US embassy cable - 03TEGUCIGALPA674

C O N F I D E N T I A L SECTION 01 OF 04 TEGUCIGALPA 000674 
 
SIPDIS 
 
STATE FOR WHA, WHA/CEN, EB, PM, OES, S/CT AND CA 
STATE PASS AID FOR LAC/CEN 
DOL FOR ILAB 
 
E.O. 12958: DECL: 03/18/2013 
TAGS: ECON, PGOV, EFIN, EAID, ETRD, KJUS, PREL, ELAB, HO 
SUBJECT: ECONOMIC TOUR D'HORIZON WITH HONDURAN MINISTER OF 
THE PRESIDENCY LUIS COSENZA 
 
Classified By: AMBASSADOR LARRY PALMER; REASONS 1.5 (B) AND (D) 
 
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SUMMARY 
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1. (C) In a March 12 call on Honduran Minister of the 
Presidency Luis Cosenza, DCM and Econcouns discussed the top 
economic items on the bilateral agenda.  Cosenza committed to 
campaigning for the repeal of the teacher and nurse 
"estatutos" that have caused the rapid increase in government 
expenditures over the past five years (and impeded the 
attainment of an IMF program this year).  He expressed 
interest in the Millenium Challenge Account, and in ways to 
include incentives for new foreign investment in the Central 
America Free Trade Agreement (CAFTA) negotiations.  DCM urged 
rapid ratification of the ICC Article 98 Agreement and two 
OAS counter-terrorism conventions, and a raft of important 
economic legislation. Both sides agreed on the importance of 
improvement to port security, Honduras' investment climate 
and the rule of law.  End Summary. 
 
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Bilateral and Regional Relationships 
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2. (C) DCM expressed USG satisfaction with the March 11 
suspension by the Nicaraguan Congress of the 35 percent 
retaliatory tariff and appreciation for Honduran restraint 
over the past three years, indicating that the USG had been 
quietly urging this move in the interest of integration. 
Cosenza attributed much of the credit to Nicaraguan President 
Bolanos.  Asked if he thought that the Honduran Congress 
would proceed with the enactment of sanctions (and immediate 
suspension) as some in the business community were urging, 
Cosenza shook his head no.  He indicated that President 
Maduro was advising against such a move; if the Nicaraguan 
tariff were reinstated, the Honduran Congress could easily 
enact countermeasures at that time. 
 
3. (C) Cosenza indicated that President Maduro will try to 
meet with the IMF, World Bank and IDB on the margins of the 
April 11 meeting of the Central American Presidents with 
President Bush on CAFTA.  He asked for suggestions on other 
meetings. 
 
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Negotiations with the IMF 
------------------------- 
 
4. (C) Asked about the status of fiscal measures needed to 
reach agreement with the IMF on a new Poverty Reduction and 
Growth Facility program, Cosenza replied that the package of 
tax measures was ready and will be submitted in early April, 
between the President's trips to Italy (which may now be off) 
and Washington.  Emboffs complimented him on his clear 
presentation on the need to repeal the wage and benefits 
provisions of the special laws (called "estatutos") governing 
teacher and medical worker pay.  Cosenza confirmed that the 
GOH had concluded that this was absolutely necessary to 
regain control over government finances and reach agreement 
with the IMF, and had decided to fight as hard as possible to 
attain this goal.  He noted that the move could come within 
the next week; the GOH is currently discussing which estatuto 
will be first.  Comment: The government may be working with 
the Supreme Court to have the estatutos found 
unconstitutional.  This would allow them to avoid the 
difficult task of building 
the needed consensus for repeal of the laws in the Congress. 
End Comment. 
 
5. (C) Econcouns provided Cosenza with a copy of the 
Embassy's March 10 notification to the Minister of Finance, 
per instructions from Washington, that lack of payment of USD 
12,000 on July 15 or USD 1.7 million on September 3 for debt 
service on Department of Defense loans could trigger a 
cessation of new USG foreign assistance under the Brooke 
Amendment.  The looming debt service payment deadline was one 
more important driver for reaching an agreement with the IMF 
that would put the GOH back on the road to HIPC debt relief. 
 
 
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Millennium Challenge Account 
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6. (C) DCM provided Cosenza with a copy of the fact sheet on 
the Millennium Challenge Account program and outlined the 
currently envisaged system of qualifying for MCA eligibility 
and emphasized the importance of paying special attention to 
measures that might help the GOH meet the good governance 
criteria.  Cosenza expressed his appreciation for the 
background on the program and indicated that the eligibility 
criteria are all important issues that the GOH is already 
working to address for the sake of the country's own 
well-being.  He requested a list of the countries that are 
likely to be considered for eligibility during the first year 
of the program, in order to start getting an idea of how 
Honduras compares to its low-income peers. 
 
