Identifier
Created
Classification
Origin
06TEGUCIGALPA2046
2006-10-27 16:26:00
CONFIDENTIAL
Embassy Tegucigalpa
Cable title:  

HONDURAS: MIN FIN SEEKING DONOR SUPPORT AND MORE

Tags:  ECON EFIN PGOV SOCI HO 
pdf how-to read a cable
VZCZCXRO2557
PP RUEHLMC
DE RUEHTG #2046/01 3001626
ZNY CCCCC ZZH
P 271626Z OCT 06
FM AMEMBASSY TEGUCIGALPA
TO RUEHC/SECSTATE WASHDC PRIORITY 3907
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC PRIORITY 0501
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 04 TEGUCIGALPA 002046 

SIPDIS

SIPDIS

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

E.O. 12958: DECL: 10/27/2016
TAGS: ECON EFIN PGOV SOCI HO
SUBJECT: HONDURAS: MIN FIN SEEKING DONOR SUPPORT AND MORE
DEBT FORGIVENESS


Classified By: Ambassador Charles Ford for reasons 1.4 (b) and (d)

C O N F I D E N T I A L SECTION 01 OF 04 TEGUCIGALPA 002046

SIPDIS

SIPDIS

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

E.O. 12958: DECL: 10/27/2016
TAGS: ECON EFIN PGOV SOCI HO
SUBJECT: HONDURAS: MIN FIN SEEKING DONOR SUPPORT AND MORE
DEBT FORGIVENESS


Classified By: Ambassador Charles Ford for reasons 1.4 (b) and (d)


1. (C) Summary: In an October 23 meeting with Ambassador,
Minister of Finance Rebeca Santos asked for additional
technical assistance to assist her ministry in improving
fiscal administration and oversight and increasing
transparency. She also renewed her request for technical
assistance in budget formulation and implementation. Santos
denied that the Ministry of Finance is responsible for slow
project implementation, blaming that on the political choice
by the Zelaya Administration to focus on current spending
instead, and on the slow and overly bureaucratic procedures
of the international financial institutions. She said she is
pleased with her relations with the IMF, but asked donor
governments to pressure President Zelaya to return to fiscal
responsibility, since he "does not always listen" to his
ministers. Despite declarations from President Zelaya
discounting any possibility of electricity rate hikes, Santos
supports such rate hikes to return the state-run electricity
company profitability. She asks the international donor
community to press this issue with Zelaya. GOH fiscal
discipline -- the pre-requisite for previous debt relief --
has eroded significantly under the new Zelaya Administration,
yet the GOH continues to seek new debt relief from the
Interamerican Development Bank (IDB). Post would not support
such a request until the GOH could demonstrate a renewed
commitment to fiscal discipline, including by receiving a
passing grade from the IMF. Finally, on the issue of
establishing and funding the new Competition Commission,
vital to combating corruption and monopolistic collusion in
Honduras, Santos disappointed by exhibiting a distrust of the
agency and an unwillingness to provide sufficient funds for
it to begin full operations. Instead, she requests that,

once again, the international donors pick up the tab. End
Summary.


2. (SBU) In an October 23 call on Ambassador, Minister of
Finance Rebeca Santos expressed satisfaction with her
relations with the International Monetary Fund (IMF) but
sought additional technical assistance from the USG and other
donors to improve fiscal administration. She seeks better
fiscal "clarity," and sees her goals as including harmonizing
policies in the region to attract investment and create jobs
while rooting out unfair competition.

--------------
More Technical Assistance, Please
--------------


3. (SBU) On the subject of USG-supplied technical
assistance, Santos lamented the loss of a resident U.S.
Treasury Advisor on tax matters, and intends to raise this
issue with Treasury Assistant Secretary Lowery during his
proposed November 8 visit. She found the former Treasury
advisor to be an excellent source of objective advice,
particularly on questions of improving tax collections.


