US embassy cable - 03TEGUCIGALPA1169

UNCLAS SECTION 01 OF 04 TEGUCIGALPA 001169 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EB, DRL/IL, WHA/EPSC, AND WHA/CEN 
USDOC FOR 3134/USFCD/IOI/WH/RD/DLUTTER 
USDOC FOR 4320/IEF/WH/OMCB 
USDOC FOR 4322/ITA/MAC/WH/OLAC/EJAFFEE 
GUATEMALA FOR COMMATT DTHOMPSON AND AGAH FCOOLIDGE 
DOL FOR ILAB 
STATE PLEASE PASS TO USAID, OPIC, EXIM, USTR 
STATE PLEASE PASS TO USED IDB, USED WB, USED IMF 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ETRD, ENRG, EINV, EAIR, ELAB, PGOV, HO 
SUBJECT: HONDURAN ECON HIGHLIGHTS: MARCH AND APRIL 2003 
 
REFS: A) TEGUCIGALPA 00865 
 
      B) TEGUCIGALPA 00606 
      C) TEGUCIGALPA 00652 
 
TOPICS: 
 
MACROECONOMIC ISSUES 
     GDP Growth in 2003 
     Lempira Devaluation 
     Rise in Inflation 
     Honduran Congress Approves New Agricultural Law 
     Honduran Congress Adopts New Fiscal Package 
     GOH Increases Minimum Wage Base 
 
TRADE 
     Coffee Woes in Exports and Prices 
     Nicaraguan National Assembly Temporarily Suspends Tariff 
 
INVESTMENT 
     Honduran Bid of Mobile Telephone Service 
     Sol Air to Commence Daily Service to El Salvador 
 
FOREIGN AID 
     IDB and Central American Bank of Economic Integration Loans 
 
MACROECONOMIC ISSUES 
 
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GDP Growth in 2003 
------------------ 
 
1. (U) The Central Bank of Honduras expects the GDP to increase 
by 3.0 to 3.5 percent in 2003. It grew by 2.0 percent in 2002, 
which was lower than the increases of 2.7 and 4.8 percent in 2001 
and 2000, respectively. The Bank expects the GDP to reach more 
than 121 billion lempiras (USD 7.03 billion), a 21 billion 
lempira (USD 1.2 billion) increase from the 2002 GDP of 100 
billion lempiras (USD 5.89 billion).  The expected GDP growth is 
being attributed to a recuperation of traditional exports and the 
anticipation of increased profits from the telecommunication, 
electricity, housing, agriculture and livestock sectors. 
 
------------------- 
Lempira Devaluation 
------------------- 
 
2. (U) From January to March, the lempira devalued by 1.3 
percent, less than the trimester of the previous years 
devaluation of 1.7 percent.  In nominal terms this year's 
devaluation equals 22 centavos, while the past year registered 28 
centavos. 
 
----------------- 
Rise in Inflation 
----------------- 
 
3. (U) The Central Bank of Honduras registered a 1.3 percent 
increase for the Consumer Price Index (CPI) in February, which is 
higher than the 1.1 percent increase from February 2002. 
January's CPI registered a .8 percent increase, which is higher 
than the .3 percent increase from January 2003.  The rising 
inflation has been attributed to the increase in the price of 
electricity, water, and fuel, which contributed .3 points to the 
percentage of the February CPI.  Higher educational cost was the 
most influential factor in February's CPI increase and 
contributed .4 points to the percentage. 
 
--------------------------------------------- -- 
Honduran Congress Approves New Agricultural Law 
--------------------------------------------- -- 
 
4. (SBU) The Honduran National Congress approved on April 23 an 
agricultural debt relief program (called the Agricultural Sector 
Financial Strengthening Law).  This law replaced the agricultural 
credit laws enacted in previous years that were deemed to be 
ineffective in dealing with the debt arrears of the agricultural 
sector and too costly for the government if they were to be 
implemented.  The stated purpose of the new law, proposed by the 
Executive Branch, is to resolve the agricultural debt crisis for 
some 13,600 Honduran farmers by providing debt forgiveness, 
rescheduling of the existing debt, and providing new credit. The 
law will also help the private banking system because it pays off 
much of the bad agricultural debt held by the banks (although in 
the form of low-yielding long-term government bonds), and 
attempts to protect banks against future financial agricultural 
losses by requiring farmers to pay for crop insurance. 
 
