Nicaragua HondurasSummary Nicaragua, Honduras 2nd quarter 1996 April 30, 1996 The region Outlook: There will be talks on free trade with Mexico. A Mexico-Brazil alli-ance will help

COUNTRY REPORT

Nicaragua

Honduras

2nd quarter 1996

The Economist Intelligence Unit15 Regent Street, London SW1Y 4LRUnited Kingdom

The Economist Intelligence Unit

The Economist Intelligence Unit is a specialist publisher serving companies establishing and managingoperations across national borders. For over 40 years it has been a source of information on businessdevelopments, economic and political trends, government regulations and corporate practice worldwide.

The EIU delivers its information in four ways: through subscription products ranging from newslettersto annual reference works; through specific research reports, whether for general release or for particularclients; through electronic publishing; and by organising conferences and roundtables. The firm is amember of The Economist Group.

London New York Hong KongThe Economist Intelligence Unit The Economist Intelligence Unit The Economist Intelligence Unit15 Regent Street The Economist Building 25/F, Dah Sing Financial CentreLondon 111 West 57th Street 108 Gloucester RoadSW1Y 4LR New York Wanchai United Kingdom NY 10019, USA Hong KongTel: (44.171) 830 1000 Tel: (1.212) 554 0600 Tel: (852) 2802 7288Fax: (44.171) 499 9767 Fax: (1.212) 586 1181/2 Fax: (852) 2802 7638

Electronic deliveryEIU Electronic Publishing New York: Lou Celi or Lisa Hennessey Tel: (1.212) 554 0600 Fax: (1.212) 586 0248London: Moya Veitch Tel: (44.171) 830 1007 Fax: (44.171) 830 1023

This publication is available on the following electronic and other media:

Online databases CD-ROM Microfilm

FT Profile (UK) Knight-Ridder Information World Microfilms Publications (UK)Tel: (44.171) 825 8000 Inc (USA) Tel: (44.171) 266 2202

DIALOG (USA) SilverPlatter (USA)Tel: (1.415) 254 7000

LEXIS-NEXIS (USA)Tel: (1.800) 227 4908

M.A.I.D/Profound (UK)Tel: (44.171) 930 6900

Copyright© 1996 The Economist Intelligence Unit Limited. All rights reserved. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of The Economist Intelligence Unit Limited.

All information in this report is verified to the best of the author’s and the publisher’s ability. However,the EIU does not accept responsibility for any loss arising from reliance on it.

Symbols for tables“n/a” means not available; “–” means not applicable

Printed and distributed by Redhouse Press Ltd, Unit 151, Dartford Trade Park, Dartford, Kent DA1 1QB, UK

ISSN 0969-8809

Summary

Nicaragua, Honduras 2nd quarter 1996

April 30, 1996

The region Outlook: There will be talks on free trade with Mexico. A Mexico-Brazil alli-ance will help shape the FTAA. The USA will ban shrimp imports. Page 3

Review: The pope has visited the region. There has been progress on regionalintegration and tariff reduction. Trade ministers have attended an FTAA sum-mit. Washington has promised NAFTA parity. The presidents have reachedagreement with Mexico on cooperation but not on free trade. Costa Rica hassigned a trade agreement with Panama. Illegal migration and drug-traffickinghave focused attention. A Central America-EU meeting has established a newrelationship. Intellectual property has been discussed. The CDC has offeredsupport. An ECLAC study shows increased dependence on thermal power.Electricity interconnection is progressing. The El Salvador-Honduras borderconflict is continuing. Stock exchange links have been strengthened. Privatis-ation has met with varied responses. Export credit agencies have detectedimprovements. A computer communications network has been completed.

Pages 3-9

Nicaragua Political and economic structures Pages 10-11

Outlook: The 1996 elections will probably remain polarised, but there is spacefor a moderate centrist coalition to challenge the left and the right. The govern-ment will pursue a resumption of the IMF’s ESAF lending but the temptationsof an election year will be hard to resist. Growth will rise to 4.5% in 1996 and4.8% in 1997. Inflation will fall gradually. The trade deficit will narrow slightlyin 1996 while the current-account gap will shrink significantly due to debtrestructuring. The trade and current-account deficits will stabilise in 1997. Theexchange rate will end 1996 at C8.70:$1 and 1997 at C9.40:$1. Pages 12-14

The political scene: Some of Arnoldo Alemán’s supporters seem to havedeserted him for Arriba Nicaragua. Daniel Ortega is likely to be selected as theFSLN candidate. The search is on to find a centrist coalition figurehead. Themayor’s office is being keenly contested. Women candidates will have newbacking. Violence is mounting as the elections approach. The OAS observers’mission has been accused of abetting rearmed Contras. The elections councilhas a new head. The battle over university funding continues. Pirates are com-plicating a border dispute. Pages 15-18

The economy: Bids have been received for ENITEL. Tax reform proposalsremain unpopular. Negotiations with the IMF continue. The state banks areunder pressure to recover bad debts. BANIC is to be part-sold. Coffee producerswant more protection. Mining concessions are coming under scrutiny. The rateof currency depreciation may slow. Inflation shows little improvement, butsome claim prices have fallen. The central government deficit narrowed in1995 but the large public-sector deficit prompted a tightening of monetary and

1

EIU Country Report 2nd quarter 1996 © The Economist Intelligence Unit Limited 1996

fiscal policy. Agricultural credit is scarce. Banana output will rise. Energy out-put will increase. A cross-country canal or railway may be built. Loan arrearscontributed to private bank losses in 1995. New hotel projects are in the pipe-line. Exports are set to rise. Trade strategy may change. Russia’s debt write-off issettled. Other debt negotiations are in progress and lending is buoyant.