4. (SBU) Santos also renewed the GOH request for Treasury
OTA assistance on budget preparation and implementation. A
Treasury OTA budget team visited Honduras earlier this year,
but the proposal has not advanced since then. Santos
referred to improving budget preparation and oversight as
"extremely important" for her, as she is quite concerned over
the lack of discipline imposed on Ministries regarding budget
execution. In one recent case, the Minister of Health was
sacked when it was learned he had wildly exceeded his
budgeted authorizations by hiring hundreds of contract
workers, largely to satisfy political pressures for
patronage. Santos seeks help in auditing both that Ministry
and the Ministry of Education, to see just how bad the damage
is. Privately, Santos called President Jose Manuel "Mel"
Zelaya Rosales' recent decision to yield to teacher's demands
for massive wage hikes (a violation of the IMF agreement)
"totally irresponsible." She asked for support from the
donor group (known as the G-16) in pressing for an audit of
the funds and these positions. (Note: The USG, as President
pro tem of the G-16, supports Santo,s suggestion if combined
with genuine and substantial reforms to the educational
system. End Note.)

-------------- ---
Slow Capex is a Political, not Technical Problem

TEGUCIGALP 00002046 002 OF 004


-------------- ---


5. (C) Pushing back against recent criticisms that the
Ministry of Finance is slow in implementing spending
priorities, Santos rhetorically asked, "If SIAFI (the
Integrated Financial Administration System) works so well for
current spending, why does it not work for investment
spending?" The answer, she said, is that SIAFI is working
well, but political choices have been made within the GOH to
focus on current spending and not investment spending.
(Comment: Some would argue with her assertion that SIAFI is
functioning smoothly, but her point that the GOH has focused
on current spending to the detriment of longer-term
investment is a view widely shared throughout the donor
community. End Comment.)


6. (C) Santos also laid some of the blame at the feet of the
multilateral financial institutions, complaining of
significant bureaucratic delays in refocusing projects and
approving disbursements. She also criticized them for
relying too much on independent Project Implementation Units
embedded within Ministries, rather than using the technical
capacity of the Ministries to conduct oversight. The GOH
Social Investment Ministry (FHIS) particularly suffers from
this, and its minister, Presidential-hopeful Marlon Lara,
finds the current arrangement "unmanageable." (Comment:
Lara has been criticized severely in the press for this and
other organizational difficulties, possibly in the run-up to
a rumored December Cabinet reshuffle. Many view this as a
precursor to firing him, as a means of diminishing his
stature prior to the 2009 elections. During his 12 years as
mayor of Puerto Cortes, Post found him engaging, intelligent,
and an accomplished manager, and can easily see why other
Liberal Party stalwarts might view him as an electoral
threat. End Comment.)

-------------- -
Greater Transparency, Sooner Rather Than Later
-------------- -


7. (SBU) Santos also supports greater transparency by the
GOH, with or without the long-awaited Transparency Law, which
is still stuck in the bureaucracy. Santos wants to expand
the information contained on the Ministry's website, and make
it more accessible to the public. She is also calling for a
web portal that would link all information on upcoming
government procurements, to make such information easily
accessible to potential suppliers both inside and outside
Honduras. That portal would be administered by the Ministry
of the Presidency and supported by MinFin and others (such as
the Public Works Ministry) that host such bid solicitations.

-------------- --
Content with the Fund, But is the Fund Content?
-------------- --


8. (C) Santos said she is "very content" with her relations
with the IMF, citing an open and continuing dialogue. An IMF
Article IV Team is expected to visit Honduras from November
6-20, to review the state of fiscal affairs in preparation
for negotiations over a proposed Policy Support Instrument
(PSI). The PSI would carry all the conditionalities of the
current Poverty Reduction and Growth Facility (PRGF),which
expires in February 2007, but does not include financial
support. However, the IMF was unable to close the fourth
review of the PRGF in May 2006, indicating significant
concerns over current fiscal policies and priorities. Post
has reported extensively on these concerns, and the widely
held view that, were the Fund to be forced to make a
declaration, it would have to find the GOH is off-track (that
is, out of compliance) with its PRGF commitments. Santos did
not address the GOH's significant challenges going into the
upcoming IMF review. She did, however, say that she is
"urging the President to pay more attention to the IMF."
However, she said, "the President does not always listen to
me." She therefore asked that the donor community continue
to keep pressure on the GOH to return to a policy of fiscal
discipline.