5. (SBU) This law creates a trust fund of up to 4.0 billion 
lempiras (USD 235.3 million) in FONAPROVI (the government's 
second tier development bank) to finance this agricultural debt- 
relief program over ten years.  The law legislates that the 
government will forgive the entire debt of farmers who owe banks 
less than 50,000 lempiras (USD 2,941). In addition, the 
government will forgive 50 percent of the debt of farmers who owe 
banks more than this amount, up to a maximum of 4.0 million 
lempiras (USD 235.3 million). These farmers' debts will be paid 
by having the government provide 1.7 billion lempiras (USD 100 
millon) in low-yield long-term government bonds to the creditor 
banks over a period of ten years. The yearly government payment 
to the banks, including interest payments, is a declining amount, 
starting with an initial payment of 347 million lempiras (USD 
20.4 million) in 2003, which has already been included in this 
year's national budget. The remaining 2.3 billion lempiras (USD 
133 million) to be allocated to the trust fund will be used to 
reschedule the remaining 50 percent of the farmers' debt arrears 
so that the banks can issue discounted new loans to these farmers 
at interest rates of 8.725 percent for a maximum ten year term. 
The GOH has estimated the total fiscal cost of the consolidated 
package of assistance at USD 133 million over 10 years (0.15 
percent of the yearly GDP). 
 
6. (SBU) In addition, this new law set off a firestorm of 
criticism in the press, because the President of Congress and a 
number of other politically influential individuals were listed 
as potential beneficiaries of this law.  These individuals' 
interests include ownership and/or business partnerships in 
agricultural enterprises that are highly indebted to banks. 
Several of these individuals are also shareholders in banking 
institutions that will be compensated for bad agricultural loans 
made to agricultural producers.  The law will become effective 
upon President Maduro's signature and its publication in the 
Gaceta. 
 
------------------------------------------- 
Honduran Congress Adopts New Fiscal Package 
------------------------------------------- 
 
7. (SBU) On April 2, the Honduran National Congress adopted its 
second fiscal package of tax measures (called the Law of Tax 
Equity).  The stated purpose of this package is to expand the tax 
base, reduce chronic budget deficits, move the GOH towards an IMF 
agreement, and eliminate a number of special tax exemptions.  The 
GOH's target had been an annual revenue increase of 3.5 billion 
lempiras (USD 200 million)- of which 2 billion lempiras (USD 118 
million) would be collected from the remaining months of 2003. 
 
8. (SBU) Key provisions in the fiscal package include reducing 
income tax exemptions for bonuses and representation expenses for 
individuals with an annual income above 600,000 lempiras (USD 
35,294), unifying the corporate tax at a rate of 25 percent of 
net taxable income and reducing the number of products exempt 
from sales tax (from 800 to about 200 mostly foodstuffs, 
pharmaceuticals, books and publications and school supplies).  On 
the expenditure side, provisions include freezing wages for 
public employees not covered by collective bargaining agreements 
and canceling 60 percent of government positions that were vacant 
on December 31, except in education, health and security.  The 
Congress discarded three important tax measures from the original 
government proposal and increased the sales tax on tobacco 
products and alcoholic beverages (to 15 percent) to compensate 
for this lost revenue.  IMF sources are skeptical that the total 
revenue from the measures will be as high as the GOH's 
projections.  (See ref A for further information on the tax 
measures). 
 
------------------------------- 
GOH Increases Minimum Wage Base 
------------------------------- 
 
9. (U) On March 21, the GOH officially increased the minimum wage 
base by nine percent for most workers with retroactive payments 
starting from January 1.  Only a small number of workers, mostly 
in companies with fewer than 15 employees received the 12 percent 
increase that the press was reporting.  The minimum wage decision 
was devolved to President Maduro after bilateral negotiations 
between the three labor confederations and the business 
associations ended without an agreement.  Congress is also 
examining possible legislation for the creation of a USD 88 
million workers fund that will provide money to the unemployed 
for living expenses and other necessities. 
 
10. (U) The nine percent increase has garnered discontentment 
from representatives of the business community.  The National 
Association of Industries (ANDI) has been one of the most vocal 
groups.  They have stated that the increase in the minimum wage 
will force businesses to increase the prices of their products, 
which will lead to a rise in inflation.  The increase will occur 
because businesses have already set the prices of their products 
based on a minimum wage increase of no more than 8 percent.  ANDI 
has also stated that the decision of the GOH was not based on the 
needs of the nation, but on the need to gain the political 
support of labor confederations and their members. 
 
