Background Notes: Nicaragua, March 1998

Released by the Bureau of Inter-American Affairs.

Official Name: Republic of Nicaragua

PROFILE

Geography

Area: 130,688 sq. km. (50,446 sq. mi.); slightly larger than New York State.
Cities: Capital--Managua (pop. 1 million). Other cities--Leon, Granada, Jinotega, Matagalpa, Chinandega, Masaya.
Terrain: Extensive Atlantic coastal plains rising to central interior mountains; narrow Pacific coastal plain interrupted by volcanoes.
Climate: Tropical in lowlands, cooler in highlands.

People

Nationality: Noun and adjective--Nicaraguan(s).
Population: 4.48 million.
Annual growth rate (1995): 2.9. Density: 33 per sq. km.
Ethnic groups: Mestizo (mixed European and indigenous) 69%, white 17%, black (Jamaican origin) 9%, indigenous 5%.
Religion: Roman Catholic 85%.
Languages: Spanish (official), English and indigenous languages on Caribbean coast.
Education: Years compulsory--none enforced (28% 1st graders eventually finish 6th grade). Literacy--75%.
Health: Life expectancy--62 yrs. Infant mortality rate--50/1,000.
Work force (1996): 1.7 million. Unemployed--16%. Underemployed--36%.

Government

Type: Republic.
Independence: 1821.
Constitution: The 1995 reforms to the 1987 Sandinista-era Constitution provide for a more even distribution of power among the four branches of government.
Branches: Executive--president and vice president. Legislative--National Assembly (unicameral). Judicial--Supreme Court; subordinate appeals, district and local courts; separate labor and administrative tribunals. Electoral--Supreme Electoral Council, responsible for organizing and holding elections.
Administrative subdivisions: 15 departments and two autonomous regions on the Atlantic coast; 145 municipalities.
Major political parties: Liberal Alliance (AL), Sandinista National Liberation Front (FSLN).
Suffrage: Universal at 16.

Economy

GDP (1996): $2.3 billion.
Annual growth rate (1997): 5.0%.
Per capita GDP: $452.
Inflation rate: 12%.
Natural resources: Arable land, livestock, fisheries, gold, timber.
Agriculture (35% of GDP): Products--corn, coffee, sugar, meat, rice, beans, bananas.
Industry (20% of GDP): Types--processed food, beverages, textiles, petroleum, and metal products.
Services (45% of GDP): Types--commerce, construction, government, banking, transportation, and energy.
Trade (1996): Exports--$671 million (FOB): coffee, seafood, beef, sugar, industrial goods, gold, bananas, sesame. Markets--U.S. 43%, European Union 33%, Central American Common Market (CACM) 17%, Mexico 2%. Imports--$1,024 million (FOB): petroleum, agricultural supplies, manufactured goods. Suppliers--U.S. 32%, CACM 21%, Venezuela 11%, European Union 9%.
Exchange rate (1997): Nicaraguan cordobas 9.470=U.S. $1.

PEOPLE

Most Nicaraguans have both European and Indian ancestry, and the culture of the country reflects the Ibero-European and Indian heritage of its people. Only the Indians of the eastern half of the country remain ethnically distinct and retain tribal customs and languages. A large black minority (of Jamaican origin) is concentrated on the Caribbean coast. In the mid-1980s, the central government divided the eastern half of the country--the former department of Zelaya--into two autonomous regions and granted the people of the region limited self-rule. The 1995 constitutional reform guaranteed the integrity of the regions' several unique cultures, and gave the inhabitants a say in the use of the area's natural resources. Roman Catholicism is the major religion, but Evangelical Protestant groups have grown recently, and there are strong Anglican and Moravian communities on the Caribbean coast. Most Nicaraguans live in the Pacific lowlands and the adjacent interior highlands. The population is 54% urban.

HISTORICAL HIGHLIGHTS

Nicaragua takes its name from Nicarao, chief of the indigenous tribe then living around present-day Lake Nicaragua. In 1524, Hernandez de Cordoba founded the first Spanish permanent settlements in the region, including two of Nicaragua's two principal towns: Granada on Lake Nicaragua and Leon east of Lake Managua. Nicaragua gained independence from Spain in 1821, briefly becoming a part of the Mexican Empire and then a member of a federation of independent Central American provinces. In 1838, Nicaragua became an independent republic.

