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Nicaragua

Executive Summary

Investors should be extremely cautious about investing in Nicaragua under President Daniel Ortega’s authoritarian government. Almost three years have passed since the 2018 political-economic crisis left over 300 peaceful protesters killed, 2,000 protestors injured, and over 100,000 Nicaraguans displaced and seeking asylum outside of Nicaragua. The Ortega regime continues to suspend constitutionally guaranteed civil rights, detain political prisoners, and disregard the rule of law, creating an unpredictable investment climate rife with reputational risk and arbitrary regulation. Presidential elections are scheduled for November 2021. Failure to restore civil liberties and guarantee free and fair elections could spark renewed unrest and lead to the further isolation of the Ortega regime.

According to the International Monetary Fund, Nicaragua’s economy contracted 3.8 percent in 2018, 5.8 percent in 2019, and an estimated 3.5 percent in 2020. The World Bank expects the economy to grow 0.9 percent in 2021 as it recovers from the COVID-19 pandemic, less than the 2.5-3.5 percent forecast by the Nicaraguan Central Bank.

In 2020, the Ortega–controlled National Assembly approved six additional repressive laws that should alarm investors. Some of the most concerning laws include a “gag” law that criminalizes political speech; a “foreign agents law” that requires organizations and individuals to report foreign assistance and prevents any person receiving foreign funding from running for office; and a “consumer protection law” that could prevent financial institutions from making independent decisions on whether to service financial clients, including sanctioned entities. Tax authorities have seized properties following reportedly arbitrary tax bills and jailed individuals without due process until taxes were negotiated and paid. Furthermore, arbitrary fines and customs inspections prejudice foreign companies that import products.

The COVID-19 global pandemic impacted Nicaragua’s economy, upsetting tourism and investment. The government’s attempts to conceal the scope of the pandemic, including the number of new cases and deaths, may have hurt consumer and investor confidence. Inflation increased another 3 percent after rising 6.1 percent in 2019, and the number of Nicaraguans insured through social security, a measure of the robustness of the formal economy, fell 19 percent since March 2018. These conditions pose significant challenges for doing business in Nicaragua. Credit largely disappeared in early 2019 before starting to return later in the year and in 2020. The government’s 2019 tax reforms continue to hurt business profit margins and raise consumer prices. Most international organizations ended their assistance to the government due to human rights concerns, with the exception of some humanitarian assistance related to the COVID-19 pandemic and Hurricanes Eta and Iota.

Nicaragua’s economy still has significant potential for growth if institutional and rule of law challenges can be overcome and investor confidence can be restored. Its assets include: ample natural resources; a well-developed agricultural sector; a highly organized and sophisticated private sector committed to a free economy; ready access to major shipping lanes; and a young, low-cost labor force that supports a vibrant manufacturing sector. The United States is Nicaragua’s largest trading partner—it is the source of roughly one quarter of Nicaragua’s imports, and the destination of approximately two-thirds of Nicaragua’s exports.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 159 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 142 of 190 http://www.doingbusiness.org/en/rankings
https://www.doingbusiness.org/en/data/
exploreeconomies/nicaragua
Global Innovation Index N/A N/A https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) N/A N/A https://apps.bea.gov/international/factsheet/
World Bank GNI per capita N/A N/A http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Nicaraguan government seeks foreign direct investment to project normalcy and international support in a time when foreign investment has all but stopped following the government’s violent suppression of peaceful protests starting in April 2018. As traditional sources of foreign direct investment fled the ongoing political crisis, the government has increasingly pursued foreign investment from other countries such as Iran and China. Investment incentives target export-focused companies that require large amounts of unskilled or low-skilled labor.

In general, there are local laws and practices that harm foreign investors, but few that target foreign investors in particular. Investors should be aware that local connections with the government are vital to success. Investors have raised concerns that regulatory authorities act arbitrarily and often favor one competitor over another. Foreign investors report significant delays in receiving residency permits, requiring frequent travel out of the country to renew visas.

ProNicaragua, the country’s investment and export promotion agency, has all but halted its investment promotion activities. It has virtually no clients due to the ongoing political crisis. ProNicaragua, already heavily politicized, became more so after President Ortega installed his son, Laureano Ortega (who was designated for sanctions by the Office of Foreign Assets Control (OFAC)), as the organization’s primary public face. ProNicaragua formerly provided information packages, investment facilitation, and prospecting services to interested investors. For more information, see http://www.pronicaragua.org .

Personal connections and affiliation with industry associations and chambers of commerce are critical for foreigners investing in Nicaragua. Prior to the crisis, the Superior Council of Private Enterprise (COSEP) had functioned as the main private sector interlocutor with the government through a series of roundtable and regular meetings. These roundtables have ceased since the onset of Nicaragua’s 2018 crisis, as has collaboration between the government, private sector, and unions. Though municipal and ministerial authorities may enact decisions relevant to foreign businesses, all actions are subject to de facto approval by the Presidency.

