HONDURAS: GOH ROLLS BACK PRICES; CARDINAL, IMF

C O N F I D E N T I A L SECTION 01 OF 03 TEGUCIGALPA 001873

SIPDIS

STATE FOR EB/IFD, WHA/EPSC, INR/IAA, DRL/IL, AND WHA/CEN
STATE FOR CA/OCS/ACS/WHA AND DS
TREASURY FOR DDOUGLASS
STATE PASS AID FOR LAC/CAM
DOL FOR ILAB

E.O. 12958: DECL: 09/12/2015
TAGS: ECON EFIN ELAB EPET ENRG PGOV CASC ASEC HO
SUBJECT: HONDURAS: GOH ROLLS BACK PRICES; CARDINAL, IMF
CALL FOR REASON AND ECONOMIC RESTRAINT

REF: A. TEGUCIGALPA 1742


B. TEGUCIGALPA 1831

C. TEGUCIGALPA 1842

D. TEGUCIGALPA 1837

E. TEGUCIGALPA 1720

Classified By: Classified by EconCheif PDunn for reasons 1.5 (B and D)



1. (C) Summary: In a session lasting until four a.m.
September 8, the National Congress passed three decrees that
seek to alleviate the impact of higher fuel prices on
Honduran workers. One rolls back gasoline prices and calls
for a commission to establish a new gasoline pricing formula;
the second halts a proposed expansion of electricity
subsidies to the poor and instead uses the funds to subsidize
gasoline sales; and the third imposes a price freeze on
certain food commodities. President Maduro's proposed 1,000
to 2,000 lempira (USD 53-106) salary bonus was rejected and
is now "dead," but a price freeze on basic consumer goods has
been imposed. Catholic Church Cardinal Oscar Rodriguez has
publicly called for reasonable policy choices that do not
endanger the economic health or benefits of recent debt
forgiveness. The IMF is privately calling for similar
prudence, but is withholding judgment on the new decrees
until it has had an opportunity to review them. The fiscal
and economic impacts of the measures are as yet unknown, but
the political impact was immediate, as striking taxi drivers
have returned to work and relative calm has returned to
Tegucigalpa. See septel for reporting on the political
aspects of this issue. End Summary.

GOH Lowers Prices, Raises Subsidies; Fiscal Impact Unknown
-------------- --------------


2. (U) In late-night action, the Honduran Congress passed
three decrees that seek to alleviate the impact of higher
fuel prices on Honduran workers. The first decree rolls back
retail gasoline prices to pre September 2 levels, removing
the remainder of the sharp 17 lempira (nearly one USD) per
gallon increase. The plan will reportedly be financed by
diverting some of the funds that had been previously
programmed to increase electricity subsidies to the poor.
This might be sufficient in the short term to meet Minister
of Finance William Chong Wong's requirement that any new
spending be financed by identified revenues or offsetting
spending cuts. (Note: The Minister, currently in Spain, has
thus far been very hawkish in curbing similar Congressional
handouts in the past. Acting Minister Ralph Oberholzer said
to IMF ResRep Monroe on September 8 that he has not yet seen
the decree and cannot comment. A meeting of Senior GOH
officials has been called for the morning of September 8 to
discuss the issue further. End Note).


3. (C) The decree also establishes a commission of notables
to reform the current fuel pricing formula. The commission
has ten days to return its findings. Early indications are
that the commission will be composed of: Catholic Church
Cardinal Oscar Rodriguez (who is a moderate on the fuel
pricing issue -- see paras 5-6, below); former Minister of
Trade Juliette Handal (who led a vocal but unsuccessful
attempt to reform the fuel pricing structure last year and
who has openly called for nationalizing fuel imports);
journalist Rossana Guevarra (linked to the Liberal Party);
President of Banco Occidente Jorge Bueso Arias (who
unsuccessfully ran for the Liberal presidential nomination in
years past and has in recent days reportedly hosted a series
of roundtable discussions on the need for a responsible fuel
policy rather than demagogic proposals); Adolfo "Fito"
Facusse, President of the Honduran Industrialists Association
(ANDI) and vocal critic of current fuel policies; Irma Acosta
de Fortin, university rector and former National Party
candidate for Vice President; Arturo Corrales, leader of the
Christian Democratic Party (coalition partner of the
governing National Party) and businessman/pollster; Jose
Maria Agurcia, President of COHEP, the umbrella private
employers association; Juan Ferrera, President of the new
Anti-Corruption Commission (formerly with COHEP); and Emilio
Larach, businessman.