Much of Nicaragua's politics since independence has been characterized by the rivalry between the Liberal elite of Leon and the Conservative elite of Granada, which often spilled into civil war. Initially invited by the Liberals in 1855 to join their struggle against the Conservatives, an American named William Walker and his "filibusters" seized the presidency in 1856. The Liberals and Conservatives united to drive him out of office in 1857, after which a period of three decades of Conservative rule ensued.

Taking advantage of divisions within the Conservative ranks, Jose Santos Zelaya led a Liberal revolt that brought him to power in 1893. Zelaya ended the long-standing dispute with Britain over the Atlantic Coast in 1894, and reincorporated that region into Nicaragua. However, due to differences over an isthmian canal and concessions to Americans in Nicaragua as well as a concern for what was perceived as Nicaragua's destabilizing influence in the region, in 1909 the United States provided political support to Conservative-led forces rebelling against President Zelaya and intervened militarily to protect American lives and property. Zelaya resigned later that year. With the exception of a nine-month period in 1925-26, the United States maintained troops in Nicaragua from 1912 until 1933. From 1927-1933, U.S. marines stationed in Nicaragua engaged in a running battle with rebel forces led by renegade Liberal general Augusto Sandino, who rejected a 1927 negotiated agreement brokered by the United States to end the latest round of fighting between Liberals and Conservatives.

After the departure of U.S. troops, National Guard Commander Anastasio Somoza Garcia outmaneuvered his political opponents, including Sandino, who was assassinated by National Guard officers, and took over the presidency in 1936. Somoza, and two sons who succeeded him, maintained close ties with the U.S. The Somoza dynasty ended in 1979 with a massive uprising led by the Sandinista National Liberation Front (FSLN), which since the early 1960s had conducted a low-scale guerrilla war against the Somoza regime.

The FSLN established an authoritarian dictatorship soon after taking power. U.S.-Nicaraguan relations deteriorated rapidly as the regime nationalized many private industries, confiscated private property, supported Central American guerrilla movements, and maintained links to international terrorists. The United States suspended aid to Nicaragua in 1981. The Reagan Administration provided assistance to the Nicaraguan Resistance and in 1985 imposed an embargo on U.S.-Nicaraguan trade.

In response to both domestic and international pressure, the Sandinista regime entered into negotiations with the Nicaraguan Resistance and agreed to nationwide elections in February 1990. In these elections, which were proclaimed free and fair by international observers, Nicaraguan voters elected as their president the candidate of the National Opposition Union, Violeta Barrios de Chamorro.

During President Chamorro's nearly seven years in office, her government achieved major progress toward consolidating democratic institutions, advancing national reconciliation, stabilizing the economy, privatizing state-owned enterprises, and reducing human rights violations. In February 1995, Sandinista Popular Army Commander General Humberto Ortega was replaced, in accordance with a new Military Code enacted in 1994, by General Joaquin Cuadra, who has espoused a policy of greater professionalism in the renamed Army of Nicaragua. A new police organization law, passed by the National Assembly and signed into law in August 1996, further codified both civilian control of the police and the professionalization of that law enforcement agency.

The October 20, 1996 presidential, legislative, and mayoral elections were also judged free and fair by international observers and by the ground-breaking national electoral observer group "Etica y Transparencia" (Ethics and Transparency) despite a number of irregularities, due largely to logistical difficulties and a baroquely complicated electoral law. This time Nicaraguans elected former-Managua Mayor Arnoldo Aleman, leader of the center-right Liberal Alliance. More than 76% of Nicaragua's 2.4 million eligible voters participated in the elections. The first transfer of power in recent Nicaraguan history from one democratically elected president to another took place on January 10, 1997, when the Aleman government was inaugurated.

GOVERNMENT AND POLITICAL CONDITIONS

Nicaragua is a constitutional democracy with executive, legislative, judicial, and electoral branches of government. In 1995, the executive and legislative branches negotiated a reform of the 1987 Sandinista constitution which gave impressive new powers and independence to the legislature--the National Assembly--including permitting the Assembly to override a presidential veto with a simple majority vote and eliminating the president's ability to pocket veto a bill. Both the president and the members of the unicameral National Assembly are elected to concurrent five-year terms. The National Assembly consists of 90 deputies elected from party lists drawn at the department and national level, plus the defeated presidential candidates who obtained a minimal quotient of votes. In the 1996 elections, the Liberal Alliance won a plurality of 42 seats, the FSLN won 36 seats, and nine other political parties and alliances won the remaining 15 seats.

