US embassy cable - 05TEGUCIGALPA1873

C O N F I D E N T I A L SECTION 01 OF 03 TEGUCIGALPA 001873 
 
SIPDIS 
 
STATE FOR EB/IFD, WHA/EPSC, INR/IAA, DRL/IL, AND WHA/CEN 
STATE FOR CA/OCS/ACS/WHA AND DS 
TREASURY FOR DDOUGLASS 
STATE PASS AID FOR LAC/CAM 
DOL FOR ILAB 
 
E.O. 12958: DECL: 09/12/2015 
TAGS: ECON, EFIN, ELAB, EPET, ENRG, PGOV, CASC, ASEC, HO 
SUBJECT: HONDURAS: GOH ROLLS BACK PRICES; CARDINAL, IMF 
CALL FOR REASON AND ECONOMIC RESTRAINT 
 
REF: A. TEGUCIGALPA 1742 
 
     B. TEGUCIGALPA 1831 
     C. TEGUCIGALPA 1842 
     D. TEGUCIGALPA 1837 
     E. TEGUCIGALPA 1720 
 
Classified By: Classified by EconCheif PDunn for reasons 1.5 (B and D) 
 
 
1. (C) Summary:  In a session lasting until four a.m. 
September 8, the National Congress passed three decrees that 
seek to alleviate the impact of higher fuel prices on 
Honduran workers.  One rolls back gasoline prices and calls 
for a commission to establish a new gasoline pricing formula; 
the second halts a proposed expansion of electricity 
subsidies to the poor and instead uses the funds to subsidize 
gasoline sales; and the third imposes a price freeze on 
certain food commodities.  President Maduro's proposed 1,000 
to 2,000 lempira (USD 53-106) salary bonus was rejected and 
is now "dead," but a price freeze on basic consumer goods has 
been imposed.  Catholic Church Cardinal Oscar Rodriguez has 
publicly called for reasonable policy choices that do not 
endanger the economic health or benefits of recent debt 
forgiveness.  The IMF is privately calling for similar 
prudence, but is withholding judgment on the new decrees 
until it has had an opportunity to review them.  The fiscal 
and economic impacts of the measures are as yet unknown, but 
the political impact was immediate, as striking taxi drivers 
have returned to work and relative calm has returned to 
Tegucigalpa.  See septel for reporting on the political 
aspects of this issue.  End Summary. 
 
GOH Lowers Prices, Raises Subsidies; Fiscal Impact Unknown 
--------------------------------------------- ------------- 
 
2. (U) In late-night action, the Honduran Congress passed 
three decrees that seek to alleviate the impact of higher 
fuel prices on Honduran workers.  The first decree rolls back 
retail gasoline prices to pre September 2 levels, removing 
the remainder of the sharp 17 lempira (nearly one USD) per 
gallon increase.  The plan will reportedly be financed by 
diverting some of the funds that had been previously 
programmed to increase electricity subsidies to the poor. 
This might be sufficient in the short term to meet Minister 
of Finance William Chong Wong's requirement that any new 
spending be financed by identified revenues or offsetting 
spending cuts. (Note:  The Minister, currently in Spain, has 
thus far been very hawkish in curbing similar Congressional 
handouts in the past.  Acting Minister Ralph Oberholzer said 
to IMF ResRep Monroe on September 8 that he has not yet seen 
the decree and cannot comment.  A meeting of Senior GOH 
officials has been called for the morning of September 8 to 
discuss the issue further.  End Note). 
 
3. (C) The decree also establishes a commission of notables 
to reform the current fuel pricing formula.  The commission 
has ten days to return its findings.  Early indications are 
that the commission will be composed of: Catholic Church 
Cardinal Oscar Rodriguez (who is a moderate on the fuel 
pricing issue -- see paras 5-6, below); former Minister of 
Trade Juliette Handal (who led a vocal but unsuccessful 
attempt to reform the fuel pricing structure last year and 
who has openly called for nationalizing fuel imports); 
journalist Rossana Guevarra (linked to the Liberal Party); 
President of Banco Occidente Jorge Bueso Arias (who 
unsuccessfully ran for the Liberal presidential nomination in 
years past and has in recent days reportedly hosted a series 
of roundtable discussions on the need for a responsible fuel 
policy rather than demagogic proposals); Adolfo "Fito" 
Facusse, President of the Honduran Industrialists Association 
(ANDI) and vocal critic of current fuel policies; Irma Acosta 
de Fortin, university rector and former National Party 
candidate for Vice President; Arturo Corrales, leader of the 
Christian Democratic Party (coalition partner of the 
governing National Party) and businessman/pollster; Jose 
Maria Agurcia, President of COHEP, the umbrella private 
employers association; Juan Ferrera, President of the new 
Anti-Corruption Commission (formerly with COHEP); and Emilio 
Larach, businessman. 
 