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Agriculture Issues 
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7. (C) DCM noted that there would be a decision on Honduras's 
request for wheat under the Food for Progress Program 
shortly.  If Honduras is approved, it will be important for 
the Ministry of Agriculture (SAG) and USDA  to work closely 
on a agreement on the use of the local currency proceeds from 
the sale of the wheat.  Cosenza asked if the funds could be 
used for low-income housing.  Econcouns explained that they 
are more commonly used for agricultural projects.  She took 
the opportunity to emphasize the importance of completion of 
the last major USDA-SAG project, the transfer of the mango 
hot-water treatment plant in Comayagua to an association of 
mango producers.  She explained that the legislation creating 
this association had been stalled in Congress and that 
Emboffs had been talking to the Minister of Agriculture about 
the importance of completion of the transfer.  Cosenza 
promised to look into it. 
 
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CAFTA 
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8. (C) Econcouns gave an overview of the current status of 
the Central American Free Trade Agreement negotiations and 
asked about GOH plans to build up the permanent, technical 
trade policy staff.  Cosenza said that the GOH is supporting 
Minister of Industry and Trade Norman Garcia's efforts to 
hire and train negotiators and reiterated his strong belief 
that the only way to keep well-trained negotiators after a 
change in administration would be to create a non-political 
public-private institute.  He discounted the possibility that 
Congressional approval of a Civil Service law would prevent 
large-scale turnover in government agencies after the next 
election; Cosenza acknowledged that the law would be an 
important step, but emphasized that it would take time to 
change the political culture. 
 
9. (C) Econcouns noted that there would be sensitivities on 
agriculture on both sides, but that the two countries could 
work together in the WTO toward the goal of reducing trade 
distorting subsidies without affecting the USG's ability to 
implement food aid and agricultural credit programs that are 
available to countries like Honduras. She confirmed that the 
Embassy is working closely with the Trade Ministry to 
identify areas in which cooperation in the WTO negotiations 
would be particularly helpful, such as the TRIPS moratorium, 
the agriculture negotiations and the services talks. 
 
10. (C) Econcouns also mentioned that during the course of 
the negotiations, the USG will be warning the Central 
Americans that some issues can not bend because of their 
importance to gaining U.S. congressional ratification for an 
eventual CAFTA, such as compliance with labor and environment 
language in the Trade Promotion Authority legislation.  The 
GOH can expect that some of the trade rule chapters may 
require changes to Honduran legislation. 
 
11. (C) Cosenza asked about the possibility of including in 
the CAFTA a provision allowing U.S. investors to deduct 
income taxes paid in Honduras from their U.S. tax returns 
(thus allowing the GOH to start levying income tax on these 
maquila companies).  Econcouns explained that the Treasury 
Department is the key contact for discussion of a prospective 
Double Taxation treaty.  The GOH could forward a request 
directly to Treasury (and she had provided this information 
to the Ministry of Finance previously).  She also explained 
that in considering these requests, Treasury places priority 
on those countries that the U.S. private sector has 
identified as important.  As far as the elimination of the 
Honduran income tax exemptions for companies located in free 
zones, Econcouns noted that it was generally the 
Honduran-owned maquila companies (comprising about 40-50 
percent of the textile and apparel firms in Honduras) that 
have pushed for maintenance of these tax incentives. 
Investment incentives will be an importa 
nt topic of negotiation in the CAFTA talks.  Cosenza then 
backtracked and expressed the GOH's view that continued 
maintenance of the free zones would be important to keeping 
the textile and apparel industry in Central America. 
 
12. (C) Cosenza also asked about the possibility of the 
inclusion of tax incentives by the USG for U.S. companies to 
invest in Honduras and other Central American companies, 
along the lines of incentives provided for Puerto Rico (an 
apparent reference to Section 936 exemptions from federal 
taxes for Puerto Rican based subsidiaries of U.S. companies). 
 He talked at length about the importance of a CAFTA 
agreement that promotes additional investment so that it does 
not just represent at the end another broken dream. 
Econcouns countered that U.S. companies who critique the 
investment climate in Honduras never mention the need for tax 
incentives - instead they point to issues such as the high 
cost telecommunications and energy, the weak judicial system, 
crime, and regulatory and administrative delays.  Cosenza was 
adamant that the GOH will be seeking some type of foreign 
investment incentive program from the USG in the context of 
the CAFTA negotiations. 
 