The Supreme Court supervises the functioning of the still largely ineffective and overburdened judicial system. As part of the 1995 constitutional reforms, the independence of the Supreme Court was strengthened by increasing the number of magistrates from 9 to 12. Supreme Court justices are elected to seven-year terms by the National Assembly.

Led by a council of five magistrates, the Supreme Electoral Council is the co-equal branch of government responsible for organizing and conducting elections, plebiscites and referendums. The magistrates and their alternates are elected to five-year terms by the National Assembly.

Freedom of speech is a right guaranteed by the Nicaraguan constitution and vigorously exercised by its people. Diverse viewpoints are freely and openly discussed in the media and in academia. There is no state censorship in Nicaragua.

Other constitutional freedoms include peaceful assembly and association, freedom of religion, and freedom of movement within the country, as well as foreign travel, emigration, and repatriation. The government also permits domestic and international human rights monitors to operate freely in Nicaragua. The constitution prohibits discrimination based on birth, nationality, political belief, race, gender, language, religion, opinion, national origin, economic condition, or social condition. All public and private sector workers, except the military and the police, are entitled to form and join unions of their own choosing, and they exercise this right extensively. Nearly half of Nicaragua's work force, including agricultural workers, is unionized. Workers have the right to strike. Collective bargaining is becoming more common in the private sector.

Political Parties

In all, Nicaragua's 35 political parties participated in the 1996 elections, independently or as part of one of five electoral coalitions. With nearly 52% of the vote, the Liberal Alliance, a coalition of five political parties and sectors of another two, won the presidency, a plurality in the national legislature and a large majority of the mayoral races. The FSLN ended in second place with 38%.

Most other parties fared poorly. A new political party, the Nicaraguan Christian Path, ended a distant third with 4% of the vote and four seats in the 93-member National Assembly. The traditional alternative to the Liberals, the National Conservative Party, ended in fourth place with slightly over 2% of the vote and three seats in the National Assembly. The remaining 24 parties and alliances together obtained less than 5% of the vote. Seven of these smaller parties control eight seats in the National Assembly. Only two of 145 mayors belong to third parties.

According to Nicaraguan law, those political parties that did not win at least one seat in the National Legislature automatically lose their legal status and must repay government campaign financing. There are 19 parties represented in the National Assembly independently or as part of an alliance.

Principal Government Officials

President--Arnoldo Aleman
Vice President--Enrique Bolanos
Foreign Affairs Minister--Emilio Alvarez Montalvan
Finance Minister--Esteban Duque Estrada
Economy Minister--Noel Sacasa
Central Bank Minister--Noel Ramirez
Government Minister--Jose Antonio Alvarado
Agriculture Minister--Mario De Franco
Defense Minister--Jaime Cuadra
Construction and Transportation Minister--Edgard Quintana
Health Minister--Carlos Quinonez
Education Minister--Humberto Belli
Attorney General--Julio Centeno
Labor Minister--Wilfredo Navarro
Ambassador to the United States--Francisco Aguirre
Ambassador to the United Nations--Enrique Paguaga
Ambassador to the Organization of American States--Felipe Rodriguez

Nicaragua maintains an embassy in the United States at 1627 New Hampshire Avenue, NW, Washington, DC 20009 (tel. 202-387-4371).

ECONOMY

Nicaragua began free market reforms in 1991 after 12 years of economic free-fall under the Sandinista regime. Despite some setbacks, it has made dramatic progress: privatizing 351 state enterprises, reducing inflation from 13,500% to 12%, and cutting the foreign debt in half. The economy began expanding in 1994 and grew a strong 4.5% in 1996 (its best performance since 1977). As a result, GDP reached $1.969 billion.

Despite this growing economy, Nicaragua remains the second-poorest nation in the hemisphere with a per capita GDP of $438 (below where it stood before the Sandinista take-over in 1979). Unemployment, while falling, is 16% and another 36% are underemployed. Nicaragua suffers from persistent trade and budget deficits and a high debt service burden, leaving it highly dependent on foreign assistance (22% of GDP in 1996).

