HONDURAN ECON HIGHLIGHTS: FEBRUARY 2003

UNCLAS SECTION 01 OF 03 TEGUCIGALPA 000622

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STATE FOR WHA/CEN, WHA/EPSC, DRL/IL, EB, AND OES
STATE PASS TO USAID FOR LAC/CEN
STATE PASS OPIC, EXIM, USTR
STATE PASS TO USED IDB, USED WB, USED IMF
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E.O. 12958: N/A
TAGS: ECON EFIN ETRD ENRG EAGR EINV ELAB PGOV SENV HO
SUBJECT: HONDURAN ECON HIGHLIGHTS: FEBRUARY 2003

REFS: A) TEGUCIGALPA 00606

TOPICS:

-IMF Criteria
-Coffee Production Declines
-Minimum Wage Negotiation Ends in Impasse
-Records Fuel Prices Induce GOH to Reduce Fuel Taxes
-Looming Retaliatory Tariffs on Nicaraguan Products
-Papaya Exports to the United States
-Cocoa Harvest to Decline by 70 percent
-Impact of Illegal Logging on National Economy and Poverty

IMF Criteria
--------------


1. As part of the GOH efforts to reach an agreement with the
IMF, an executive decree was issued by President Maduro to reduce
public expenditure in salaries to the equivalent of 10.1 percent
of the GDP. The measures include: freezing public sector
employee wages for all of 2003, excluding teachers and employees
covered by collective bargaining agreements; cancellation of 60
percent of positions vacant at the end of 2002; freezing of up to
50 percent of vacant positions as they occur this year; reducing
representation expenditures by 85 percent; reducing travel
expenditures by 85 percent; limitations on cellular phone and
vehicle privileges; and centralized management of government
procurement.

Coffee Production Declines
--------------


2. The Honduran Association of Coffee Producers has estimated a
loss of 40 percent of the coffee harvest for the 2002-2003 season
from 4.2 million sacks in 2001-2002 to 2.1 million sacks in 2002-

2003. The association has attributed the decline in production
to cold weather that impacted the coffee zones. The association
has also attributed the decline to torrential rains that
destroyed roads, which prevented workers from maintaining coffee
groves and transporting the harvest to the market. Coffee
producers are also being hurt by continually low international
coffee prices. The president of the Honduran Institute of Coffee
requested financing from the GOH to aid growers in their recovery
from losses. There is pessimism that the government will have
the financing to aid growers and international institutions are
being asked for assistance.

Minimum Wage Negotiation Ends in Standstill
--------------


3. After bilateral negotiations between labor confederations
and businesses ended without an agreement, the GOH announced
plans to intervene in establishing the minimum wage for 2003.
Labor unions were asking for an increase of 25 percent to the
base minimum wage while businesses made a counter proposal of 5
percent. A proposed minimum wage will be presented to the
president, which will likely be approved by him by the end of
March. Minister of Labor German Leitzelar has stated that to
make a fair decision on the issue, the government will consult
with the Central Bank and other ministries. Leitzelar said he
believes that the government's decision will be criticized by
labor unions and businesses, but will benefit the nation as a
whole. LabAtt spoke to Leitzelar's assistant March 7, who
confirmed press reports, but said that the timing of the final
decision was up to the President.

Record Fuel Prices Induce GOH to Reduce Fuel Taxes
-------------- --------------


4. In February, Honduran fuel prices increased to record levels
for the following grades of fuel per gallon; Super 48.82
lempiras, Regular 47.21 lempiras, Diesel 38.02 lempiras, Kerosene
33.22 lempiras. On February 27, the GOH adjusted the calculation
of ad valorem fuel taxes so that the base price used in the
calculations will be capped at USD 30 per barrel. The change
will mitigate the volatility in tax revenues and temper the
effects of future increases in the world price of oil. With the
approval of the decree, fuel prices were lowered by the following
amount; Super 3 lempiras, Regular 1.81 lempiras, Diesel 12.05
lempiras, Gas LPG 2.63 lempiras, and Kerosene 1.39 lempiras. The
GOH previously expected to earn 5 billion lempiras from fuel
taxes in 2003 and expects to lose 1 billion of this with the
approval of the decree.

Looming Retaliatory Tariffs on Nicaraguan Products
-------------- --------------


5. Honduran hopes were dashed when Nicaraguan legislators
apparently balked at the proposed rescinding of Nicaragua's 35
percent tariff sent to the National Assembly on February 11 by
President Enrique Bolaos. 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. The Honduran Association of Industries (ANDI) has
estimated that the tariff has affected 55 business industries at
a cost of USD 210 million. In 1999, when the tariff was
implemented Honduran exports to Nicaragua totaled USD 74 million,
by 2001 they had decreased to USD 23 million and are continuing
to decline. President Maduro announced, on March 3, that he would
introduce legislation to the National Congress that imposes
retaliatory tariffs of 35 percent on Nicaraguan goods, and
possibly on Nicaragua's use of Puerto Corts to distribute its
products (full report in Ref A).

Papaya Exports to the United States
--------------


6. For the first time, Honduras will export 600,000 tons of
f
papaya to the United States. To produce better quality the seed
of the papaya has been genetically modified by the Agricultural
Institute of Science and Technology. There are currently 28
orchards and in March papaya growers expect a harvest of 30,000
tons per hectare. By the end of June 2003 they hope to have
increased production to 100 orchards. The papaya export is being
facilitated by a USAID assisted hot water treatment project (to
rid the papayas of medfly infestation).

Cocoa Harvest to Decline by 70 percent
--------------


7. This year's cocoa harvest is expected to decline by 70
percent due to the Monilia plague that has destroyed most of this
year's crop. The decline will affect 30,000 people who depend on
cocoa production and cost the economy a loss of 50 million
lempiras (USD 2.9 million). The industry is looking for
government and international aid to obtain better fertilizers,
fungicides, and develop new varieties that are resistant to
diseases.

Impact of Illegal Logging on National Economy and Poverty
-------------- --------------


8. A World Bank study, which investigated illegal logging in
Honduras and Nicaragua, addressed the impact it has on the
national economy and poverty. The investigation concluded that
the governments of Honduras and Nicaragua lose USD 300 million to
USD 1 billion annually from illegal logging in national, private,
and public forest. These losses include profits not received by
the governments for the sale of the wood and tax revenue not
received. Other economic losses that are not quantified are
lower per capita income for the workers and lower levels of
literacy and life expectancy. The study determined that in
Honduras 70 to 80 percent of the annual cutting of hardwood and
30 to 50 percent of the pine harvesting is illegal. It was
estimated that annually USD 50 to USD 70 million, is earned from
illegal logging in Honduras, which has flourished due to the
reluctance of local officials to enforce logging laws.


9. The study stated that companies who illegally log obtain the
cooperation of local officials through bribery. To resolve this
problem, several laws have been proposed that will make
corruption less prevalent and use locals in detecting and
reporting illegal logging activity. Recent efforts by Honduran
authorities to stop illegal logging have been met with
resistance. On February 25, when authorities attempted to stop
illegal logging in Nahuaterique a town next to the El Salvadorian
border, 7 police and 4 military officials were held by close to
400 local residents. This incident shows the difficulties the
GOH faces in stopping illegal logging because it is sometimes the
only source of income in the region.

PALMER