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Nicaragua enacted its Water Law in 2007, with the Dublin Principles for sustainable water management and integrated water resources management as its guiding framework. Implementation of the law remains a challenge, but significant efforts have been made to roll out this new water resources framework, to improve water management by enhancing a multilevel water governance system. To analyze multilevel water governance in Nicaragua and diagnose stakeholders’ roles and compliance with the law, we applied a socio-ecological system framework and several methods of analysis to process data collected from 52 in-depth semistructured interviews conducted with key stakeholders in the water sector. We found that the major variables affecting multilevel water governance were social interests, administrative capacity, and political, economic, and legal arrangements. The results suggest that there is centralization at the national level, a tendency toward noncollective choice rules, little investment in water resources, and a lack of knowledge concerning conflict resolution mechanisms. For multilevel water governance, a lack of funds is the main social, economic, and political constraint, affecting interactions and outcomes. Nevertheless, there is great potential to improve water resource management in Nicaragua by enacting the self-funding schemes established in the law. Moreover, government institutions, users, and various networks are willing to participate and take action to implement the law.