US embassy cable - 03TEGUCIGALPA622

UNCLAS SECTION 01 OF 03 TEGUCIGALPA 000622 
 
SIPDIS 
 
STATE FOR WHA/CEN, WHA/EPSC, DRL/IL, EB, AND OES 
STATE PASS TO USAID FOR LAC/CEN 
STATE PASS OPIC, EXIM, USTR 
STATE PASS TO USED IDB, USED WB, USED IMF 
USDOC FOR 3134/USFCD/IOI/WH/RD/DLUTTER 
USDOC FOR 4320/IEF/WH/OMCB 
USDOC FOR 4322/ITA/MAC/WH/OLAC/EJAFFEE 
LABOR FOR ILAB 
GUATEMALA FOR COMMATT DTHOMPSON AND AGAH FCOOLIDGE 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, ENRG, EAGR, EINV, ELAB, PGOV, SENV, HO 
SUBJECT: HONDURAN ECON HIGHLIGHTS: FEBRUARY 2003 
 
REFS: A) TEGUCIGALPA 00606 
 
TOPICS: 
 
-IMF Criteria 
-Coffee Production Declines 
-Minimum Wage Negotiation Ends in Impasse 
-Records Fuel Prices Induce GOH to Reduce Fuel Taxes 
-Looming Retaliatory Tariffs on Nicaraguan Products 
-Papaya Exports to the United States 
-Cocoa Harvest to Decline by 70 percent 
-Impact of Illegal Logging on National Economy and Poverty 
 
IMF Criteria 
------------ 
 
1.    As  part of the GOH efforts to reach an agreement with  the 
IMF, an executive decree was issued by President Maduro to reduce 
public  expenditure in salaries to the equivalent of 10.1 percent 
of  the  GDP.   The  measures  include:  freezing  public  sector 
employee  wages for all of 2003, excluding teachers and employees 
covered by collective bargaining agreements; cancellation  of  60 
percent of positions vacant at the end of 2002; freezing of up to 
50  percent of vacant positions as they occur this year; reducing 
representation  expenditures  by  85  percent;  reducing   travel 
expenditures  by  85 percent; limitations on cellular  phone  and 
vehicle  privileges;  and  centralized management  of  government 
procurement. 
 
Coffee Production Declines 
-------------------------- 
 
2.   The Honduran Association of Coffee Producers has estimated a 
loss of 40 percent of the coffee harvest for the 2002-2003 season 
from 4.2 million sacks in 2001-2002 to 2.1 million sacks in 2002- 
2003.  The association has attributed the decline in production 
to cold weather that impacted the coffee zones.  The association 
has also attributed the decline to torrential rains that 
destroyed roads, which prevented workers from maintaining coffee 
groves and transporting the harvest to the market.  Coffee 
producers are also being hurt by continually low international 
coffee prices.  The president of the Honduran Institute of Coffee 
requested financing from the GOH to aid growers in their recovery 
from losses.  There is pessimism that the government will have 
the financing to aid growers and international institutions are 
being asked for assistance. 
 
Minimum Wage Negotiation Ends in Standstill 
------------------------------------------- 
 
3.   After bilateral negotiations between labor confederations 
and businesses ended without an agreement, the GOH announced 
plans to intervene in establishing the minimum wage for 2003. 
Labor unions were asking for an increase of 25 percent to the 
base minimum wage while businesses made a counter proposal of 5 
percent.  A proposed minimum wage will be presented to the 
president, which will likely be approved by him by the end of 
March.  Minister of Labor German Leitzelar has stated that to 
make a fair decision on the issue, the government will consult 
with the Central Bank and other ministries.  Leitzelar said he 
believes that the government's decision will be criticized by 
labor unions and businesses, but will benefit the nation as a 
whole.  LabAtt spoke to Leitzelar's assistant March 7, who 
confirmed press reports, but said that the timing of the final 
decision was up to the President. 
 
