was estimated that about 20 percent of Nicaraguans worked abroad to earn remittances to support their families. In 2019, the tax reforms were implemented instead of adjusting the minimum wages of workers to maintain foreign investments, reducing employment between 30 to 35 percent in the industrial sector, stated by Sergio Maltez, president of the Chamber of Industries of Nicaragua in July.23 The Nicaraguan government passed Law 987 on February 28, 2019 as a reform to the tax Law 822,24 which included the following but not limited to:25
1) Increase personal income tax to the withholding rate of board of directors and similar head positions from the original 12.5 percent to 25 percent, while local workers have retained at 12.5 percent and non-residents at 20 percent.
2) Cooperatives with annual gross income larger than $60 million córdobas (US$1.73 million), originally $40 million córdobas (US$1.15 million), must pay an increased
23 Tax reform reduces industrial employment by 30 percent. El Nuevo Diario. July, 4, 2019. Retrieved March 2020. https://www.elnuevodiario.com.ni/economia/495628-reforma-fiscal-desempleo-nicaragua/
24 Law 822, also known as Tax Concertation Law, was approved in January 2013 to expand export incentives and encourage agricultural production in rural areas. For instance, a deduction of income tax equivalent to 1.5 percent of its export value for the first to six years for the newly established and existing exporter, exemption of Value Added Tax and Selective Consumption Tax, transfers of raw materials, intermediate goods, capital goods, spares, parts and accessories for machinery and equipment to agricultural producers. Information retrieved from PRONicaragua (2019), Investor Guideline, p. 48.
25 Main changes to the Income Tax in Nicaragua. García & Bodán (Attorneys and Counselors at Law). March 30, 2019. Available at: https://garciabodan.com/en/main-changes-to-the-income-tax-in-nicaragua/
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annual income tax from the original 1 percent to 3 percent, while the fishing sectors in the Caribbean and main taxpaying contributors increased from 1 percent to 2 percent.
3) 10 percent deduction of income from foreign financial institutions, and increase resident and non-resident income and capital gains, including trusts, from 10 percent to 15 percent, while increasing the withholding to tax havens26 from 17 percent to 30 percent.
The implementation of the new tax reform hoped to counter the budget deficits of about US$300 million the government was facing in order to maintain fiscal stability.27 The Superior Council for Private Enterprise (COSEP), the main business chamber that represents the private institutions in Nicaragua, has criticized greatly the government‘s enforcement of the new tax law, stating that the new tax law will seriously hurt the operation and production of the enterprises, especially when the new tax law increases the minimum income tax calculated based on revenue, which may exceed the actual profits of the enterprises.
In response the incident, the government decided to increase the wages by 8.25 percent for the workers in the free zone areas on January 1, 2020, and adjust the minimum wage of other sectors by 2.63 percent starting March 1, 2020 (see table 3). However, with the prices rising year by year and the inflation index increasing as well, the conversion of Nicaraguan currency into U.S. dollars is still not much lower than the minimum wage level of 2018. In comparison to the similar wage adjustment the government ratified on January 1, 2018 for workers in free zone industries, an increase of 8.25 percent was provided much like the updated one in the year
26 Financial technique that allows businesses and organizations to pay less tax compared to their nation.
27 Department of Investment Services (2019). ―Investment Guide to Nicaragua‖, pp. 34-36.
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US$190) thereafter,28 which has not increased much in comparison to the new monthly salary of 6,399.07 córdobas when converted into US$188.50 in 2020.Table 3. Nicaragua: Minimum Wage Adjustment in 2020.
Economic sector Wage Adjustment
Mining and quarrying 2.63% US$ 227.50
Manufacturing Industry 2.63% US$ 170.00
Free Zone Industries 8.25% US$ 188.50
Micro and Small National
Handicraft and Tourism Industry 2.63% US$ 135.00
Electricity and Water; Commerce,
Establishments and Insurance 2.63% US$ 283.10
Community, social and personal
services 2.63% US$ 177.00
Central and Municipal Government 2.63% US$ 157.50
Source: JD Supra. Available at: jdsupra.com/legalnews/nicaragua-increase-in-minimum-wage -for-75132/
According to the national income per capita, the per capita gross national income
28 Nicaragua: 8.25% Increase in Wages in Free Zones. June 8, 2017. Retrieved March 2019.
https://www.centralamericadata.com/en/article/home/Nicaragua_825_Increase_in_Wages_in_Free_Zones
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provided by the World Bank measures a country‘s most recent and updated version of the annual income divided by the value of the population, reflecting the average income of a citizen within the country. To understand the current economic strength and needs of a country, the data of World Bank will be used here to better understand the standard of living of the citizens of Nicaragua, starting from the third term of President Ortega. The per capita gross national income of a country is closely related to social, economic and environmental indicators. People living in countries with lower gross national income per capita tend to have shorter life span, access to sufficient food and safe drinking water, low literacy, low medical standards, and high infant mortality rates.
Table 4. GDP per capita (based current US$)29
Year 2012 2013 2014 2015 2016 2017 2018 2019
GDP per capita (US$) 1760 1812 1934 2050 2108 2159 2021 1913 Retrieved from World Bank. Available at: data.worldbank.org/indicator/NY.GDP.PCAP.