One of the key engines of economic growth has been production for export. Exports rose to $671 million in 1996, up 27% from 1995. Although traditional products such as coffee, meat, and sugar continued to lead the list of Nicaraguan exports, during 1996 the fastest growth came in non-traditional exports: maquila goods (apparel), bananas, gold, seafood, and new agricultural products such as sesame, melons, and onions.

Nicaragua is primarily an agricultural country, but construction, mining, fisheries, and general commerce have also been expanding strongly during the last few years. Foreign private capital inflows saw a net increase in 1996, totaling an estimated $215 million. The private banking sector continues to expand and now holds 70% of the nation's deposit base.

Rapid expansion of the tourist industry has made it the nation's third-largest source of foreign exchange. Some 51,000 Americans visited Nicaragua in 1996 (primarily business people, tourists, and those visiting relatives). An estimated 5,300 U.S. citizens reside in the country. The U.S. Embassy's consular section provides a full range of consular services, from passport replacement and veteran's assistance to prison visitation and repatriation assistance.

Nicaragua now appears poised for rapid economic growth. However, long-term success at attracting investment, creating jobs, and reducing poverty depend on its ability to comply with an International Monetary Fund (IMF) program, resolve the thousands of Sandinista-era property confiscation cases, and open its economy to foreign trade.

The U.S. is the country's largest trading partner by far--the source of 32% of Nicaragua's imports and the destination of 42% of its exports. About 25 wholly or partly owned subsidiaries of U.S. companies operate in Nicaragua. The largest of those investments are in the energy, communications, manufacturing, fisheries, and shrimp farming sectors. Good opportunities exist for further investments in those same sectors, as well as in tourism, mining, franchising, and the distribution of imported consumer, manufacturing, and agricultural goods.

The U.S. embassy's Economic/Commercial Section advances American economic and business interests by: briefing U.S. firms on opportunities and stumbling blocks to trade and investment in Nicaragua; encouraging key Nicaraguan decision makers to work with American firms; helping to resolve problems that affect U.S. commercial interests; and working to change local economic and trade ground rules in order to afford U.S. firms a level playing field on which to compete. The Economic/Commercial Section counseled 112 U.S. and 148 Nicaraguan firms in 1996 on trade and investment opportunities. U.S. businesses may access key Embassy economic reports via the Mission's Internet home page at http://www.usia.gov/posts/managua.html.

FOREIGN RELATIONS

The 1990 election victory of President Violeta Chamorro placed Nicaragua in the ranks of Latin American democracies. Nicaragua pursues an independent foreign policy. President Chamorro was instrumental in obtaining considerable international assistance for her government's efforts to improve living conditions for Nicaraguans (the country is the second-poorest in the Western Hemisphere after Haiti). Her administration also negotiated substantial reductions in the country's foreign debt burden. A participant of the Central American Security Commission (CASC), Nicaragua also has taken a leading role in pressing for regional demilitarization and peaceful settlement of disputes within states in the region.

The Aleman administration has expressed a commitment to follow the major tenets of its predecessor's foreign policy, to promote Central American political and economic integration, and to resolve outstanding boundary disputes peacefully. At the 1994 Summit of the Americas, Nicaragua joined six Central American neighbors in signing the Alliance for Sustainable Development, known as the Conjunta Centroamerica-USA or CONCAUSA, to promote sustainable economic development in the region.

In Costa Rica in May 1997, President Aleman met with President Clinton, his Central American counterparts, and the president of the Dominican Republic to celebrate the remarkable democratic transformation in the region and reaffirm support for strengthening democracy, good governance and promoting prosperity through economic integration, free trade, and investment. The leaders also expressed their commitment to the continued development of just and equitable societies and responsible environmental policies as an integral element of sustainable development.

Nicaragua belongs to the UN and several specialized and related agencies, including the World Bank, the International Monetary Fund (IMF), World Trade Organization (WTO), UN Educational, Scientific, and Cultural Organization (UNESCO), World Health Organization (WHO), Food and Agriculture Organization (FAO), International Labor Organization (ILO), and the UN Human Rights Commission (UNHRC). Nicaragua is also a member of the Organization of American States (OAS), the Non-aligned Movement (NAM), International Atomic Energy Commission (IAEA), the Inter-American Development Bank (IDB), the Central American Common Market (CACM), and the Central America Bank for Economic Integration (CABEI).