9. (C) On the key issue of parastatal telephone company
Hondutel's declining revenues, Santos said the solution is
simply a rebalancing of rates (echoing the advice of previous

TEGUCIGALP 00002046 003 OF 004


IMF missions.) Regarding the much more severe losses at
parastatal electricity company ENEE, Santos said Honduras
"needs to face reality." The GOH should eliminate untargeted
subsidies to consumers, and should be prepared to raise
electricity rates. This politically explosive but fiscally
realistic view runs contrary to the very clear statements
emanating from the Presidency that electricity rate increases
will not even be considered. Asked how the GOH could please
the Fund if a rate hike is off the table, Santos again turned
to the donor community for support, saying that everyone
"needs to keep pushing" the GOH to do the right thing.

-------------- --------------
Seeking More Debt Relief; But Where Did the Last One Go?
-------------- --------------


10. (C) The GOH continues to seek additional debt relief, in
this instance from the Interamerican Development Bank (IDB).
The IDB debt was not included in the debt relief package
contemplated under the Heavily Indebted Poor Countries (HIPC)
debt relief initiative, for which Honduras qualified in 2005.
Since reaching Completion Point, Honduras has received
approximately USD 2.8 billion in debt relief, which it
committed under terms of the agreement to dedicate to poverty
reduction activities. The GOH has a fully-developed Poverty
Reduction Strategy, but complaints abound that few
disbursements are being made under this program. Instead, it
is widely believed that GOH spending is focusing on
non-productive but popular subsidies to consumers such as
gasoline price freezes, salary hikes for teachers, and
subsidies for electricity. The GOH failed for ten months to
present required reports to Congress on this spending, and
only on October 13 did it present its first report to the
Group of 16 (G-16) of donor nations and institutions. The
G-16 will study this information and request additional data
from the GOH in the coming weeks.


11. (C) Despite the fact the GOH increasingly appears to be
out of compliance with its IMF commitments and cannot
demonstrate that it has met the HIPC debt-relief requirement
to spend those funds on poverty reduction, Santos believes
Honduras merits the additional IDB debt relief requested. So
far, IDB members Mexico and Brazil have reportedly blocked
creating a debt relief mechanism within the IDB, while the
USG supports it. (Comment: Should such a debt relief
mechanism be created, Post is of the strong opinion that
Honduras should be evaluated for any debt relief based on its
current economic performance. Since Zelaya assumed office on
January 26, 2006, Post has observed declining GOH fiscal
discipline and increasing recourse to populist, short-term
measures. To provide debt relief under such circumstances
would be to reward bad behavior. It would be better to
condition future relief, as was the case with the original
HIPC relief, on fiscal performance, including performance
under its agreements with the IMF. End Comment.)

-------------- --------------
Little Moral or Financial Support for New Anti-Trust Agency
-------------- --------------


12. (C) On funding the newly formed Competition Commission
(roughly analogous to the U.S. Federal Trade Commission),
Santos disappointed by taking a fairly unsupportive stance.
"My gut reaction," she said, "is to fight the formation of
any new bureaucracy." She said the Commissioners, who seek
salaries equivalent to those paid to the Commissioners of the
Banking and Securities Commission, are asking for too much.
Santos also noted that she has funded only half of their
relatively modest request for funds to hire staff and set up
an office. EconChief pointed out that high-quality staff
that are above reproach are needed if the commission is to
remain uncorrupted, and such staff do not come cheap.
Furthermore, we pointed out, the commission has a mandate to
begin operations by December, and yet it does not even have a
staff or offices yet, some eight months after the bill
creating the commission was passed. In reply Santos
expressed her confidence that donors would once again assume
the responsibilities the GOH is unwilling to assume, and pay
the lion's share of the effort to fight monopolies and other
forms of unfair competition.


13. (C) Comment: Minister Santos clearly looks to the

TEGUCIGALP 00002046 004 OF 004


international donor community to communicate hard messages to
President Zelaya. The GOH may increasingly look to donor
funding to fill gaps in investment spending, allowing the GOH
to spend its resources (including funds freed from debt
servicing) on politically expedient programs that largely
fail to reduce poverty. We will continue to work with
Minister Santos and also through the G16 to preach the
message of fiscal discipline, and urge Washington agencies to
encourage the IDB to review the economic performance of the
Zelaya administration as a part of any debt forgiveness
discussion. Minister Santos says she would like to foster a
more competitive economy, but it is difficult to reconcile
that goal with her mistrust of the anti-trust commission
established to foster competitiveness in a traditionally
monopolistic and collusive business sector. End Comment.

Ford


FORD