4. (U) The second decree reduces the proposed expansion of
targeted electricity subsidies for the poor. The program,
called "Bono 80", is already included in the GOH budget, and
the IMF had informally assented to expanding the program as
long as fiscal impacts are minimal. Some of the funds that
had been programmed for this expansion will be diverted
instead to a fund that the Ministry of Finance will use to
subsidize gasoline retailers, to allow them to sell at
pre-Hurricane Katrina prices until the commission of notables
renders its opinion on retail prices. That commission has
been given 10 days to issue its report. In the same
Congressional session, the President's proposal to require
the private sector to pay salary bonuses of 1,000 to 2,000
lempiras (USD 53 to 106) per worker (ref C) was rejected and
is now "dead" according to Honduran Private Sector Council
(COHEP) Executive Director Benjamin Bogran, who participated
in the all-night session. The third decree imposes a price
freeze on the basket of basic consumer goods -- an action
that is in violation of the IMF agreement and Honduran law
unless it is agreed to with the private sector. Bogran is
currently calling for consultations on this matter. (For a
list of the affected goods -- the "canasta basica" -- see Ref
E.)

Cardinal Takes a Stand for Fiscal Prudence
--------------


5. (U) Just before departing for Washington for a meeting
with the Interamerican Development Bank, Cardinal Oscar
Andres Rodriguez gave an extensive interview with leading
Honduran daily El Heraldo, in which he called for sensible
and prudent responses to the current fuel crisis gripping
Honduras. (Note: This interview preceded the late-night
Congressional action, on which he has not yet had an
opportunity to comment. End Note.) The Cardinal said the
current calls from leading presidential candidates and others
to eliminate taxes on gasoline are "totally irrational" and
"demagoguery" and said that adoption of such a policy would
be a "total failure" for those who have been working for the
economic benefit of the country. "Now that we have reached
(the HIPC Completion Point),I feel it would be a great
injustice, after all the sacrifices we have made, that for
simple opportunism or for the benefit of a given political
candidate we would lose the benefits of all our efforts."


6. (U) The Cardinal pointed out the risks to fiscal
discipline and debt forgiveness posed by "precipitous" action
on fuel taxes: "You have to understand, this debt
forgiveness does not mean that money is flowing into
Honduras, rather it represents state revenues that are not
leaving the country to pay the external debt or debt service.
Suppose that, for somewhat precipitous attitudes -- I don't
wish to think it is the result of demagoguery, but perhaps is
a bit precipitous -- let's say for example that in the
Congress they remove the tax on gasoline. Then, immediately
state income drops by one third and then where are your
savings from debt forgiveness? There would be none, there
would (instead) be a fiscal deficit. And how are we going to
pay for this fiscal deficit? How are we going to continue
paying doctors, and teachers, and others if there are no
revenues? We cannot think we will get external financing,
because no one will want to lend to a country in social
chaos."

IMF Watchful and Wary
--------------


7. (C) International Monetary Fund Resident Representative
Hunter Monroe told EconChief on September 7 that the Fund had
been caught unawares by some of the GOH actions. The Fund
had not agreed to the GOH proposal for bonus payments to
workers to offset rising fuel costs (ref C.),nor to any GOH
actions to offset fuel price increases. While the Fund was
aware of GOH plans to increase targeted subsidies to poor
electricity users, no final agreement had been reached before
the GOH publicly announced its plan to reprogram some portion
of those funds. Nevertheless, Monroe said these measures are
"not likely to be an obstacle" for the Fund unless the GOH
moves to explicitly control prices. (The impact of the
Congressionally-approved price freeze, if it comes into
effect, is unclear.) The IMF is privately calling for
prudence, but is withholding judgment on the new
Congressional decrees until it has had an opportunity to
review them.

Taxi Strike Over
--------------

8. (U) Following a September 7 meeting between
representatives of striking taxi drivers and Minister of
Transportation and Public Works Jorge Carranza, taxi drivers
have ended the two-day strike that paralyzed the city with
road blockages (ref D). The drivers had been demanding fuel
price reduction and/or fare increases following the sharp
price increase of gasoline on September 2. The final details
of the settlement are not yet public, but the September 8
Congressional decision to reduce retail gasoline prices would
appear to have met the strikers' principal demand. While
teachers, students, and anti-globalists of the Popular Block
still marched on September 8, road traffic in Tegucigalpa
appears to have returned mostly to normal.
Williard