Nicaragua - Market Challenges Nicaragua - Market Challenges
Political instability, along with the lack of transparent, consistent, and accountable institutions and bureaucracy makes Nicaragua a high-risk place to invest and do business. Inconsistent and illegal actions by Nicaraguan agencies that regulate private enterprise, the fear of property or business seizure or nationalization, and poor infrastructure discourages foreign investment. These challenges are even more significant for smaller foreign firms.
The legal environment is very weak. Property rights, including intellectual property rights, are especially difficult to defend. The number of property expropriations, land invasions, and property confiscations have increased significantly since 2018. The judicial sector and police forces are politicized and are subject to external influence and significant corruption. Investors regularly complain that regulatory authorities and courts are arbitrary, negligent, and slow to apply existing laws, often favoring one competitor over another.Given the weak rule of law and lack of capable institutions, business chambers and labor unions were historically called upon to fill the void. They used a network of personal connections to resolve problems with taxes, tax exemptions, customs, permits, regulations, contracts, labor, and other issues. Since April of 2018, however, Nicaragua’s model of consensus and dialogue with business chambers and labor representatives collapsed due to the ongoing civil crisis. Today, there is no reliable method to address commercial issues that may arise.
To date, the U.S. Treasury has sanctioned seven government officials and one bank. Seeking to comply with sanctions law, companies have seen compliance costs increase. Two U.S. banks severed correspondent banking relationships in Nicaragua because of such costs. As the U.S. plans to continue sanctions until the restoration of democracy, such compliance costs may continue to rise. The Nicaraguan Customs Authority regularly subjects shipments of commercial and even donated goods to bureaucratic delays and arbitrary valuation. Importers and exporters alike accuse the Nicaraguan Customs Authority of regularly assessing excessive fines for minor administrative discrepancies. In some cases, shipments are held for weeks or months with no justification. Seaport infrastructure is limited and transport costs are high.
The frequency, duration and scope of audits conducted by the Nicaraguan Tax Authority (DGI) on businesses has increased since April 2018. While some audits are politically motivated, others seems to be without cause. The extensive audits can take several months and require businesses to dedicate office space to the auditors. Businesses report that these factors result in significantly higher operation costs.
For large industrial and commercial customers, electricity service in Nicaragua is the most expensive in Central America. A complicated tariff structure subsidizes some users at the expense of others, with larger consumers generally paying very steep costs. Rates are established through a political process that lacks transparency and poses challenges for long term planning.