Nicaragua WT/TPR/G/167/Rev.1
Page 49
World Trade
Organization
WT/TPR/G/167/Rev.1
26 September 2006
(06-4577)
Trade Policy Review Body
TRADE POLICY REVIEW
Report by
NICARAGUA
Revision
Pursuant to the Agreement Establishing the Trade Policy Review Mechanism (Annex 3 to the Marrakesh Agreement Establishing the World Trade Organization), the policy statement by Nicaragua is attached.

Note: This report is subject to restricted circulation and press embargo until the end of the first session of the meeting of the Trade Policy Review Body on Nicaragua.

Nicaragua WT/TPR/G/167/Rev.1
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CONTENTS

Page

I. introduction 5

II. ECONOMIC SETTING 6

III. NICARAGUA AND THE WTO 9

IV. Nicaragua's Trade Policy 10

(1) Trend of the External Sector (1999-2004) 11

(2) Trade Agreements 12

(3) Central American Integration 12

V. ECONOMIC AND TRADE PROSPECTS 13

annex i: REGULATORY FRAMEWORK ESTABLISHED SINCE 1999 15

annex ii: appendix tables 18

Nicaragua WT/TPR/G/167/Rev.1
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I.  Introduction

  1. The period covered by the second Trade Policy Review saw the Nicaraguan economy continue to move along on the free-market growth path it had embarked upon in 1990. Key features of economic policy over the period 1999-2004 were efficient macroeconomic management involving tight monetary policy and fiscal discipline, supported by strengthening and expansion of economic liberalization and open trade practices.
  2. Structural reforms were further deepened, to facilitate economic growth and social development, and to reinforce the fight against poverty. In addition, a group of laws were passed to strengthen the country's economic and institutional foundations, thereby maintaining political stability and enhancing the climate of confidence for both domestic and foreign investors.
  3. Since 2002, the Nicaraguan Government has formulated a medium- and long-term National Development Plan (PND) containing policy measures and structural reforms to transform the Nicaraguan economy in the medium-to-long term, based on the country's resource potential and with the aim of achieving economic growth and reducing poverty.
  4. The PND proposes an economic policy aimed at improving competitiveness in the private sector, based on public investments oriented more towards fixed capital formation and human capital, supported by policies giving incentives to production and trade, which in turn help to reduce poverty. The sector focus is thus complemented with a territorial approach, to make the most of the potential of different areas and achieve harmonized and integrated development between them.
  5. The PND also sets guidelines for strengthening the financial system and oversight institutions such as the Central Bank, for long-run fiscal and external sustainability, and for retargeting public investments, which are viewed as crucial to achieving a medium-term macroeconomic framework that enables the country to achieve its development goals.
  6. In keeping with the priorities established in the PND, work is ongoing to implement the following sector programmes: Prorural, Promypime, Proambiente and the National Competitiveness Programme, which includes the cluster strategy as a means of achieving productive growth. Key clusters include coffee, meat and dairy products, light manufacturing, tourism and shrimp farming.
  7. The reforms introduced during the period covered by this second trade policy review include deepening of administrative decentralization, strengthening of the financial system and modernization of tax administration, among others.
  8. The process of executing structural adjustment programmes was also strengthened; and this enabled the country to become eligible for the benefits of the Heavily Indebted Poor Countries (HIPC) initiative in September 1999, attaining the decision point in December 2000, and the completion point in January 2004.
  9. Since 1999, Nicaragua has successfully quickened the process of deeper trade liberalization in keeping with its macroeconomic policy framework, with a view to overcoming the fragility of the economy's external sector. Measures have been introduced to improve competitiveness, remove barriers to international trade and engage more effectively in the international economy.
  10. As the liberalization process unfolds, the strategy aims to enhance economic integration in the region through the establishment of a customs union, and to develop greater bilateral openness towards the country's main trading partners through export promotion measures and guarantees of a stable regulatory framework for both domestic and foreign investment. Steps are also being taken to strengthen multilateral, regional, subregional and bilateral trading links, to make the country an open and secure market for its trade partners.
  11. Trade agreements have become a means of promoting production for export and foreign direct investment (FDI). In 2005, Nicaragua ratified the Central America-Dominican Republic- United States Free Trade Agreement (CAFTA-DR); and negotiations were completed for a trade accord with the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu (Chinese Taipei), reflecting a deepening of Nicaragua's strategy in the globalization process.
  12. As a result of economic policies implemented during the reporting period, including trade liberalization, economic growth rose to an average of 3.0 per cent per year, driven mainly by goods and services exports and private consumption, which expanded by 7.8 per cent and 3.8 per cent respectively.
  13. Policy measures have been implemented against a backdrop of enhanced competition, unrestricted foreign exchange dealings, elimination of foreign trade barriers and a gradual lowering of tariffs.
  14. Going forward, the Government proposes to target policies on achieving fiscal, external, environmental and social sustainability in the medium-to-long term, based on its resource potential, which makes it possible to improve competitiveness in the economy generally and strengthen the rule of law, based on principles of peace and democracy in a free-market system.

