Honduran Econ Highlights: February 2004

UNCLAS SECTION 01 OF 04 TEGUCIGALPA 000560

SIPDIS

SENSITIVE

STATE FOR EB, DRL/IL, WHA/EPSC, AND WHA/CEN
GUATEMALA FOR AGATT SHUETE
SAN SALVADOR FOR COMMATT DTHOMPSON
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 EAIR EFIN EINV ELAB ETRD PGOV TSPA HO IMF
SUBJECT: Honduran Econ Highlights: February 2004

REF: A) 04 Tegucigalpa 232

B) 04 Tegucigalpa 543
C) 03 Tegucigalpa 2432

Contents
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Macroeconomics:
- Finally, An IMF Agreement
- But Rising Fuel Costs Could Spark Discontent
- Minimum Wage Negotiations Underway

Aviation:
- A New National Safety and Security Plan
- Runway Extension at Toncontin
- Work Stalled on Roatan Fence
- Governor Bush Unable to Land in Tegucigalpa

Business:
- IDB Recommends Fewer Tax Exemptions
- DOC Under-Secretary Aldonas Visits San Pedro Sula

Science:
- NASA Administrator O'Keefe Returns Moon Rock to Honduras

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Finally, an IMF Agreement
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1. (U) On February 2, the GOH signed a Letter of Intent for
a three-year Poverty Reduction and Growth Facility (PRGF),
which was then approved by the IMF Board in Washington on
February 18. This marks the end of two long years of
negotiations between the IMF and the Maduro government, but
the result is a macroeconomic plan that establishes some
control over public sector salaries and places the GOH on a
more secure financial footing.


2. (U) The program was premised on GOH completion of four
"prior actions": the adoption of a law to control public
sector salaries, a package of expenditure cuts and revenue
enhancements, a 2004 budget consistent with expenditure
targets, and an adjustment to the Poverty Reduction
Strategy. All four moves were completed by early January
2004 (see Ref A for a complete account of these measures).


3. (U) After one year of compliance with the program and
commitments in the GOH's Poverty Reduction Strategy,
Honduras will be eligible for reaching the completion point
under the HIPC initiative. This will provide debt relief of
approximately $960 million over a period of fifteen years.
This savings from debt forgiveness will be used for
improvements in education, health care, and other aspects of
the Poverty Reduction program.


4. (U) Following the signing of the Letter of Intent,
several multilateral and bilateral assistance packages were
announced which will be worth $110 million over the next
several years. On February 10, the government of Sweden
announced $31 million of assistance to be given to the GOH
this year, for support of the Poverty Reduction Strategy.
On February 11, the Inter-American Development Bank (IDB)
announced approval of $55 million in soft loans: $30 million
to support Honduras' Poverty Reduction Strategy, and $25
million for a program to support the stability of Honduras'
banking sector. The loans are for a 40-year period, with a
10-year grace period, and an annual interest rate of 1
percent for the first decade and 2 percent thereafter. In
addition, on February 26, the World Bank approved a $25
million credit for a Land Administration Program to help
expand access to formal land titling and registration. The
credit is repayable over 40 years, with a 10-year grace
period, at zero interest.

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But Rising Fuel Costs Could Spark Discontent
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5. (SBU) On February 29, fuel prices in Honduras rose for
the third time this year, by more than three lempiras (16.7
cents) a gallon. As of the end of the month, the price of
gasoline had increased by 19 percent, and that of diesel
fuel by 17.6 percent, from December 31 of last year. The
price increases are largely due to the increase in the
tariff on fuel, which the GOH applied at the end of 2003 to
raise revenue and reach agreement with the IMF. At the same
time, the rising world price of oil, which was at a one-year
high by the end of February, has put further pressure on
gasoline prices, much to the dismay of Honduran officials
who had hoped for falling prices to cushion the blow. Taxi,
bus, and truck drivers have all been clamoring for relief,
and the private sector is urging the legislature to cap fuel
prices. So far, the government has remained firm in its
intention to abide by the terms of the IMF program targets
and avoid further price controls. (See Ref B for a full
account of this issue.)

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Minimum Wage Negotiations Underway
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6. (U) The Tripartite Commission on the minimum wage (with
representatives of labor, business and the government) met
twice during February to discuss the annual increase to the
minimum wage. Negotiations began with the two sides far
apart, each accusing the other of making unreasonable
offers. The private sector organization COHEP (Honduran
Private Enterprise Council) offered an increase of 7 percent
(keeping up with inflation). Israel Salinas, secretary
general of the United Confederation of Honduran Workers
(CUTH),called for an increase of 30 percent, and said that
there seems to be no general agreement between labor and the
private sector on the issue. In 2003, the government
approved a 12 percent increase in the minimum wage after
business/labor negotiations stalled.

