US embassy cable - 05TEGUCIGALPA709

UNCLAS SECTION 01 OF 02 TEGUCIGALPA 000709 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB, DRL/IL, WHA/EPSC, AND WHA/CEN 
TREASURY FOR DDOUGLASS 
STATE PASS AID FOR LAC/CAM 
DOL FOR ILAB 
 
E.O. 12958: N/A 
TAGS: ECON, EINV, PGOV, EPET, ELAB, HO 
SUBJECT: HONDURAN PRESIDENT MADURO AND PRESIDENTIAL 
CANDIDATE LOBO INVOKE THREAT OF PRICE CONTROLS 
 
 
1. (U) On March 29, Honduran President Ricardo Maduro 
announced that if it becomes necessary he is willing to 
impose price controls on basic consumer goods.  He called on 
the private sector not to raise prices "abusively" on 
consumer goods based on rising fuel prices.  Justifying his 
concerns, Maduro is quoted in press reports saying, "It is 
not fair that for us, a country so poor, our bill for fuel 
imports should have gone up by 400 million dollars -- that 
is, twenty times the cost of a school feeding program for a 
million children -- which (instead) we poor countries are 
paying to the rich countries."  National Party Presidential 
candidate and current President of Congress Pepe Lobo echoed 
these themes, saying that the government must "impose order" 
on the markets and that the private sector needs to 
understand it "cannot have greater profits on the backs of 
the Honduran people, a people already battered by the 
(increases in the) price of fuel." 
 
2. (U) Honduras has no domestic petroleum production or 
refining capacity, relying entirely on imported products. 
Prices in Honduras are loosely tied to import costs, but are 
managed by the government based on a complicated formula that 
guarantees profits to each segment of the supply chain, and 
also imposes hefty taxes on the consumer.  As world crude and 
refined products prices have gone up to near record levels in 
nominal terms, the GOH has raised gasoline prices 
approximately eight times since January.  Gasoline in 
Honduras costs about USD 3.25 per gallon currently.  This has 
sparked public outcry, particularly from the transport 
unions, who clamor for both fuel subsidies and increases in 
route fares.  Other unions (public sector, including nurses) 
have invoked these rising costs to justify calls for wage 
increases. 
 
3. (SBU) On March 30, EconChief raised the issue of price 
controls with Ambassador to the U.S. Mario Canahuati, who is 
the Vice-Presidential candidate on Lobo's Nationalist Party 
ticket, businessman, and former president of the Cortes 
Chamber of Commerce.  Canahuati unflinchingly backed the call 
for price controls, claiming that vendors are using higher 
fuel prices as a pretext for raising their prices at rates 
far exceeding inflation.  Asked why the market does not 
arbitrage away such price gouging, if it exists, Canahuati 
pointed out that Honduras' is not a free and competitive 
market, rather, it is dominated by monopolies and secret 
cartels that set artificial prices and undermine competition. 
 EconChief countered that price controls, in addition to all 
the damaging economic distortions they introduce, do not 
address these core issues.  Instead, EconChief suggested, the 
Lobo/Canahuati ticket should come out strongly for rule of 
law, anti-corruption, and an effective judiciary that 
enforces contracts.  An excellent first step, he pointed out, 
would be completion of and ratification of a strong 
competition (anti-trust) law, such as the one currently 
pending in congressional committee.  That should give the GOH 
the tools it needs to combat any price gouging, without 
invoking price controls.  Canahuati agreed that Honduras 
needs all those things, but he said, "Rule of law starts with 
price controls."  The private sector, he said, has to be told 
that there are limits. 
 
4. (SBU) Comment:  Given rising public sentiment against 
inflation, it is understandable that the administration 
needed to issue public comments promising improvements in the 
economy.  Constrained by its agreements with the IMF, the GOH 
can neither raise wages nor cut taxes on gasoline.  A frontal 
attack on rising consumer prices perhaps seemed the next best 
alternative.  (It also provides the GOH with a welcome 
distraction from Catholic Church Cardinal Oscar Rodriguez's 
relentless Holy Week attacks on GOH inaction on corruption, 
which he likened to a cross on which the people of Honduras 
have been crucified.)  Unfortunately, the GOH has chosen once 
again to target the "little fish" (the small vendors they 
allege are price gouging) rather than take on the politically 
powerful elites that monopolize sectors such as cement and 
milled flour.  Post is disappointed with this new, populist 
demagoguery by the President and his party's presidential 
candidate -- though it is consistent with the campaign Pepe 
Lobo ran to win the nomination of his party.  Price controls 
are an inefficient and damaging economic policy.  Worse, the 
ruling Nationalist party appears to be invoking them in part 
out of despair of ever being able to confront and remedy the 
underlying structural problems -- such as market power and 
collusion -- that confront this economy.  We will continue to 
press the GOH and the current crop of Presidential candidates 
to face up to one of the top structural economic problems: a 
lack of genuine competition. 
 
 
Palmer 
Palmer