ECONOMIC TOUR D'HORIZON WITH HONDURAN MINISTER OF

C O N F I D E N T I A L SECTION 01 OF 04 TEGUCIGALPA 000674

SIPDIS

STATE FOR WHA, WHA/CEN, EB, PM, OES, S/CT AND CA
STATE PASS AID FOR LAC/CEN
DOL FOR ILAB

E.O. 12958: DECL: 03/18/2013
TAGS: ECON PGOV EFIN EAID ETRD KJUS PREL ELAB HO
SUBJECT: ECONOMIC TOUR D'HORIZON WITH HONDURAN MINISTER OF
THE PRESIDENCY LUIS COSENZA

Classified By: AMBASSADOR LARRY PALMER; REASONS 1.5 (B) AND (D)

--------------
SUMMARY
--------------


1. (C) In a March 12 call on Honduran Minister of the
Presidency Luis Cosenza, DCM and Econcouns discussed the top
economic items on the bilateral agenda. Cosenza committed to
campaigning for the repeal of the teacher and nurse
"estatutos" that have caused the rapid increase in government
expenditures over the past five years (and impeded the
attainment of an IMF program this year). He expressed
interest in the Millenium Challenge Account, and in ways to
include incentives for new foreign investment in the Central
America Free Trade Agreement (CAFTA) negotiations. DCM urged
rapid ratification of the ICC Article 98 Agreement and two
OAS counter-terrorism conventions, and a raft of important
economic legislation. Both sides agreed on the importance of
improvement to port security, Honduras' investment climate
and the rule of law. End Summary.

--------------
Bilateral and Regional Relationships
--------------


2. (C) DCM expressed USG satisfaction with the March 11
suspension by the Nicaraguan Congress of the 35 percent
retaliatory tariff and appreciation for Honduran restraint
over the past three years, indicating that the USG had been
quietly urging this move in the interest of integration.
Cosenza attributed much of the credit to Nicaraguan President
Bolanos. Asked if he thought that the Honduran Congress
would proceed with the enactment of sanctions (and immediate
suspension) as some in the business community were urging,
Cosenza shook his head no. He indicated that President
Maduro was advising against such a move; if the Nicaraguan
tariff were reinstated, the Honduran Congress could easily
enact countermeasures at that time.


3. (C) Cosenza indicated that President Maduro will try to
meet with the IMF, World Bank and IDB on the margins of the
April 11 meeting of the Central American Presidents with
President Bush on CAFTA. He asked for suggestions on other
meetings.

--------------
Negotiations with the IMF
--------------


4. (C) Asked about the status of fiscal measures needed to
reach agreement with the IMF on a new Poverty Reduction and
Growth Facility program, Cosenza replied that the package of
tax measures was ready and will be submitted in early April,
between the President's trips to Italy (which may now be off)
and Washington. Emboffs complimented him on his clear
presentation on the need to repeal the wage and benefits
provisions of the special laws (called "estatutos") governing
teacher and medical worker pay. Cosenza confirmed that the
GOH had concluded that this was absolutely necessary to
regain control over government finances and reach agreement
with the IMF, and had decided to fight as hard as possible to
attain this goal. He noted that the move could come within
the next week; the GOH is currently discussing which estatuto
will be first. Comment: The government may be working with
the Supreme Court to have the estatutos found
unconstitutional. This would allow them to avoid the
difficult task of building
the needed consensus for repeal of the laws in the Congress.
End Comment.


5. (C) Econcouns provided Cosenza with a copy of the
Embassy's March 10 notification to the Minister of Finance,
per instructions from Washington, that lack of payment of USD
12,000 on July 15 or USD 1.7 million on September 3 for debt
service on Department of Defense loans could trigger a
cessation of new USG foreign assistance under the Brooke
Amendment. The looming debt service payment deadline was one
more important driver for reaching an agreement with the IMF
that would put the GOH back on the road to HIPC debt relief.


--------------
Millennium Challenge Account
--------------


6. (C) DCM provided Cosenza with a copy of the fact sheet on
the Millennium Challenge Account program and outlined the
currently envisaged system of qualifying for MCA eligibility
and emphasized the importance of paying special attention to
measures that might help the GOH meet the good governance
criteria. Cosenza expressed his appreciation for the
background on the program and indicated that the eligibility
criteria are all important issues that the GOH is already
working to address for the sake of the country's own
well-being. He requested a list of the countries that are
likely to be considered for eligibility during the first year
of the program, in order to start getting an idea of how
Honduras compares to its low-income peers.

