Identifier
Created
Classification
Origin
06TEGUCIGALPA1008
2006-06-02 23:41:00
CONFIDENTIAL
Embassy Tegucigalpa
Cable title:  

HONDURAS: IMF INCREASINGLY CONCERNED ABOUT TREND

Tags:  EFIN ECON PGOV SOCI HO 
pdf how-to read a cable
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C O N F I D E N T I A L SECTION 01 OF 03 TEGUCIGALPA 001008 

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STATE FOR EB/IFD, WHA/EPSC, INR/IAA, DRL/IL, AND WHA/CEN
TREASURY FOR JHOEK
COMMERCE FOR MSIEGELMAN
STATE PASS AID FOR LAC/CAM
NSC FOR DAN FISK

E.O. 12958: DECL: 06/01/2016
TAGS: EFIN ECON PGOV SOCI HO
SUBJECT: HONDURAS: IMF INCREASINGLY CONCERNED ABOUT TREND
OF GOH FISCAL POLICIES


Classified By: ECONOMIC CHIEF PATRICK DUNN FOR REASONS 1.4 (B) AND (D)

C O N F I D E N T I A L SECTION 01 OF 03 TEGUCIGALPA 001008

SIPDIS

SIPDIS

STATE FOR EB/IFD, WHA/EPSC, INR/IAA, DRL/IL, AND WHA/CEN
TREASURY FOR JHOEK
COMMERCE FOR MSIEGELMAN
STATE PASS AID FOR LAC/CAM
NSC FOR DAN FISK

E.O. 12958: DECL: 06/01/2016
TAGS: EFIN ECON PGOV SOCI HO
SUBJECT: HONDURAS: IMF INCREASINGLY CONCERNED ABOUT TREND
OF GOH FISCAL POLICIES


Classified By: ECONOMIC CHIEF PATRICK DUNN FOR REASONS 1.4 (B) AND (D)


1. (C) Summary: The International Monetary Fund is
increasingly concerned about the direction of GOH fiscal
policies. Rising losses in parastatal telecommunications and
energy companies, coupled with the possibility of a return to
unsustainable wage hikes for teachers, threaten to shatter
GOH compliance with its Fund commitments. It is not too late
for the GOH to turn the situation around, but that will
require political leadership and some tough decisions on the
part of President Zelaya. The Fund appears prepared to
deliver a sharp message to Zelaya in a June 4 meeting in
Washington. Post concurs that, absent a course correction,
the medium term situation could become bleak, and therefore
supports any Fund attempt to advise Zelaya in plain terms
just how dangerous his continuing fiscal policy improvisation
could be. End Summary.


2. (C) The International Monetary Fund (IMF) has failed to
reach agreement with the GOH on the results of its
semi-annual review of GOH performance. In IMF parlance,
"discussions are continuing," as an IMF May 2-10 review and
subsequent follow-up contacts have failed to reassure the
Fund. Resident Representative Hunter Monroe met with
EconChief and AIDOff on May 31 to discuss what the Fund is
concerned could become a rapidly deteriorating situation.

-------------- --------------
Spending is Controlled... In Fact, Too Controlled
-------------- --------------


3. (C) According to Monroe, the Fund is "more concerned now
than when the mission left" on May 10. Monroe highlighted
the three areas of energy, telecommunications, and public
sector wages as the most troubling. Moreover, the Zelaya
Administration is "under-executing" its investment and
poverty alleviation programs. In actuality, the GOH missed

the floor (minimum expenditure) requirement for poverty
alleviation spending in the first quarter. This figure is
only indicative (the figures that count will be released in
June),but the trend is giving both the Fund and other donors
pause. Thus, while overall deficit figures remain well
within established targets -- the GOH actually ran a fiscal
surplus in the first quarter -- those laudable bottom-line
results mask a disturbing failure to disburse capital
investment, and an equally worrisome focus on expensive,
consumption-oriented spending that, if left unchecked, could
eventually drive the program off the rails.

--------------
Telecomms: Failure to Carry Out the Plan
--------------


4. (C) The GOH and the Fund have long recognized that rate
restructuring at the parastatal telephone company Hondutel
would be vital to balancing the GOH's books following
Hondutel's loss of its monopoly on December 25, 2005.
Predictably, shortly after Hondutel lost that monopoly, rates
for international calls fell from over USD 0.90 to about USD
0.38 per minute to the U.S. The monopoly rents Hondutel
enjoyed for decades had allowed it to cross-subsidize
low-cost local calling, maintain a highly paid and bloated
workforce of 3,000 employees, and return an estimated 9
billion lempiras (about USD 500 million) to the GOH
government coffers over the last four years. Snuggly
protected and monstrously inefficient, Hondutel has long been
a cash-cow for the GOH.


5. (C) Consequently, the Fund and the GOH agreed on a "prior
action" for program implementation, consisting of five
reforms to address the lost Hondutel revenues. (Note:
Hondutel will likely continue to be a profit center, but
revenues are expected to drop significantly. End Note.)
Those reforms, detailed in the third IMF review document
(available on the IMF website) include such actions as
increasing basic line charges, increasing user charges, and
capturing "grey traffic." To date the GOH has not taken
these steps. According to Monroe, "there is no going back"
on these agreements, despite any political difficulty this
might now pose for the GOH. Failure to implement meaningful
reforms would not only violate the accord with the Fund, it
would also perpetuate the fiscal imbalance accruing on the

TEGUCIGALP 00001008 002 OF 003


GOH's books.