Pages 18-27

Honduras Political and economic structures Pages 28-29

Outlook: The position of the president, Carlos Roberto Reina, will remainfragile as the 1997 elections approach, but structural adjustment reforms willremain on track. Growth will reach 4% this year, falling to 3.5% next year.Inflation will end 1996 at 20% and 1997 at 23%. Currency depreciation will berapid, as the external accounts remain weak; the current-account deficit willrise to 8.8% of GDP in 1997. Pages 30-32

The political scene: New cabinet members have been appointed; the pres-ident has imposed his choice of defence minister. The PL and PN presidentialcandidates’ campaigns are gathering momentum. The armed forces chief facesproblems in implementing change. The courts are pursuing cases of 1980shuman rights abuse and corruption. Strikers have gained wage increases. Thenew COHEP leader has taken a tough stand. Indigenous leaders have protested.The government has been criticised for its treatment of criminals.

Pages 32-35

The economy: An IMF mission has visited the country and the 1996 mone-tary programme has been released. The Central Bank has begun a 7-percentagepoint reduction in the minimum reserve requirement. Open market operationswill be stepped up to absorb liquidity. The Central Bank hopes for 16% cur-rency depreciation this year. The National Assembly has approved income taxreforms. The minimum wage has risen. A private-sector revitalisation plan hasbeen proposed. The economy grew by 3.6% in 1995. Inflation is slowing.Banana workers have been evicted from Chiquita land, but Dole has allowed itsworkers to farm unused land. Chiquita will increase production. World coffeeprices have angered growers. Greenpeace has targeted shrimp farmers. A40-mw thermal electricity plant has opened. Domestic fuel price increases maystabilise but electricity tariffs have been raised. The San Pedro Sula-PuertoCortés highway will be completed. El Cajón will receive US aid. Motorola hasbeen given a cellular telephone concession. A Salvadorean bank has boughtinto BANPRO. Export revenue growth helped reserves last year. Milk tariffshave been raised. Paris Club debt restructuring has been disappointing. TheUSA and the EU will provide assistance. Pages 35-45

Statistical appendices Pages 46-50

Editors: All queries:

Sarah Levy; Graham StockTel: (44.171) 830 1007 Fax: (44.171) 830 1023

2


The region

Outlook

There will be talks on freetrade with Mexico

The Mexican president, Ernesto Zedillo, made it clear to Central Americanheads of state at the recent Tuxtla Gutiérrez II meeting that bilateral tradeliberalisation would be gradual (see Review). However, negotiations betweenMexico and Nicaragua on a free-trade treaty could be concluded by mid-1996,while talks between Mexico and the Northern Triangle countries of Guatemala,El Salvador and Honduras on free trade and investment are due to begin againin July. Meanwhile, Mexico has agreed to extend its Acuerdo de AlcanceParcial, a preferential tariff agreement benefiting Guatemala, El Salvador,Honduras and Nicaragua, for one year to June 1997.

Mexico and Brazil buildan alliance

A recent agreement between Brazil and Mexico to establish a “strategicalliance” is expected to help shape the Free Trade Area of the Americas (FTAA),the hemispheric integration process. In late February the two countries agreedto build bilateral links on trade, investment and tourism. Specific commit-ments were reached on technical, scientific, cultural and educational cooper-ation only, but eventually the alliance could result in a free-trade bridgebetween Mercosur, the southern cone free-trade area, and the North AmericanFree Trade Agreement (NAFTA). The presidents of Brazil and Mexico havereiterated their support for the FTAA.

Shrimp conflict The USA has announced that, beginning in May, it will ban imports of shrimpfrom countries which do not protect turtles. Shrimp is a major export in theregion, of particular importance in Honduras, Nicaragua and Panama. TheConsejo Agropecuario Centroamericano (the regional agriculture council) hasprotested against the ban.

Review

The pope visits the region In early February work came to a standstill in three Central American countries,Guatemala, El Salvador and Nicaragua, as Pope John Paul II flew in. The pope’svisit was intended to boost the efforts of local Catholics to resist Protestantevangelism, and to encourage the clergy to reject left-wing liberation theology.His main political message was one of peace. In Guatemala he urged thegovernment and the guerrillas to move towards peace and social justice. InNicaragua he applauded the eclipse of the Sandinistas, recalling the sorrow ofhis previous visit in 1983 at the height of the war with the Contras.

The region 3


There is progress onregional integration—

Despite the death of the president of the Central American parliament(PARLACEN), Roland Valenzuela Oyuela, a month after he took office(1st quarter 1996, page 4), the parliament has made rapid progress on politicalintegration. It has approved a proposal to introduce a regional passport, whichshould obtain the signatures of the presidents of at least three countries onSeptember 15 (Central American independence day). The parliament’s politicalcommission believes that this would be the biggest step towards political inte-gration it will have achieved.

—and tariff reduction Central American countries are continuing their efforts to reduce the commonexternal tariff, after the Salvadorean trade liberalisation initiative of January1995. Last year the Consejo Arancelario y Aduanero Centroamericano (tariffcouncil) agreed on March 30 to a reduction in tariffs on capital goods importsfrom 5% to 1%, to be implemented by each country at its convenience. ElSalvador did so in April, Nicaragua in June and Guatemala in November. CostaRica reduced tariffs on capital goods imports to 3% in June, while Honduras didnot make any cuts. On December 12, 1995, a council of ministers responsiblefor regional economic integration agreed to reduce tariffs on raw materialsfrom 5% to 1% after June 1996 at each country’s convenience, and to studyproposals for a cut in tariffs on finished goods from 20% to 15%.

Ministers discusshemispheric integration

In the third week in March a summit of trade ministers of the Americas washeld in Cartagena, Colombia, as part of efforts to build a Free Trade Area of theAmericas (FTAA). The first such summit was held in Denver in June 1995. Ofthe continent’s 35 countries, 34 are represented in the FTAA talks; Cuba isexcluded. There was considerable enthusiasm, not least from a Business Forum,which brought together over a thousand businessmen from the Americas a daybefore the ministers’ summit. However, fears were expressed about differingpolitical approaches and about the problems caused by trying to bring togetherlarge and small countries in one trading bloc.

The Cartagena summit established four FTAA working groups, on governmentprocurement; intellectual property rights; services; and competition policy.The Denver summit had already set up seven working groups, on market ac-cess; customs procedures and rules of origin; investment; standards and techni-cal barriers; sanitary measures; smaller economies and subsidies; anti-dumpingand countervailing duties. In early February the working group on investment,which is headed by Costa Rica, recommended that the final FTAA treaty shouldcontain an agreement on investment flows as well as on trade.

