Country Commercial Guide for U.S. Companies

Chapter 1: Doing Business in Nicaragua

International Copyright, U.S. Department of State, 2009. All rights reserved outside of the United States.

• Market Overview
• Market Opportunities
• Market Challenges
• Market Entry Strategy

 

Market Overview        Return to top

• Nicaragua’s real GDP growth was 3.2% in 2008. Inflation in 2008 reached 13.77%, driven mainly by rising oil prices.

• On April 1, 2006, the United States – Central America – Dominican Republic Free Trade Agreement (CAFTA-DR) entered into force for the United States and Nicaragua. 80% of U.S. exports of consumer and industrial goods now enter Nicaragua duty-free, with remaining tariffs to be phased out by 2016. Tariffs on most U.S. agricultural products will be phased out within 15 years, with all tariffs eliminated in 20 years.

• With CAFTA-DR, Nicaragua also offers substantial market access for U.S. firms across the entire services regime, including telecommunications, express delivery, computer and related services, tourism, energy, transport, construction and engineering, financial services, insurance, audio/visual and entertainment, and professional services. The agreement features key protections for U.S. investments and intellectual property. It also includes commitments on environmental standards, labor rights, government procurement, and corruption.

• The United States is Nicaragua’s largest trading partner, the source of roughly 24% of Nicaragua's imports in 2008 and the destination for approximately 62% of its exports (including free zone exports). U.S. exports to Nicaragua were in $1.03 billion in 2008, including donated goods, cereals, mechanical machinery, mineral oils, textiles and apparel, electrical machinery, vehicles, cotton, and plastics. Nicaraguan exports to the United States were $1.71 billion in 2008, including textiles and apparel, wiring harnesses, coffee, meat, fish, tobacco, fruits, vegetables and sugar. Other important trading partners for Nicaragua are its Central American neighbors (especially El Salvador and Costa Rica), Mexico, and the European Union.

• The Nicaraguan Government reports that foreign investment inflows totaled $626 million in 2008, up from $335 million in 2007. Electricity generation projects and telecommunications infrastructure were the leading sectors, accounting for approximately $400 million of the total.  There are more than a 100 wholly or partly-owned subsidiaries of U.S. companies currently operating in Nicaragua. The largest of these investments are in textiles, energy, financial services, light manufacturing, tourism, fisheries, and shrimp farming. Other major investors include Mexican, Canadian, and other Central American firms.

Market Opportunities       Return to top

• Poor infrastructure increases costs for many businesses. Because oil is the fuel used by most power plants, electricity is the most expensive in Central America. With the exception of the Pan-American Highway, roads are poorly maintained and sometimes impassable. Seaport infrastructure is limited, and costs are high.

• The Nicaraguan economy is small and purchasing power is limited for many consumers. Of the total population of 5.4 million, 75.8% live on $2 a day or less. Family remittances of $818.1 million per year in 2008 significantly augment incomes for many Nicaraguans.

• Several factors contribute to an increasingly uncertain policy environment for foreign investors. Harsh rhetoric against the United States, capitalism, and free trade has had a negative effect on foreign investor perceptions of risk. Government officials frequently deride neoliberal policies and the “tyranny of capitalism” and criticize foreign investors for paying “slave wages.”

• Protracted political battles among branches of government and between parties in the National Assembly have limited Nicaragua’s ability to develop laws and institutions and implement policies that would strengthen the private sector in the face of global competition. Nicaragua has fallen in the World Economic Forum’s Competitive Index Rankings from 95th place in 2006 to 120th in 2008.

• The legal environment is among the weakest in Latin America. Property rights are especially difficult to defend. Nicaraguans commonly believe that the judicial system is controlled by political interests and is corrupt. Investors regularly complain that regulatory authorities are arbitrary, negligent, slow to apply existing laws, and often favor one competitor over another. Lack of a reliable means to quickly resolve disputes with administrative authorities or business associates has resulted in disputes becoming intractable.

• In June 2009, the Board of the Millennium Challenge Corporation (MCC) partially terminated MCC’s compact assistance to Nicaragua for activities totaling $62 million for road construction and property regularization over concerns that the Nicaraguan Government had not adequately addressed allegations of fraud related to the municipal elections in November 2008. 

 

Market Challenges        Return to top 

• CAFTA-DR has provided new market opportunities for U.S. exports to Nicaragua. The treaty has also provided new opportunities for Nicaraguan exports to the United States, especially for meat, dairy, seafood, agricultural produce and processed foods.

• Continued advances in transforming the Central American Common Market into a customs union make Nicaragua a viable option for a regional distribution center or a manufacturing stop along a regional supply chain.

• Nicaragua offers business opportunities in the tourism sector that are enhanced by attractive tax incentives. Nicaragua's emerging tourism industry allows for opportunities to those entrepreneurs who fully accept the risk of investing in Nicaragua, especially as regards disputes over land title.

• Market opportunities exist in the following sectors: textiles and apparel, vehicles, auto parts and equipment, consumer goods, computer equipment and peripherals, telecommunication equipment and services, medical, optical and dental equipment, plastics, agricultural inputs, food processing and refrigeration equipment, wheat, yellow corn for animal feed, vegetable oil, and rice.

 

Market Entry Strategy       Return to top

• The use of agents and distributors is the most common way to export U.S products and services.

• One agent for the country is sufficient as commercial activity is concentrated in the capital Managua and the size of the country does not justify regional agents.

• A local lawyer should be consulted to determine the pros and cons of various agency or representation agreements

• U.S. companies should visit potential partners or agents prior to entering into a relationship.

• U.S. firms should check the bona fides of potential partners before establishing a formal business relationship.

The U.S. Embassy, Managua, Economic/Commercial Section takes no responsibility for actions readers may take based on the information in this guide. Readers should always conduct their own market research and due diligence before entering into any commercial arrangement.