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1997 Country Reports
On Economic Policy and Trade Practices

Department of State report submitted to the Senate Committees on Foreign Relations and on Finance and to the House Committees on Foreign Affairs and on Ways and Means, January 1998.

Income, Production and Employment	1995	1996	1997 1/
Nominal GDP 2/	1,888	1,969	2,068
Real GDP Growth (pct) 2/ 3/	4.3	4.5	5.0
GDP by Sector: 2/
Agriculture 4/	645	673	707
Manufacturing	303	308	324
Services 5/	819	877	918
Government	121	111	119
Per Capita GDP (US$) 2/	433	438	447
Labor Force (000s)	1,488	1,537	1,583
Unemployment Rate (pct)	18.2	16.1	13.9
Money and Prices (annual percentage growth)
Money Supply Growth (M2)	17.8	26.9	46.0
Consumer Price Inflation (pct)	11.1	12.1	8.0
Exchange Rate (Cordobas/US$ - annual average)
Official	7.53	8.44	9.47
Parallel	7.61	8.44	9.47
Balance of Payments and Trade
Total Exports FOB 6/	526	671	809
Exports to U.S. 7/	238	350	420
Total Imports CIF 6/	962	1,160	1,421
Imports from U.S. 7/	250	262	315
Trade Balance 6/	-435	-489	-612
Balance with U.S. 7/	-11	88	105
External Public Debt (US$ blns)	10.3	6.1	6.1
Fiscal Deficit/GDP (pct)	5.4	5.9	3.48/
Current Account Deficit/GDP (pct)	30.5	25.2	30.3
Debt Service Payments/GDP (pct)	12.8	12.6	16.5
Gold and Foreign Exchange Reserves	80	104	143
Aid from U.S.	31	26	27
Aid from All Other Sources	493	357	328

1/All 1997 figures are projections based on data available in October 1997.
2/1995 and 1996 GDP data revised by Central Bank in October 1997.
3/Percentage changes calculated in local currency.
4/Includes livestock, fisheries, and forestry.
5/Includes construction and mining.
6/Merchandise trade.
7/Source: U.S. Department of Commerce and U.S. Census Bureau; exports FAS, imports customs basis; 1997 figures are estimates based on trade data through July 1997.
8/Combined public sector deficit after foreign donations.

1. General Policy Framework

Nicaragua's transition from a centralized to a market-oriented economy began with the 1990 election of President Violeta Chamorro. Her administration brought inflation under control, liberalized the foreign trade regime, and got the economy growing again. After a decade of decline, real GDP expanded by 3.3 percent in 1994, 4.3 percent in 1995, and 4.5 percent in 1996. With the January 1997 inauguration of President Arnoldo Aleman of the center-right Liberal Alliance, Nicaragua began to quicken the pace of its opening to foreign trade. The economy is projected to grow by 5.0 percent in 1997.

At the end of its first year in office, the Aleman administration faced important economic challenges, including: meeting the requirements of an Enhanced Structural Adjustment Facility with the International Monetary Fund; making progress on the resolution of thousands of Sandinista-era property confiscation cases; and reducing unemployment and poverty in the hemisphere's second-poorest nation.

Nicaragua remains essentially agricultural, with a small manufacturing base. It is dependent on imports for most manufactured, processed and consumer items. A member of the World Trade Organization, Nicaragua has reduced tariffs, eliminated most nontariff barriers and foreign exchange controls. The United States is Nicaragua's largest trading partner, with both exports and imports expanding in recent years. Nicaragua's large current account deficit and fiscal deficit are counterbalanced by strong inflows of foreign assistance and private capital.

2. Exchange Rate Policy

Since January 1993, the Nicaraguan government has followed a crawling-peg devaluation schedule. The cordoba to dollar rate is adjusted daily, with the real exchange rate held essentially constant. A legal parallel exchange market supplies foreign currency for all types of exchange transactions. The spread between the official and parallel markets was under one percent in 1997. The government eliminated all significant restrictions on the foreign exchange system in 1996.

3. Structural Policies

Pricing Policies: The Nicaraguan government maintains price controls only on sugar, domestically produced soft drinks, certain petroleum products, and pharmaceuticals. However, in the past, the government has negotiated voluntary price restraints with domestic producers of important consumer goods.