NAFTA parity tops theagenda

Meanwhile, the region’s leaders continue to press the USA to give CentralAmerica privileges similar to those which Mexico currently enjoys under theNorth American Free Trade Agreement (NAFTA), until the FTAA comes intobeing in the year 2005. On February 26 the US secretary of state, WarrenChristopher, on a visit to the region, renewed the Clinton administration’soffer of NAFTA parity. He said that the US president, Bill Clinton, wouldinclude in his 1997 budget an Interim Trade Programme proposal for exportsfrom countries in Central America and the Caribbean. This would aim toextend Caribbean Basin Initiative (CBI) privileges to products such as textiles,apparel, footwear and petroleum. However, the difficulty of obtaining US

4 The region


congressional approval (1st quarter 1996, page 6) remains, and is complicatedby the US elections.

There is no free-tradeaccord at Tuxtla—

In mid-February a meeting which had raised considerable hopes for progresstowards free trade with Mexico was held in San José, Costa Rica. It was attendedby heads of state and ministers from Mexico and the five countries of CentralAmerica. The president of Panama, Ernesto Pérez Balladares, and the primeminister of Belize, Manuel Esquivel, were also present. Tuxtla Gutiérrez II wasso-called because the first free-trade talks between Central America and Mexicowere held in Tuxtla Gutiérrez in southern Mexico in January 1991. These set agoal of establishing free trade between Mexico and its Central American neigh-bours. But the only accord reached so far is that between Costa Rica andMexico, signed in April 1994, which led to free trade between the two countriesfrom January 1, 1995. Efforts to reach agreements between Mexico and theother countries in the region were interrupted by the Mexican peso crisis inDecember 1994, and little progress was made last year.

—but cooperationprogrammes are revived

Those who participated in Tuxtla Gutiérrez II stressed before the meeting thatimmediate results on free trade were not to be expected. They emphasised theimportance of agreeing on other matters, such as bilateral cooperation andinvestment, imports of Mexican oil under the San José pact (4th quarter 1995,page 7) and Central American debt with Mexico. The accord signed at the endof the meeting contained commitments on these subjects. The declaration ofTuxtla Gutiérrez II establishes the following.

• Mexico will revise the terms of the San José pact. The pact currently providesfor 20% of the invoice value of Mexican crude oil to be returned to the purchas-ing countries in the form of soft loans to finance government projects; theseterms will be changed to include petroleum derivatives as well as crude in thetotal eligible for generating concessionary financing, and the loans will beavailable to support private as well as public investment projects.

• Mexico will begin talks with Panama and Nicaragua on restructuring debt.

• Mexico will meet its pledge of $108m to the Banco Centroamericano deIntegración Económica (BCIE, the regional integration bank) in full.

• There will be cooperation on energy; on technical, cultural and educationalmatters; and on drug trafficking, illegal migration and organised car theft.

These agreements were interpreted as the first step towards building a“Mesoamerican community” from the eight countries which attended theTuxtla Gutiérrez II meeting.

Costa Rica reaches anaccord with Panama

Costa Rica has signed a bilateral trade agreement with Panama which will allowthe latter to complete preparations for entry into the World Trade Organization(WTO). The two countries have agreed to make substantial mutual concessions.Panama’s tariffs will fall from as high as 200% in some cases to a uniform 40%ceiling, with further reductions to a 30% ceiling over five years. However, someproducts have been allocated special import quotas and tariffs. Costa Ricanmilk—the product which caused most difficulties for the negotiators—has beenaccorded a quota of 2.5m litres and tariffs of between 90% and 60% for

The region 5


ten years. Costa Rican pork, which also caused problems, was given a quota of130m tons over a ten-year period. In both cases the quotas will allow substan-tial increases in Costa Rica’s exports to Panama.

Migration and drugs focusleaders’ attention

In recent meetings of regional leaders there has been increasing emphasis oncontrolling illegal migration and drug-trafficking, which have long been ofmajor concern to the USA. Commitments to addressing these problems headedthe political chapter of the declaration of Tuxtla Gutiérrez II, signed jointly inmid-February by the heads of state of Central America, Panama, Mexico andBelize. They were at the centre of the discussion between Central Americanleaders and the US secretary of state, Mr Christopher, later in the month.Mr Christopher promised to help fight drug-trafficking, by training police offi-cers and providing technical assistance. In March two regional meetings wereheld to study the problem of illegal migration, one in Nicaragua on March 7,bringing together the labour ministers, and another in Puebla, Mexico, onMarch 13-14, attended by the vice-ministers of foreign affairs of CentralAmerica and Mexico.

Ties with Europe aremodified

On March 21-22 the heads of state of Central America and Panama met repre-sentatives of the European Union (EU) in Florence, Italy for the 12th meetingof the San José group. Venezuela, Colombia and Mexico attended as cooper-ating countries, and Belize was present as an observer. The meeting agreed toupdate the relationship between the EU and Central America. The EU remainsprimarily interested in consolidating peace and democracy in the CentralAmerican region. It is the biggest foreign aid donor, and has providedECU1.3bn ($1.6bn) in aid since the San José meetings began in 1984. However,the focus of attention is shifting to trade and investment. In 1994 trade flowsbetween the EU and the region were estimated at $4.9bn. At the Florencemeeting, the EU promised to consider reducing or eliminating tariffs on someCentral American agricultural exports in three or four years’ time. The meetingalso agreed to recommend that the European Investment Bank and the EUbecome partners of the BCIE. In addition, a committee was set up to promoteforeign debt reduction. The San José group will no longer hold plenary meet-ings annually, but will meet every two years.

Intellectual property isdiscussed

At the end of February regional representatives met in Panama to discuss har-monising legislation on industrial patents. They examined a proposal by theWorld Intellectual Property Organisation (WIPO). The WIPO hopes to reach anagreement which would be signed by the governments of each country withinthe space of a year, before being submitted to the national legislatures. InHonduras the National Assembly approved an intellectual property law in1993. In Costa Rica and Panama the assemblies are currently discussing legis-lation proposals.

