Daniel Ortega began his six-year presidential term on January 10, 1985. After the United States Congress turned down continued funding of the Contras in April 1985, the Reagan administration ordered a total embargo on United States trade with NicaraguaÍÍÍÍ the following month, accusing the Sandinista regime of threatening United States security in the region. The FSLN government responded by suspending civil liberties. Both the media and the Roman Catholic bishops were accused of destabilizing the political system. The church's press, as well as the conservative newspaper La Prensa, were censored or closed at various periods because of their critical views on the military draft and the government's handling of the civil war. In June 1986, the United States Congress voted to resume aid to the Contras by appropriating US$100 million in military and nonmilitary assistance. The Sandinista government was forced to divert more and more of its economic resources from economic development to defense against the Contras.

Debate in the United States over military aid for the Contras continued until November 1986, when the policy of the Reagan administration toward Nicaragua was shaken by the discovery of an illegal operation in which funds from weapons sold to Iran during 1985 were diverted to the Contras. The Iran-Contra scandal resulted from covert efforts within the Reagan staff to support the Contras in spite of a United States Congressional ban on military aid in 1985. In the aftermath of the Iran-Contra affair, the United States Congress again stopped all military support to the Contras in 1987 except for what was called "non-lethal" aid. The result of the cutoff was a military stalemate the Contras were unable or unwilling to keep on fighting without full United States support, and the Sandinista government could not afford to continue waging an unpopular war that had already devastated the economy. The conditions for a negotiated solution to the conflict were better than ever, leaving both parties, the Contras and the Sandinistas, with few options other than to negotiate.

After Oscar Arias Sánchez was elected to the presidency of Costa Rica in 1986, he designed a regional plan to bring peace to Central America, following earlier efforts by the Contadora (see Glossary) Group (formed by Mexico, Venezuela, Panama, and Colombia in 1983). The Arias Plan, officially launched in February 1987, was signed by the presidents of the five Central American republics (Guatemala, Honduras, El Salvador, Nicaragua, and Costa Rica) at a presidential summit held in Esquipulas, Guatemala in August 1987. This agreement, also known as Esquipulas II, called for amnesty for persons charged with political crimes, a negotiated cease-fire, national reconciliation for those countries with insurgencies (Guatemala, El Salvador, and Nicaragua), an end to all external aid to insurgencies (United States support to the Contras and Soviet and Cuban support to guerrillas in Guatemala and El Salvador), d83and demomocratic reforms leading to free elections in Nicaragua. After the signing of Esquipulas II, the government created a National Reconciliation Commission headed by Cardinal Miguel Obando y Bravo. The United States government responded by encouraging the Contras to negotiate. At the time, there were an estimated 10,000 Contra rebels and as many as 40,000 of their dependents living in Honduras.

An additional step toward the solution of the Nicaraguan conflict was taken at a summit of Central American presidents held on January 15, 1988, when President Daniel Ortega agreed to hold direct talks with the Contras, to lift the state of emergency, and to call for national elections. In March the FSLN government met with representatives of the Contras and signed a cease-fire agreement. The Sandinistas granted a general amnesty to all Contra members and freed former members of the National Guard who were still imprisoned.

By mid-1988, international institutions had demanded that the Sandinistas launch a drastic economic adjustment program as a condition for resumption of aid. This new economic program imposed further hardship on the Nicaraguan people. Government agencies were reorganized, leaving many Nicaraguans unemployed. The Sandinista army also went through a reduction in force. To complicate matters, in October 1988 the country was hit by Hurricane Joan, which left 432 people dead, 230,000 homeless, and damages estimated at US$1 billion. In addition, a severe drought during 1989 ruined agricultural production for 1990.

With the country bankrupt and the loss of economic support from the economically strapped Soviet Union, the Sandinistas decided to move up the date for general elections in order to convince the United States Congress to end all aid to the Contras and to attract potential economic support from Europe and the United States. As a result of Esquipulas II, the Sandinista regime and the Contras successfully concluded direct negotiations on a cease-fire in meetings held at Sapoá, Nicaragua, during June 1988. In February 1989, the five Central American presidents met once again in Costa del Sol, El Salvador, and agreed on a plan to support the disarming and dissolving of Contra forces in Honduras, as well as their voluntary repatriation into Nicaragua. President Ortega also agreed to move the next national elections, scheduled for the fall of 1990, up to February 1990 to guarantee fair participation for opposition parties and to allow international observers to monitor the entire electoral process.

Data as of December 1993