III. ECONOMIC TRENDS AND OUTLOOK - MAJOR TRENDS AND OUTLOOK During the period 1990-93, the Government of Nicaragua focused on making the transition from a centralized to a market-oriented economy. The Chamorro administration was also tasked with reversing the severe mismanagement of the economy of the Sandinista era and the resultant 25 percent drop in real GDP and 50 percent drop in GDP per capita during the 1980's. The main emphasis during this period was upon stabilization of the currency -- the c rdoba oro -- and implementation of basic structural adjustment measures. The stabilization process has been remarkably successful. Annual inflation fell from 13,490 percent in 1990 to 775 percent in 1991, 3.5 percent in 1992, and 20.4 percent in 1993. The cordoba oro remains stable and is presently devalued against the dollar on a crawling peg at the rate of 1 percent per month. During 1993, the average spread between the official cordoba/dollar rate and the legal parallel and black market rates was only 3 percent. With respect to structural adjustment measures, the Chamorro Administration successfully privatized more than 300 of the 350 non- financial public sector companies it inherited from the previous administration. A Superintendency was created to supervise the banking sector, which now includes seven private banks and three state-owned institutions. The Government has reduced tariffs, eliminated most non-tariff trade barriers, and greatly relaxed foreign exchange controls. All these measures were designed to pave the way for increased growth. To date, however, the anticipated growth has failed to materialize, as real GDP has remained stagnant, registering rates of -0.2 percent in 1991, 0.4 percent in 1992, and -0.9 percent in 1993. GDP per capita for 1993 was $414, the lowest in Central America, and one of the lowest in the hemisphere. Overall economic improvement is anticipated for the period 1994-97 as democratic and market reforms crystallize. The IMF and World Bank recently approved assistance programs to guarantee continued reforms and a flow of funds through 1997. The IMF now estimates growth rates of 2.0 percent in 1994, 3.0 percent in 1995, 4.5 percent in 1996, and 4.5 percent in 1997. - PRINCIPAL GROWTH SECTORS Agriculture, livestock, fisheries, mining, and telecommunications are the principal growth sectors for the short term. Manufacturing and commercial activity are expected to remain stagnant. Agriculture: Agricultural production accounts for approximately 20 percent of Nicaragua's GDP. According to official estimates, production increased 23 percent in the 1993/94 cycle (May 1 - April 30) over the 1992/93 cycle. Reasons for the increase included improved world prices, an excellent rainy season, and depressed production levels during the previous cycle. Major increases in the production of beans, rice, corn, soybeans, and peanuts were noted. The Government estimates a further 10 percent increase in 1994/95. A substantial rise in world coffee prices, Nicaragua's largest export crop, should play a major role in boosting this sector. Livestock: Prior to the Sandinista revolution, Nicaragua was a major producer of livestock. The sector is now showing signs of recovery and preliminary estimates show a 16 percent increase in production in 1994. Meat exports increased 25 percent in 1993, largely as a result of the USDA sanitary certification of four slaughterhouses which permitted renewed exports to the U.S. Fisheries: The fisheries sector grew by 60 percent in 1993, led by shrimp exports which increased from 1.7 million pounds in 1992 to 3.8 million in 1993. Potential exists for continued growth due to extensive coastlines on two oceans and substantial fish resources. Aquaculture production has also increased, primarily in the Estero Real near the Gulf of Fonseca. Thirteen companies presently export shrimp from farms in the region. Mining: Nicaragua was once a major producer of gold and silver, but production fell sharply during the 1980's following nationalization of the mines. Approximately 40,000 troy ounces of gold and 72,000 troy ounces of silver were produced in 1993. Foreign investors have shown great interest in Nicaragua's mines, which are in the process of being privatized. In addition, several companies have sought concessions for new explorations. Telecommunications: The Government of Nicaragua has announced plans to privatize 40 percent of the telephone operations of the state telecommunications entity (TELCOR) in October 1994. Seven foreign companies continue to express interest in submitting a bid. Cellular telephone service, private leased-line services, paging and trunked radio service are all presently offered in Nicaragua by private companies under license from TELCOR. - GOVERNMENT ROLE IN THE ECONOMY In 1990 the Chamorro Administration inherited a centralized economy dominated by state enterprises. Since then, all state monopolies except for public utilities and insurance have been eliminated, virtually all price controls have been phased out, and more than 300 of 350 state enterprises have been privatized. The Government's role in international trade and exchange controls has also been vastly reduced. As a result, the percentage of GDP generated by state enterprises has declined from 30 percent in 1990 to less than 10 percent today. Nonetheless, doing business in Nicaragua can still mean becoming involved in interagency bureaucratic conflicts. Many investors complain that commitments by one agency or branch of government are sometimes not honored by another. - BALANCE OF PAYMENTS SITUATION Nicaragua suffers from a chronic severe external accounts deficit which has been narrowed slightly as a result of the Government's structural adjustment measures. Nonetheless, Nicaragua remains highly dependent upon donor assistance to balance its accounts. This dependence will continue for the foreseeable future. See Appendix A for current statistics and estimates. - TRADE AND INVESTMENT BARRIERS Property Rights: Lack of clear title to property, both urban and rural, continues to be a major impediment to investment. Most of the properties in question were confiscated during the Sandinista years and redistributed to individuals and cooperatives. The