There is a new Río Grouprepresentative

Costa Rica took over from Nicaragua as the regional representative of the RíoGroup at the end of January. Nicaragua represented Central America during1995. The group is made up of ten South American countries, Mexico, Panamaand one representative each from Central America and the Caribbean.

6 The region


The CDC offers support The Commonwealth Development Corporation (CDC) has announced thecreation of a $22m Central American Investment Fund (CAIF) to provide long-term investment funds to private firms by acquiring stocks in the companies.The fund envisages investments of up to $3m over periods of three to six years,after which the shares purchased may be sold back to the original shareholdersor other private parties, or auctioned on the local and Central American stockexchanges.

ECLAC finds a growingdependence on thermal

power

A recent report by the UN Economic Commission for Latin America and theCaribbean (ECLAC) indicates that in the early 1990s the region’s dependenceon thermal electricity generation has increased. Contrary to the experience ofthe 1980s, when the percentage of electricity generated by hydroelectricityplants increased in most countries, in the 1990s thermal power as a percentageof total electricity generated rose rapidly. This was largely because droughts in1991 and 1994 lowered water levels in hydroelectricity dams, obliging govern-ments to turn to thermal electricity generation, often by private companies.

Electricityinterconnection advances

The Inter-American Development Bank (IDB) is supporting a project to estab-lish an intra-regional power grid (3rd quarter 1995, page 4). The project iscurrently at the stage of a feasibility study of interconnection alternatives, forwhich the IDB is providing $1.5m and Spain $500,000. The Consejo deElectrificación de América Central is carrying out the study, through its secre-tariat, SIEPAC.

El Salvador-Hondurasfrontier conflict

In March and April there was renewed tension between El Salvador andHonduras over the fate of 10,000 Salvadoreans living in an area in the north-east of El Salvador, bordering on Honduras. A decision in 1992 by the Inter-national Court of Justice in The Hague gave this border area to Honduras. Ademarcation process has been progressing slowly since then; it will be speededup this year with the purchase of high-technology equipment. Last year abilateral negotiating commission agreed to solve the problem of the Salvadore-ans living in the area by granting them dual nationality. But this was rejected

The region 7

0

30

60

90

Costa Rica El Salvador Guatemala Honduras Nicaragua Panama

1980

1990

1994

Thermal power generation

% of total

Source: UN Economic Commission for Latin America and the Caribbean (ECLAC).

nilnilnilnilnilnilnilnilnilnilnilnilnilnilnilnilnilnilnilnilnilnilnilnilnilnilnilnilnilnilnilnil


by Honduran representatives at a meeting in March. A further complicationwas added recently when the Honduran military began to clamp down onillegal logging by Salvadoreans, who are alleged to be crossing the border to cuttimber.

Stock market integrationcontinues

Links between the Central American stock exchanges (bolsas de valores) werestrengthened in late February when Costa Rica’s Bolsa Nacional de Valores(BNV) signed an agreement on custodian services with the Bolsa de Panamá.The BNV already has such arrangements with exchanges in Guatemala, ElSalvador, Honduras and Nicaragua. These facilitate trading by Costa Rican andforeign investors in instruments listed in other exchanges in the region. Mean-while, in November last year the Panamanian beer producer, Cervecer’aNacional, filed for registration on the Costa Rican stock exchanges before theComisión Nacional de Valores (CNV, the latters’ regulatory body).

At the end of April representatives of stock exchanges attended the fifth semi-nar of the Asociación de Bolsas de Comercio de Centroamérica, Panamá yRepública Dominicana (BOLCEN, the regional body). The meeting discussedways of speeding up integration. It also focused on the development of equitymarkets and the impact of forthcoming privatisations on the region’s stockexchanges.

Privatisation createsvaried expectations

At the end of March the BCIE announced that it had secured loans worth $55mfor investment in telecommunications and energy utilities in the region. Thefinancing comes from the Chemical Bank, Credit Suisse, Bank of Boston, ABNAmro and the US Export-Import Bank. It responds to a perceived need toupgrade telecommunications and electricity infrastructure, now that privatis-ation is advancing rapidly, particularly in El Salvador and Nicaragua. However,the privatisation process is being actively opposed by the utilities’ trade unions,which announced at the end of April that they were forming a region-widefederation to fight the privatisation of state telecommunications and electricitycompanies. The federation will be known as the Federación Centroamericanade Trabajadores de las Telecomunicaciones y de la Energía Eléctrica (FESTEN).

Export credit agencies seeimprovements

Canada’s Export Development Corporation (EDC) and the Export-Import Bankof Japan (Jexim) have noted improvements recently in Costa Rica, Guatemala,El Salvador, Honduras and Nicaragua. Although they are not likely to establishfull cover in the near future, EDC and Jexim believe that the region meritsgreater financing facilities, which will help Canadian and Japanese exportersinterested in selling to the Central American market. The EDC will provide acredit worth $20m through the BCIE, while Jexim has agreed to provide theBCIE with an untied loan worth ¥26.5bn ($252m).

Computercommunications are

consolidated

The BCIE announced at the end of 1995 the completion of a network for theconnection of all of Central America and Panama to Bitnet and Internet. TheBCIE gave the necessary funds under the modality of a non-reimbursable co-operation project, which was executed with the cooperation of the Costa RicanMinistry for Science and Technology and the private and public entities associ-ated with CRNET, in particular the University of Costa Rica and the InstitutoTecnológico de Costa Rica.

8 The region


FECAICA elects a newpresident

The president of the Guatemalan chamber of industry, Juan José Urruela, hastaken over from the president of the Salvadorean industrialists’ association,Leonel Mejía, as president of the regional body, the Federación de Cámaras yAsociaciones de Industria de Centroamérica (FECAICA). Mr Urruela was chosenfor the post during a meeting of FECAICA at the end of March.

