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Nicaragua: Nicaragua Finance Profile 2012

2012/03/21

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Nicaragua Finance Profile 2012

Since the 1990s, governments have pursued a strict market-economic and export-oriented development model, based on the private economy and oriented toward the principles of free-market competition. However, the rules of the game are not always followed. Apart from the possibility of presidential decrees that can suddenly change those rules, the greatest threats to the market economy in Nicaragua are the aforementioned problems of corruption and the weak legal system. Aside from utilities such as energy and water, the state controls the prices of only a very few products. The minimum wage differs across different sectors of the economy, from $70 per month in agriculture to $170 per month in construction and finance. According to the central bank, the informal sector accounts for almost two-thirds of jobs. Profits can be used and transferred freely. There is no limitation on currency convertibility. Foreign and domestic investments are treated equally. Yet, in a cluster approach to development, a handful of sectors such as the tourism and maquila industries are offered tax exemptions on profits, building materials and property. The World Bank’s Doing Business Report 2009 ranks Nicaragua 107th out of 175 countries. The deterioration in this ranking in recent years can be attributed to other countries’ progress, and to some methodological changes, rather than to serious obstructions in Nicaragua itself. Foreign direct investment (FDI) inflows are concentrated on maquila operations, telecommunications and tourism projects. FDI inflows have been increasing steadily in recent years, reaching $335 million or 5.8% of GDP in 2007, showing trust on the part of international investors.

In September 2006, parliament finally approved a competition promotion law, with bipartisan support, which had been discussed since the 1990s. The law came into effect in 2007. Before this point, Nicaragua had anti-monopoly laws in place only for specific sectors such as telecommunications and energy. The new law prohibits anticompetitive practices, and created a national institute for the promotion of competition (Pro Competencia) tasked with enforcing the law. As of the time of writing, the board of the new institution as suggested by President Ortega had not yet been approved by parliament. Studies by the Comisión Económica para América Latina (CEPAL) have shown that markets in Nicaragua have to date shown low levels of competition. Since price fixing is suspected in markets for some staple foods, increased levels of competition can be expected to directly benefit the poor.

Foreign trade has been liberalized since 1990. Trade openness measured by the ratio of imports and exports to GDP is very high, at 106% in 2008. Nicaragua has abolished all WTO-inconsistent non-tariff barriers and does not have import prohibitions on commercial grounds. Since it is a low-income country, incentives for maquila operations and tourism are consistent with WTO standards. Aside from these, Nicaragua grants exporters a 1.5% tax benefit on exported goods but does not provide export financing. The most favored nation (MFN) duty rate declined sharply during the 1990s, and now stands at around 4%. Nicaragua is also a member of various regional and bilateral trade agreements. It is very well integrated in Central America and has strong trade ties with the United States. Integration has further improved due to Nicaragua’s membership in the Dominican Republic-Central American Free-Trade Agreement (DR-CAFTA), which came into effect in April 2006. Nicaragua has also participated in the EU-Central America negotiations over a proposed association agreement, which would include the establishment of a free trade area.

Nicaragua’s banking sector is underdeveloped, and is one of the smallest in Latin America, accounting for about 5% of GDP. The banking sector expanded during the 1990s with the founding of 14 new private banks. State banks were closed or privatized between 1994 and 2000. In 2001, the last state-owned bank, Banco Nicaragüense de Industria y Comercio, was closed due to severe losses. Despite strong credit growth in recent years, financial intermediation remains very weak and seriously hinders economic growth. Banks’ high exposure to the public sector due to their extensive investment in public debt bonds is also worrisome. The capital adequacy ratio is sufficient and the percentage of non-performing loans low. More than two-thirds of deposits and loans are denominated in U.S. dollars. Independent supervision of the banking sector has become stricter over time, especially since the banking crisis in 2000. The principles of the Basel Accords have been implemented, and Nicaragua has ratified its commitment to the 1997 WTO Financial Services Agreement. Today, the banking sector consists of seven banks and two finance companies. Foreign ownership of banks has increased as a result of investments by Citigroup, HSBC and General Electric. Nevertheless, many households and businesses (especially in agriculture) have been left without access to credit from the formal banking sector since the closure of the state-owned national development bank BANADES in 1998, because the private banking sector has very little presence in rural areas. Microfinance institutions have partially filled this gap. The Ortega administration’s “Usura Cero” program has supported the use of microfinance to increase financial intermediation. Four private insurance companies, which also offer policies from foreign insurers without additional regulation, have joined state-owned insurer INISER since 1997’s abolishment of the state insurance monopoly. Nicaragua’s stock exchange, Bolsanic, is host mainly to the trading of government-issued bonds. Nicaragua’s banking system was not directly exposed to the 2008 financial crisis, but secondary effects due to the foreign ownership of banks have restrained credit growth.