2009 Index of Economic Freedom

Quick Facts

Population:

• 5.5 million

GDP (PPP):

• $15.4 billion
• 3.9% growth
• 3.4% 5-year compound annual growth
• $2789 per capita

Unemployment:

• 3.6%

Inflation (CPI):

• 11.1%

FDI Inflow:

• $282.3 million

Nicaragua's economic freedom score is 59.8, making its economy the 84th freest in the 2009 Index. Its overall economic score is 1 point lower than last year, reflecting setbacks in four of the 10 economic freedoms. Nicaragua is ranked 17th out of 29 countries in the South and Central America/Caribbean region, and its overall score is nearly equal to the world average.

Nicaragua scores relatively high in trade freedom, fiscal freedom, labor freedom, and investment freedom. Liberalization of trade has progressed, but moderately high non-tariff barriers still limit overall trade freedom. Tax administration has improved, and taxation is moderate. Government expenditures are not high, but reforms to improve public finance management have moved slowly. Foreign investment is welcome, and foreign capital is accorded equal treatment, although certain restrictions still exist. The government has made efforts to streamline the regulatory process.

Nicaragua is weak in property rights and freedom from corruption. The judicial system is inconsistent in contract enforcement and subject to political interference. Corruption is perceived as widespread and persistent.

Background Back to the top

Following a decade of Sandinista dictatorship in the 1980s, successive elected governments improved economic and political stability and respect for human rights, but this progress was jeopardized by the re-election of former Sandinista leader Daniel Ortega in 2006. Despite claims that he has abandoned Marxism in favor of “fair markets” and democracy, Ortega has shown little interest in restoring confiscated properties to their rightful owners or working for the rule of law. He has aligned Nicaragua with Venezuela’s leftist President Hugo Chávez and Bolivia’s populist President Evo Morales. Though the government reports low unemployment, in reality nearly half of Nicaragua’s workforce is unemployed or underemployed. The economy, traditionally dependent on coffee, seafood, and sugar exports, has been diversified to include minerals and maquila textiles. The Central America–Dominican Republic–United States Free Trade Agreement came into force in April 2006.

Business Freedom 57.6 Back to the top

The overall freedom to start, operate, and close a business is limited by Nicaragua's regulatory environment. Starting a business takes an average of 39 days, compared to the world average of 38 days. Obtaining a business license requires less than the world average of 18 procedures and 225 days, although the cost is high. Closing a business is relatively easy.

Trade Freedom 79.2 Back to the top

Nicaragua's weighted average tariff rate was 5.4 percent in 2005. The government has made progress in liberalizing the trade regime, but import restrictions, import taxes and fees, import licensing requirements for some goods, some restrictive technical standards, weak enforcement of intellectual property rights, corruption, and delays in customs clearance add to the cost of trade. Ten points were deducted from Nicaragua's trade freedom score to account for non-tariff barriers.

Fiscal Freedom 78.8 Back to the top

Both the top income tax rate and the top corporate tax rate are 30 percent. Other taxes include a value-added tax (VAT) and a capital gains tax. During the most recent year, overall tax revenue as a percentage of GDP was 17.8 percent. Tax administration has improved in recent years.

Government Size 71.0 Back to the top

Total government expenditures, including consumption and transfer payments, are moderate. In the most recent year, government spending equaled 31.1 percent of GDP. Structural reforms have been sluggish, and privatization has all but stalled in recent years. A pension reform plan, passed in 2000 and updated in 2005, has yet to be implemented.

Monetary Freedom69.5 Back to the top

Inflation is high, averaging 10.5 percent between 2005 and 2007. Most price controls have been eliminated, but the government sets prices for pharmaceuticals, sugar, domestically produced soft drinks and cigarettes, and liquefied natural gas; regulates the retail price of butane gas and rates for electricity, energy, water, and telecommunications; and has a history of negotiating voluntary price restraints with domestic producers of important consumer goods. Ten points were deducted from Nicaragua's monetary freedom score to account for policies that distort domestic prices.

Investment Freedom70.0 Back to the top

Investment is guaranteed equal treatment and allowed in most sectors. It is not screened and generally faces no performance requirements; however, the government has used the administration of regulations to introduce non-commercial concessions in contracts. Burdensome commercial dispute resolution and weak contract enforcement add to the cost of investing, and property rights are poorly protected. The law grants investors repatriation of capital and immediate remittance abroad of profits. Investors may hold foreign exchange accounts, but the process is cumbersome. There are no controls or restrictions on payments and transfers and very few restrictions on capital transactions. Investors may own property.

Financial Freedom50.0 Back to the top

Nicaragua’s financial sector is not fully developed and is concentrated in urban areas. The 1998–2001 closing of three banks eliminated the state’s last bank holdings. The system has been stabilizing since regulators intervened to liquidate four banks. Reforms introduced international standards and revitalized the capital base. The insurance sector, once a state monopoly, is based primarily on insuring property and is now open to private investors. A state-owned firm remains the largest insurer and controls over half of the market. Capital markets are small, and the stock exchange trades primarily in government bonds, with only a small number of private companies listed.

Property Rights25.0 Back to the top

Protection of property rights is weak. Contracts are not easily enforceable, and the judiciary is politicized and subject to corruption. Protection of intellectual property rights is almost nonexistent. Estimates of optical media piracy range from 70 percent of DVDs sold to almost 100 percent of music CDs sold. Weak land title registries and the many unresolved land expropriation cases from the 1980s seriously undermine the security of real property interests.

Freedom From Corruption26.0 Back to the top

Corruption is perceived as widespread. Nicaragua ranks 123rd out of 179 countries in Transparency International's Corruption Perceptions Index for 2007. Corruption and political deal-making, especially within the ruling Sandinista party, the National Police, and the judiciary, are viewed as pervasive.

Labor Freedom70.6 Back to the top

Nicaragua's relatively flexible labor regulations enhance employment and productivity growth. The non-salary cost of employing a worker is moderate, and dismissing a redundant employee is not costly. Regulations on the number of work hours remain rigid.