US embassy cable - 03TEGUCIGALPA2034

UNCLAS SECTION 01 OF 04 TEGUCIGALPA 002034 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA/CEN, WHA/EPSC, DRL/IL, EB/IFD/OMA, INR, DS 
STATE PASS AID FOR LAC/CEN 
STATE PASS USTR FOR ANDREA GASH DURKIN 
TREASURY FOR C. KUSHLIS 
DOL FOR ILAB 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, PGOV, EAID, ETRD, ELAB, EAGR, PINR, ASEC, HO 
SUBJECT: IMF AGREEMENT HINGING ON SALARY LAW 
 
REF: TEGUCIGALPA 1581 AND PREVIOUS 
 
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SUMMARY 
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1. (SBU) The imminent GOH submission to Congress of a new 
government salary bill (substituting the broader Civil 
Service Framework bill) is dominating the political debate in 
Honduras this week.  President Maduro and his team have 
appeared on the airwaves and taken out ads in the papers 
defending the need to address the burgeoning public sector 
wage bill, and in particular the legislatively-mandated 
increases in teacher and medical employees' salaries.  The 
World Bank will sponsor a two-day roundtable entitled the 
National Dialogue, on August 28-29, in an effort to forge a 
national fiscal pact that will facilitate the adoption of the 
legislation by the National Congress, when introduced next 
week.  The IMF and GOH continue intensive discussions on the 
details needed to be included in the law to lay the basis for 
an IMF agreement, and continue to have strong differences. 
The leftist Popular Block held demonstrations in Tegucigalpa 
and temporarily blockaded the major routes into the city 
August 26 to voice its membership's strong opposition to the 
measures.  This may prove to be the endgame for the IMF 
negotiation.  End Summary. 
 
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The Needs: A Salary Law and Wage Bill Reductions 
--------------------------------------------- --- 
 
2. (SBU) Improved control of the burgeoning public sector 
wage bill has now become the critical issue in Honduras' 
troubled negotiations with the International Monetary Fund on 
a new Poverty Reduction and Growth Facility (PRGF) program. 
Government wages rose by 140 percent in nominal terms between 
1998 and 2002, accounting for 60 percent of the growth in 
public spending in that period.  Government wages have 
reached an unsustainable level of ten percent of GDP. 
Although other issues (such as the adequacy of recent tax 
measures and implementation of financial sector reform) 
remain on the table and will need to be addressed in the 
context of a three-year PRGF program, Fund staff have made 
clear to the government that the following measures are 
minimum requirements for return of a mission and negotiation 
of the letter of intent: (1) legislation which provides the 
executive branch of government control over public sector 
wage policy, and (2) reductions in the wage bill as a percent 
of GDP of 0.5 percent in both 2004 and in 2005, which in turn 
implies a reduction of the planned wage increases for 
teachers.  The IMF had earlier been pushing for a 1.0 percent 
of GDP reduction in the wage bill in both 2004 and 2005, but 
has agreed to allow the GOH to fill the budget hole with 
additional foreign donations. 
 
3. (SBU) The IMF and GOH have agreed that negotiation of a 
fiscal pact among different sectors of society would be the 
best way to develop the elusive consensus on needed changes 
in Honduran law and policy.  The World Bank office here is 
assisting in this process by bringing in Colombian economist 
and former Finance Minister Roberto Junguigo to moderate a 
two-day roundtable entitled the National Dialogue, on August 
28-29.  Approximately 60 participants, from government, 
Congress, private sector, public sector unions and civil 
society, will participate in the roundtable.  One of the 
hoped-for outcomes of this meeting will be a commitment on 
the control of public sector salaries. 
 
4. (SBU) Because of the political controversy that has arisen 
this summer as a result of the discussion over a draft Civil 
Service law, the GOH has decided to divide the bill in two. 
The GOH now plans to introduce a shorter bill (during the 
first week of September) called the Law on Salary Equity that 
only covers the wage policy for the government employees. 
The reforms that would establish a permanent and professional 
civil service will be submitted at a later date.  To meet the 
targets of reducing the public sector wage bill as percent of 
GDP in 2004 and 2005, the GOH has proposed a law that would 
include the spreading out of planned teacher increases for 
2004 and 2005 over the four-year period of 2004-2007. 
 