A maritime institute isplanned

In early April the president of Honduras, Carlos Roberto Reina, flew to Peru fora two-day visit. He signed an agreement to set up a Central American Institutodel Mar (maritime institute), based in Honduras. The institute will receivesupport from Peru.

DHL invests in expansion DHL Worldwide Express, the multinational courier service, has announcedthat it will invest $30m in its Central American operations. The company willexpand its offices in Panama from 300 to 2,100 sq metres and will acquireaeroplanes and equipment.

The region 9


Political structure: Nicaragua

Official name: Republic of Nicaragua

Form of state: presidential democracy with National Assembly

The executive: president is head of state and commander-in-chief of the armed forces; elected for a period offive years by universal adult suffrage; appoints a cabinet (last cabinet reshuffle January 10, 1995)

National legislature: National Assembly, 92-member unicameral legislature, directly elected by adult suffrageand proportional representation for a period of five years

Legal system: Supreme Court at apex of subordinate court system, elected by the National Assembly for aperiod of seven years

Last national elections: February 1990 (presidency, National Assembly and municipal councils); February1994 (two Atlantic coast autonomous councils)

Forthcoming national elections: October-November 1996 (presidency, National Assembly, municipalcouncils and autonomous councils)

National government: Mrs Barrios de Chamorro governs with the support of a loose coalition

Main political organisations: government—Proyecto Nacional, a loose coalition of the Grupo del Centro,the Partido Socialista (PS) and independents. Opposition—Frente Sandinista de Liberación Nacional (FSLN);Movimiento Renovador Sandinista (MRS); Partido Nacional Conservador (PNC); Alianza Liberal of the PartidoLiberal Constitucionalista (PLC) and smaller liberal parties; Unión Demócrata Cristiana (UDC); Partido SocialDemócrata (PSD); Arriba Nicaragua

President Violeta Barrios de ChamorroVice-president Julia Mena Rivera

Key ministers agriculture Dionisio Cuadra Kautz construction & transport Pablo Vigil Icaza economy & development Pablo Pereira Gallardo education Humberto Belli Pereira environment & natural resources Claudio Gutiérrez Huete finance Emilio Pereira Alegría foreign affairs Ernesto Leal Sánchez foreign cooperation Erwin Kruger Máltez health Federico Muñoz Fernández interior Sergio Narvaez Sampson labour Francisco Rosales Argüello presidency Julio Cárdenas social action William Baez Sacasa tourism Fernando Guzmán Cuadra

President of the Central Bank José Evenor Taboada AranaNational Assembly president Cairo Manuel López

10 Nicaragua


Economic structure: Nicaragua

Latest available figures

Economic indicators 1991 1992 1993 1994 1995a

GDP at current prices $ m 1,740 1,845 1,969 1,843 1,904

Real GDP growth % –0.7 0.8 –0.7 2.5 3.9

Consumer price inflation (av) % 2,742 20.3 21.4 7.8 11.4

Population m 4.00 4.13 4.27 4.40 4.54

Exports fob $ m 268 223 267 363 525b

Imports fob $ m 688 771 659 785 858b

Current account $ m –5 –834 –644 –729 –610

Reserves excl gold $ m 134 130 55 141 136

Total external debt $ m 10,654 11,145 10,541 11,019 9,039

Debt-service ratio % 156.6 34.3 34.1 40.5 44.6

Exchange rate (av) C:$c 4.27 5.00 5.62 6.72 7.54

April 26, 1996 C8.22:$1

Origins of gross domestic product 1994 % of total Components of gross domestic product 1994 % of total

Agriculture 21.4 Private consumption 90.8

Manufacturing 16.3 Government consumption 15.0

Construction 2.3 Fixed capital formation 15.5

Electricity, gas & water 1.2 Change in stocks 0.0

Government 6.8 Exports of goods & services 21.5

Commerce 26.1 Imports of goods & services –43.0

Total incl others 100.0 GDP at market prices 100.0

Principal exports 1994 $ m Principal imports cif 1994 $ m

Coffee 72.9 Raw materials & intermediate products 299.0

Meat 67.6 Consumer goods 245.1

Fish & seafood 48.1 Capital goods 215.0

Sugar 20.2 Total incl others 823.8

Bananas 7.4

Total incl others 351.7

Main destinations of exports 1993 % of total Main origins of imports 1993 % of total

USA 40.8 USA 26.6

Central America 21.3 Central America 26.1

EU 16.3 Latin America 18.7

Other Europe 12.1 Japan 8.0

Latin America 4.2 EU 7.6

a EIU estimates. b Preliminary official estimate. c The gold córdoba, introduced as a parallel currency in 1990, at parity with the dollar, wasdevalued to C5:$1 on March 3, 1991. The new córdoba had been removed from circulation by May 1, 1991.

Nicaragua 11


Nicaragua

Outlook

The election campaignwill gather momentum

The general election is just six months away. From now until November 1996the political scene will be dominated by election campaigning. The campaignwill continue to be polarised, with sporadic incidents of violence. Opinion pollsshow only modest change in the pattern of public support for the contenders,with the former mayor of Managua, Arnoldo Alemán, presidential candidate ofthe right-wing Alianza Liberal, still enjoying a lead of some ten points over theformer president, Daniel Ortega, who is likely to be confirmed as the candidateof the left-wing Frente Sandinista de Liberación Nacional (FSLN) in early May.Other parties are trailing far behind and have failed so far in attempts to formalliances. But there is space for a coalition to emerge in the centre of the politicalspectrum. This would have a real chance of winning the presidency.Mr Alemán’s politics are too right wing and divisive for many, while voters fearthat the return of a Sandinista government would threaten the foreign aid andinvestment which has driven economic growth in the first half of the 1990s.

With the confrontation between the Alianza Liberal and the Sandinistas reviv-ing memories of revolution and counterrevolution, calls have gone up onvarious sides for a code of ethics to govern the campaign. An upsurge in activityby armed bands in the north of the country has increased fears of disruption ofthe voting in certain areas. The administration of Violeta Barrios de Chamorroinsists it will do everything it can to ensure an orderly ballot and transition tothe next government. Underscoring its commitment to the same goal, the USAhas indicated that it will keep its sitting ambassador in place until the electionsare over.

