Upcoming IMF Mission: Civil Service Reform is

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