U.S.-NICARAGUAN RELATIONS

U.S. policy is to support the consolidation of the democratic process initiated in Nicaragua with the 1990 election of President Chamorro. The U.S. has promoted national reconciliation, encouraging Nicaraguans to resolve their problems through dialogue and compromise. It recognizes as legitimate all political forces that abide by the democratic process and eschew violence. U.S. assistance is focused on strengthening democratic institutions, stimulating sustainable economic growth, and supporting the health and basic education sectors.

The resolution of U.S. citizen claims arising from Sandinista-era confiscations and expropriations still figure prominently in our bilateral policy concerns. Section 527 of the Foreign Relations Authorization Act (1994) prohibits certain U.S. assistance and support for a government of a country that has confiscated U.S. citizen property, unless the government has taken certain remedial steps. In July 1997, the Secretary of State issued a fourth annual national interest waiver of the Section 527 prohibition because of Nicaragua's record in resolving U.S. citizen claims as well as its overall progress in implementing political and economic reforms.

Other key U.S. policy goals for Nicaragua are:

• Improving respect for human rights, and resolving outstanding high-profile human rights cases;
• Development of a free market economy with respect for property and intellectual property rights;
• Ensuring effective civilian control over defense and security policy;
• Increased effectiveness of Nicaragua's efforts to combat narcotics trafficking, illegal alien smuggling, international terrorist and criminal organizations; and
• Reforming the judicial system.

Since 1990, the U.S. has provided $1.2 billion in assistance to Nicaragua. Approximately $260 million of that was for debt relief and another $450 million was for balance-of-payments support. The levels of assistance have fallen incrementally to reflect the improvements in Nicaragua, and FY 1997 assistance is estimated at approximately $25 million. This assistance is focused on promoting more citizen political participation, compromise, and government transparency; stimulating sustainable growth and income; and fostering better educated, healthier, and smaller families.

Principal U.S. Officials

Ambassador--Lino Gutierrez
Deputy Chief of Mission--Frederick Becker
Economic/Commercial Counselor--Sandra Dembski
Political Counselor--Kevin Whitaker
Public Affairs Counselor--Elizabeth Whitaker
Defense Attache--Col. Richard Driver
Consul General--Robert Blohm
Chief USAID Mission--George Carner
Peace Corps Director--Howard Lyon

The U.S. Embassy in Nicaragua is located at Kilometer 4.5, Carretera Sur, Managua (tel. country code 505, phone 266-6010). Letters mailed in the U.S. should be addressed to American Embassy Managua, APO AA 34021. Internet: http://www.usia.gov/posts/managua.html.

Other contact information:

U.S. Department of Commerce
International Trade Administration
Trade Information Center
14th and Constitution, NW
Washington, DC 20230
Tel: 1-800-USA-TRADE

American Chamber of Commerce in Nicaragua
Apartado Postal 202
Managua, Nicaragua
Tel: (5052) 67-30-99
Fax: (5052) 67-30-98

Caribbean/Latin American Action
1818 N Street, NW, Suite 310
Washington, D.C. 20036
Tel: 202-466-7464
Fax: 202-822-0075

TRAVEL AND BUSINESS INFORMATION

The U.S. Department of State's Consular Information Program provides Travel Warnings and Consular Information Sheets. Travel Warnings are issued when the State Department recommends that Americans avoid travel to a certain country. Consular Information Sheets exist for all countries and include information on immigration practices, currency regulations, health conditions, areas of instability, crime and security, political disturbances, and the addresses of the U.S. posts in the country. Public Announcements are issued as a means to disseminate information quickly about terrorist threats and other relatively short-term conditions overseas which pose significant risks to the security of American travelers. Free copies of this information are available by calling the Bureau of Consular Affairs at 202-647-5225 or via the fax-on-demand system: 202-647-3000. Travel Warnings and Consular Information Sheets also are available on the Consular Affairs Internet home page: http://travel.state.gov and the Consular Affairs Bulletin Board (CABB). To access CABB, dial the modem number: (301-946-4400 (it will accommodate up to 33,600 bps), set terminal communications program to N-8-1 (no parity, 8 bits, 1 stop bit); and terminal emulation to VT100. The login is travel and the password is info (Note: Lower case is required). The CABB also carries international security information from the Overseas Security Advisory Council and Department's Bureau of Diplomatic Security. Consular Affairs Trips for Travelers publication series, which contain information on obtaining passports and planning a safe trip abroad, can be purchased from the Superintendent of Documents, U.S. Government Printing Office, P.O. Box 371954, Pittsburgh, PA 15250-7954; telephone: 202-512-1800; fax 202-512-2250.