II.  Economic Setting

  1. The sound economic policies implemented in the period 1999-2004 enabled Nicaragua to maintain positive and broadly based growth rates averaging 3.0 per cent per year, despite lower prices obtained for its main agricultural export products. On the supply side, most economic activities posted growth rates above the annual average, with agriculture, forestry, manufacturing industry, financial services, energy, and potable water and other services playing leading roles. Factors boosting the demand side were consumer spending and the expansion of external demand.
  2. In 2004, the economy posted its highest growth rate in recent years (5.1 per cent), thanks to a number of events that fuelled expectations in the business sector, encouraging private investment and economic expansion.
  3. Nonetheless, the Nicaraguan economy has not been immune to negative shocks from the world economy stemming from higher oil prices and international interest rates, which, in conjunction with a low saving rate, affect real interest rates prevailing in the financial market.
  4. Despite supply shocks such as price hikes in oil and several consumer goods, inflation was kept at single-digit levels in 1999-2004, as a result of fiscal discipline aimed at reducing the non-financial public-sector deficit, and a tight monetary policy.
  5. Wage policy has allowed for increases in the government sector, with pay rises for teachers, paramedic staff and the national police. The national average real wage, measured in relation to the cost of a basket of 53 basic consumer goods, rose from 136 per cent in December 1999 to 149 per cent in December 2004.
  6. The performance of the Nicaraguan economy in 1999-2004 was supported by the following programmes: (a) a second Enhanced Structural Adjustment Facility (ESAF), a triennial agreement between the Government and the International Monetary Fund (IMF) established for 1998-2000; (b)the Central American Reconstruction Programme implemented in 1999-2001, following the destruction caused by Hurricane Mitch in December 1998; and (c) the first Poverty Reduction and Growth Facility (PRGF) arrangement for 2002-2005, which was signed in December 2002.
  7. On the foreign trade front, policies to promote exports, attract foreign investments and ensure open trade practices have helped raise the performance of the external sector, generating a sustained increase in the value of merchandise exports, which grew by an average of 8.3 per cent per year. In volume terms goods and services exports expanded at an average annual rate of 7.8 per cent between 1999 and 2004, and their value rose from US$509.0 million in 1999 to US$760 million in 2004.[1]
  8. Merchandise imports trended upwards in c.i.f. value terms. This reflected lower tariffs, for which the simple average dropped to 5.4 per cent in 2004; additional external assistance averaging US$200 million per year in 1999-2001 in connection with the national reconstruction programme following Hurricane Mitch; and needs generated by economic growth and stronger private consumption (fuelled by a rise in disposable national income).
  9. For these reasons, the c.i.f. value of merchandise imports rose from US$1,723 million in 1999 to US$2,256 million in 2004; and in volume terms they expanded by 1.4 per cent on average during the reporting period.
  10. The trade deficit widened from US$1,063 million in 1999 to US$1,290 million in 2004, or from 24.0 per cent of GDP in 2000 to 28.7 per cent in 2004. The country has also lost real income at an average annual rate of 19.7 per cent, resulting from a deterioration in the terms of trade as average import prices grew faster (8.3 per cent) than average export prices (6.2 per cent).
  11. The real-exchange-rate index has varied only slightly and is keeping the country's competitiveness constant; the index shows an average annual variation of 1.2 per cent during the reporting period. The rate of depreciation in the official exchange rate slowed from 11.6 per cent in 1999 to 5.5 per cent in 2004.
  12. The widening current-account deficit has been financed largely through foreign borrowing; external-debt relief; and, increasingly, family remittances, which, according to Central Bank data, amounted to US$519 million in 2004. External cooperation, including debt relief, provided an average of US$686 million in funding per year, structured as follows: loans (42 per cent); grants (39per cent); and debt relief (29 per cent). Nicaragua only has access to loans on highly concessional terms from international financial institutions.
  13. A key aspect of the process of opening the Nicaraguan economy has been the role played by FDI, which averaged US$238 million per year during the period. This also reflects the establishment of a climate of security and stability, supported by the approval of an appropriate legal framework, deepening of the privatization process, and the signing of investment promotion and protection agreements, backed by the country's potential in terms of resource abundance, and other actions implemented. The fact that the largest amounts of investment target the energy, trade, service, telecommunications, agribusiness and free zone sectors, reflects the economy's openness to FDI in practically all economic sectors.
  14. Gross international reserves climbed to a new high (US$670 million) in 2004. Excluding the cancellation of external debt and interim relief on external debt payments, the flow of external cooperation received by Nicaragua in 1999-2004 totalled US$3,331 million, and averaged US$555million per year. The external debt stock shrank from US$6,549 million in 1999 to US$5,391 million in 2004, thanks mainly to the relief provided by the HIPC initiative, which resulted in an over 80 per cent reduction in external debt.
  15. In the fiscal domain, strenuous efforts have been made to avoid the distortion in public finance, caused by a prudent fiscal policy aimed at strengthening and facilitating production, increasing saving and reducing the deficit of the non-financial public sector. Current saving doubled from 2.9 per cent of GDP in 2002 to 6.0 per cent in 2004; and the relative size of the public-sector deficit shrank by almost half from 9.6 per cent of GDP in 2001 to 5.0 per cent in 2004.
  16. This improvement in the country's public finances was based on larger tax revenue, following an expansion of the tax base pursuant to the Law on Commercial Tax Justice (which was replaced by the Fiscal Equity Law and subsequent recent amendments), assisted by the momentum of economic activity in the last three years.
  17. Nicaragua's monetary policy has been kept on a tight rein to maintain exchange-rate and price stability. This made it possible to overcome the banking crisis that occurred during the period and to maintain confidence in the domestic financial system. Open market operations have made a major contribution to keeping liquidity at levels consistent with economic growth, thereby helping to ease inflationary pressures.
  18. Sound monetary policy management has made it possible to lower interest rates on loans in the financial system; and, as a result, credit expanded during the period in nominal terms, consistently with economic growth. The stock of loans outstanding has trended down in relation to GDP, thereby easing pressures on gross international reserves.
  19. In terms of holdings of monetary assets, the public have revealed a preference for deposits in dollars and indexed-linked time deposits in córdobas.
  20. Lastly, the main structural reforms implemented during the reporting period include the following:

