IMF AGREEMENT HINGING ON SALARY LAW

UNCLAS SECTION 01 OF 04 TEGUCIGALPA 002034

SIPDIS

SENSITIVE

STATE FOR WHA/CEN, WHA/EPSC, DRL/IL, EB/IFD/OMA, INR, DS
STATE PASS AID FOR LAC/CEN
STATE PASS USTR FOR ANDREA GASH DURKIN
TREASURY FOR C. KUSHLIS
DOL FOR ILAB

E.O. 12958: N/A
TAGS: EFIN ECON PGOV EAID ETRD ELAB EAGR PINR ASEC HO
SUBJECT: IMF AGREEMENT HINGING ON SALARY LAW

REF: TEGUCIGALPA 1581 AND PREVIOUS

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SUMMARY
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1. (SBU) The imminent GOH submission to Congress of a new
government salary bill (substituting the broader Civil
Service Framework bill) is dominating the political debate in
Honduras this week. President Maduro and his team have
appeared on the airwaves and taken out ads in the papers
defending the need to address the burgeoning public sector
wage bill, and in particular the legislatively-mandated
increases in teacher and medical employees' salaries. The
World Bank will sponsor a two-day roundtable entitled the
National Dialogue, on August 28-29, in an effort to forge a
national fiscal pact that will facilitate the adoption of the
legislation by the National Congress, when introduced next
week. The IMF and GOH continue intensive discussions on the
details needed to be included in the law to lay the basis for
an IMF agreement, and continue to have strong differences.
The leftist Popular Block held demonstrations in Tegucigalpa
and temporarily blockaded the major routes into the city
August 26 to voice its membership's strong opposition to the
measures. This may prove to be the endgame for the IMF
negotiation. End Summary.

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The Needs: A Salary Law and Wage Bill Reductions
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2. (SBU) Improved control of the burgeoning public sector
wage bill has now become the critical issue in Honduras'
troubled negotiations with the International Monetary Fund on
a new Poverty Reduction and Growth Facility (PRGF) program.
Government wages rose by 140 percent in nominal terms between
1998 and 2002, accounting for 60 percent of the growth in
public spending in that period. Government wages have
reached an unsustainable level of ten percent of GDP.
Although other issues (such as the adequacy of recent tax
measures and implementation of financial sector reform)
remain on the table and will need to be addressed in the
context of a three-year PRGF program, Fund staff have made
clear to the government that the following measures are
minimum requirements for return of a mission and negotiation
of the letter of intent: (1) legislation which provides the
executive branch of government control over public sector
wage policy, and (2) reductions in the wage bill as a percent
of GDP of 0.5 percent in both 2004 and in 2005, which in turn
implies a reduction of the planned wage increases for
teachers. The IMF had earlier been pushing for a 1.0 percent
of GDP reduction in the wage bill in both 2004 and 2005, but
has agreed to allow the GOH to fill the budget hole with
additional foreign donations.


3. (SBU) The IMF and GOH have agreed that negotiation of a
fiscal pact among different sectors of society would be the
best way to develop the elusive consensus on needed changes
in Honduran law and policy. The World Bank office here is
assisting in this process by bringing in Colombian economist
and former Finance Minister Roberto Junguigo to moderate a
two-day roundtable entitled the National Dialogue, on August
28-29. Approximately 60 participants, from government,
Congress, private sector, public sector unions and civil
society, will participate in the roundtable. One of the
hoped-for outcomes of this meeting will be a commitment on
the control of public sector salaries.


4. (SBU) Because of the political controversy that has arisen
this summer as a result of the discussion over a draft Civil
Service law, the GOH has decided to divide the bill in two.
The GOH now plans to introduce a shorter bill (during the
first week of September) called the Law on Salary Equity that
only covers the wage policy for the government employees.
The reforms that would establish a permanent and professional
civil service will be submitted at a later date. To meet the
targets of reducing the public sector wage bill as percent of
GDP in 2004 and 2005, the GOH has proposed a law that would
include the spreading out of planned teacher increases for
2004 and 2005 over the four-year period of 2004-2007.


