TFHO1: POSITIONS OF MULTILATERALS ON REENGAGEMENT

C O N F I D E N T I A L TEGUCIGALPA 001206 SIPDIS E.O. 12958: DECL: 11/24/2019 TAGS: ECON EFIN EAID PGOV PREL PHUM KDEM HO SUBJECT: TFHO1: POSITIONS OF MULTILATERALS ON REENGAGEMENT WITH HONDURAS REF: A. TEGUCIGALPA 883 ¶B. TEGUCIGALPA 1155 Classified By: AMBASSADOR HUGO LLORENS FOR REASONS 1.4 B AND D. ¶1. (C) Summary: Following the signing of the Tegucigalpa-San Jose Accord on October 30, the U.S. Treasury Resident Advisor met with the International Monetary Fund (IMF) and the World Bank representatives to learn their perspectives on reengagement with a possible government of national unity and with the new government that will take office in January. The World Bank representative believed that his organization would move quickly to engage, while the IMF representative was more hesitant. The eventual policy decisions of these organizations will, of course, be made in Washington, and the USG may need to push for rapid reengagement if that appears to be the best course of action following the November 29 election. End Summary. IMF Comments -------------- ¶2. (C) The U.S. Treasury Advisor met with IMF ResRep for Honduras Mario Garza in early November to discuss the IMF's perspectives on reengagement with the proposed unity government and the government that will be elected on November 29. Garza was very hesitant about initiating a rapid reengagement process, stating that current conditions did not warrant extraordinary efforts on the part of the IMF. He noted that the IMF had bent over backwards to reach an agreement with the Zelaya administration only to see the benchmarks of the resulting stand-by agreement violated within weeks. He also noted a lack of will by the de facto regime to address serious macroeconomic problems. He cited a proposed 18 percent increase in salaries in the 2010 budget that would increase salaries as a percent of GDP to around 10.5 percent, well above the IMF goal of 9.2 percent. The de facto regime also has no intention of modifying the current fixed exchange rate regime. ¶3. (C) According to Garza, the internal IMF bureaucracy also dictates a relatively slow response to the changing situation in Honduras. He noted that it had taken a vote of all the members to deny the de facto regime access to the increased special drawing rights (SDRs) made available to all members around the world (ref A). A change of policy to allow the unity government access to these reserves would likewise require a poll of the members, which, according to Garza, could not occur until after recognition by the Organization of American States (OAS),since the IMF follows the lead of regional bodies on recognition. Garza stated that he believed that a caretaker government such as a possible government of national unity would not have the ability to engage with the IMF since it could not speak for the next administration. He was also hesitant about sending an evaluation mission as a first step toward a new agreement until the new government had clarified its macroeconomic policies and built some credibility. ¶4. (C) The U.S. Treasury Advisor asked Garza about the USD 500 million Eurobond issue being proposed by Ashmore Investment Management (ref B). Garza noted that the availability of concessional loans to Honduras was likely to decline over time and that the proposed Eurobond would likely accelerate this trend as many multilateral and bilateral lenders were unhappy about providing below market rates while others benefitted. He said he was especially concerned that this Eurobond would be used to finance current expenditures such as salaries, adding that the government needed more fiscal discipline rather than more financing. World Bank Comments -------------- ¶5. (SBU) Also in early November, the U.S. Treasury Resident Advisor met with the Country Operations Officer (COO) of the World Bank, Dante Mossi. Mossi, a Honduran national, expressed his appreciation for the efforts of then-Assistant Secretary Shannon in trying to resolve the political crisis and for the clarity of his statements to the G-16 (a group representing the foreign community in Honduras). ¶6. (C) Mossi noted that, as a result of the progress made on the Tegucigalpa-San Jose Accord, World Bank President Robert Zoellick had authorized the Honduras office to release some disbursements for projects contracted with the government prior to the coup of June 28th. About USD 6 million out of a bit more than USD 8 million has been disbursed. The World Bank has continued to make disbursements to the private sector (primarily from the International Finance Corporation) and to NGOs. He noted that a macro mission would likely be coming to Honduras in December to review the state of the economy and to begin putting together an emergency loan program. This emergency loan would be intended to help close the fiscal gap but would be designated as an investment loan because it is likely that no IMF agreement will be in place in time. He felt that this program could be ready for disbursement by March. ¶7. (C) Mossi noted that the GOH was late on servicing already outstanding debts with the World Bank (highlighting the serious cash flow problems of the de facto regime) but said that he had been assured by de facto Minister of Finance Gabriela Nunez that the payments would be made before a default was triggered. The debt service amounts were fairly small (between USD 200,000 and USD 400,000) but a default would trigger cross defaults with most other outstanding debts of the country. ¶8. (C) Mossi was aware of Garza's disenchantment with Honduras and his views on reengagement with the unity government and new government. He appeared more optimistic than Garza on the possibility of a quick response and thought that it might be possible to have simultaneous board meetings of the World Bank, the IMF and the Interamerican Development Bank (as well as other bilateral and multilateral lenders) relatively quickly. The lack of an IMF agreement would make it difficult for other cooperating nations and multilateral institutions to renew lending or enter into new compacts. Comment -------------- ¶9. (C) The local representatives of the World Bank and the IMF expressed very different perspectives on how their boards in Washington viewed the process of reengagement in Honduras. The Department may need to engage with these institutions to press for quick agreement on a way forward, if constitutional government is restored quickly. In the absence of an IMF agreement, many cooperating nations and bilateral institutions may be slow to restart assistance. ¶10. (C) While Garza stated that readmission to the OAS is a prerequisite for IMF reengagement, it is not clear to us whether this is a hard-and-fast rule. We note that Honduras's suspension from the OAS did not trigger the IMF's non-recognition of the de facto government. The IMF called for a membership vote on the issue only months later, when the granting of special drawing rights forced it to take a stance. The Department may wish to look into the mechanics of how IMF recognition can take place in preparation for a possible future USG decision to advocate reengagement. End Comment. LLORENS