Cablegate: Nicaragua: Input for the Seventh Cbera Report

DE RUEHMU #2428/01 3092115
P 052115Z NOV 07





E.O. 12958: N/A


1. As requested in reftel, the following is post's input for the
Seventh Report on Caribbean Basin Economic Recovery Act (CBERA).

Statistical Information

2. Population (2006, estimate): 5,457,000 (Nicaraguan National
Statistics and Census Office)

Real GDP per Capita (2006, estimate): $958 (Nicaraguan Central

Department of Commerce 2006 Trade Statistics
U.S. Exports: $705.3 million
U.S. Imports: $1,526.1 million
U.S. Trade Balance: -$820.7 million

Economic Review

3. From 1991 to 2006, three successive Liberal Party governments
focused on free market reform as a path to recovery from 12 years of
economic free-fall under the Sandinista regime and civil war.
Before Daniel Ortega's return to the presidency in January 2007, the
government had privatized more than 350 state enterprises, reduced
accumulated year-on-year inflation from 33,548% in 1988 to 9.45% in
2006, and cut foreign debt by two-thirds. In 2006, real GDP growth
was 3.7 %. Exports have been a key engine of economic growth,
topping $1.98 billion in 2006 (including free trade zones). Foreign
capital inflows were $282.3 million in 2006. Nicaragua's economy is
based primarily on agriculture and agricultural processing. Other
sectors such as light manufacturing (apparel), tourism, banking,
mining, fisheries, and retail are also important.

4. Despite these advances, Nicaragua remains the second-poorest
nation in the hemisphere. Unemployment is officially estimated at
5% of the economically active population, but an estimated 60% of
workers belong to the informal sector. Nicaragua suffers from
persistent trade and budget deficits and a high internal
debt-service burden. Foreign assistance comprised 26% of the budget
in 2006. Nicaragua also depends heavily on remittances from
Nicaraguans living abroad, who transferred $655.5 million to
Nicaragua in 2006.

5. The Sandinista National Liberation Front (FSLN) economic team
has promised to continue policies that engender a stable
macroeconomic environment, and in July 2007 the government signed a
Poverty Reduction and Growth Facility (PRGF) with the International
Monetary Fund (IMF) that requires the implementation of free-market
policies and includes targets linked to fiscal discipline, spending
on poverty, and regulation of the energy sector. However, President
Ortega's continues to publicly criticize the "neo-liberal" economic
model and a perceived lack of support from the private sector in
reducing poverty. A lack of clear policy direction, the spotty
application of the rule of law, and continued battles over property
rights have created uncertainty for the private sector and has
complicated investment decisions. Yields on domestic,
cordoba-denominated government debt have risen sharply since Ortega
took office, reflecting the higher risk that debt now carries owing
to the government's unclear economic orientation.

Commitment to Trade Liberalization

6. Nicaragua has been an active participant in the World Trade
Organization (WTO) Doha Development Agenda. In 2002, the country
completed a broad package of tariff reductions launched in 1997 and
adopted a WTO-consistent customs valuation methodology. The WTO's
2006 Trade Policy Review for Nicaragua recognizes that the country
has made substantial progress in modernizing its legal and
regulatory framework to comply with WTO commitments.

7. Nicaragua, along with Costa Rica, El Salvador, Guatemala, and
Honduras, is a member of the Central American Common Market (CACM).
With the exception of agricultural products, these countries have
harmonized all external tariffs at 15 percent or less. Members have
also made significant progress in modernizing customs administration
to facilitate trade within the region.

8. On August 5, 2004, Costa Rica, the Dominican Republic, El
Salvador, Guatemala, Honduras, Nicaragua, and the United States
signed the Dominican Republic-Central America-United States Free
Trade Agreement (CAFTA-DR). The CAFTA-DR entered into force for
Nicaragua and the United States on April 1, 2006. The agreement
removes barriers to trade and investment in the region and provides
impetus to further regional economic integration. The CAFTA-DR
requires that the Central American countries and the Dominican
Republic undertake needed market liberalization as well as greater
transparency and certainty in customs administration, protection of
intellectual property rights, services, investment, financial
services, government procurement, and sanitary and phytosanitary
(SPS) measures. Nicaraguan exports to the United States grew 17.4%
during in the first 12 months following the implementation of the
CAFTA-DR, including the export of 237 products not previously
exported to the United States. Imports from the United States
increased 22.1%, with machinery, cereals, vehicles, vegetable oils,
and plastics leading the way.

9. Nicaragua and other CACM members have negotiated separate
bilateral trade agreements with the Dominican Republic and Mexico.
Other CACM members have implemented bilateral trade agreements with
Chile, but Nicaragua's negotiations have stalled over trade in
sugar. CACM members are also negotiating trade agreements with
Canada, the European Union, Panama, and Taiwan.