5. (SBU) An IMF mission, visiting Honduras in late July, saw
a draft of the bill and gave its blessing with one important
exception. The Fund staff objected to the provision stating
that teachers will not be subject to the integrated salary
(one salary rate, without additional built-in raises for
years of service, teacher certification and other collateral
allowances) until 2008; this matches the planned, new period
for the teacher agreement. This draft government salary bill
has been under intensive, but private, discussion since that
time. The IMF resident rep. continues to express the Fund's
concerns that the lack of reduction of the collateral
allowances during the transition period will undercut the
GOH's efforts to control the wage bill in the next few years
and reduce the budget deficit to manageable levels. This is
going to be a politically difficult proposition; teachers are
already striking and marching against an earlier proposed
reform to the civil service law that has much more modest
impact on their compensation packages.


6. (SBU) The GOH, working closely with the World Bank, is
trying to square the circle by identifying other ways to
reach the IMF's fiscal goals. They hope, for example, that
the fiscal pact will include a two-year wage freeze for
doctors and nurses. They may also try to focus on quiet
incremental changes to the two most costly collateral
built-in salary increases in the teachers' compensation
statute. For example, one idea forwarded is that the
"quincenio" provision, which provides a twenty percent
increase in salary for every five years of service, might not
be provided to new teachers. Another idea, that the
"licenciatura", which provides a seventy percent increase for
teachers who receive their teacher certification, be divided
between a 20 percent increase in pay and a 50 percent
contribution to pension funds.

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Appealing for Congressional and Public Support
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7. (SBU) Congressional leaders have made it clear, up to now,
that any proposed reforms to medical and teacher compensation
(implying changes to the special statutes that govern these
public sector groups) would be dead on arrival unless there
is a consensus from all sides on the bill, which has forced
the government into problematic negotiations with the unions.
The teacher unions have refused, up to now, to reopen
negotiations on the 2002 agreement (which by the way, were
only accepted by the primary school teacher unions and not
the secondary teachers, although the GOH imposed these terms
on the secondary teachers).


8. (SBU) Under heavy pressure from the international
community for more leadership and political courage, Maduro
and his team have started a full court (although at times
clumsy) press to appeal for public support. Maduro spoke to
the nation on August 24 on the need to control the public
sector wages of certain privileged groups for the sake of
economic reactivation.


9. (SBU) Minister of the Presidency Luis Cosenza, Central
Bank President Maria Elena Mondragon, and Finance Minister
Arturo Alvarado spoke the next evening providing the
technical arguments for the need to control the wage bill.
The three focused on the fact that these privileged groups
are receiving large annual increases while others have had
their wages frozen, and all at the expense of provision of
public services and spending on poverty reduction. Although
they did acknowledge that wage policy control was vital to
reaching an agreement with the IMF, the GOH team has tried to
make it clear that the underlying issue is the unsustainable
budget deficits.


10. (SBU) The politics of this legislation has been
complicated all along, and has been a clear example of
Maduro's weak political position and limited political skills
of his technocratic administration. Maduro is the first
democratically elected president whose party has not had a
majority in the National Congress, making his administration
dependent on support from small parties. The Christian
Democrats left a formal coalition in July (citing, among
other reasons, the GOH's lack of openness about the IMF
negotiations and the civil service law deliberations). The
GOH now needs to pick up votes from the opposition Liberal
Party and try to keep members of Maduro's own Nationalist
party, from straying. Politically, neither side can afford
to be seen as catering to the demands of the IMF over the
interests of Honduran workers. On the other hand, none of
the political parties can afford the economic mess that will
result if an agreement with the Fund is not reached (and the
structural deficits are not addressed). As political leaders
around the country are weighing their chances of gaining a
Presidential nomination, these calculations become difficult.