The absence of commercial international flights—caused in part by the COVID-19 pandemic— significantly hinders international investment. Although a few commercial airlines are operating flights to and from Nicaragua, the government only permits those airlines to operate under charter flight regulations, including providing the government with full passenger manifests 36 hours before the arrival or departure of each flight. Currently there is only one non-stop flight per day between the United States and Nicaragua, with the exception of Saturday, when there are two non-stop flights to Miami.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign and domestic private entities have the right to establish and own business enterprises and engage in all forms of remunerative activity. Any individual or entity may make investments of any kind. In general, Nicaraguan law provides equal treatment for domestic and foreign investment. There are a few exceptions imposed by specific laws, such as the Border Law (2010/749), which prohibits foreigners from owning land in certain border areas.

Investors should be cautious of the 2020 Foreign Agents Law—also commonly referred to as “Putin’s Law”—which places onerous reporting and registration burdens on all organizations receiving funds or direction from abroad. While the law purportedly exempts purely business entities, some companies have been required to register or end their social responsibility efforts to avoid scrutiny. The process to register as a foreign agent is overtly politicized, with the government outright refusing to register some entities for their perceived political leanings.

Nicaragua allows foreigners to be shareholders of local companies, but the company representative must be a Nicaraguan citizen or a foreigner with legal residence in the country. Many companies satisfy this requirement by using their local legal counsel as a representative. Legal residency procedures for foreign investors can take up to eighteen months and require in-person interviews in Managua.

The government can limit foreign ownership for national security or public health reasons under the Foreign Investment Law. The government requires all investments in the petroleum sector include one of Nicaragua’s state-owned enterprises as a partner. Similar requirements are in place for the mining sector as well.

The government does not formally screen, review, or approve foreign direct investments. However, President Daniel Ortega and the executive branch maintain de facto review authority over any foreign direct investment. This review process is not transparent.

Other Investment Policy Reviews

Nicaragua had a trade policy review with the WTO in 2021. The trade policy review did not resolve the many informal trade barriers faced by importers in Nicaragua.

Business Facilitation

The government is eager to draw more foreign investment to Nicaragua. Its business facilitation efforts focus primarily on one-on-one engagement with potential investors, rather than a systematic whole-of-government approach.

Nicaragua does not have an online business registration system. Companies must typically register with the national tax administration, social security administration, and local municipality to ensure the government can collect taxes. Those registers are typically not available to the public. Investors should be aware the social security system is close to insolvency, having engaged in a series of “investments” over the past decade that funnel social security funds into the hands of Ortega insiders. The government has sought to close the shortfalls by increasing social security taxes and contributions. This has caused many workers to flee the social security system to the informal sector, which economists estimate hold between 70 and 90 percent of Nicaragua’s workers.

According to the Ministry of Growth, Industry, and Trade (MIFIC), the process to register a business takes a minimum of 14 days. In practice, registration usually takes more time. Establishing a foreign-owned limited liability company takes eight procedures and 42 days.

Outward Investment

Nicaragua does not promote or incentivize outward investment and does not restrict domestic investors from investing abroad.

5. Protection of Property Rights

Real Property

Property rights and enforcement are notoriously unreliable in Nicaragua. The government regularly fails to enforce court decisions with respect to seizure, restitution, or compensation of private property. Legal claims are subject to non-judicial considerations and members of the judiciary, including those at senior levels, are widely believed to be corrupt or subject to political pressure. During the upheaval starting on April 18, 2018, members of the ruling Sandinista National Liberation Front (FSLN) party illegally took over privately owned lands, with implicit and explicit support by municipal and national government officials. Some land seizures were politically targeted and directed against individuals considered independent or against the ruling party. Under Ortega’s first government in the 1980s, the expropriation of 28,000 properties in Nicaragua from both Nicaraguans and foreign investors resulted in a large number of claims and counter claims involving real estate. Property registries suffer from years of poor recordkeeping, making it difficult to establish a title history, and in 2019 the Supreme Court modified the property registry rules to prohibit most from accessing these records. Mortgages and liens exist, but the recording system is not reliable.

Investors should conduct extensive due diligence and extreme caution before investing in real property. Unscrupulous individuals have engaged in protracted confrontations with U.S. investors to wrest control of prime properties, in particular in tourist areas. Judges and municipal authorities are known to collude with such individuals, and a cottage industry supplies false titles and other documents to those who scheme to steal land. In the Autonomous Caribbean Region, communal land cannot be legally purchased, although individuals sell communal land and lawyers and notaries will knowingly extend the apparent correct paperwork, only to have property buyers be stripped of their property by communal authorities.

Those interested in purchasing property in Nicaragua should seek experienced legal counsel early in the process. The Capital Markets Law (2006/587) provides a legal framework for securitization of movable and real property. There are no specific restrictions regarding foreign or non-resident investors aside from certain border and other properties considered important to national security.