Tax Policies: Nicaragua maintains a maximum tariff level of from 5 to 15 percent of CIF value on most imports. Intermediate goods and raw materials produced in Central America are exempt. An additional temporary protection tariff of 10 to 35 percent of CIF value is levied on almost all imported items. This tariff will drop to a maximum of 15 percent in the year 2000. Some 550 products are also assessed a specific consumption tax of from 4 to 20 CIF value. The country's 15 percent sales tax is charged (in a cascading fashion) on all imported goods that are not categorized as basic food basket items. Overall import taxation levels on so-called "fiscal" goods (e.g., tobacco, soft drinks and alcoholic beverages) are particularly high. Thus, importers of many types of consumer items confront a total import tax burden of 30 to 59 percent.

4. Debt Management Policies

The Chamorro administration inherited a $10.7 billion debt from the Sandinista regime in 1990. Over the next seven years, Nicaragua negotiated a series of deals (including a mid-1997 debt write-off by the Central American Bank for Economic Integration) that reduced its stock of debt to $6.1 billion. Despite this progress, Nicaragua's debt, at almost three times GDP, remains unsustainably high. Accordingly, the Aleman government has made debt reduction a top priority. Two promising avenues for debt reduction are with the Paris Club ($1.4 billion) and through the IMF/World Bank debt reduction initiative for the heavily indebted poor countries ($1.6 billion). However, to be eligible for those programs, Nicaragua must first show satisfactory performance under an IMF program.

5. Aid

Nicaragua is highly dependent on foreign aid to cover its trade and fiscal deficits. More than half of its assistance is provided by multilateral financial institutions like the Inter-American Development Bank and World Bank. European countries, Japan, Taiwan, and the U.S. are also major donors. Nicaragua is not believed to be getting military aid from any source.

6. Significant Barriers to U.S. Exports

Import Licenses: In most cases, the issuance of import licenses is a formality. Permits are required only for the importation of sugar, firearms and explosives. U.S. exporters of food products must meet some phytosanitary requirements.

Services Barriers: Although 10 private banks are now operating, no U.S. bank has yet re-entered the Nicaraguan financial market. Legislation passed in 1996 opened the insurance industry to private sector participation and four private insurance companies have been formed.

Investment Barriers: Remittance of 100 percent of profits and original capital three years after investment is guaranteed through the Central Bank at the official exchange rate for those investments registered under the Foreign Investment Law. Investors who do not register their capital may still make remittances through the parallel market, but the government will not guarantee that foreign exchange will be available. The U.S. Embassy is aware of no investor who has encountered remittance difficulties since the inception of the Foreign Investment Law in 1991. The fishing industry remains protected by requirements involving the nationality and composition of vessel crews, and a requirement for domestic processing of the catch.

Customs Procedures: Importers complain of steep secondary customs costs, including customs declaration form charges and consular fees. In addition, importers are required to utilize the services of licensed customs agents, adding further costs.

Private Property Rights: The need to resolve thousands of cases of homes, businesses and tracts of land confiscated without compensation by the Sandinista government during the 1980s remains a divisive issue in Nicaragua. The Nicaraguan government has made the resolution of these cases a priority. Nonetheless, potential investors must carefully verify property titles before purchase.

In 1996, Nicaragua ratified the United States-Nicaragua Bilateral Investment Treaty that is designed to improve protection for investors. The treaty has not yet been submitted to the U.S. Senate for ratification.

7. Export Subsidy Policies

Beginning in 1998, all exporters will receive tax benefit certificates equivalent to 1.5 percent of the FOB value of the exported goods. In addition, foreign inputs to export goods enter duty-free and are exempt from value-added tax. Exporters of non-traditional goods (e.g., goods other than coffee, cotton, sugar, wood, lobster and sea-harvested shrimp) receive exemptions of 65 percent of product value on income tax liabilities. Although this benefit expires after 1997, the government's Export Promotion Committee is empowered to extend exemptions beyond that date to exports of key interest to the country.

8. Protection of U.S. Intellectual Property

The Nicaraguan government has indicated a firm commitment to providing adequate and effective intellectual property right protection. Current levels of protection, however, still do not meet international standards.