Emergency information concerning Americans traveling abroad may be obtained from the Office of Overseas Citizens Services at (202) 647-5225. For after-hours emergencies, Sundays and holidays, call 202-647-4000.

Passport Services information can be obtained by calling the 24-hour, 7-day a week automated system ($.35 per minute) or live operators 8 a.m. to 8 p.m. (EST) Monday-Friday ($1.05 per minute). The number is 1-900-225-5674 (TDD: 1-900-225-7778). Major credit card users (for a flat rate of $4.95) may call 1-888-362-8668 (TDD: 1-888-498-3648)

Travelers can check the latest health information with the U.S. Centers for Disease Control and Prevention in Atlanta, Georgia. A hotline at (404) 332-4559 gives the most recent health advisories, immunization recommendations or requirements, and advice on food and drinking water safety for regions and countries. A booklet entitled Health Information for International Travel (HHS publication number CDC-95-8280) is available from the U.S. Government Printing Office, Washington, DC 20402, tel. (202) 512-1800.

Information on travel conditions, visa requirements, currency and customs regulations, legal holidays, and other items of interest to travelers also may be obtained before your departure from a country's embassy and/or consulates in the U.S. (for this country, see "Principal Government Officials" listing in this publication).

U.S. citizens who are long-term visitors or traveling in dangerous areas are encouraged to register at the U.S. embassy upon arrival in a country (see "Principal U.S. Embassy Officials" listing in this publication). This may help family members contact you in case of an emergency.

Further Electronic Information:

Department of State Foreign Affairs Network. Available on the Internet, DOSFAN provides timely, global access to official U.S. foreign policy information. Updated daily, DOSFAN includes Background Notes; Dispatch, the official magazine of U.S. foreign policy; daily press briefings; Country Commercial Guides; directories of key officers of foreign service posts; etc. DOSFAN's World Wide Web site is at http://www.state.gov.

U.S. Foreign Affairs on CD-ROM (USFAC). Published on an annual basis by the U.S. Department of State, USFAC archives information on the Department of State Foreign Affairs Network, and includes an array of official foreign policy information from 1990 to the present. Contact the Superintendent of Documents, U.S. Government Printing Office, P.O. Box 371954, Pittsburgh, PA 15250-7954. To order, call (202) 512-1800 or fax (202) 512-2250.

National Trade Data Bank (NTDB). Operated by the U.S. Department of Commerce, the NTDB contains a wealth of trade-related information. It is available on the Internet () and on CD-ROM. Call the NTDB Help-Line at (202) 482-1986 for more information.

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Nicaragua is currently in the process of modernizing its intellectual property rights protection regime. Patent, trademark, and copyright protection are available, but new patent and copyright laws are waiting to be ratified by the National Assembly. In February 1996, the National Assembly ratified the Paris Convention for the Protection of Industrial Property, and in April 1997, Nicaragua approved the Central American Convention of Industrial Property, Inventions and Industrial Design. President Arnoldo Aleman has made it an objective to establish internal procedures that permit the use of effective international arbitrage regulations, especially with regards to the Convention of the Enforcement of Foreign Arbitrage Awards (CEFAA) and the Interamerican Convention on International Commercial Arbitration (ICICA).

President Arnoldo Aleman’s administration passed a major reformation of the nation’s tax code, the Tax and Commercial Justice Law, on May 15, 1997, making Nicaragua’s trade liberalization policy the most radical in Central America seen yet. The law implements a program that dramatically reduces protective tariffs over the next 3 years, liberalizes imports by eliminating a restrictive Agent/Distributor Law along with various commercial licenses and permits, and serves as a promotion of exports. In conjunction with progressive tax relief and increased efficiency in government fiscal revenue, international trade and exchange controls were vastly reduced -- an incentive for agricultural production, exports, investment, employment generation, and small business production.