Given the state of the public records registry, it is not possible to determine what percentage of land does not have clear title. There is no defined government effort to resolve this. Squatters can obtain ownership of unoccupied property, particularly if they are government-backed.

Intellectual Property Rights

Nicaragua established standards for the protection and enforcement of intellectual property rights (IPR) through CAFTA-DR implementing legislation consistent with U.S. and international intellectual property standards. While the written legal regime for protection of IPR in Nicaragua is adequate, enforcement has been limited. Piracy of optical media and trademark violations are common. The United States also has concerns about the implementation of Nicaragua’s patent obligations under CAFTA-DR, including: the mechanism through which patent owners receive notice of submissions from third parties; how the public can access lists of protected patents; and the treatment of undisclosed test data.

On March 24, 2020, the National Assembly approved two reforms to Law 1024 on the intellectual property registry and Patent Law. Members of the National Assembly’s Economic Commission emphasized updates to the fees for registering copyrights and patents, leading observers to assume the reforms are focused on continuing to raise funds to run the government amidst the ongoing political crisis.

Nicaragua does not publicly report on seizures of counterfeit goods and is not listed in the U.S. Trade Representative’s 2021 Special 301 Report or its 2020 Review of Notorious Markets for Piracy and Counterfeiting.

For additional information about national laws and points of contact at local IP offices, please see the World Intellectual Property Organization’s country profiles at http://www.wipo.int/directory/en/ .

9. Corruption

Nicaragua has a developed legislative framework criminalizing acts of corruption, but the rampant corruption in Nicaragua begins at the top and pervades every element of government, including the national police, judiciary, customs authorities, and tax authorities. There is no expectation that the framework be enforced other than token cases to pretend compliance. A general state of permissiveness, lack of strong institutions, ineffective system of checks and balances, and the FSLN’s complete control of government institutions create conditions for corruption to thrive. The judicial system remained particularly susceptible to bribes, manipulation, and political influence. Companies reported that bribery of public officials, unlawful seizures, and arbitrary assessments by customs and tax authorities were common.

The government does not require private companies to establish internal controls. However, Nicaraguan banks have robust compliance and monitoring programs that detect corruption and attempt to pierce the façade of front men seeking to process transactions for OFAC-sanctioned and other actors. Multiple government officials and government-controlled entities have been sanctioned for corruption.

Nicaragua ratified the United Nations Convention against Corruption (UNCAC) in 2006 and the Inter-American Convention Against Corruption in 1999. It is not party to the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions.

Businesses reported that corruption is an obstacle to FDI, particularly in government procurement, licensing, and customs and taxation.

Resources to Report Corruption

Nicaragua’s supreme audit institution is the Contraloria General de la República de Nicaragua (CGR). The CGR can be reached at +505 2265-2072 and more information is available at its website www.cgr.gob.ni .

10. Political and Security Environment

President Daniel Ortega and his wife and Vice President Rosario Murillo dominate Nicaragua’s highly centralized, authoritarian political system. Ortega is serving in his third consecutive term as president after the Ortega-controlled Supreme Court ruled that a constitutional ban on the re-election of a sitting president was unenforceable. Ortega’s rule has been marked by increasing human rights abuses, consolidation of executive control, and consolidation of strategic business sectors that enrich him and his inner circle.

These abuses of power came to a head in April 2018 when Ortega’s security forces killed over 300 peaceful protesters. Government tactics included the use of live ammunition, snipers, fire as a weapon, and armed vigilante forces. Protesters built makeshift roadblocks and confronted the national police (NNP) and parapolice with rocks and homemade mortars. The ensuing conflict left over 325 dead, thousands injured, and more than 100,000 exiled in neighboring countries. Hundreds were illegally detained and tortured. Beginning in August 2018, the Ortega government instituted a policy of “exile, jail, or death” for anyone perceived as regime opponents. It amended terrorism laws to include prodemocracy activities and used the legislature and justice system to characterize civil society actors as terrorists, assassins, and coup-mongers. Political risk has increased dramatically as a result, and the future of the country’s political institutions remains very uncertain.

The NNP presence is ubiquitous throughout Nicaragua, including with randomized checkpoints. Excessive use of force, false imprisonment, and other harassment against opposition leaders—including many private sector leaders—is common. On March 5, 2020, the United States sanctioned the NNP for its human rights abuses against the people of Nicaragua.

Widespread dissatisfaction with Ortega’s authoritarian rule continues. Elections are scheduled for November 2021, and Ortega plans to compete for a fourth consecutive presidential term, raising doubts whether the Ortega regime will permit elections that are free and fair. The Department of State’s Bureau of Consular Affairs advises that travelers reconsider travel to Nicaragua due to limited healthcare availability and arbitrary enforcement of laws.

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