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Investment Climate, Commercial Disputes and Needed Legislation 
--------------------------------------------- ----- 
 
13. (C) Continuing the discussion on needed improvements in 
the investment climate, DCM commented on the impressive 
presentation made by Vice President Vicente Williams on March 
11 during the rollout of the Competitiveness Council's 
workplan.  An important element affecting the investment 
climate is the relatively weak judiciary.  The DCM thanked 
Cosenza for the government and Supreme Court's help in 
pushing for resolution of outstanding commercial disputes. 
Post saw a number of cases resolved in late 2002, although 
there had been significant backsliding in three of the cases 
in early 2003.  The DCM also emphasized that no progress had 
been made to date in arbitration of outstanding Amcit land 
disputes involving the Honduran government or municipalities. 
 Econcouns reminded Cosenza that the GOH had adopted a law 
allowing the state to engage in arbitration in selected cases 
during a short window of six months.  As the law went into 
effect on January 16, there are only approximately four 
months left to make of 
fers to the Amcit claimants.  Cosenza indicated that he would 
look into the issue. 
 
14. (C) The DCM mentioned pending legislation that we see as 
important.  On the economic side, these include passage of 
the civil service reform law, a civil aviation law, 
restructuring of the telecommunications and power sectors, 
creation of a unified land registry, and the legislation 
creating the mango plant association.  On the political side, 
the DCM emphasized the critical importance of ratification of 
ICC Article 98 Agreement and two pending OAS conventions on 
counter-terrorism. 
 
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Port Security 
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15. (C) Emboffs also emphasized the importance of vastly 
improved port security, in the post September 11 environment. 
 They urged Cosenza to ensure that the GOH prepares the 
country's ports over the next year to meet new legislation 
for maritime traffic to the U.S., even if this requires 
partial or total concession of port operation and security 
functions.  Cosenza responded that the GOH is fully committed 
to doing so, and in fact do hope to concession Puerto Cortes 
during this administration.  The Customs Service is currently 
working on the purchase of container X-ray equipment that 
will be used to scan both incoming and outgoing containers. 
He took on board Emboffs comments about the importance of 
also strengthening port perimeter security and creation of an 
independent security force. 
 
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Roatan 
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16. (C) Econcouns summarized the diverse problems that Post 
is seeing on the island of Roatan, including egregious land 
disputes, lack of arrests in Amcit murder cases, drug 
trafficking, flouting of U.S. fishing laws, and lack of 
environmental enforcement.  She acknowledged that the rule of 
law has traditionally been weak in the Bay Islands but 
explained that the treatment of Amcits in Roatan is becoming 
intolerable; Consenza indicated that he concurred. 
She explained that there had been no progress to date in the 
Moore land case and at the same time, she noted, the 
islanders are benefiting from U.S. dollars in a variety of 
ways - tourism, real estate tax revenues, fishery exports to 
the U.S. and dockings by U.S. Navy and Coast Guard vessels. 
 
17. (C) Cosenza, fairly frankly, discussed the wide-ranging 
challenges they faced in improving the rule of law in the 
islands.  He noted that the USG perhaps has the strongest 
leverage of all, such as our ability to deny or revoke visas 
for presumption of illegal activity and capacity to invoke 
sanctions for violations of U.S. laws such as the TEDS/shrimp 
decertification.  Cosenza indicated that the GOH would 
understand if the USG takes targeted moves, and asked only 
that we not harm the reputation of the country or cut off 
U.S. tourism.  DCM noted that we will stay in close touch on 
these issues. 
 
18. (C) Comment: The discussion was cordial and relaxed, and 
provided a good opportunity to ensure that President's top 
staff is aware of the top economic issues on the USG's 
agenda. Cosenza appeared sincerely intent on tackling the 
estatutos, one of the major reasons for the GOH's structural 
and growing budget deficit.  Although he had received 
briefing material on the Millennium Challenge Account from 
the Honduran Ambassador in Washington, he appreciated the 
opportunity to discuss the envisioned process in greater 
detail.  The discussion also gave Emboffs an opportunity to 
focus on the Honduran need to make stronger efforts on good 
governance and anti-corruption.  The GOH, if found eligible, 
can be expected to make MCA proposals for large 
infrastructure projects and funding of low-income housing. 
Cosenza also seemed sincerely interested in improving port 
security in order to assure Puerto Cortes' continued 
importance for shipping between the U.S. and the isthmus. 
 
19. (C) Comment continued: Cosenza's push for USG incentives 
for companies investing in Central America reflects the lack 
of understanding in the Honduran government of U.S. trade 
policy and sensitivities in the U.S. about claims that trade 
agreements lead to an export of jobs.  In the discussions 
about the investment climate and Roatan, he expressed the 
GOH's frustration with their inability to make more rapid 
progress in changing the status quo.  Embassy will continue 
to urge the GOH to focus on the details of the CAFTA 
negotiations, including the trade capacity building 
discussions, and to move on reforms that will improve the 
investment climate in Honduras (including moving on long 
standing investment and commercial disputes).  We will also 
continue to encourage the Hondurans to be more active in 
support of our mutual interests in the FTAA and WTO 
negotiations.  End Comment. 
Palmer