Government has developed a dispute resolution mechanism to either return confiscated properties to their original owners or provide compensation in the form of government bonds; progress has been slow. The World Bank has initiated a major program to assist in the titling of rural lands. Legal System: The legal system is inefficient and highly politicized; enforcement of judicial determinations is inconsistent. In contractual relationships, mandatory arbitration provisions are an alternative to judicial resolution of disputes. Nicaragua is a member of the International Center for the Settlement of Investment Disputes (ICSID). Investment Barriers: In order to receive the benefit of the 1991 Foreign Investment Law (guaranteed repatriation of profits and repatriation of original capital 3 years after the initial investment), investments must be approved by an interagency Foreign Investment Committee. These approvals can be time-consuming and contain criteria (e.g., approval by the Government's environmental agency) which lack clear definition. Investments may be made without Foreign Investment Committee approval, but such investments do not enjoy repatriation guarantees. Licenses: 5-year import/export licenses are issued on an essentially pro forma basis. State Monopolies: Insurance and the importation of crude petroleum remain under exclusive government control, along with the provision of basic public utility services. - LABOR FORCE Nicaragua's labor force, estimated at 1.16 million workers, is rural-based and largely unskilled. 37 percent of the workforce is employed in the agricultural sector, 17 percent in the manufacturing sector, and 46 percent in the service sector. The Government estimates an unemployment rate of 23 percent and underemployment rate of 28 percent; the World Bank pegs unemployment at 13 percent. See Appendix A for a more detailed statistical analysis of the labor force. - MAJOR LOCAL AND THIRD-COUNTRY COMPETITORS IN SPECIFIC SECTORS There is virtually no local competition in the industrial and manufacturing sectors. Third-country competition for agricultural machinery and food processing equipment comes primarily from Western Europe and Asia. Local production of fine grains does not meet demand in quantity or quality. Third-country competition exists for wheat (France) and rice (Vietnam). For cooking oils, the main competition is from other Central American countries and Argentina. In the processed food market, the main third-country competitors are Costa Rica, Guatemala, and Mexico. There is no local production of automobiles or auto parts. The major third-country competition is Japan (Toyota, Nissan, Subaru and Mitsubishi). There are also limited sales of Hyundai and Volkswagon vehicles. Mercedes-Benz is planning to enter the market, essentially with its truck line. Japanese, Taiwanese, Korean, and Western European presence in the equipment and machinery markets (e.g., telecommunications equipment, computers, and construction machinery) is notable. - INFRASTRUCTURE SITUATION, RE: GOODS/SERVICES DISTRIBUTION Ports: Nicaragua has a total of six seaports, all of which are operated by the Government-run Port Authority (ENAP). The most suitable for commercial shipping is the Port of Corinto located on the Pacific coast, 110 miles northwest of Managua. The Port of Corinto has a capacity of 1,516,900 tons annually and is presently upgrading its facilities. Puerto Sandino, also located on the Pacific coast, is primarily used for the import of petroleum. The remaining Pacific port of San Juan del Sur has limited capacity and uses barges to load and unload cargo. On the Atlantic coast, Nicaragua has three seaports (El Bluff, El Rama, and Puerto Cabezas). El Bluff and Puerto Cabezas are basically piers and handle limited cargo. El Rama is a roll-on, roll-off port and is located on the Rama River, 40 miles from the coast. Most containerized sea cargo and fresh fruit is shipped by highway to Puerto Limon in Costa Rica or Puerto Cortes in Honduras. Airport: August Sandino International Airport in Managua has no separate cargo facilities, but construction of such infrastructure is under way. On average, there are five scheduled all-cargo flights per week to and from Managua, which carry trade primarily with the U.S. and Central America. In addition, most passenger airlines, including American and Continental, maintain some cargo capacity. Highways: There are approximately 2,750 miles of paved highways and roads in Nicaragua, the majority located in the western part of the country. The Pan-American Highway runs north-south through Nicaragua on the Pacific side and carries the majority of overland cargo. There is no all-weather east-west road. A partially unpaved secondary highway runs from Managua to the interior port town of El Rama, from where there is river transport to Bluefields. There are plans to upgrade this road with the help the World Bank. The unpaved road which winds from Managua to the northern Atlantic Coast town of Puerto Cabezas is presently being upgraded, but even under optimum weather conditions, the trip may be difficult. - MAJOR INFRASTRUCTURE PROJECTS UNDERWAY Project Description Financed By Project Value (In USD Millions) 1. Electric System Rehabilitation Program IDB/CABEI/ 35.0 MEXICO 2. Water and Sewer System Rehabilitation Program (Managua and 18 Other Cities) IDB 65.0 3. Rural Roads Rehabilitation Program (REMECAR) IDB 46.0 4. Gas Turbine Installation Phase II, Linda Vista BCIE 20.0 (Currently, one turbine is installed; counterpart investment of c rdobas 1.56 million) 5. Diesel Generating Plant, Planta Managua FINIDA 2.4 (Counterpart investment of c rdobas 3.0 million) 6. Expansion and Upgrade of Electrical Transmission System SEVERAL 5.8 (Counterpart investment of DONORS c rdobas 3.6 million) 7. Rehabilitation/Construction of Electrical Transmission Lines in Managua GERMANY 1.2 (Counterpart investment of c rdobas 367.0 thousand) 8. Road Repavement, Nationwide MCT* 1.4 9. Nejapa-Izapa Road Rehabilitation MCT 12.8 10. San Benito-El Rama Road Rehabilitation MCT 5.0 11. Rural Roads Rehabilitation MCT 1.8 12. Corinto Cargo Deck MCT 3.3 ----------------------------- * Government of Nicaragua's Ministry of Construction and Transport