US embassy cable - 02TEGUCIGALPA3023

UNCLAS SECTION 01 OF 02 TEGUCIGALPA 003023 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR WHA/CEN, WHA/ESPC, DRL/IL, EB/IFD/OMA 
STATE PASS AID FOR LAC/CEN 
STATE PASS USTR, EXIM, OPIC 
STATE PASS USED IDB, USED WB, USED IMF 
TREASURY FOR JOHN JENKINS 
 
LABOR FOR ILAB, ROBERT WHOLEY 
PANAMA FOR CUSTOMS 
 
E.O. 12958: N/A 
 
TAGS: EFIN, ECON, EAID, ETRD, ELAB, PGOV, HO 
SUBJECT: Upcoming IMF Mission: Civil Service Reform is 
Number One Priority 
 
REF: Tegucigalpa 3004 
 
1. (SBU) The long awaited IMF mission (originally planned 
for February 2002 and delayed several times to give the 
Maduro team time to understand the inherited fiscal problems 
and develop plans to address them) will arrive on November 
4.  The mission is scheduled to conduct an Article IV review 
and discuss the potential outlines of a new three-year 
Poverty Reduction and Growth Facility program.  Both the IMF 
resident rep and the Central Bank President have confirmed 
that the key issue is the uncontrolled increase in public 
sector salaries. 
 
2. (SBU) The Fund will push hard for introduction and 
passage of a comprehensive civil service law that would 
provide the legal framework for having a sensible wage 
policy.  Along with this provision, the IMF would like to 
see the GOH provide a plan for reducing the percentage that 
central government salaries represent of GDP (this has risen 
from 45 percent of GDP in 1997 to an estimated 67 percent in 
2002).  The IMF will also push for better tax collection and 
elimination of tax exemptions to help reduce the fiscal 
deficit in the short-run (see reftel for description of the 
problems in the country's tax policy). 
 
3. (SBU) The IMF is emphasizing the civil service law (which 
was a prominent commitment in the GOH's earlier IMF program 
as well, but was never implemented) for two important 
reasons.  First, the uncontrolled increase in the central 
government wage bill is leading to a fiscal imbalance of 
eventually crisis proportions.  Second, the country badly 
needs institutional strengthening throughout the government 
and this can only be achieved with a strong legal framework 
creating a career civil service.  The Interamerican 
Development Bank and World Bank reps here agree with the 
view that the Civil Service Law is a key policy change 
needed to control government expenditures and increase GOH 
effectiveness. 
 
4. (SBU) We understand from other members of the donor 
community that the IMF mission may also push the GOH to 
develop a more realistic plan of social projects, as 
outlined in the Poverty Reduction Strategy Paper (PRSP). 
This would require revision of the PRSP (which has already 
been approved by Congress) with extensive consultation with 
civil society.  The government clearly does not have the 
financial resources to comply with its commitments in the 
PRSP, in the current macroeconomic climate and without HIPC 
debt relief. 
 
5. (SBU) Structural reforms, such as liberalization of the 
energy and telecommunications sectors, are not currently 
being discussed in the context of the IMF program.  The Fund 
has decided to focus strictly on macroeconomic policy. 
 
6. (SBU) The fragile financial sector continues to be of 
great importance in Honduras, but the GOH has complied with 
most of the conditions in the previous IMF plan and is 
acting responsibly in addressing this problem.  The World 
Bank and IDB are continuing their work in the sector, 
including a full assessment of the financial sector, on-site 
reviews of each bank with subsequent development of action 
plans to ensure full compliance with regulatory 
requirements, and improvement in the legal framework to 
allow for strengthened supervision in the non-bank 
institutions. 
 
7. (SBU) The IMF appears to be impressed with the political 
will in Maduro's team (primarily Banking Commission 
President Ana Cristina Pereira and Central Bank President 
Maria Elena Mondragon) to strengthen financial sector 
supervision and compliance with the Basel accords. 
 
8. (SBU) The passage of legislation in July to reduce the 
cap on related lending from 120 percent of capital to 20 
percent of capital within three years was viewed favorably 
by the IFIs.  The decision to take over two banks in the 
spring (instead of liquidating them) was supported by the 
IMF because it reduced the up-front cost to the government. 
The Fund also was supportive of the decision to extend the 
100 percent deposit insurance for another three years, to 
avoid a run on the smaller banks. 
 
Palmer