--------------
Agriculture Issues
--------------


7. (C) DCM noted that there would be a decision on Honduras's
request for wheat under the Food for Progress Program
shortly. If Honduras is approved, it will be important for
the Ministry of Agriculture (SAG) and USDA to work closely
on a agreement on the use of the local currency proceeds from
the sale of the wheat. Cosenza asked if the funds could be
used for low-income housing. Econcouns explained that they
are more commonly used for agricultural projects. She took
the opportunity to emphasize the importance of completion of
the last major USDA-SAG project, the transfer of the mango
hot-water treatment plant in Comayagua to an association of
mango producers. She explained that the legislation creating
this association had been stalled in Congress and that
Emboffs had been talking to the Minister of Agriculture about
the importance of completion of the transfer. Cosenza
promised to look into it.

--------------
CAFTA
--------------


8. (C) Econcouns gave an overview of the current status of
the Central American Free Trade Agreement negotiations and
asked about GOH plans to build up the permanent, technical
trade policy staff. Cosenza said that the GOH is supporting
Minister of Industry and Trade Norman Garcia's efforts to
hire and train negotiators and reiterated his strong belief
that the only way to keep well-trained negotiators after a
change in administration would be to create a non-political
public-private institute. He discounted the possibility that
Congressional approval of a Civil Service law would prevent
large-scale turnover in government agencies after the next
election; Cosenza acknowledged that the law would be an
important step, but emphasized that it would take time to
change the political culture.


9. (C) Econcouns noted that there would be sensitivities on
agriculture on both sides, but that the two countries could
work together in the WTO toward the goal of reducing trade
distorting subsidies without affecting the USG's ability to
implement food aid and agricultural credit programs that are
available to countries like Honduras. She confirmed that the
Embassy is working closely with the Trade Ministry to
identify areas in which cooperation in the WTO negotiations
would be particularly helpful, such as the TRIPS moratorium,
the agriculture negotiations and the services talks.


10. (C) Econcouns also mentioned that during the course of
the negotiations, the USG will be warning the Central
Americans that some issues can not bend because of their
importance to gaining U.S. congressional ratification for an
eventual CAFTA, such as compliance with labor and environment
language in the Trade Promotion Authority legislation. The
GOH can expect that some of the trade rule chapters may
require changes to Honduran legislation.


11. (C) Cosenza asked about the possibility of including in
the CAFTA a provision allowing U.S. investors to deduct
income taxes paid in Honduras from their U.S. tax returns
(thus allowing the GOH to start levying income tax on these
maquila companies). Econcouns explained that the Treasury
Department is the key contact for discussion of a prospective
Double Taxation treaty. The GOH could forward a request
directly to Treasury (and she had provided this information
to the Ministry of Finance previously). She also explained
that in considering these requests, Treasury places priority
on those countries that the U.S. private sector has
identified as important. As far as the elimination of the
Honduran income tax exemptions for companies located in free
zones, Econcouns noted that it was generally the
Honduran-owned maquila companies (comprising about 40-50
percent of the textile and apparel firms in Honduras) that
have pushed for maintenance of these tax incentives.
Investment incentives will be an importa
nt topic of negotiation in the CAFTA talks. Cosenza then
backtracked and expressed the GOH's view that continued
maintenance of the free zones would be important to keeping
the textile and apparel industry in Central America.


12. (C) Cosenza also asked about the possibility of the
inclusion of tax incentives by the USG for U.S. companies to
invest in Honduras and other Central American companies,
along the lines of incentives provided for Puerto Rico (an
apparent reference to Section 936 exemptions from federal
taxes for Puerto Rican based subsidiaries of U.S. companies).
He talked at length about the importance of a CAFTA
agreement that promotes additional investment so that it does
not just represent at the end another broken dream.
Econcouns countered that U.S. companies who critique the
investment climate in Honduras never mention the need for tax
incentives - instead they point to issues such as the high
cost telecommunications and energy, the weak judicial system,
crime, and regulatory and administrative delays. Cosenza was
adamant that the GOH will be seeking some type of foreign
investment incentive program from the USG in the context of
the CAFTA negotiations.

