Entrepreneurs, foreigners and Nicaraguans alike, will find a wide array of investment possibilities in this country. The Nicaraguan market is characterized by favorable as well as unfavorable aspects, including high growth rates in certain sectors, increases in production and foreign investment, but also widespread bureaucracy and a corrupted judicial system. Nevertheless, keen entrepreneurs will encounter a wealth of opportunities in a country where hard work can be rewarded with great returns. In this special, we describe the Nicaraguan market and its particularities, and we outline the steps that need to be taken to set up a company in this country. Although part of this information applies only to foreigners, we also hope to provide valuable information to local entrepreneurs.
Battered by civil war, plundering political leaders, and natural disasters Nicaragua carries a history that hardly encourages investment. However, circumstances are changing and despite the negative image that many foreigners still picture, Nicaragua nowadays offers a business climate superior to that of other Central American countries in many aspects. In this section, we will discuss the many facets of the Nicaraguan business environment, from trends in macro economic developments to the peculiarities of the tax system.
In the past, monocultures have made Nicaragua highly dependent on few sources of income. This formula proved to be successful when intensively grown crops like cotton yielded high returns on the international market, but these days have long gone by and recently the Bolaños government (2002-2006) drafted a plan to focus on a variety of promising industries instead. In 2002 President Bolaños hired the renowned expert Michael Porter whose research helped shape the new economic plan that included a focus on seven different sectors. Applying Porter’s cluster theory, the government aims to promote development at all levels of these sectors in an effort to increase industry-wide productivity and improve the national competitive position. Among these sectors are tourism, textiles and apparel, light manufacturing and assembly, agribusiness and forestry, and energy. Several governmental institutions have been set up to support these industries.
With an annual gross net income (GNI) of US$910 per capita Nicaragua is considered the second-poorest country in the Western Hemisphere, after Haiti. Per-capita income has been rising over the last couple of years, but a large part of the population remains poor to extremely poor, especially in the rural zones. Increasing access to education and health centers are among the greatest governmental challenges.
Inflation rates, a major issue during the 1980s, have remained under control in the last decade. The local currency, the Nicaraguan córdoba, is used for most everyday transactions although the United States dollar functions as widely accepted substitute throughout the country. The córdoba/dollar exchange rate varies according to a pattern set by the Central Bank (in 2006 the córdoba will devaluate with 5%).
The national budget of the Nicaraguan government is relatively low. For a population of 5 million the budget is equal to that of a midsize town of 150,000 people in The Netherlands, for instance. Furthermore, the US$965 million budget consists of about one third of international donor funds. The limited budget is a result of the low national income combined with a poorly functioning tax recollection system and, compared to international standards, exorbitant tax breaks for many of Nicaragua’s richest inhabitants (including congressmen and other governmental representatives)
The Labor Force
Most of Nicaragua’s 2.05 million people workforce is rural-based and unskilled, and almost a third of the employed population is working in the agricultural sector. The unemployment rate is estimated at 8% by the Ministry of Labor (July 2005), but other sources mention an unemployment rate of 11% and a combined unemployment and underemployment rate of 37%.
Finding personnel for routine jobs is generally easy, but due to the limited level of education of a large part of the population it is harder to find skilled people for certain positions. However, Nicaraguan salaries are among the lowest salaries in Central America and the relatively high productivity ranking (lower than Costa Rica but higher than Guatemala and Honduras, according to CLADS: INCAE Business School) creates a very competitive situation. The presence of several English high schools and universities provide the Pacific side of Nicaragua with more and more English speaking people, whereas a large part of the population on the Atlantic Coast speaks Caribbean English. The attitude of the Nicaraguan workforce varies significantly. Although unfavorable characteristics including lack of a proper work attitude and even on-the-job theft by employees might discourage entrepreneurs, there is certainly a great deal of hard-working and very honest people, making employee screening an utmost important aspect for many businesses. There are also companies that assist in finding the right employee for a job.
Employers should be aware of the rules and regulations that govern labor contracts. The Nicaraguan Labor Code establishes the employer-employee relationship, with or without a written contract. Below follows an overview of the most important rules that this code stipulates.
Dayshift jobs have a maximum of 48 hours per week. Overtime should be paid double and may not exceed nine hours per week. Any work before 6 AM or after 8 PM is considered overtime for a dayshift job. For night shift jobs the schedule is opposite and there is a 42 hours per week maximum. Combined jobs (both during daytime and nighttime) have a maximum of 45 hours per week.