5. (SBU) An IMF mission, visiting Honduras in late July, saw 
a draft of the bill and gave its blessing with one important 
exception.  The Fund staff objected to the provision stating 
that teachers will not be subject to the integrated salary 
(one salary rate, without additional built-in raises for 
years of service, teacher certification and other collateral 
allowances) until 2008; this matches the planned, new period 
for the teacher agreement.  This draft government salary bill 
has been under intensive, but private, discussion since that 
time.  The IMF resident rep. continues to express the Fund's 
concerns that the lack of reduction of the collateral 
allowances during the transition period will undercut the 
GOH's efforts to control the wage bill in the next few years 
and reduce the budget deficit to manageable levels.  This is 
going to be a politically difficult proposition; teachers are 
already striking and marching against an earlier proposed 
reform to the civil service law that has much more modest 
impact on their compensation packages. 
 
6. (SBU) The GOH, working closely with the World Bank, is 
trying to square the circle by identifying other ways to 
reach the IMF's fiscal goals.  They hope, for example, that 
the fiscal pact will include a two-year wage freeze for 
doctors and nurses.  They may also try to focus on quiet 
incremental changes to the two most costly collateral 
built-in salary increases in the teachers' compensation 
statute.  For example, one idea forwarded is that the 
"quincenio" provision, which provides a twenty percent 
increase in salary for every five years of service, might not 
be provided to new teachers.  Another idea, that the 
"licenciatura", which provides a seventy percent increase for 
teachers who receive their teacher certification, be divided 
between a 20 percent increase in pay and a 50 percent 
contribution to pension funds. 
 
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Appealing for Congressional and Public Support 
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7. (SBU) Congressional leaders have made it clear, up to now, 
that any proposed reforms to medical and teacher compensation 
(implying changes to the special statutes that govern these 
public sector groups) would be dead on arrival unless there 
is a consensus from all sides on the bill, which has forced 
the government into problematic negotiations with the unions. 
 The teacher unions have refused, up to now, to reopen 
negotiations on the 2002 agreement (which by the way, were 
only accepted by the primary school teacher unions and not 
the secondary teachers, although the GOH imposed these terms 
on the secondary teachers). 
 
8. (SBU) Under heavy pressure from the international 
community for more leadership and political courage, Maduro 
and his team have started a full court (although at times 
clumsy) press to appeal for public support.  Maduro spoke to 
the nation on August 24 on the need to control the public 
sector wages of certain privileged groups for the sake of 
economic reactivation. 
 
9. (SBU) Minister of the Presidency Luis Cosenza, Central 
Bank President Maria Elena Mondragon, and Finance Minister 
Arturo Alvarado spoke the next evening providing the 
technical arguments for the need to control the wage bill. 
The three focused on the fact that these privileged groups 
are receiving large annual increases while others have had 
their wages frozen, and all at the expense of provision of 
public services and spending on poverty reduction.  Although 
they did acknowledge that wage policy control was vital to 
reaching an agreement with the IMF, the GOH team has tried to 
make it clear that the underlying issue is the unsustainable 
budget deficits. 
 
10. (SBU) The politics of this legislation has been 
complicated all along, and has been a clear example of 
Maduro's weak political position and limited political skills 
of his technocratic administration.  Maduro is the first 
democratically elected president whose party has not had a 
majority in the National Congress, making his administration 
dependent on support from small parties.  The Christian 
Democrats left a formal coalition in July (citing, among 
other reasons, the GOH's lack of openness about the IMF 
negotiations and the civil service law deliberations).  The 
GOH now needs to pick up votes from the opposition Liberal 
Party and try to keep members of Maduro's own Nationalist 
party, from straying.  Politically, neither side can afford 
to be seen as catering to the demands of the IMF over the 
interests of Honduran workers.  On the other hand, none of 
the political parties can afford the economic mess that will 
result if an agreement with the Fund is not reached (and the 
structural deficits are not addressed).  As political leaders 
around the country are weighing their chances of gaining a 
Presidential nomination, these calculations become difficult. 
 