·  Reduction in the number of ministries and restructuring thereof in May 1999.

·  Privatization of power distribution (in 2000) and of the telephone company (in 2003), and leasing of the State oil importer (PETRONIC) in 1999.

·  The General Customs Directorate and the General Revenue Directorate turned into institutions with administrative and financial autonomy in 2000.

·  Approval of tax reform in the Fiscal Equity Law in May 2003.

·  Privatization of 51 per cent of the capital of the country's second State bank, Banco Nicaragüense de Industria y Comercio (BANIC), in January 1999.

·  Passing of the Deposits Guarantee Law in 2002, to preserve the security and confidence of depositors in financial institutions.

·  Liquidation of Banco Nicaragüense de Industria y Comercio (BANIC) in August2002.

·  Reform of the Penal Code in 2002, to define financial crimes.

·  Reform of the Law on the Deposits Guarantee Fund (FOGADE) in 2003, to centralize the administration of asset liquidation in a new FOGADE unit, in the event of bank interventions.

·  Tax and tariff reform to reduce import duties; progress in solving problems relating to disputed ownership; privatization of power distribution lines; sale of 40 per cent of the share capital of the telephone company.

·  Start of implementation of the Financial-Administrative Management Information System (SIGFA) to guarantee transparent use of national budgetary resources.

·  Reorganization of the Executive Branch; amendment of the Foreign Investments Law; issuance of a new law in relation to the Attorney General of the Republic; and modernization of laws on the central bank, commercial banks and the Banking Superintendency, as well as the strengthening of prudential regulations in the national financial system.