Record Fuel Prices Induce GOH to Reduce Fuel Taxes 
--------------------------------------------- ----- 
 
4.   In February, Honduran fuel prices increased to record levels 
for the following grades of fuel per gallon; Super 48.82 
lempiras, Regular 47.21 lempiras, Diesel 38.02 lempiras, Kerosene 
33.22 lempiras.  On February 27, the GOH adjusted the calculation 
of ad valorem fuel taxes so that the base price used in the 
calculations will be capped at USD 30 per barrel.  The change 
will mitigate the volatility in tax revenues and temper the 
effects of future increases in the world price of oil.  With the 
approval of the decree, fuel prices were lowered by the following 
amount; Super 3 lempiras, Regular 1.81 lempiras, Diesel 12.05 
lempiras, Gas LPG 2.63 lempiras, and Kerosene 1.39 lempiras. The 
GOH previously expected to earn 5 billion lempiras from fuel 
taxes in 2003 and expects to lose 1 billion of this with the 
approval of the decree. 
 
Looming Retaliatory Tariffs on Nicaraguan Products 
--------------------------------------------- ----- 
 
5.   Honduran hopes were dashed when Nicaraguan legislators 
apparently balked at the proposed rescinding of Nicaragua's 35 
percent tariff sent to the National Assembly on February 11 by 
President Enrique Bolaos.  The Nicaraguan National Assembly 
implemented the tariff called the "Patriotic Tax" in December of 
1999, after Honduras ratified a treaty with Colombia recognizing 
a Nicaraguan-Colombian maritime dispute as a Colombian 
possession.  The Honduran Association of Industries (ANDI) has 
estimated that the tariff has affected 55 business industries at 
a cost of USD 210 million.  In 1999, when the tariff was 
implemented Honduran exports to Nicaragua totaled USD 74 million, 
by 2001 they had decreased to USD 23 million and are continuing 
to decline. President Maduro announced, on March 3, that he would 
introduce legislation to the National Congress that imposes 
retaliatory tariffs of 35 percent on Nicaraguan goods, and 
possibly on Nicaragua's use of Puerto Corts to distribute its 
products (full report in Ref A). 
 
Papaya Exports to the United States 
----------------------------------- 
 
6.   For the first time, Honduras will export 600,000 tons of 
f 
papaya to the United States.  To produce better quality the seed 
of the papaya has been genetically modified by the Agricultural 
Institute of Science and Technology.  There are currently 28 
orchards and in March papaya growers expect a harvest of 30,000 
tons per hectare.  By the end of June 2003 they hope to have 
increased production to 100 orchards.  The papaya export is being 
facilitated by a USAID assisted hot water treatment project (to 
rid the papayas of medfly infestation). 
 
Cocoa Harvest to Decline by 70 percent 
-------------------------------------- 
 
7.   This year's cocoa harvest is expected to decline by 70 
percent due to the Monilia plague that has destroyed most of this 
year's crop.  The decline will affect 30,000 people who depend on 
cocoa production and cost the economy a loss of 50 million 
lempiras (USD 2.9 million).  The industry is looking for 
government and international aid to obtain better fertilizers, 
fungicides, and develop new varieties that are resistant to 
diseases. 
 
Impact of Illegal Logging on National Economy and Poverty 
--------------------------------------------- ------------ 
 
8.   A World Bank study, which investigated illegal logging in 
Honduras and Nicaragua, addressed the impact it has on the 
national economy and poverty.  The investigation concluded that 
the governments of Honduras and Nicaragua lose USD 300 million to 
USD 1 billion annually from illegal logging in national, private, 
and public forest. These losses include profits not received by 
the governments for the sale of the wood and tax revenue not 
received.  Other economic losses that are not quantified are 
lower per capita income for the workers and lower levels of 
literacy and life expectancy.  The study determined that in 
Honduras 70 to 80 percent of the annual cutting of hardwood and 
30 to 50 percent of the pine harvesting is illegal.  It was 
estimated that annually USD 50 to USD 70 million, is earned from 
illegal logging in Honduras, which has flourished due to the 
reluctance of local officials to enforce logging laws. 
 
9.   The study stated that companies who illegally log obtain the 
cooperation of local officials through bribery.  To resolve this 
problem, several laws have been proposed that will make 
corruption less prevalent and use locals in detecting and 
reporting illegal logging activity.  Recent efforts by Honduran 
authorities to stop illegal logging have been met with 
resistance.  On February 25, when authorities attempted to stop 
illegal logging in Nahuaterique a town next to the El Salvadorian 
border, 7 police and 4 military officials were held by close to 
400 local residents.  This incident shows the difficulties the 
GOH faces in stopping illegal logging because it is sometimes the 
only source of income in the region. 
 
PALMER