Although unable to dedicate extensive resources to protecting intellectual property rights, Nicaragua is in the process of modernizing its intellectual property rights protection regime. The National Assembly is currently reviewing a proposal for a new copyright law, while the government is preparing a proposal for a new patent law (existing copyright and patent legislation date from the turn of the century). The trademark law was updated in 1994, and Nicaragua has codified the Central American Convention for the Protection of Intellectual Property. Nicaragua ratified the Convention's Protocol on Trademarks in July 1996 and, in April 1997, approved the technical portion of a proposed Central American Convention for the Protection of Industrial Property, Inventions and Industrial Designs. In December 1997, Nicaragua and the U.S. initialed a bilateral IPR agreement covering patents, trademarks, copyright, trade secrets, plant varieties, integrated circuits and encrypted satellite signals In addition, Nicaragua signed a free trade agreement with Mexico, which includes a chapter on protection of trademarks and copyrights. Nicaragua acceded to the Paris Convention for the Protection of Industrial Property in 1995. The National Assembly has not yet ratified the Berne Convention on Copyrights. Nicaragua is a signatory to the following copyright conventions:

• Mexico Convention on Literary and Artistic Copyrights (1902)
• Buenos Aires Convention on Literary and Artistic Copyrights (1910)
• Inter-American Copyrights Convention (1946)
• Universal Copyright Convention (Geneva 1952 and Paris 1971)
• Brussels Convention on Satellites (1974)

Trademarks: Protection of well-known trademarks is a problem area for Nicaragua. Current procedures allow individuals to register a trademark without restriction for a renewable 10-year period at a low fee.

Copyrights/New Technology: Pirated videos are readily available in video rental stores nationwide, as are pirated audio cassettes and software. In addition, cable television operators are known to intercept and retransmit U.S. satellite signals, a practice that continues despite a trend of negotiating contracts with U.S. sports and news satellite programmers. A report prepared in 1994 by the International Intellectual Property Alliance estimated that losses in Nicaragua due to copyright infringements cost U.S. firms $5.3 million annually.

9. Worker Rights

a. The Right of Association: The Constitution provides for the right of workers to organize voluntarily in unions. This right was reaffirmed in the new labor code which entered into effect in November 1996. Less than half of the formal sector workforce, including agricultural workers, is unionized, according to labor leaders. The Constitution recognizes the right to strike. Unions freely form or join federations or confederations, and affiliate with and participate in international bodies.

b. The Right to Organize and Bargain Collectively: The Constitution provides for the right to bargain collectively. The right was reaffirmed in the 1996 labor code. According to the code, companies engaged in disputes with employees must negotiate with the employees' union if they are organized.

c. Prohibition of Forced or Compulsory Labor: The Constitution prohibits forced or compulsory labor. There is no evidence that it is practiced.

d. Minimum Age for Employment of Children: The Constitution prohibits child labor that can affect normal childhood development or interfere with the obligatory school year. The 1996 labor code raised the age at which children may begin working with parental permission from 12 to 14. Parental permission is also required for 15 and 16 year-olds. The law limits the workday for such children to 6 hours and prohibits night work. However, because of the economic needs of many families and lack of effective government enforcement mechanisms, child labor rules are rarely enforced, except in the small, formal sector of the economy.

e. Acceptable Conditions of Work: The 1996 labor code maintains the constitutionally mandated 8-hour workday. The standard legal workweek is a maximum of 48 hours, with one day of rest. The 1996 code established that severance pay shall be from one to five months duration, depending on the length of employment and the circumstances of termination. The code also seeks to bring the country into compliance with international standards of workplace hygiene and safety, but the Ministry of Labor lacks adequate staff and resources to enforce these provisions. Minimum wage rates were raised in November 1997, but the majority of urban workers earn well above the minimum rates.

f. Rights in Sectors with U.S. Investment: Labor conditions in sectors with U.S. investment do not differ from those in other sectors of the formal economy.

Category	Amount
Petroleum		(1)
Total Manufacturing		-5
Food & Kindred Products	0
Chemicals & Allied Products	0
Metals, Primary & Fabricated	0
Machinery, except Electrical	0
Electric & Electronic Equipment	(1)
Transportation Equipment	0
Other Manufacturing	(1)
Wholesale Trade		3
Banking		0
Finance/Insurance/Real Estate		0
Services		3
Other Industries		0
TOTAL ALL INDUSTRIES		(1)

(1) Suppressed to avoid disclosing data of individual companies.
Source: U.S. Department of Commerce, Bureau of Economic Analysis

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