The IMF still sets thetargets—

The economic policy of the Barrios de Chamorro administration continues tobe framed by the IMF-backed structural adjustment programme, with lendingprovided under an Enhanced Structural Adjustment Facility (ESAF), which runsuntil mid-1997. The fund made another visit to the country in February toreview policy performance (see Economic policy). It agreed a new bridge pro-gramme intended to bring Nicaragua back in line with ESAF targets by June1996. As a precondition for access to new ESAF-linked financing, the fund hasstressed the need to secure legislative approval for the government’s tax pack-age and to reduce the fiscal deficit.

—but the temptations willbe hard to resist

The government is under strong pressure to correct the fiscal imbalance; but itwill be tempted to boost spending in the run-up to the general election tofavour the pro-government presidential candidate, Antonio Lacayo. Even if thegovernment tries hard to keep real public investment at last year’s level,

12 Nicaragua


election-year pressures on the legislature to approve a higher budget for theuniversities and a moratorium on payment of producers’ debts to the statebank, may complicate the government’s fiscal management. The NationalAssembly’s actions could jeopardise $180m in liquid financing tied to resump-tion of the ESAF. This sum includes a $28m tranche from the IMF and $70m fora public-sector modernisation programme which the World Bank and Inter-American Development Bank (IDB) want to start in June. Fiscal indicators willcontinue to be closely monitored to prevent election-year slippage.

The economy will grow in1996—

The EIU forecasts that the gradual economic recovery that began in 1994 willcontinue. Following last year’s 3.9% rise, GDP growth in 1996 should acceler-ate to 4.5%, led by another surge in exports, including maquila (offshoreassembly). Although major projects are in abeyance until after the elections,investment will strengthen in construction, where pent-up demand for hous-ing has created a wave of home-building for middle-income families. However,growth in private consumption demand will be constrained by the govern-ment’s proposed tax package and the improved enforcement of tax collection,together with stricter controls over credit and money supply growth.

—and 1997 We expect GDP growth to rise to 4.8% in 1997. If Mr Alemán wins the election,business confidence will improve, and there will be an immediate surge offoreign investment from the USA, Taiwan and the rest of Central America. Avictory for a centrist coalition would give rise to a similar boom, and therewould be less risk of civil unrest sparked by left-wing opposition to Mr Alemán.However, some post-election austerity is likely as the new government affirmsits commitment to continuing structural adjustment, and in particular to curb-ing the fiscal deficit. This may take the form of cuts in the public-sector payroll,posing the danger of strikes and protests. Electricity shortages, poor infrastruc-ture, and lingering uncertainty over property rights will remain as medium-term obstacles to growth.

Inflation and currencydepreciation will slow

Despite the monetary and credit squeeze by the Banco Central de Nicaragua(BCN, the Central Bank) in early 1996, annual inflation is likely to remain indouble-digits this year. We do not expect the Central Bank to meet its 8%year-end inflation target, since buoyant export revenue and inflows of foreignaid will continue to sustain broad money (M2) growth. But year-end inflationshould fall from 11.7% in 1995 to 10% this year. The austerity expected in1997, during the first year of the new government, should reduce year-endinflation further, to 9%.

As inflation falls, the authorities will be able to reduce the rate of crawling-pegdevaluation of the córdoba, still keeping ahead of the inflation differentialwith the USA and avoiding real currency appreciation. We expect the exchangerate to end 1996 at C8.70:$1 and 1997 at C9.40:$1.

The trade deficit willstabilise—

With the recent fall in world coffee prices, export growth in 1996 will be lessrapid than 1995’s dramatic 49% increase. Nevertheless, we expect total exportrevenue to climb by 19% to $625m in 1996 and a further 12% to $700m in1997 as the seafood, sugar and non-traditional export sectors continue to ex-pand. With average import prices falling as a result of lower world oil prices,

Nicaragua 13


the rise in import costs will slow marginally in 1996 to 8%, reducing the tradegap (fob-fob) from $333m in 1995 to around $300m. Although import pricesare likely to pick up again in 1997, fiscal austerity will restrain domestic de-mand for imports, stabilising the trade gap.

—and the current-accountdeficit will narrow

The gap in the current account narrowed from $729m in 1994 to an estimated$610m last year due mainly to rapidly rising exports. It is likely to fall furtherthis year, to $363m, as interest payments fall in line with debt restructuring(see Foreign trade and payments). Total debt stocks fell by $2bn in 1995, andseem set to fall by a further $3.5bn this year under the latest renegotiationswith Russia and the Banco Centroamericano de Integración Económico (BCIE).Annual interest payments should fall in proportion. Although most of theseare not actually made, they are included in the current account as interestpayment obligations. Rising revenue from maquila and other services exportswill help to reduce the invisibles deficit. In 1997, we expect continued stronggrowth in services export earnings. Although this will be partially offset by adecline in foreign aid transfers after the elections, the current-account deficitwill fall slightly, to $350m.

Forecast summary($m unless otherwise indicated)

1994a 1995b 1996c 1997c

Real GDP growth (%) 2.5 3.9 4.5 4.8

Consumer price inflation (%; year-end) 12.4 11.7 10.0 9.0

Merchandise exports fob 363 525d 625 700

Merchandise imports fob 785 858d 930 1,000

Current-account balance –729 –610 –363 –350

Exchange rate (C:$, year-end) 7.11 7.96 8.70 9.40

a Actual. b EIU estimates. c EIU forecasts. d Official estimate.

-1

0

1

2

3

4

5

6

1993 94 95(a) 96(b) 97(b)

NicaraguaLatin America

Gross domestic product % change on previous year

(a) EIU estimates. (b) EIU forecasts. (c) Nominal exchangerates adjusted for changes in relative consumer prices.Sources: EIU; IMF, International Financial Statistics.

