Investors should be extremely cautious about investing in Nicaragua under President Daniel Ortega’s authoritarian government. The Ortega regime’s massacre of over 300 peaceful protesters starting in April 2018 and ongoing suspension of constitutionally guaranteed civil rights, detention of political prisoners, and disregard for the rule of law have created an unpredictable investment climate rife with reputational risk and arbitrary regulation. These factors caused Nicaragua’s economy to contract 3.8 percent in 2018 and 5.8 percent in 2019. While by some measures the situation appears to have stabilized, it is not close to a recovery. Inflation increased to 6.1 percent in 2019, and the number of Nicaraguans insured through social security, a measure of the robustness of the formal economy, fell 13.2 percent in the first half of 2019.
Weak public institutions, deficiencies in the rule of law and administration of justice, corruption, inefficiency, and growing executive control pose significant challenges for doing business in Nicaragua, particularly for smaller investors. Prior to the 2018 civil unrest, investors that fostered positive relationships with Ortega’s inner circle could generally avoid the worst forms of government harassment. However, Nicaragua’s model of dialogue with a select few private sector actors to resolve specific issues collapsed due to the ongoing civil crisis.
The government has taken few counter-cyclical steps to address the economic recession, instead focusing on raising revenue by cutting the national budget, increasing taxes, and reducing benefits. Credit largely disappeared in early 2019 before starting to return later in the year. In February 2019 the government passed tax reforms that tripled income taxes for businesses earning over $5 million per year and increased other taxes. The government promised to analyze and adjust these policies within 90 days, but still has not as of May 2020. With a few holdouts such as the Central American Bank for Economic Integration, most international organizations ended their assistance to the government.
By late 2019, economists expected the economy to contract an additional 1.1 percent in 2020. However, the government’s lax response to the COVID-19 crisis will likely cause a disproportionate toll on Nicaragua; as of May 2020 the government continues to promote public events and political rallies. As a result, economists revised their original projections downward to a 3.9 percent contraction in 2020.
Nicaragua’s economy still has significant potential for growth if institutional and rule of law challenges can be overcome. Its assets include: ample natural resources; a well-developed agricultural sector; a highly organized and sophisticated private sector committed to a free economy; ready access to major shipping lanes; and a young, low-cost labor force that supports a vibrant manufacturing sector. The United States is Nicaragua’s largest trading partner—it is the source of roughly one quarter of Nicaragua’s imports, and the destination of approximately two-thirds of Nicaragua’s exports.
|TI Corruption Perceptions Index||2019||161 of 180||http://www.transparency.org/
|World Bank’s Doing Business Report||2019||142 of 190||http://www.doingbusiness.org/
|Global Innovation Index||2019||122 of 129||https://www.globalinnovationindex.org/
|U.S. FDI in partner country ($M USD, stock positions)||2018||$187||http://apps.bea.gov/international/
|World Bank GNI per capita||2018||$2,030||http://data.worldbank.org/indicator/
5. Protection of Property Rights
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 Sandinista National Liberation Front (FSLN) 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. During 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 from 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 with regard to foreign or non-resident investors aside from certain border and other properties considered to be 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 the Dominican-Republic Central America Free Trade Agreement (CAFTA-DR) implementing legislation consistent with U.S. and international intellectual property rights 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. There are 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 April 3, 2020, two IPR reform laws went into effect: Law No. 1024, which reformed Law No. 380, Law on Trademarks and Other Distinctive Signs; and Law No. 1025, which reformed Law 354, Law on Patents, Utility Models and Industrial Designs.
Nicaragua does not publicly report on seizures of counterfeit goods and is not listed in the United States Trade Representative’s Special 301 Report or the Notorious Market List.