TRADE 
 
--------------------------------- 
Coffee Woes in Exports and Prices 
--------------------------------- 
 
11. (U) According to the Honduran Institute of Coffee, coffee 
exports in 2003 will amount to 2.8 million sacks, a decrease of 
18 percent from last year's 3.4 million.  From the period of 
October 2002 to April 2003, exports amounted to 2,007,578 sacks 
that represented an income of USD 115 million.  The increase in 
international coffee prices of USD 8.16 from USD 49.54 to USD 
57.70 was being looked upon as a possible savior for the coffee 
industry whose production and revenues have been declining. 
Industry analysts are expecting the numbers to continue their 
descent as the year moves ahead. 
 
--------------------------------------------- ----------- 
Nicaraguan National Assembly Temporarily Suspends Tariff 
--------------------------------------------- ----------- 
 
12. (U) The Nicaraguan National Assembly's March 11, temporary 
suspension of its 35 percent tariff on Honduran goods put an end 
to the long-standing dispute between the two nations.  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.  In March, after waiting three 
years for Nicaraguan legislators to repeal the tariff, the 
Honduran National Congress decided it was time to implement 
retaliatory tariffs on Nicaragua.  With the National Assembly's 
temporary suspension of the tariff the Honduran National Congress 
cut short their efforts to enact retaliatory tariffs. Under the 
direction of the Ministry of Industry and Trade, Honduran 
companies are now in the process of restoring Honduran exports to 
Nicaragua.  If all goes well Honduran exports to Nicaragua can 
accumulate between USD 60 to 70 million and should continue to 
increase in the future. (Full report in ref B and additional 
background information in ref C). 
 
INVESTMENT 
 
---------------------------------------- 
Honduran Bid of Mobile Telephone Service 
---------------------------------------- 
 
13. (U) On April 25, CONATEL (Honduras' equivalence of the FCC) 
announced the awarding of a 25-year PCS contract to the Honduran- 
Swedish consortium Megatel-EMCE.  Megatel-EMCE's bid of USD 7.1 
million won it the contract over two other bidding companies 
Entel of Chile and Bellsouth Honduras.  Working under band b, 
Megatel-EMCE plans to install more than 50,000 lines within the 
next year to provide nationwide and international cellular 
service.  Megatel-EMCE will also provide transmission of video, 
data, and photos through its lines.  Megatel-EMCE plans to 
commence service towards the end of this year and is stating that 
it will offer competitive prices (relative to existing wireless 
operator, Celtel) to consumers. 
 
--------------------------------------------- --- 
Sol Air to Commence Daily Service to El Salvador 
--------------------------------------------- --- 
14. (U) Starting June 11, the Honduran air carrier Sol Air will 
begin daily flights (except for Saturday) to San Salvador.  Sol 
Air had originally applied for a five-year contract to operate in 
El Salvador, but instead Salvadoran aviation officials granted 
them a contract for one-year (until March 31, 2004).  Sol Air has 
been applying for access to the Salvadorian market since 2002, 
but had been consistently denied by Salvadorian officials.  In 
March, this became a highly contentious issue when, after meeting 
with Salvadoran aviation officials for almost two years, the 
president of Sol Air, Ricardo Martinez, requested that the GOH 
cancel Salvadoran commercial airlines entrance privileges into 
Honduras.  It is widely believed that officials of TACA, an El 
Salvadoran air carrier, were highly influential in convincing 
Salvadoran officials to deny Sol Air access. 
 
FOREIGN AID 
 
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IDB and Central American Bank of Economic Integration Loans 
--------------------------------------------- -------------- 
 
15. (U) The Inter-American Development Bank (IDB) approved a USD 
20 million loan to the GOH for its peace and coexistence project. 
The project's objective is to reduce crime and violence among 
youth in the Valle de Sula region, a region that has some of the 
highest crime statistics in the nation.  The program will provide 
social services to youth such as educational assistance, 
training, outreach and counseling services, prevention campaigns, 
and the reformation of gang members. 
 
16. (U) The Central American Bank of Economic Integration (CABEI) 
approved a USD 22.5 loan to the GOH to complete the last portion 
of the highway, which will link Puerto Cortes to the Guatemalan 
border.  The latest loan will bring the CABEI's total 
contribution to this project to USD 45.3 million. 
 
Palmer