There is furthermore an obligatory year-end bonus equivalent to a one-month pay, proportionally to the number of months the employee was contracted during the year. This bonus is due in the first ten days of December, but even if an employee leaves before this date the employer will have to pay the proportionate bonus upon leaving. Severance pay works in a similar fashion. For every year worked the employee receives a month severance pay until the third year, and 20 days per year until the sixth year. By law this amount can not exceed five months of salary.
Employers are furthermore obligated to pay a fee to the National Technological Institute, INATEC, equal to 2% of the salaries paid. INATEC can in turn provide technology education to employees. Another obligated governmental institution that should be paid is the National Social Security Institute, INSS, for an amount of 15% of the salary expenses in order to provide the employees with health insurance.
The Labor Code also sets standards for vacation days. Every six days worked an employee has a right to one vacation day. During public holidays employees also enjoy paid, compulsory vacation days. There are ten national holidays per year and around as much local holidays. This number of local holidays differs per region, due to the fact that certain festivities (‘Fiestas Patronales’) vary from department to department. In Managua for instance there are 11 local holidays per year.
Due to these aforementioned added benefits employers should add around 46% to the salary expenses to account for these social benefits (calculation by ProNicaragua).
The quality of the Nicaraguan road network varies widely, offering everything from superb highways to potholed dirt roads. Only 2,300 of the 19,000 kilometers of road are paved. The infrastructure is much better at the more densely populated Pacific side of the country than on the Atlantic (Caribbean) side where most transportation takes place over water. Through a recently (2005) finished highway to El Rama the Atlantic Coast has become much more accessible. El Rama is located some 18 kilometers land inward, along the shore of the Escondido River. The port at El Rama is being improved in order to be able to handle more and larger containers ships.
The most important road is the Pan American highway that runs from north to south. This highway is generally in great shape, but it passes by towns, villages, and larger cities like Managua where congestion significantly slows down traffic.
There are six ports in Nicaragua, most of which can not handle large-scale cargo. The most important port is located at El Corinto, Chinandega, and it processes bulk goods and raw materials like oil and sugar. The port at San Juan del Sur, Rivas, occasionally receives cruise ships and the third seaport at the Pacific Coast at Puerto Sandino, León, handles cargo like oil and goods from small boats. The other three seaports are located at the Atlantic side (at Puerto Cabezas, El Bluff, and El Rama). The National Port Authority (Empresa Portuaria Nacional) manages all of these ports. More information and tariffs can be found on their website. For international sea freight Puerto Cortéz (in Honduras) and Puerto Limón (in Costa Rica) are frequently used. Although these ports provide superior infrastructure, there is an added expense and extra effort involved to ship the goods from Nicaragua to these ports.
The international airport in Managua has small-scale but modern facilities, both for passenger and cargo transportation. A cold storage facility is available for foodstuff. Being located in the center of the Americas, many strategic places are located nearby. There are daily flights to several destinations in the United States, Panama, Costa Rica, and El Salvador. Several flight times are given below:
|Miami, United States||2 hours 30 minutes|
|Houston, United States||3 hours 15 minutes|
|Los Angeles, United States||7 hours|
|San Salvador, El Salvador||55 minutes|
|San Jose, Costa Rica||50 minutes|
|Panama City, Panama||1 hour 30 minutes|
|Bogotá, Columbia||4 hours|
Small carriers offer daily flights to several cities within Nicaragua including Bluefields, San Carlos, Puerto Cabezas, and Corn Islands.
The communication infrastructure in Nicaragua has been greatly improved over the last couple of years, but still significant improvements should be made. The pros and cons of different communication sectors are briefly discussed below.
In the telephone industry the market liberation has driven down the prices. Phone calls over landlines are relatively cheap but cell phone calls are still quite expensive (US$0.10-US$0.40 per minute). The landline network has not reached many rural areas yet, and frequently people in these areas rely on cell phones.
Internet usage is increasing nationwide, with more Nicaraguans connecting to the internet every year and cyber cafes allowing cheap internet access to large parts of the population. Private connections are expensive and slow. Broadband internet is limited to 512 Kb lines for a price of over US$100 per month (cable or ADSL). Large businesses can acquire a private 2MB connection (IPLC) for US$5,000 per month. Connection problems are not uncommon and every now and then international connections break down, normally only for a brief period of time. Internet connections are – not taking into account the necessary disposable income – unavailable to a large part of the population due to the fact that the necessary cable or telephone lines lack in that area. The network expansion continuous, though, and ISPs also offer promotions and packages that provide low-cost computers, allowing a new group of customers to connect to the internet.