The Nicaraguan tax system, with a negotiable fiscal period, includes income, ad-valorem, specific consumption, customs, social security, and import tariff taxes on a national level, and sales and territorial taxes at a municipal level. All persons and associations of persons, whether incorporated or not, and regardless of nationality, that are in receipt of Nicaraguan-source income, profits, or gains are subject to income tax.

Calculated through a progressive tax rate as income increases, taxable income for individuals is based on Nicaraguan-source income. The maximum rate applicable is 30%, although this will fall to 25% in July, 1999, under the Tax and Commercial Justice Law. For corporation and other associations, there is a flat rate of 30% on Nicaraguan-source income which will be reduced to 25% beginning July, 1999. Under the new reforms, income tax is not to be paid on capital gains or interest earned from the local stock exchange or from dividends.

Consumption taxes (IEC), on a very limited list of luxury goods, are based on the sale price of the producer plus any import duties. Exempt from IEC are raw materials, intermediate goods, and capital goods necessary for the production process.

The General Sales Tax (IGV), a 15% tax, is applicable to most transfers of goods and services, with the exception of basic food basket items. However, the new Tax and Commercial Justice Law has eliminated the IGV for several activities. Credit for IEC and IGV paid is possible when the goods acquired or services performed are necessary for the production process or for deductible goods and services under income taxes.

Under the Tax and Commercial Justice Law the Temporary Protection Tariff (ATP) is a replacement for the previous Stamp Tax (ITF) applicable to all imported items; although some exceptions for computation equipment and parts applies. The establishment of preferential treatment for Nicaragua in the Central American commercial field with the creation of the ATP, which protects innumerable national products, is the principal benefit obtained by the domestic private sector. Its tariff will equal 5% but will be fazed out by January 1, 1999, with some exceptions. All items that will still have a tariff above 0% by January 1, 2000 will be reduced 5% every 6 months until it reaches 0%.

The degradation calendar of the Tax and Commercial Justice Law establishes a 15% maximum import tariff (DAI) on final consumer goods, which will go down to 10% in 1999. Intermediate, raw material, and capital goods produced in Central America as of 1998 will have a DAI of 10%, and as of July 1, 1999, 5%. Intermediate, raw material, and capital goods not produced in Central America will have a 0% tariff as of January 1, 1998.

The maximum rate on (DAI+ATP+ITF) dropped to 32 percent since January 1, 1997, yet the average tariff rate estimated for these three tariffs is only 14.5%. DAI+ATP is scheduled to be reduced to 10.1% by the year 2000, given that the ITF will have been fazed out by then. Exonerated from DAI, ATP, and IGV after July 1997, are raw materials, semi-finished goods, machinery, and spare parts acquired for agriculture and aquaculture purposes and the fishing industry; raw materials, semi-finished goods, machinery, and spare parts acquired for the handicraft industry; and petroleum and its derivatives.

Furthermore, the Tax and Commercial Justice Law decrees that the municipal local sales tax will be reduced from 2% to 1.5% in January, 1998, and to 1% in January, 2000.

Tax and Commercial Justice Law:

The Tax and Commercial Justice Law surpasses all other Central American countries in its accelerated undertaking of import tariff reduction and export promotion. Besides reducing maximum and average income, consumption, sales, and import tax rates, the reforms unify tax rates and widen the tax base to gain more contribution from taxes levied on consumption. In addition, it eliminates the discretionality of government officials to exonerate tariffs and eliminate payments, permits, and licenses related to export activities. The Law prohibits the application of any non-tariff barriers on exports and imports other than those imposed for phytosanitary reasons or as reciprocity established within the World Trade Organization framework. The Tax and Commercial Justice Law repeals the Law of Agents, Representatives or Distributors of Foreign Firms, which protected local agents and distributors and established exclusiveness of foreign representatives contracts, effective as of July 1998. Moreover, it establishes a subsidy of 1.5% of FOB value on all exports to offset export-biases produced by state inefficiencies and unsuitable national infrastructure to sustain competitive export.