 
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Popular Block and Teachers Take to the Street 
--------------------------------------------- 
 
11. (SBU)  Teacher's union and other opponents of any change 
in the civil service law that would negatively affect their 
pay and benefits have denounced the proposed changes as 
"fascist", despite the fact that no one has yet seen a draft 
bill detailing the proposed changes.  The fact that the IMF 
is pressing for such changes makes it easier for reform 
opponents to protest proposed changes as, in their view, 
globalist, neoliberal economics being imposed via the GOH to 
the detriment of Honduran sovereignty and the Honduran 
people. 
 
12. (U) The leftist Popular Block, a loosely knit umbrella 
organization that encompasses many public sector unions, 
leftist NGOs, and other groups, led a series of significant 
protests in and around Tegucigalpa August 26 demonstrating 
against the proposed civil service law, a new water law, as 
well as the usual anti-globalization targets such as CAFTA. 
Protesters initially blocked the four major roads in and out 
of Tegucigalpa, the roads to Choluteca, Danli, Olancho, and 
San Pedro Sula and the North Coast.  The demonstrators, while 
peaceful, were armed with rocks, sticks, ropes, boards with 
nails, and gasoline, and caused huge traffic problems in and 
out of the city.  Protesters then marched to the center of 
Tegucigalpa for demonstrations in front of Congress. 
Although peaceful when witnessed by PolOffs, some protesters 
later became violent, throwing rocks and Molotov cocktails at 
congressional buildings and confronting the police.  Post 
believes it is likely that the Popular Block will organize 
more such demonstrations if Congress takes up a wage bill. 
 
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Comment: Why the Urgency? 
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13. (SBU) The negotiations with the GOH have been dragging on 
since Maduro took office in January 2002.  The last 19 months 
have been marked by a series of austerity and tax measures 
that have been controversial and politically costly, but in 
fact have had only moderate impact on the government's budget 
woes.  In addition, there have been some key junctures in 
which the Fund's position was ignored (i.e. the unsustainable 
cost of the 2002 agreement with the teachers) or 
misunderstood (i.e. the Agricultural Finance law).  The 
Congress, during this period, has continued to water down 
fiscal package legislation and try to slip in new budget 
busting measures without care.  The IMF mission has thus 
become increasingly skeptical about GOH commitments.  The 
GOH, after getting two fiscal packages through in two years 
and cutting discretionary spending to the bone, feels 
strongly that the IMF has been unfair and unrealistic about 
political realities.  One could make the argument that the 
latest burp in the negotiations is just more of the same. 
 
14. (SBU) However, there are two new changes in the 
environment that justify the argument that it is now or never 
for a Honduran IMF agreement.  First, the GOH has now 
basically exhausted the USD 170 million dollars previously 
held by Hondutel (the Honduran state-owned telephone 
company).  These funds have been used to fund budget deficits 
and cash requirements for state takeovers of failed banks 
last year.  From now on, budget deficits are going to need to 
be covered by foreign donations and concessional loans from 
international financial institutions.  Many of these sources 
of funds are tied to having an IMF agreement.  At the same 
time, deferrals on foreign official debt are starting to 
expire, which will increase the demands on the Honduran 
treasury.  The USG, for example, has notified the GOH of a 
series of overdue payments on old DOD debt that must be paid 
in order to avoid Brooke amendment sanctions.  July and 
September payments have now been received, but more payments 
are due in October, and throughout 2004. 
15. (SBU) If the GOH is not able to reach agreement with the 
IMF quickly, President Maduro may be tempted to begin 
printing money to cover expenses or to forego the foreign 
debt payments and let the Brooke sanctions take effect. 
Maduro badly needs to move beyond this issue in order to 
begin spending time and money on the strengthening of public 
security, education and health programs, and delivering on 
his campaign promises of poverty reduction and economic 
growth. 
 
16. (SBU) It is beginning to look likely that the GOH will 
submit to Congress a government salary bill that does not 
fully meet IMF requirements, partially with World Bank 
blessing.  If that is the case, and the Congress adopts the 
legislation (itself a big if), the Fund staff will have a big 
decision to make on whether a half glass is better than none 
at all.  End Comment. 
PALMER