5. THEORETICAL FRAMEWORK
5.3. Nicaragua Overview
5.3.2. Nicaragua’s Organization of the Market and Competition [13]
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Nicaragua’s socioeconomic development status is low. According to the 2016 Human Development Report, the country’s Human Development Index (HDI) value was 0.631 (0.614 in 2014) and Nicaragua ranked 125 out of 188 countries, only ahead of Guatemala (128), Honduras (131) and Haiti (163) in Latin America. The country’s Gender Inequality Index score was 0.449, worse than the Latin American average, though ahead of Panama (0.454), Honduras (0.480) and Guatemala (0.533) in the Central American region.
Social exclusion due to poverty and hardship is quantitatively and qualitatively very pronounced and is structurally entrenched. According to official data, inequality diminished during the 2000s. In 2014, the Gini Index value reached 47.1. According to the World Bank Development Indicators 2016, 17.1% of the population lived on less than $3.10 a day. However, most of the country’s almost 6 million inhabitants live in poverty.
5.3.2. Nicaragua’s Organization of the Market and Competition [13]
The organization of market and competition in Nicaragua works under a weak institutional framework. There is little judicial independence, a weak regulatory framework and very high levels of corruption. Since the 1990s, free-market competition has been implemented in Nicaragua and the return of Sandinista government in 2006 hasn’t changed the principles of free-market organization. However, during Ortega’s mandates, market competition has been undermined by the emergence of strong enterprises dependent on the government and Ortega’s family. The informal sector remains large.
In the Doing Business Report 2017, Nicaragua ranked 127 out of 190 countries, an improvement on previous years, but lowest of all Central American countries. Nicaragua ranked particularly poorly for paying taxes (176), protecting minority investors (145) and registering
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property (146). The 2016-2017 Global Competitiveness Report ranked Nicaragua 103 out of 138 countries, with Nicaragua scoring poorly for the efficiency of government bureaucracy, educated workforce, supply of infrastructure and corruption.
Weak government institutions, shortcomings in the rule of law and executive control pose significant challenges to investors in Nicaragua, especially for smaller foreign investors.
According to the U.S. Department of Commerce, investors regularly complain that regulators, in particular the Nicaraguan Customs Authority, are arbitrary, negligent and slow to apply existing laws. Nevertheless, foreign investment is considered to be economically important and Nicaragua offers business opportunities in various sectors such as construction, food processing, packaging equipment and tourism. Nicaragua’s emerging tourism industry has recently been enhanced by attractive tax incentives.
According to the central bank, the informal sector in Nicaragua represents 75.2% of the jobs (74.4% in 2013). This percentage is even higher for women.
A competition-promotion and anti-monopoly law came into effect in 2007 and was again modified in 2008. The law prohibits anti-competitive practices and created a national institute for the promotion of competition (Procompetencia), which is tasked with enforcing the law.
The promotion of competition law establishes financial sanctions for companies that engage in anti-competition practices, varying between 1% and 10% of the company’s net sales.
However, after 10 years of the law’s existence, anti-competitive practices still exist.
Procompetencia has experienced a lot of difficulties in tackling anti-competitive practices and its record has been poor. In 2016, Procompetencia dealt with only 11 cases related to unfair competition and price fixing, according to its 2016 report.
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Nicaragua’s market contains a number of oligopolies, common to small economies, in which two or three companies control the majority of a sector. According to Procompetencia, anti-competitive practices prevail in sectors such as milk, flour, wood and tourism. Oligopolies in the airline and telecommunication sectors have also been denounced by the president of the National Assembly. According to Procompetencia, many of the most important economic sectors have one company that controls more than 50% of the sector.
One contributing factor, related to Nicaragua’s development model, is considerable state interference in economic activity. Collaboration and complicity between the government and business sector has resulted in a small group, generally based on strong friendship or family bonds, making economic decisions favorable to themselves and facilitating anti-competitive practices.
Furthermore, in its last report, Procompetencia recognized that, 10 years after its creation, most industrial businesses don’t even know that Procompetencia exists, which indicates the weak culture of competition in Nicaraguan markets. The Global Competitiveness Index 2016-2017 ranked Nicaragua 121 out of 138 countries concerning the effectiveness of anti-monopoly policy, and 135 concerning the extent of market dominance.