--------------
Energy: Failure to Have a Plan
--------------


6. (C) The second Fund concern stems from the parastatal
electricity company, ENEE, which continues to lose
approximately 300 million lempiras (about USD 15 million) per
month. According to experts, fixing ENEE involves five
steps: replacing old equipment and reducing technical
losses; installing meters on the estimated 20 percent of
customers (or about 200,000 homes) that are currently neither
metered nor billed; renegotiating generation contracts with
electricity providers to lower costs; replacing political
sinecures at ENEE with technically proficient administrators,
and raising electricity rates. One expert indicated that the
first four combined could reduce losses by 100 million
lempiras per month -- only one third of what is required. In
short, there is no obvious alternative to raising electricity
rates.


7. (C) Electricity rates have not kept pace with generating
costs, and raising the base rate has proven so politically
distasteful that the GOH adopted a "fuel surcharge" instead.
Even with the fuel surcharge, rates fail to cover costs.
When former ENEE Director Juan Bendeck attempted to raise the
surcharge from 55 percent of the base electricity bill to
59.5 percent, President Zelaya replaced him. New director
Leo Starkman warned early-on of the need to raise rates when
he assumed Bendeck's position, and was reportedly similarly
ordered by Zelaya not to raise rates. In June 2006, ENEE
will actually reduce that surcharge to 53 percent, further
exacerbating monthly financial losses. With annual losses
projected at more than USD 120 million, or over 1.5 percent
of GDP, a continued hemorrhage of funds from ENEE imperils
not only the company itself, but potentially the overall GOH
fiscal deficit targets as well.

-------------- --------------
Teachers Wages: A Time Bomb, Ticking Down To February 2007
-------------- --------------


8. (C) The third and by far most dangerous concern is that
of teachers' wages and benefits. In the late 1990s,
then-president of Congress Rafael Pineda Ponce engineered a
wage and benefit increase policy for teachers that far
exceeded pay raise rates elsewhere in the economy. Unable to
meet the costs, the GOH has reportedly never fully complied
with these "estatutos." Despite that, the total GOH public
sector wage bill exploded, nearly doubling over that period
from 6 percent to 11 percent of GDP. Recognizing that such
growth was unsustainable, the GOH agreed to the IMF demand
that the benefits be folded back into the overall government
wage structure, thereby controlling public sector wage
growth. The GOH committed -- in a 2003 wage agreement -- to
design the wage reform program by 2005, and to implement it
by February 2007. (Note: The Maduro Administration
essentially kicked the can of the teachers, problem down the
road by ensuring that real reform was not due until after
they left office. End Note.) Citing the November 2005
Presidential elections, the GOH sought and received a waiver
of this performance criterion, getting a passing mark from
the Fund, but with the explicit understanding that the wage
issue must still be resolved by 2007 as agreed.


9. (C) Zelaya has since promised the teachers full
implementation of the estatutos, and has appointed Pineda
Ponce as his Minister of Education. Pineda Ponce further
exacerbated tensions by calling in January 2006 for fully
funding the benefits out of debt-relief savings. In May
2006, he emerged from a meeting with Zelaya and the
teachers, unions and announced that the 2003 wage law would
be abrogated, and the estatutos fully funded. If carried
out, such an action would be a "significant reversal" of
progress under the Fund agreement, according to Monroe. The
cost of such an action is difficult to quantify, but
estimates range up to 7 billion lempiras (about USD 368
million),equivalent to over 5 percent of GDP. That kind of
an unbudgeted spending commitment could, in a single blow,
knock the GOH entirely out of compliance with its Fund
commitments.

TEGUCIGALP 00001008 003 OF 003



--------------
What Went Wrong?
--------------


10. (C) Comment: A few short weeks ago analysts were
describing GOH compliance using terms like "outperforming its
targets." What happened? Essentially, two things: First,
the GOH continues to announce expensive programs like
subsidies to farmers, agricultural sector bailouts (which
would also be a disincentive to future lending to the
sector),and fuel price subsidies, while failing to deal with
unsustainable big-ticket items including electricity and
public sector wages. If the current rhetoric betrays a
genuine lack of political will to confront these issues, the
GOH/Fund program is heading for serious trouble. However,
that is not a forgone conclusion by any means, which leads us
to the second factor. Sensing that the GOH is beginning to
head in the wrong direction, the Fund apparently seeks to
deliver a strong message to the GOH during Zelaya's June 4
meeting with IMF Western Hemisphere Department Chief Anoop
Singh. He will reportedly warn Zelaya of the dire
consequences of failing to come to grips with a rapidly
deteriorating situation. It would appear that the Fund feels
an early, sharp intervention now could prevent the
medium-term collapse of the program in Honduras.


11. (C) Comment continued: Post concurs with the Fund's
concerns, and with delivering a strong message to Zelaya
about the need to exercise political leadership and maintain
fiscal discipline, particularly this early in his four-year
term. In the last year, Honduras has joined CAFTA, qualified
for MCC, earned USD 2.8 billion in debt relief, established
solid macro foundations, and (for the first time in decades)
sustained four years in a row of GDP growth. This historic
constellation of positive economic news might never recur.
Simply put, this is Honduras' best ever hope for setting
itself on a path towards sustainable economic growth and
poverty alleviation. Neither we nor Honduras can afford to
let the Zelaya Administration squander that. End Comment.

Ford
Ford