Nicaragua – Sanctions Threat

Municipal elections were held on November 5, and, to the surprise of no one, the result was another landslide victory for the ruling FSLN. However, the opposition’s claims of vote-rigging and the government’s heavy-handed response to the related post-election unrest increase the likelihood that the US will impose financial penalties on Ortega’s government that could weaken the foundation of the FSLN’s popular support over the medium term.

Shortly before the municipal elections, the US House of Representatives unanimously approved the Nicaraguan Investment Conditionality Act (NICA), which requires Washington’s representatives to multilateral organizations to block the extension of most loans to Ortega’s government, pending a determination by the US State Department that the regime in Managua is taking steps to ensure fair and competitive elections, is combating corruption, and is protecting political freedoms.

It is not a given that the US will implement NICA, even if the legislation is approved by the Senate. In a departure from the post-World War II liberal consensus, the Trump administration’s foreign-policy strategy de-emphasizes the promotion of democracy as a means to bolster US national security.

Recognizing the shift, business representatives from both the US and Nicaragua have lobbied against sanctions by arguing that the imposition of punitive economic measures on Nicaragua could lead to a worsening of security conditions in Central America, triggering a fresh wave of illegal immigration into the US. That argument may resonate with Trump, who made tough immigration restrictions a central plank of his campaign platform in 2016, and whose government recently announced that some 5,300 Nicaraguan immigrants will lose their temporary protected status (TPS) and face deportation beginning in 2019.

For now, the economy is continuing to grow at robust pace, boosted by a strong performance in the export sector and household spending underpinned by real wage growth and remittances from Nicaraguans working in the US. Real GDP growth is forecast at 4.5% in 2017, and a combination of larger outlays for social programs and a likely increase in remittances ahead of the expiration of TPS will help to sustain growth of more than 4% next year. The government contends that improved revenue collection will prevent a worrisome expansion of the fiscal deficit, but the Ortega administration could face financing difficulties if NICA is signed into law next year.