Protection of Intellectual Property

10. To implement the CAFTA-DR, Nicaragua has strengthened its legal
framework for the protection of intellectual property rights. The
agreement provides improved standards for the protection and
enforcement of a broad range of intellectual property rights, which
are consistent with U.S. intellectual property standards and with
emerging international standards. Such improvements include
state-of-the-art protections for digital products such as software,
music, text and videos; stronger protection for patents, trademarks
and test data, including an electronic system for the registration
and maintenance of trademarks; and further deterrence of piracy and

11. Nicaraguan efforts to enforce intellectual property law remain
limited. During the first ten months of 2007, the Nicaraguan
Government had conducted 20 raids and the police seized 58,547
pirated DVDs, 21,629 CDs, 13 computers, 3 multi-purpose copiers, and
other audiovisual equipment worth approximately $123,000. On July
13, 2007, the Nicaraguan Government successfully prosecuted a case
in a local court against a Nicaraguan selling pirated music CDs.
The offender was sentenced to two years in prison--later reduced to
parole--and fined 5,000 cordobas ($267). The Prosecutor General and
National Police are currently investigating 28 intellectual property
cases for possible prosecution.

Provision of Internationally Recognized Workers Rights
--------------------------------------------- ---------

12. Nicaraguan law grants public and private sector workers, except
those in the military and police, the right to organize. Workers
need not advise the employer or the Ministry of Labor of their
intention to do so. In general, workers exercise the right to
organize unhindered. However, labor activist allege that some
business operating in free trade zones violate this right. Although
employers are legally required to reinstate workers fired for union
activity, formal reinstatement requires a judicial order. In
practice, employers often do not reinstate workers due to weak
enforcement of the law. Employers may dismiss any employee,
including union organizers, by agreeing to pay double the legally
mandated severance pay.

13. The law provides for the right to bargain collectively. By
law, several unions, each with different membership, may coexist at
any one enterprise. Employers may sign separate collective
bargaining agreements with each union. Labor leaders complain that
employers routinely violate collective bargaining agreements and
Nicaraguan labor laws. Although the law recognizes the right to
strike, according to Labor Ministry information, there were no legal
strikes in 2006. The law contains burdensome and lengthy
conciliation procedures before calling a strike. During a strike,
employers cannot hire replacement workers. According to the law,
the Ministry of Labor may suspend a strike if it continues for 30
days without resolution. At that point, parties are required to
resolve their differences through arbitration.

14. The law prohibits any type of forced or compulsory labor. The
statutory minimum wage is set through tripartite negotiations
involving business, government, and labor and must be approved by
the National Assembly. Each sector of the economy has a different
minimum wage, which must be reviewed every six months. In general,
the minimum wage is enforced only in the formal sector. The maximum
legal workweek is 48 hours. While the law mandates premium pay for
overtime and prohibits excessive compulsory overtime, these
requirements are not always effectively enforced.

15. The law establishes occupational health and safety standards,
but the Ministry of Labor lacks adequate staff and resources to
fully enforce these provisions. The law provides workers with the
right to remove themselves from dangerous workplace situations
without jeopardizing continued employment, but many workers are
unaware of this right. The Nicaraguan Center for Human Rights
(CENIDH) receives frequent complaints related to working conditions.

Commitments to Eliminate the Worst Forms of Child Labor
--------------------------------------------- ----------

16. The worst forms of child labor are prohibited under several
laws in Nicaragua. The Constitution bans forced labor, slavery, and
indentured servitude. Nicaraguan law provides for the protection of
children's rights and prohibits any type of economic or social
exploitation of children. Labor law sets the minimum age for
employment at 14 years and limits the workday to six hours.
Children between the ages of 14 and 16 must have parental approval
to work. Annually, the Ministry of Labor identifies types of work
that are harmful to the health, safety, or morals of children under
International Labor Organization (ILO) Conventions 182 and 138.

17. Child labor remains a widespread problem, and many
children--particularly those working in small family-owned
businesses--do not receive direct compensation for their labor.
Labor activists report that cigar factories continue to employ many
children, a violation of Article 84 of the Constitution, which
prohibits the use of child labor in activities that may affect their
normal development and education. Although the law imposes fines
for violators and permits inspectors to close facilities employing
child labor, the Ministry of Labor lacks adequate resources to
effectively enforce the law, except in the small formal sector.

