US embassy cable - 03TEGUCIGALPA494

UNCLAS SECTION 01 OF 02 TEGUCIGALPA 000494 
 
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, PGOV, EAID, ETRD, ELAB, HO 
SUBJECT: Honduras Hopes For IMF Letter of Intent by March 31 
 
Ref: Tegucigalpa 00010 
 
1. (SBU) Summary.  Honduras is putting the finishing touches 
on a package of laws that will put the GOH's fiscal house in 
order and satisfy the International Monetary Fund (IMF) team 
negotiating the terms of Honduras' three-year Poverty 
Reduction and Growth Facility (PRGF) program.  The package 
will include the long-awaited Civil Service Framework bill 
that will supercede the salary provisions in the profession- 
specific laws (called estatutos); expenditure measures that 
will reduce the central government wage bill to 10.1 percent 
of GDP in 2003 and reduce the wage bill of the entire public 
sector by one percent of GDP annually in 2004 and 2005; and 
a series of revenue measures that will widen the tax base 
for income and sales taxes.   The only important tax 
exemption elimination that the GOH plans to propose to 
Congress is the exemption for fuel products used in the 
power sector; however, it appears that the other tax 
measures will be sufficient to lower the deficit 
significantly.  The IMF and GOH are also working together 
closely on improvements to the financial sector.   The GOH 
hopes the whole fiscal package will go to Congress by the 
end of February and will be approved by mid March.  The goal 
is to sign a letter of intent with the Fund by the end of 
March.  The GOH believes that the letter of intent would be 
sufficient to hold off pressure from Paris Club creditors, 
until IMF Board approval in June.  Much will depend on the 
GOH's skill in getting the measures through Congress.  End 
Summary. 
 
2. (SBU) In a February 18 meeting with econoffs, Minister of 
Finance Arturo Alvarado explained that the GOH is very close 
to an agreement with the IMF on the terms of Honduras' three- 
year Poverty Reduction and Growth Facility program.   The 
program includes commitments on creating a professional 
civil service, reducing the wage bill as a percent of GDP, 
and adopting revenue measures.  According to Ministry of 
Finance projections, this will bring the central government 
deficit down to three percent of GDP in 2003 (a marked 
improvement over the last two years). The IMF and GOH are 
also working together closely on policy changes to 
strengthen the financial sector. 
 
3. (SBU) After contentious late January meetings between the 
GOH and IMF in Washington (in which the Fund at first 
insisted on a constitutional amendment), there is now a 
basic agreement on the text of the long-awaited Civil 
Service Framework bill.  Article 110 of the bill will 
replace the salary provisions in the profession-specific 
laws - the so-called estatutos - immediately upon entry into 
force, except for the phasing in of the salary increases for 
teachers by 2006.   Alvarado is waiting for the IMF's final 
comments on the draft bill (due any day now). 
 
4. (SBU) The GOH identified expenditure measures that will 
allow it to reduce the central government wage bill to 10.1 
percent of GDP in 2003.  Many of these measures have already 
been implemented (wage freeze for non-unionized employees, 
elimination of 60 percent of vacant positions, elimination 
of ghost workers, retirement of public sector workers over 
the age of 65, etc.).  For 2004 and 2005, the GOH convinced 
the Fund they would have more flexibility to reduce the wage 
bill an additional one percent of GDP per year if they 
included the entire public sector.  Alvarado noted that 
reductions in staff are already underway in autonomous 
government agencies such as SANAA (the state water and 
sanitation company) and COHDEFOR (the Forestry Service). 
The IMF team agreed to exclude the severance payments from 
the wage bill calculations.  Note: IMF contacts indicate 
that the GOH still needs to present more detail on these 
planned expenditure measures in order to obtain Fund staff 
support. 
 
5. (SBU) The third part of the package is a series of 
revenue measures (amounting to at least 2.5 percent of GDP) 
that will widen the tax base for income and sales taxes. 
Many bonuses and allowances will now be included as income 
in the calculation for income tax and the minimum level of 
salary for individuals subject to the tax will be reduced. 
A type of withholding tax will be implemented for companies. 
Many more products will be subject to the sales tax, leaving 
only basic foods and medicines tax free (i.e., an expanded 
"basic basket of goods").  The government still plans to 
eliminate the tax exemption for fuel products used in the 
power sector and will direct the state electricity company 
ENEE to negotiate compensatory adjustments for the price of 
electricity in its contracts with the private power 
generators.  The expected increased revenue from these 
measures is expected to be: 
         Income tax                0.9 percent of GDP 
         Sales tax                 0.5 percent of GDP 
         Oil taxes and others      1.1 percent of GDP 
 
6. (SBU) Econcouns noted that the GOH has backed away from 
its intent to reduce the numerous special tax exemptions for 
companies, and that this would put the GOH on the defensive 
as only raising taxes on the poor and lower middle class. 
Alvarado acknowledged that elimination of special exemptions 
turned out to be politically unfeasible.  The GOH will do 
its best to explain to the public that in fact tax rates are 
not being raised.  Note: IMF sources indicated concern this 
week that the GOH might back off from some of the measures, 
based on criticism from the public. 
 
7. (SBU) Alvarado, who is consulting closely with President 
of Congress Porfirio "Pepe" Lobo, hopes the whole fiscal 
package will go to Congress the week of February 24 and will 
be approved in Congress by early to mid March.  The IMF team 
would then return to Honduras March 24 to finalize and sign 
off on a letter of intent on a PRGF program by March 31. 
The package would go to the IMF Board in June.  The Fund 
staff said that once a letter of intent is signed, they 
would signal to the Paris Club that the GOH is basically 
back on track, taking pressure off from official bilateral 
creditors for resumed debt payments.  Honduras' extension of 
debt relief from the Paris Club runs out on March 31. 
 
8. (SBU) Comment: Although the umbrella public sector 
organization COHEP expressed solidarity with the GOH on the 
need to regain fiscal equilibrium and stop the dramatic 
growth in public sector salaries (and despite the fact that 
the current plan leaves many investment incentives intact), 
key private sector groups have started to complain about the 
proposed tax measures.  Government pronouncements about the 
measures, their impact on the poor, and the relationship to 
the GOH's need for an IMF program have been confusing and 
inconsistent.  The next few weeks will be a key test of the 
Maduro government's commitment (and ability) to take the 
needed measures. 
 
Palmer