Since the 1990s, Nicaragua has liberalized its foreign trade. Nicaragua is now a member of various regional and bilateral trade agreements with other Central American countries and the United States, including the Dominican Republic-Central American Free Trade Agreement (CAFTA-DR). According to WTO, Nicaragua has a relatively open trade and investment regime.
The average applied tariff rate is 2.0% according to the Heritage Foundation. In the Global Competitiveness Index 2016-2017, Nicaragua ranked only 103 out of 138 countries, but 66 concerning foreign competition and 51 concerning trade tariffs. According to World Bank’s
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Doing Business Report 2017, Nicaragua made trading across borders more expensive by introducing a new security fee, which increased the cost of border compliance for exporting and importing.
The United States is Nicaragua’s largest trading partner, both in imports and exports, followed by Mexico. According to the U.S. Department of Commerce, trade with the United Sates represents about a quarter of imports and two-thirds of exports (including free trade zone exports). In 2006, CAFTA-DR entered into force for the United States and Nicaragua, making all U.S. exports of consumer and industrial goods duty-free. Tariffs on most U.S. agricultural products will be phased out by 2024, with all tariffs eliminated by 2026. In 2010, Central American countries, including Nicaragua, also signed a trade agreement with the European Union. In 2014, a partial free trade agreement came into effect between Nicaragua and Cuba.
Nicaragua also has trade agreements with Mexico, Panama, Taiwan, Chile and the Dominican Republic.
Since its incorporation into the Bolivarian Alliance for the Peoples of America (ALBA) in 2007, the government’s foreign trade policy has also focused on bilateral relations with Venezuela.
As a result, Venezuela became Nicaragua’s third largest trade partner between 2007 and 2014.
Hugo Chavez’s death and the fall in world oil prices altered the commercial partnership between Nicaragua and Venezuela, with Venezuela limiting its investments in Nicaragua. Since the Venezuelan crisis in 2016, Venezuelan investments in Nicaragua have almost disappeared.
Since 2013, the Nicaraguan government has tried to develop new commercial partnerships.
During the period under review, Nicaragua (together with Costa Rica, El Salvador, Guatemala, Honduras and Panama) concluded terms for a free trade agreement with South Korea.
Nicaragua is also negotiating a bilateral trade agreement with Peru and its accession as a full
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member of the Latin American Integration Association (ALADI). Nicaragua has recently been incorporated into Annex “C” of the International Cocoa Agreement, which defines Nicaragua as a country exclusively producing and exporting fine cocoa. With this incorporation, Nicaraguan cacao received recognition for its quality by the International Cocoa Organization.
In 1995, the constitution was reformed to guarantee the liberty to create banks and other financial institutions (Article 99). In 2005, Law 561 established judicial guarantees for credits and investments in the national territory. Since then, the banking system is oriented to international standards and the central bank is working toward increasing supervision.
The central bank’s report for 2016 noted that the balances of the national financial system (NFS) reflected favorable performances. The liquidity of the financial system remained adequate and profitability indicators remained positive, associated in part with the improvement in the quality of the loan portfolio. The balance of the NFS loan portfolio registered an inter-annual growth of 18.6% (2015: 23.3%), while total deposits increased by 10.5% (2015: 13.5%). According to the IMF, bank soundness indicators remained solid in 2016, with the proportion of non-performing loans below 1% of total loans and capital adequacy ratio of 13.5% of risk-weighted assets at the end of 2016.
According to the Superintendency of Banks and Other Financial Institutions (SIBOIF), the number of loans granted through credit cards increased from 541,000 in 2009 to more than 1 million in September 2016, with most debts denominated in U.S. dollars (up to $123.9 million).
Despite strong credit growth, the Nicaraguan financial system appears to be robust, with capital adequacy rates above the regulatory level of IMF indicators.
According to the IMF, efforts were made to strengthen financial stability in 2016, such as the
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implementation of liquidity and solvency banking regulations. However, the IMF also noted that the national banking system remains fragile and needs to be improved, and national financial markets need to be deepened. The IMF also demanded that the government address gaps in the financial supervisory perimeter as the regulatory framework for the microfinance industry remains incomplete and some small institutions could escape oversight.