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Aviation Security and Safety: A New National Plan
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7. (U) The Honduran Civil Aviation authorities (DGAC) have
produced a new National Plan for Aviation Safety and
Security, which entered into force by means of a
Presidential decree published on February 20. The existing
plan was badly out of date and in many ways obsolete, for
example, tasking "the airport police" with certain airport
security functions, when in fact no such group has existed
since the police forces were re-organized in 1999. The new
plan was written by an IDB-funded consultant and should
bring Honduras into compliance with ICAO standards on safety
and security.

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Work Begins to Make Room for Runway Extension
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8. (U) Also in February, the first stage of construction
began on what will eventually be an extension to the runway
at Toncontin International Airport in Tegucigalpa.
Construction began to divert a major road which runs along
the southern edge of the airport grounds. Shifting the road
will allow the airport to extend its runway to the south by
an additional 300 meters, bringing the total length of the
runway to 2,162 meters. The road construction is being
handled and paid for by the Ministry of Transportation and
is expected to be completed by the end of March. Once the
road has been rerouted, InterAirports, the international
consortium that manages Honduras' four international
airports, can begin work on the runway extension.

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But Progress Stalls on Roatan Fence
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9. (U) At the airport on the island of Roatan, however, the
construction of an internal fence to protect the runway area
came to an abrupt halt when an angry resident began
threatening the workers with a gun. As explained in Ref C,
the fence is necessary due to the presence of fourteen
families who actually live on the airport grounds and are
currently prevented from walking onto the runway only by the
presence of 24-hour guards, not by any physical structure.
These families believe that they are owed compensation by
the GOH and had long opposed the construction of the
internal fence. However, officials from InterAirports, the
DGAC, and the local government secured written permission
from the majority of the families in December 2003 and
construction began. Unfortunately, one resident who did not
sign remains violently opposed to the fence, and has
successfully brought its construction to a standstill with
only 180 meters left to build. Aviation officials are again
planning to go to Roatan to work with local authorities to
resolve the matter.

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Governor Bush's Visit Postponed
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10. (SBU) Florida Governor Jeb Bush was forced to call off a
planned visit to Honduras on February 19 when bad weather
and malfunctioning equipment at the airport in Tegucigalpa
threatened his landing. Governor Bush was leading a
delegation of Florida business leaders on a week-long visit
through Central America, to promote regional trade and to
generate support for Miami's bid to host the FTAA
Secretariat. However, bad weather and poor visibility at

SIPDIS
Toncontin Airport, coupled with the fact that the distance-
measuring equipment (DME) transponder at the airport was
temporarily out of order, forced the group to postpone the
visit. The Governor's office hopes to reschedule the visit
for sometime in March.

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IDB Recommends Elimination of Tax Exemptions
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11. (U) On February 10, two tax specialists from the IDB
presented the results of a study they had conducted on the
Honduran tax system. The study emphasized the need to
establish a more equitable tax system, since under the
current system, according to the specialists, "the people
who earn the most are paying the least." The study
advocates neither higher tax rates nor the creation of new
taxes, but rather the broadening of the tax base through the
elimination of tax exemptions in industrial "free zones," as
well as more effective tax collection. An improved tax
system is especially important at this time, according to
the authors, because of the expectation of lost tariff
revenue which will result from the implementation of CAFTA
and the FTAA.


12. (SBU) Not surprisingly, the private sector responded
negatively to the suggestion that the rules governing free
zones should be changed, claiming that a revision of the
benefits currently offered to industries operating in these
zones would undermine the growth of the maquila sector, the
strongest source of employment growth in the Honduran
economy in recent years. The Vice Minister of Finance,
William Chong Wong, gave his assurance that tax exemptions
currently enjoyed by the maquila industry will not be
touched during the present government, as these benefits
were granted in accordance with the law. However, he did
acknowledge that such exemptions might be eliminated "in the
long term."

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Under-Secretary of Commerce Aldonas Visits San Pedro Sula
-------------- --------------


13. (U) On February 4 - 5, Commerce Under-Secretary Grant
Aldonas visited the northern city of San Pedro Sula with
other Commerce Department officials. The visit focused on
the maquila industry, its relation to the textile and
apparel industry in the United States, and the prospects for
approval of CAFTA by the U.S. Congress. Under-Secretary
Aldonas also visited the MHOTIVO foundation, a school for
poor children which was founded and is financed by Honduran
businesses, particularly in the maquila sector.
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Moon Rock Returns to Honduras
--------------


14. (U) The Administrator of NASA, Sean O'Keefe, visited
Honduras and attended a ceremony at which a moon rock stolen
from Honduras during the 1990s was officially returned to
Honduras. The rock, collected in 1972 by the crew of Apollo
17, was originally given to the Honduran people by President
Richard Nixon, but a Honduran official later sold the rock
to a U.S. citizen. It was recovered by U.S. federal agents
in a sting operation in 1998, but a legal dispute delayed
its return to Honduran officials until late 2003.


15. (U) During the visit, NASA representatives also visited
the NASA-supported astronomy department and observatory of
the National University (UNAH),where O'Keefe spoke about
the history and the future of the U.S. space program. The
moon rock will remain on display in the Chiminike
Interactive Center, a recently-inaugurated children's museum
in Tegucigalpa.

Palmer