The Tax and Commercial Justice Law particularly favors agriculture, which constitutes 25% of GDP, 65% of exports, and more than 40% of employment. Import tariffs on agricultural inputs have been reduced down to 0% as an incentive for production growth, and the value added tax (IGV) on agricultural inputs has also been eliminated for the same purposes. Feed, fertilizers, insecticides, seeds, machinery, and all other inputs essential to agricultural production are now tax-exempt. Furthermore, the agricultural sector will be granted a special protection over the next four years to increase its initial profitability -- import tariffs of 40% on agricultural products will remain this year, and will diminish by 10% each year over the next four years.

Under the Tax and Commercial Justice Law, income tax is not to be paid on capital gains or interest earned from operations performed through the local stock exchange or from dividends. Interest income is taxable, but interest earned on Government bonds and equivalent certificates are excluded from the tax base.

Branches of foreign companies are taxable under the same rules as domestic businesses in general. Foreign-source income is not subject to income tax, and losses are not deductible. Dividends declared or paid by Nicaraguan corporations to companies or individuals residing abroad are not taxable. As stimuli for foreign investment in the securities market, foreign corporations and individuals are not taxed on capital gains and interests generated by securities traded in the local stock exchange.

With the attainment of political stability, Nicaragua’s tourism industry is beginning to show rapid growth, creating many opportunities for investment, particularly in ecotourism and beach-oriented projects. Construction is underway on three new first-class hotels in Managua and on a major expansion of Montelimar, the nation’s only first-class beach resort, by a Spanish investment group. Best prospects for investment are in hotels outside of Managua and for tourism services.

In the last two years tourist arrivals have increased 43% and is the nations 4th largest source of income. Tourism receipts are expected to increase by 20% in 1997, producing an income of US$70 million. The industry is expected to continue growing at a rate of 15% each year throughout the decade, which would lead to the creation of 34,000 new jobs. In order to fulfill the future demand for employment in tourism, the University of Mobile recently initiated a bilingual (English, Spanish) certificate program in hotel, restaurant and tourism management.

In order to foster and encourage growth in the tourism industry, the Nicaraguan government intends to expand and diversify the tourism supply, relying on the nation´s natural resources and cultural heritage. There are also plans for a duty free tourist zone. Other benefits to investors are the same as those under the general investment promotion laws.

The following are Nicaragua’s top tourist attractions:

Managua: Nicaragua’s capital provides an excellent base for day trips to the volcanoes, 3 volcanic lagoons and traditional market at Masaya, the colonial city of Leon, and the "Selva Negra" cloud forest, only a 1½ hour drive from Managua.

Granada: Founded in 1524, the city of Granada is one of the oldest in Central America. Its historic civic center, cathedrals, and town square provide a glimpse of life in colonial Latin America. Las Isletas, 300 tiny islands formed from the volcanic eject of Mombacho, are located just off shore from the city on Lake Nicaragua.

Pacific Beaches: With only one world-class resort, the opportunities for investment along Nicaragua’s western coast are abundant. Virgin beaches await discovery. The bay waters of San Juan del Sur, located 20 kilometers from the Costa Rican border, is excellent for water sports as well as the fishing of bass, red snapper, moray and marlin.

Lake Nicaragua: The world’s only home to freshwater sharks, Lake Nicaragua is the 7th largest freshwater lake in the world. Rising from its center, is the island of Ometepe which is home to two volcanoes. On the south end of the Lake, the Solentiname islands offer an ideal location for the ecotourist.

Caribbean Coast: The western coast of Nicaragua, consisting of 541 kilometers of shoreline, is largely isolated from the rest of the country. Most of the natives speak a mixture of English and their own native language. There is vast rain forest to explore. Corn island, located 70 km off the coast, offers clear waters, coral reefs, white sand, and a peaceful environment.

Rio San Juan: The Rio San Juan, which is adjacent to the Costa Rican border, was considered as a possible site to build a canal between the Atlantic and Pacific. Dense jungles line its shores and offer an excellent destination for the ecotourist.

Other possible tourist destinations include the Pueblos Blancos, a region near Managua with an abundance of coffee plantations and native traditions; the ruins of León Viejo, the original location of the city of Leon which was destroyed by the volcano of Momotombo; and Bluefields, which offers a taste of Caribbean culture.