-------------- --------------
Investment Climate, Commercial Disputes and Needed Legislation
-------------- --------------


13. (C) Continuing the discussion on needed improvements in
the investment climate, DCM commented on the impressive
presentation made by Vice President Vicente Williams on March
11 during the rollout of the Competitiveness Council's
workplan. An important element affecting the investment
climate is the relatively weak judiciary. The DCM thanked
Cosenza for the government and Supreme Court's help in
pushing for resolution of outstanding commercial disputes.
Post saw a number of cases resolved in late 2002, although
there had been significant backsliding in three of the cases
in early 2003. The DCM also emphasized that no progress had
been made to date in arbitration of outstanding Amcit land
disputes involving the Honduran government or municipalities.
Econcouns reminded Cosenza that the GOH had adopted a law
allowing the state to engage in arbitration in selected cases
during a short window of six months. As the law went into
effect on January 16, there are only approximately four
months left to make of
fers to the Amcit claimants. Cosenza indicated that he would
look into the issue.


14. (C) The DCM mentioned pending legislation that we see as
important. On the economic side, these include passage of
the civil service reform law, a civil aviation law,
restructuring of the telecommunications and power sectors,
creation of a unified land registry, and the legislation
creating the mango plant association. On the political side,
the DCM emphasized the critical importance of ratification of
ICC Article 98 Agreement and two pending OAS conventions on
counter-terrorism.

--------------
Port Security
--------------


15. (C) Emboffs also emphasized the importance of vastly
improved port security, in the post September 11 environment.
They urged Cosenza to ensure that the GOH prepares the
country's ports over the next year to meet new legislation
for maritime traffic to the U.S., even if this requires
partial or total concession of port operation and security
functions. Cosenza responded that the GOH is fully committed
to doing so, and in fact do hope to concession Puerto Cortes
during this administration. The Customs Service is currently
working on the purchase of container X-ray equipment that
will be used to scan both incoming and outgoing containers.
He took on board Emboffs comments about the importance of
also strengthening port perimeter security and creation of an
independent security force.

--------------
Roatan
--------------


16. (C) Econcouns summarized the diverse problems that Post
is seeing on the island of Roatan, including egregious land
disputes, lack of arrests in Amcit murder cases, drug
trafficking, flouting of U.S. fishing laws, and lack of
environmental enforcement. She acknowledged that the rule of
law has traditionally been weak in the Bay Islands but
explained that the treatment of Amcits in Roatan is becoming
intolerable; Consenza indicated that he concurred.
She explained that there had been no progress to date in the
Moore land case and at the same time, she noted, the
islanders are benefiting from U.S. dollars in a variety of
ways - tourism, real estate tax revenues, fishery exports to
the U.S. and dockings by U.S. Navy and Coast Guard vessels.


17. (C) Cosenza, fairly frankly, discussed the wide-ranging
challenges they faced in improving the rule of law in the
islands. He noted that the USG perhaps has the strongest
leverage of all, such as our ability to deny or revoke visas
for presumption of illegal activity and capacity to invoke
sanctions for violations of U.S. laws such as the TEDS/shrimp
decertification. Cosenza indicated that the GOH would
understand if the USG takes targeted moves, and asked only
that we not harm the reputation of the country or cut off
U.S. tourism. DCM noted that we will stay in close touch on
these issues.


18. (C) Comment: The discussion was cordial and relaxed, and
provided a good opportunity to ensure that President's top
staff is aware of the top economic issues on the USG's
agenda. Cosenza appeared sincerely intent on tackling the
estatutos, one of the major reasons for the GOH's structural
and growing budget deficit. Although he had received
briefing material on the Millennium Challenge Account from
the Honduran Ambassador in Washington, he appreciated the
opportunity to discuss the envisioned process in greater
detail. The discussion also gave Emboffs an opportunity to
focus on the Honduran need to make stronger efforts on good
governance and anti-corruption. The GOH, if found eligible,
can be expected to make MCA proposals for large
infrastructure projects and funding of low-income housing.
Cosenza also seemed sincerely interested in improving port
security in order to assure Puerto Cortes' continued
importance for shipping between the U.S. and the isthmus.


19. (C) Comment continued: Cosenza's push for USG incentives
for companies investing in Central America reflects the lack
of understanding in the Honduran government of U.S. trade
policy and sensitivities in the U.S. about claims that trade
agreements lead to an export of jobs. In the discussions
about the investment climate and Roatan, he expressed the
GOH's frustration with their inability to make more rapid
progress in changing the status quo. Embassy will continue
to urge the GOH to focus on the details of the CAFTA
negotiations, including the trade capacity building
discussions, and to move on reforms that will improve the
investment climate in Honduras (including moving on long
standing investment and commercial disputes). We will also
continue to encourage the Hondurans to be more active in
support of our mutual interests in the FTAA and WTO
negotiations. End Comment.
Palmer