TV is offered through two principal methods. Cable connections are offered by Estesa, but the network does not reach rural areas or certain urban zones. DIRECTV offers a TV connection throughout the country via a satellite connection. Both services offer national and international channels (including BBC, CNN, TBS, and more). Prices depend on the region. For Managua, cable TV costs US$18-US$22 per month. National channels can also be received using just an antenna, except for certain regions that are not reached by this signal.
The electricity market has experienced major problems during 2006 including programmed blackouts throughout the country due to electricity shortages. Despite the wealth of natural resources – including volcanoes, hot springs, strong winds, and plenty of sun – Nicaragua still produces a large part of its electricity using old, highly polluting oil-powered electricity plants. There are some power plants based on renewable resources, including a geothermal plant on the Momotombo Volcano in León and a hydraulic power plant at the Apanas Lake in Jinotega, but their output is minimal compared to the potential of the country’s renewable resources. Current laws do not stimulate large investments to create a much-needed shift in Nicaragua’s energy situation.
Lack of reliability of the electricity network has forced businesses and individual households to look for alternative energy sources during blackouts. A small group has been able to tap into renewable resources, mostly by installing solar panels but in other (be it sporadic) cases a nearby waterfall now generates a large part – if not all – of the necessary electricity. More frequently a diesel-driven generator is installed to take over when the outside electricity network fails. Only a minority of the businesses and households have these alternatives at hand, though.
Another important resource is water, and ENACAL, Nicaragua’s water supplier, is one of the most notorious overbillers in the country. Frequently clients are charged for much more water than is being used. Although the price of water is low this policy has obviously damaged the company’s image. During the dry season water shortages can also arise, resulting in water rationing. Installing a water tank can overcome or limit this problem.
The following table provides an overview of prices of basic services.
|Small-scale industry||Up to 25 kw||US$ 0.1035/kw|
|Medium-scale industry||Up to 200 kw||US$ 0.0796/kw|
|Large-scale industry||Over 200 kw||US$ 0.0813/kw|
|Large-scale consumers||Over 1 mw||US$ 0.055-0.065/kw (negotiable)|
|Telecommunications||Price per minute|
|- national calls||US$ 0.022|
|- Central America||US$ 0.35|
|- US / Canada||US$ 0.20-0.60|
|Cell phone calls (local)||US$ 0.10-0.40|
|Internet||Connection||Price per month|
|Connection 1||256 Kb||US$ 69-130|
|Connection 2||384 Kb||US$ 99-199|
|Connection 3||512 Kb||US$ 130-260|
|IPLC (private line)||2 MB||US$ 5,000|
Source: Nicaragua Country Profile, ProNicaragua, January 2006
The judicial system
A pact between the two most powerful political parties (the FSLN and the PLC) has led to an ineffective judicial system without neutral judges. Public confidence in the fairness of this system is extremely low and corruption and nepotism often prevail [USA Embassy]. The Supreme Court has 16 magistrates (up from 12 in 2000).
Because of the corruption in the judicial system, entrepreneurs are generally advised to search alternative dispute resolutions including mediation or facilitation by ProNicaragua.
Out of all business indicators that the World Bank uses for country comparisons, Nicaragua ranks worst in the Paying Taxes indicator. The 2006 rank is 153 out of 175 countries (down from place 150). This is mostly caused by the large administrative burden, with 64 annual payments and 240 hours spent on average for a medium-sized company. Obviously a lot can be improved here.
The governmental institution in charge of collecting taxes is called the Dirección General de Ingresos (DGI). Lacking computerization, a smooth organization, and manpower, the DGI has a hard time collecting taxes. A tax paying culture appears to be absent, and the DGI lacks control measures to make sure all businesses and citizens pay their fair share. Consequently, tax evasion is commonplace.
There are five income tax brackets, with tax rates varying from 0% to 25%. Below is an overview:
|from (C$)||to (C$)||base tax (C$)||tax rate|
The real estate sector in Nicaragua has been booming and the growth is expected to continue. With prices that are below Central American levels and a wide array of beautiful beach, mountain, rural, and other types of properties Nicaragua is transforming into a great real estate market.
When buying property the past developments should be taken into consideration. Most importantly, Nicaragua suffered from a hectic period when the Sandinista government handed over power in the 1990’s and the so-called Piñata took place and a large number of properties were distributed among party members. The situation was already complicated due to problems with property ownership rights as a result of confiscations during the Sandinista rule, and what results is a situation in which several people claim ownership of the same property. Fortunately this is exception, not rule, but still property purchases should be carefully examined and a couple steps should be taken to ensure a smooth transaction. Most importantly, a good lawyer or real estate consultant should investigate a property before purchasing it, in order to verify the documents and make sure there are no claims on it.