18. From 2001 to 2005, the Nicaraguan Government and the ILO
implemented a Strategic National Plan for the Prevention and
Eradication of Child Labor and Protection of Youth Workers. With
the support of international donors, the program provided
educational, medical, and nutritional support to 100,000 children
living in poverty and more than 14,000 children engaged in the worst
forms of child labor. In 2007, the Nicaraguan Government prepared a
10-year follow-up plan with the ILO.

Counter-Narcotics Cooperation

19. Nicaragua is not a major drug transit or major illicit drug
producing country under the terms of the 2003 Foreign Relations
Authorization Act and is not subject to the act's certification
requirements. Nevertheless, Nicaragua is an important transit point
for drugs moving from South America to U.S. and European markets.
The government has been an important partner in efforts to stem the
flow of drugs.

Anti-Corruption Efforts

20. Nicaragua is a signatory to the Organization for Economic
Cooperation and Development (OECD) Convention on Combating Bribery,
as well as the Inter-American Convention against Corruption (IACC).
The government is an active participant in the Organization of
American States' Follow-up Mechanism for the Implementation of the
IACC. Under that mechanism, a 2006 Committee of Experts report
notes significant progress in implementing the convention, but
recommends further improvements in civil service hiring,
procurement, whistleblower protection, standards of conduct,
financial disclosure for senior officials, oversight bodies, and
civil society participation.

21. The Attorney General and the Controller General have
responsibilities for investigating and prosecuting corruption cases.
The application of justice is uneven, and there is general
acknowledgement that the judicial system is corrupt and controlled
by political interests. Corruption and influence-peddling in the
judicial branch put foreign investors at a sharp disadvantage in any
litigation or dispute, and legal security for business in general is
among the weakest in Latin America. The concept of conflict of
interest is poorly understood, to the extent that regulators often
maintain business interests in sectors that they oversee. Political
connections and nepotism often affect regulatory decisions and
business decision-making.

22. Nicaragua has made progress in prosecuting cases of corruption,
but public opinion surveys show that Nicaraguans believe corruption
remains endemic in many government institutions, including the
judiciary, the National Assembly, the Supreme Electoral Council
(CSE), the Controller General, the Human Rights Ombudsperson (PDDH),
and the Attorney General. Under the Bolanos administration, the
Attorney General indicted former president Arnoldo Aleman and other
officials of his administration on money laundering, embezzlement,
and other charges. In December 2003, a local court sentenced Aleman
to a 20-year jail term. By expanding the terms of Aleman's house
arrest, the Ortega Administration has allowed Aleman to travel
freely throughout Nicaragua since March 2007. The National Assembly
is considering legislation that would effectively reduce Aleman's
sentence to five years.

Transparency in Government Procurement

23. The CAFTA-DR requires the use of fair and transparent
procurement procedures, including advance notice of purchases and
timely and effective bid review procedures, for procurement covered
by the agreement. Under the CAFTA-DR, U.S. suppliers may bid on
procurements made by most Nicaraguan Government entities, including
key ministries and state-owned enterprises, on the same basis as
Nicaraguan suppliers. To make its bidding process more transparent
and efficient, Nicaragua launched a computer-based procurement
system in November 2006. The anti-corruption provisions in the
CAFTA-DR require each government to ensure under its domestic law
that bribery in matters affecting trade and investment, including
government procurement, is treated as a criminal offense, or is
subject to comparable penalties. Nicaragua is not a signatory to
the WTO Agreement on Government Procurement. Procurement by
government agencies not covered by CAFTA-DR, as is the case for the
National Electricity Company, remain subject to nontransparent and
irregular procurement procedures.


24. Thousands of individuals and companies, including many U.S.
citizens, have filed claims for compensation for property
confiscations that took place during the 1980s under the Sandinista
government. Since 1995, the Nicaraguan Government has made
continuing progress in settling claims through compensation or
return of properties. As of September 2007, the Nicaraguan
Government has settled more than 4,500 U.S. citizen claims. A total
of 677 Embassy-registered U.S. claims remain outstanding. In 2006,
the Bolanos administration resolved 81 Embassy-registered U.S.
citizen property claims, primarily through compensation. As of
November 1, 2007, the Ortega administration has resolved five
Embassy-registered claims, all belonging to one U.S. citizen. The
courts resolved two other claims.

25. In August 2007, the Nicaraguan Government seized, via a
judicial order, several petroleum storage tanks owned by a U.S.
company on the pretext that the company had not paid value-added
taxes associated with the import of crude oil, despite the fact that
unrefined petroleum is not subject to this tax and no mechanism
exists to collect it. The government then used the tanks to store
petroleum products from Venezuela. The government has ignored due
process to declare a number of concessions in the energy sector
effectively invalid, forcing companies, including some U.S.
companies, to renegotiate terms.


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