HONDURAN ECON HIGHLIGHTS: MARCH AND APRIL 2003

UNCLAS SECTION 01 OF 04 TEGUCIGALPA 001141

SIPDIS

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

--------------
GDP Growth in 2003
--------------


1. 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. 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. 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. 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. 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. 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. 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. 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. 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

-------------- --------------
IDB and Central American Bank of Economic Integration Loans
-------------- --------------


15. 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. 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