Since Daniel Ortega returned to the presidency in 2007, the former Marxist guerrilla leader has confounded his critics by implementing a generally liberal economic policy agenda in cooperation with the IMF. Ortega’s willingness to accommodate the private sector was highlighted in late November 2012, when the FSLN majority in the National Assembly approved a tax-reform package that is among the IMF’s conditions for a new lending agreement.

Although billed as a comprehensive overhaul of what is widely acknowledged to be an unfairly regressive system, the final bill left in place most of the generous incentives that benefit the business community. These are seen as the chief weakness of the entire tax system.

The result pleased COSEP, the country’s powerful business lobby, and was praised by pro-government union heads. However, critics on the left and the right bemoaned what they saw as a missed opportunity to address the problem of income inequality and establish a strong foundation for long-term fiscal stability.

Ortega’s economic policy reflects his recognition that foreign investment and private-sector job creation are essential.

Ortega’s economic policy strategy reflects his recognition that foreign investment and private-sector job creation are essential components of any strategy to boost living standards. On that basis, the president has sought to maintain strong ties with the IMF (and at least cordial relations with the U.S.), even as he has forged a close alliance with the socialist government in Caracas.

Nicaragua’s partnership with Venezuela has yielded significant loans and investment, and provided the FSLN regime with valuable diplomatic cover. But recent developments have underscored the potential for a regime change in Caracas that could lead to the abrupt loss of those many benefits.

In a move that supporters claim is visionary and critics have derided as foolhardy, President Ortega is pressing ahead with a plan to construct an inter-oceanic waterway that will compete with the Panama Canal. Officials in Managua see their canal plan—which carries a $40 billion price tag—as a ticket to freeing Nicaragua from dependence on either the U.S. or Venezuela. In addition to creating thousands of jobs and a permanent new source of government revenue, Nicaragua’s transformation into a hemispheric transportation hub could make it a magnet for foreign investment in a broad range of industries.

But skepticism abounds, and not without reason. Beyond the logistical issues (including the fact that a Nicaraguan canal would be at least three times as long as the Panama Canal) and environmental concerns (notably, the risk of contamination of Lake Nicaragua, the world’s largest supply of fresh water), other red flags include the fact that the Hong Kong-based firm that will finance and oversee the massive undertaking has no previous experience with infrastructure projects.


The PRS Group
About The Author The PRS Group
The PRS Group is a leading global provider of political and country risk analysis and forecasts, covering 140 countries. Based on proprietary, quantitative risk models, the firm's clientele includes financial institutions, multilateral agencies, and trans-national firms.

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