CD?locations=NI
In reference to the World Bank data, the per capita income was about US$2,159 in 2017 (see table 4), which was a substantial increase of above 62.7 percent compared to the US$1,327 in 2007 (see table 1). In 2018, because of the political and economic crisis, the per capita income dropped to US$2,021 and continued declining in 2019 to US$1,913, which is lower than the income of US$2,159 in prior the crisis in 2017. The World Bank ranked Nicaragua at 142 out of 190 economies in doing businesses for 2020.30 That would mean that about 42 percent of the population earns less than US$1.25 a day, where the unemployment rate is about 6.8 percent in 2019, which is higher than the 3.3 percent in 2017 (World Bank).
29 Based on 2020 US$ currency. Retrieved in June 2020.
30 Doing Businesses 2020. World Bank Group.
http://documents1.worldbank.org/curated/en/688761571934946384/pdf/Doing-Business-2020-Comparing-Busi ness-Regulation-in-190-Economies.pdf
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The IMF stated that in 2010, the FDI coming from the United States, Mexico, Venezuela, Canada, and Spain grew to US$1.56 billion in 2010 from US$335.7 million in 2007 (IMF, 2011). Furthermore, the total FDI attracted during the period 2007-2010 combined was US$1.95 billion higher in comparison to the period 2002-2006 that brought in US$720 million.31 The economy of Nicaragua has experienced positive growths for eight consecutive years, which is reflected on its average annual economic growth rate of more than 5.1 percent from 2010 to 2017 (see figure 2).
Figure 2. GDP Growth and FDI inflow from 2007 to 2018.
Source: World Bank.
In 2012, the GDP growth rate rose slightly from 6.32 percent in 2011 to 6.5 percent due to the result of the presidential elections and new promises made for economic expansions by President Ortega. In 2015, the net inflows of FDI in Nicaragua reached its peak of about US$950 million, accounting for 7.45 percent of its GDP. The average GDP growth from 2013 to 2017 sustained a positive growth of above 4.5 percent, making it the most consistent and the
31 ibid.
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 GDP growth (%) 5.08 3.44 -3.29 4.41 6.32 6.5 4.93 4.79 4.79 4.56 4.63 -3.95 FDI, net inflows % 5.14 7.38 5.23 5.59 9.58 7.29 7.42 7.44 7.45 6.76 5.6 2.75
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second only to Panama in Central America. However, due to the socio-political outbreak in 2018, the economy experienced a reduction in GDP with an economic recession of minus 3.8 percent that amounted US$13.2 billion.
The main industries in the manufacturing sector was dominated by the food processing industry, accounting for about 20 percent of GDP and 35 percent of total exports. Agricultural output value accounted for about 20 percent of GDP while agricultural related products exports accounted for about 60 percent of total exports. Among the bulk, meat and refined sugar products are the highest. The Nicaraguan government adjusted its trade policy to create conditions that encourage diversification of export production in addition to its already established traditional exports like coffee and cash crops. It facilitated access of existing markets and new markets, and pursued free trade agreements with large trading partners in the international arena to keep reaping the benefits from the free market reforms. For instance, the government eased the relocation for textile and garment facilities in free zones and continued the CAFTA-DR free trade agreement with the U.S. to incentivize foreign investments to increase exports and help create jobs in Nicaragua.32
Table 5. Top Product Export (% share of total export) in 2018 and Total Export (in US$) to the World in relations to the progress made from year 2006 to 2013.
Year
Product 2006 2007 2008 2009 2010 2011 2012 2013 2018 Consumer goods 12.90 16.81 38.10 18.58 15.64 13.86 45.60 50.67 52.84 Raw Materials 64.60 55.41 32.42 54.39 53.57 54.82 33.66 29.15 30.17 Textiles and
clothing 0.75 0.30 22.37 0.15 0.12 0.11 25.66 28.52 29.11 Animal 26.14 35.10 18.16 35.58 33.16 32.57 18.96 19.04 18.91
32 Miller (2016). Sustainable Ecotourism in Central America, pp. 31-32.
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As a result, textiles and clothing grew from a share in exports of 0.3 percent in 2007 to a 22.37 percent in 2008 (see table 5). The exports of such goods plummeted in 2009 due to the global financial crisis, the Nicaraguan Association of Textile and Apparel Industry (ANITEC) calculated that approximately 19,000 jobs were lost in the textile clothing sector of the free zones.34 The sector later recovered in 2012, improving its percent of exports share to the world from 2012 to 2018 to an average of 27.97 percent due to expanding its exports to neighboring countries in Central America, such as Honduras and Mexico, effectively establishing it as one of the top exports among consumer goods and raw materials, despite having to cope with the absence of the Tariff Preference Level (TPL) extension that came with the CAFTA-DR from 2013 to 2024, which allowed certain clothing and apparels made
As a result, textiles and clothing grew from a share in exports of 0.3 percent in 2007 to a 22.37 percent in 2008 (see table 5). The exports of such goods plummeted in 2009 due to the global financial crisis, the Nicaraguan Association of Textile and Apparel Industry (ANITEC) calculated that approximately 19,000 jobs were lost in the textile clothing sector of the free zones.34 The sector later recovered in 2012, improving its percent of exports share to the world from 2012 to 2018 to an average of 27.97 percent due to expanding its exports to neighboring countries in Central America, such as Honduras and Mexico, effectively establishing it as one of the top exports among consumer goods and raw materials, despite having to cope with the absence of the Tariff Preference Level (TPL) extension that came with the CAFTA-DR from 2013 to 2024, which allowed certain clothing and apparels made