4. (U) The second decree reduces the proposed expansion of 
targeted electricity subsidies for the poor.  The program, 
called "Bono 80", is already included in the GOH budget, and 
the IMF had informally assented to expanding the program as 
long as fiscal impacts are minimal.  Some of the funds that 
had been programmed for this expansion will be diverted 
instead to a fund that the Ministry of Finance will use to 
subsidize gasoline retailers, to allow them to sell at 
pre-Hurricane Katrina prices until the commission of notables 
renders its opinion on retail prices.  That commission has 
been given 10 days to issue its report.  In the same 
Congressional session, the President's proposal to require 
the private sector to pay salary bonuses of 1,000 to 2,000 
lempiras (USD 53 to 106) per worker (ref C) was rejected and 
is now "dead" according to Honduran Private Sector Council 
(COHEP) Executive Director Benjamin Bogran, who participated 
in the all-night session.  The third decree imposes a price 
freeze on the basket of basic consumer goods -- an action 
that is in violation of the IMF agreement and Honduran law 
unless it is agreed to with the private sector.  Bogran is 
currently calling for consultations on this matter. (For a 
list of the affected goods -- the "canasta basica" -- see Ref 
E.) 
 
Cardinal Takes a Stand for Fiscal Prudence 
------------------------------------------ 
 
5. (U) Just before departing for Washington for a meeting 
with the Interamerican Development Bank, Cardinal Oscar 
Andres Rodriguez gave an extensive interview with leading 
Honduran daily El Heraldo, in which he called for sensible 
and prudent responses to the current fuel crisis gripping 
Honduras.  (Note:  This interview preceded the late-night 
Congressional action, on which he has not yet had an 
opportunity to comment.  End Note.)  The Cardinal said the 
current calls from leading presidential candidates and others 
to eliminate taxes on gasoline are "totally irrational" and 
"demagoguery" and said that adoption of such a policy would 
be a "total failure" for those who have been working for the 
economic benefit of the country.  "Now that we have reached 
(the HIPC Completion Point), I feel it would be a great 
injustice, after all the sacrifices we have made, that for 
simple opportunism or for the benefit of a given political 
candidate we would lose the benefits of all our efforts." 
 
6. (U) The Cardinal pointed out the risks to fiscal 
discipline and debt forgiveness posed by "precipitous" action 
on fuel taxes:  "You have to understand, this debt 
forgiveness does not mean that money is flowing into 
Honduras, rather it represents state revenues that are not 
leaving the country to pay the external debt or debt service. 
 Suppose that, for somewhat precipitous attitudes -- I don't 
wish to think it is the result of demagoguery, but perhaps is 
a bit precipitous -- let's say for example that in the 
Congress they remove the tax on gasoline.  Then, immediately 
state income drops by one third and then where are your 
savings from debt forgiveness?  There would be none, there 
would (instead) be a fiscal deficit.  And how are we going to 
pay for this fiscal deficit?  How are we going to continue 
paying doctors, and teachers, and others if there are no 
revenues?  We cannot think we will get external financing, 
because no one will want to lend to a country in social 
chaos." 
 
IMF Watchful and Wary 
--------------------- 
 
7. (C) International Monetary Fund Resident Representative 
Hunter Monroe told EconChief on September 7 that the Fund had 
been caught unawares by some of the GOH actions.  The Fund 
had not agreed to the GOH proposal for bonus payments to 
workers to offset rising fuel costs (ref C.), nor to any GOH 
actions to offset fuel price increases.  While the Fund was 
aware of GOH plans to increase targeted subsidies to poor 
electricity users, no final agreement had been reached before 
the GOH publicly announced its plan to reprogram some portion 
of those funds.  Nevertheless, Monroe said these measures are 
"not likely to be an obstacle" for the Fund unless the GOH 
moves to explicitly control prices. (The impact of the 
Congressionally-approved price freeze, if it comes into 
effect, is unclear.)  The IMF is privately calling for 
prudence, but is withholding judgment on the new 
Congressional decrees until it has had an opportunity to 
review them. 
 
Taxi Strike Over 
---------------- 
8. (U) Following a September 7 meeting between 
representatives of striking taxi drivers and Minister of 
Transportation and Public Works Jorge Carranza, taxi drivers 
have ended the two-day strike that paralyzed the city with 
road blockages (ref D).  The drivers had been demanding fuel 
price reduction and/or fare increases following the sharp 
price increase of gasoline on September 2.  The final details 
of the settlement are not yet public, but the September 8 
Congressional decision to reduce retail gasoline prices would 
appear to have met the strikers' principal demand.  While 
teachers, students, and anti-globalists of the Popular Block 
still marched on September 8, road traffic in Tegucigalpa 
appears to have returned mostly to normal. 
Williard