After months in the pipeline, Nicaragua’s 92-seat unicameral legislature approved President Daniel Ortega’s tax reform proposal.
As was the case with his 2009 fiscal reform, the new bill, which was agreed with the private sector lobby, Cosep, fails to introduce major structural changes, once again exposing the gap between Ortega’s radical left-wing rhetoric and his pro-business policies.
The reform also failed to address the issue of tax exemptions and exonerations – long a demand of the International Monetary Fund (IMF). Yet despite this, a new agreement with the IMF appears to be on the cards. The left-wing government’s cooperation with the US (and other multilateral finance organisations like the World Bank) also appears unaffected by the transparency concerns surrounding the recent 4 November municipal elections.
On 30 November, all 63 deputies from Ortega’s ruling Frente Sandinista de Liberación Nacional (FSLN) approved the so-called tax harmonisation law (LCT). Ortega has twice promised to overhaul the tax structure, first upon taking office in 2007 and again in 2012. A limited tax reform introduced in December 2009 boosted revenues by just 0.7% of GDP. As in 2009, Bayardo Arce, Ortega’s economic affairs adviser, who presented the reform, argued that it is not aimed at increasing collection - it would boost revenues by just 0.2% of GDP - but at strengthening tax administration via new mechanisms such as electronic billing. Other provisions include raising the income tax threshold for salaried workers to C$100,000 (US$4,165) from C$75,000 (US$3,124). As of Fiscal Year (FY) 2013, this would increase by C$5,000 annually, to eventually reach C$120,000.
Nicaragua already has the highest tax take as a percentage of GDP in the region (see sidebar), but the new law was slammed by civil society groups for keeping in place existing exonerations for another two years. This, critics argue, is indicative of Ortega’s alignment with big business and his unwillingness to upset the powerful Cosep.
According to figures cited by a local weekly, Confidencial, in 2010 Nicaragua lost an estimated N$9.4bn/US$399m to tax evasion and N$10.5bn/US$447m to exonerations – roughly totaling N$20bn/US$846m, or 14.2% of GDP. In a 12 July statement released after the conclusion of its Article IV consultation, the IMF called for “reforms to strengthen further the revenue effort” and highlighted as “particularly important” the need to “widen the tax base by curtailing exemptions”.
Experts such as Adolfo Acevedo, an economist for a local civil society umbrella group, Coordinadora Civil, welcomed the fact that the new reform orders the finance ministry to provide the national assembly and the comptroller general’s office with details as to which companies will benefit from these exonerations – which should improve transparency.
Despite its failure to heed the IMF’s recommendations, the Ortega government is confident of securing a new arrangement with the Fund, which otherwise has been largely positive on its management of the economy, which grew by 4.7% last year, above the regional average of 4.3% for Central America. In late 2012 the IMF sent a delegation to Managua to discuss a new arrangement to replace one that ended in October 2011. The general manager of Nicaragua’s central bank, Ovidio Reyes, said that just two further steps were necessary for a new agreement - the quantification of the tax reform to be incorporated into the macroeconomic framework and the formal negotiation of a letter of intent.
In a further sign of confidence in the government, and despite the controversy over the municipal elections, the World Bank announced on 14 November that it had approved its 2013-2017 strategy for Nicaragua, contemplating interest-free loans and donations totaling US$50m-US$60m. The next day the Inter-American Development Bank (IDB) announced that it had approved a US$39.2m loan to improve the efficiency and safety of Nicaragua’s transport system. Ten days earlier, the IDB also said that it had approved a US$35m loan to improve Nicaragua’s electricity service.
Continued cooperation with the US
While the US State Department and private sector lobbies such as the American Chamber of Commerce in Nicaragua (Amcham) expressed concern about the 4 November municipals, bilateral ties still appear strong in the key areas of trade and security. A trade mission comprising six major US companies visited Nicaragua in December “with the objective of exploring the country’s agribusiness potential and the facilities offered by the country to do business”, according to ProNicaragua, the official investment and export promotion agency.
According to figures from the Office of the US Trade Representative, Nicaraguan exports to the US reached US$2.6bn in 2011, up 29.7% on 2010, and 341% on 2000. Nicaraguan sales to the US have risen 121% since 2005 (prior to the free trade agreement between the US-Central America-Dominican Republic, Cafta-DR). Nicaragua imported US$1.1bn of US goods in 2011, up 7.3% from 2010, and 178% from 2000. US exports to Nicaragua are up 69% since 2005.
- Tax take
According to the Central American institute of fiscal studies (ICEFI) Nicaragua’s tax take in 2011 was 19.8% of GDP – well above the 14.5% average for Central America and up from 18.4% in 2010. This compares with 15.6% for Honduras; 14.5% for El Salvador; 13.7% for Costa Rica; 12.2% for Panama and 11.2% for Guatemala.
- Nicaragua boasts record exports
Nicaragua’s official investment promotion agency, Cetrex, recently announced that exports reached a record US$2.5bn in the first 11 months of the year, up 18.7% on the same period in 2011 and more than the total US$2.3bn registered for the whole of 2011. According to Cetrex, the US remains the main export market, accounting for 27.71% of the total, followed by Venezuela (15.55%); Canada (11.44%); and El Salvador (9.07%). The country’s leading export is gold label coffee, followed by gold and then beef.
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