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Popular Block and Teachers Take to the Street
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11. (SBU) Teacher's union and other opponents of any change
in the civil service law that would negatively affect their
pay and benefits have denounced the proposed changes as
"fascist", despite the fact that no one has yet seen a draft
bill detailing the proposed changes. The fact that the IMF
is pressing for such changes makes it easier for reform
opponents to protest proposed changes as, in their view,
globalist, neoliberal economics being imposed via the GOH to
the detriment of Honduran sovereignty and the Honduran
people.


12. (U) The leftist Popular Block, a loosely knit umbrella
organization that encompasses many public sector unions,
leftist NGOs, and other groups, led a series of significant
protests in and around Tegucigalpa August 26 demonstrating
against the proposed civil service law, a new water law, as
well as the usual anti-globalization targets such as CAFTA.
Protesters initially blocked the four major roads in and out
of Tegucigalpa, the roads to Choluteca, Danli, Olancho, and
San Pedro Sula and the North Coast. The demonstrators, while
peaceful, were armed with rocks, sticks, ropes, boards with
nails, and gasoline, and caused huge traffic problems in and
out of the city. Protesters then marched to the center of
Tegucigalpa for demonstrations in front of Congress.
Although peaceful when witnessed by PolOffs, some protesters
later became violent, throwing rocks and Molotov cocktails at
congressional buildings and confronting the police. Post
believes it is likely that the Popular Block will organize
more such demonstrations if Congress takes up a wage bill.

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Comment: Why the Urgency?
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13. (SBU) The negotiations with the GOH have been dragging on
since Maduro took office in January 2002. The last 19 months
have been marked by a series of austerity and tax measures
that have been controversial and politically costly, but in
fact have had only moderate impact on the government's budget
woes. In addition, there have been some key junctures in
which the Fund's position was ignored (i.e. the unsustainable
cost of the 2002 agreement with the teachers) or
misunderstood (i.e. the Agricultural Finance law). The
Congress, during this period, has continued to water down
fiscal package legislation and try to slip in new budget
busting measures without care. The IMF mission has thus
become increasingly skeptical about GOH commitments. The
GOH, after getting two fiscal packages through in two years
and cutting discretionary spending to the bone, feels
strongly that the IMF has been unfair and unrealistic about
political realities. One could make the argument that the
latest burp in the negotiations is just more of the same.


14. (SBU) However, there are two new changes in the
environment that justify the argument that it is now or never
for a Honduran IMF agreement. First, the GOH has now
basically exhausted the USD 170 million dollars previously
held by Hondutel (the Honduran state-owned telephone
company). These funds have been used to fund budget deficits
and cash requirements for state takeovers of failed banks
last year. From now on, budget deficits are going to need to
be covered by foreign donations and concessional loans from
international financial institutions. Many of these sources
of funds are tied to having an IMF agreement. At the same
time, deferrals on foreign official debt are starting to
expire, which will increase the demands on the Honduran
treasury. The USG, for example, has notified the GOH of a
series of overdue payments on old DOD debt that must be paid
in order to avoid Brooke amendment sanctions. July and
September payments have now been received, but more payments
are due in October, and throughout 2004.

15. (SBU) If the GOH is not able to reach agreement with the
IMF quickly, President Maduro may be tempted to begin
printing money to cover expenses or to forego the foreign
debt payments and let the Brooke sanctions take effect.
Maduro badly needs to move beyond this issue in order to
begin spending time and money on the strengthening of public
security, education and health programs, and delivering on
his campaign promises of poverty reduction and economic
growth.


16. (SBU) It is beginning to look likely that the GOH will
submit to Congress a government salary bill that does not
fully meet IMF requirements, partially with World Bank
blessing. If that is the case, and the Congress adopts the
legislation (itself a big if),the Fund staff will have a big
decision to make on whether a half glass is better than none
at all. End Comment.
PALMER