50

60

70

80

90

100

110

1990 91 92 93 94 95(a) 96(b) 97(b)

Cordoba: real exchange rate (c)1990=100

C:$C:$C:$C:$C:$C:$C:$C:$C:$C:$C:$C:$C:$C:$C:$C:$C:$C:$C:$

C:¥

C:$

C:¥C:¥

C:DMC:DMC:DM

C:$

C:¥

C:$

C:¥C:¥

C:DMC:DMC:DM

C:$

C:¥

C:$

C:¥

C:$

C:¥

C:$

C:¥

C:$

C:¥

C:$

C:¥

C:$

C:¥

C:$

C:¥

C:$

C:¥

C:$

C:¥

C:DM

14 Nicaragua


Review

The political scene

Support for Mr Alemánflags—

A poll by Borge y Asociados, a respected polling firm, has revealed some slippagein voter support for Arnoldo Alemán, right-wing presidential candidate of theAlianza Liberal and the front-runner in this year’s elections. In March, with justover six months to go before the elections, Mr Alemán registered a 36% voteintention as compared with a steady showing of more than 40% since early lastyear. This confirms a trend detected earlier by CID-Gallup (1st quarter 1996,page 14). Some of Mr Alemán’s supporters may be deserting to the new ArribaNicaragua party of the banker, Alvaro Robelo. Mr Alemán’s campaign profile hasbeen low recently, suggesting that the Alianza Liberal is short of funds.Mr Alemán suffered a blow in March when a leader of the Nicaraguan businesscommunity in Miami accused him of illegally occupying houses confiscatedfrom Nicaraguan exiles who are now US citizens during his recent tenure asmayor of Manugua.

—while Arriba Nicaraguaraises its profile

The surprise of the election season so far has been the pro-business movementknown as Arriba Nicaragua, led by Mr Robelo, which polled 2.8% in the latestBorge y Asociados survey. This showing, for a party which was formed only inDecember 1995, places it ahead of the Proyecto Nacional of Antonio Lacayo,which unites the pro-government parties, (2%) and the centre-left MovimientoRenovador Sandinista (MRS) of Sergio Ramírez (2%). Mr Robelo has lived mostof his adult life in Italy, serving as ambassador for the government of VioletaBarrios de Chamorro in that country in the early 1990s before returning toNicaragua to found the Banco Europeo de Centroamérica (BECA). Observersascribe the new party’s success to the large amounts of money it has showeredon campaign advertisements and the recruitment of activists in the interior.But questions have been raised about the origins of this money.

The Supreme Court dodgesa ruling on Mr Lacayo

In February the Supreme Court ruled on some of the challenges presented lastyear to the reformed constitution that affect political candidacies. The courtdismissed on procedural grounds a challenge to the reformed constitution from23 ministers and officials of the government of Mrs Barrios de Chamorro, whoargued that a requirement to resign their posts a year before election dayviolated their political rights. But the court continues to dodge a direct rulingin the case of Mr Lacayo, who, as a relative (by marriage) of the incumbentpresident, faces a constitutional ban from running for the presidency.Mr Lacayo says he will continue to campaign, and will defy any attempt to banhim. The Supreme Electoral Tribunal (the independent body in charge of theelections) will have to decide in mid-May on this and other candidacies whichare apparently in violation of the rules.

The Sandinistas rallyround Mr Ortega

The March Borge y Asociados poll also shows support for the former president,Daniel Ortega, of the Frente Sandinista de Liberación Nacional (FSLN) rising,from 20% to 24%. At the same time, support for the MRS, the moderateSandinista splinter party led by the former vice-president, Mr Ramírez, is

Nicaragua 15


declining. This suggests that Sandinista sympathisers are returning to the FSLNfold. The party conducted a primary election in February to choose candidatesfor mayors and provincial deputies. A national convention in May will decidethe nominations for president and deputies to the National Assembly. Theformer president still appears to enjoy commanding support from the partyrank and file. Mr Ortega suffers from heart problems. Nevertheless, he is likelyto be selected as the presidential candidate, seeing off a challenge from thehuman rights activist, Vilma Núñez de Escórcia.

The conservatives split— A former vice-minister in the Barrios de Chamorro government, Noel Vidaurre,has won the presidential nomination of the Partido Nacional Conservador(PNC), defeating a rival, José Castillo Osejo, in a party convention. Mr CastilloOsejo promptly announced a decision to split from the PNC and stand underhis own banner. The conservatives are currently scoring less than 1% inopinion polls.

—and the search is on fora centrist coalition

Mr Vidaurre’s candidacy could be of importance because of the support itreceives from the Pellas family, major sugar and rum producers. The Pellas andother prominent families are concerned that a victory for Mr Alemán couldbring fresh instability, and have been casting around for alternatives. One ofthese, the poet and newspaper editor, Pablo Antonio Cuadra, has repeatedlydeclined offers to be the standard-bearer for a centre-right political movement.There would be significant voter support for a conservative candidate such asMr Vidaurre leading a centre-right coalition, since the radical policies ofMr Alemán and the FSLN alienate many voters and businessmen.

The mayor’s office iskeenly contested

There are ten candidates for the post of mayor of Managua, considered astepping stone to national power. The most popular at present is a non-partycandidate, Pedro Solórzano, a rental car executive supported by the Pellasfamily whose popularity derives from sponsorship of an annual sports eventknown as the Ben Hur chariot race. The FSLN’s candidate, the director of aradio station, Carlos Guadamuz, appears to be in second place. Roberto Cedeñoof the Alianza Liberal, the former Sandinista tourism minister, Herty Lewites(MRS), and the former health minister, Marta Palacios, of the Proyecto Na-cional vie for a distant third.

Women form nationalcoalition

One hundred prominent women spanning the spectrum of political partiesfrom right to left, along with representatives of feminist and other organis-ations, have banded together in a national women’s movement. The move-ment will promote women’s candidacies for public office in their respectiveparties and support a minimum agenda of women’s rights that combines de-mands for equality of political and economic opportunity with demands for agender focus in public education and health programmes. The FSLN has an-nounced that half of its candidates for national deputies will be women.

Violence rises as theelections approach—

The February 7 visit of Pope John Paul II took place without incident undervery tight security. However, the sporadic campaign of bomb attacks againstchurches has persisted in the wake of the papal visit. Furthermore, an upsurgein activity by rearmados (rearmed bands) in areas of the north is of increasing

16 Nicaragua


concern. Their actions have claimed 64 lives so far this year. The wave ofkidnappings, robbery and murder has caused hundreds of peasant families toflee remote areas. A new effort at negotiation with the principal leader of therearmados, known as El Charro, is under way under the auspices of the CatholicChurch. This effort has the support of the government and the army. A quickpacification of the areas affected is vital given that voter registration in 26northern municipalities, many of them affected by the rearmados, is scheduledfor early June.

—and the role of CIAV isquestioned

Meanwhile, the Comisión Internacional de Apoyo y Verificación (CIAV, theelectoral observers’ mission of the Organisation of American States, OAS) hascome under fire. In March the chief of police, Fernando Caldera, insinuatedthat the group, whose mission since 1990 has been to reintegrate ex-Contrarebels into civilian life, has been abetting the rearmados. Mr Caldera’s alleg-ations have been considered a proxy attack by the Nicaraguan army, which haslong been resentful of CIAV’s criticism of human rights violations by membersof the security forces. It is not known whether the group’s mission will beextended beyond June 30, when it is due to end. However, human rightsgroups and members of the National Assembly have voiced support for theCIAV. The Barrios de Chamorro government has approved a separate OASelection observer mission, to be headed by the former foreign minister of ElSalvador, Oscar Santamaría.

The electoral tribunal hasa new head

The head of the Supreme Electoral Tribunal, Mariano Fiallos, resigned at theend of January in protest against changes in the electoral law (1st quarter 1996,page 13). Mr Fiallos argued that certain changes threatened to politicise thework of the tribunal by depriving it of the power to appoint election councilsin the departments. According to the revised law, the members of departmen-tal and local councils will be chosen from the political parties competing in theelections. On April 13, after lengthy negotiations, the National Assemblyelected a moderate Sandinista, Rosa Marina Zelaya, as the new tribunal pres-ident. Receipt of aid from the USA and Europe has narrowed the tribunal’sbudget deficit from $24m three months ago to just $7m.

The comptroller-generalimpasse is broken

The slow pace of negotiations over a new comptroller-general, mandated bythe 1995 constitutional reforms, injected fresh tension into executive-legislative relations during the first three months of this year. Under the frame-work law of June 1995 (3rd quarter 1995, page 15), the National Assemblycommitted itself to appointing a comptroller-general in agreement with thegovernment. But some legislators accused the Barrios de Chamorro adminis-tration of dragging out the bargaining, and threatened to repeal the frameworklaw. Under pressure, the government compromised, allowing the election onApril 12 of a Christian Democrat, Agustín Jarquín Anaya,.

Student protests persist University students have continued their protest over the 6% budget allocationfor higher education (1st quarter 1996, page 15). In February some 50 studentsbriefly occupied the foreign ministry taking the minister, Ernesto Leal, and twoforeign diplomats hostage. The students then gave up violent tactics, transfer-ring their pressures to the National Assembly. The universities’ budget is

Nicaragua 17


mandated as 6% of the national budget but the legislature had interpreted thisas 6% of the ordinary budget excluding extraordinary spending financed byforeign loans and grants. In mid-April the National Assembly accepted the viewthat the 6% applies to the full budget. Objecting that the legislature’s actionraises the government’s budget ceiling by $11m, the executive immediatelythreatened a veto, and a further round of conflict is likely.

Pirates complicate borderdispute

Despite negotiations in February, Nicaragua and Honduras have been unable toresolve their maritime border dispute (1st quarter 1996, page 6). Meanwhile,the Nicaraguan armed forces have promised to take firmer action to combatfishing pirates off the Atlantic coast, deploying three new Israeli gunboats forthe task. The decision was in response to a threat to pull out by the US com-pany, Gulf King, the largest legal fishing operator in the area. Gulf King said inearly April that four of its boats had been raided in a single night, and that ithas lost more than $500,000 to the pirates since 1995. But the decision todeploy new gunboats prompted a protest from the Honduran navy, which saidthe boats would be used to harass Honduran fishermen.

Economic policy

Telephone bids arereceived

The government has called for new bids from foreign companies interested inacquiring a 40% stake in the state telephone company, now called ENITEL.Under the terms of the privatisation bill approved last November, ENITEL wassplit out from the state telephone and postal service, TELCOR. Bids have beenreceived from 11 companies: AT&T, Usacell-Bell Atlantic Corporation, GTE,Sprint (all US firms), Korea Telecom, Cables and Wireless of the UK, Stet ofItaly, Telefónica de España, Singapore Telecom, France Telecom and CompañíaTelecomunicadora de Chile. A decision on the bids is expected by June. Mostof the $130m expected to be garnered from the sale will go by law to redeemgovernment bonds issued to property-owners whose land was expropriated bythe Sandinistas in the 1980s (1st quarter 1996, page 16).

Tax law meets risingopposition

The government’s crucial tax package, grandly flagged as a “law to promotestability, investment and employment” (1st quarter 1996, page 17), continuesto spark criticism from segments of the business community. Industrialistsattacked the reduction in the municipal sales tax from 2% to 1.5% as insuffi-cient, arguing that it should be brought down further to a level comparablewith other countries in the region. They also rejected the proposed 2% mini-mum income tax on fixed assets and inventories as double taxation, and de-manded income tax incentives for the reinvestment of profits. In March theChamber of Industry sent its comments on the draft law to the NationalAssembly, which committed itself to report in April. However, delays overother items on the legislative timetable and pre-elections infighting in theNational Assembly suggest that the bill will not be addressed until late May.The 2% minimum income levy, also opposed by the Chamber of Commerceand the cattle ranchers’ association, looks likely to be a major sticking point forthe legislators.

18 Nicaragua


There are newnegotiations with the IMF

After a review of performance under the September 1995 bridge plan(1st quarter 1996, pages 16-17), Nicaragua and the IMF agreed in February to anew set of policy targets designed to permit formal resumption of the secondyear of the Enhanced Structural Adjustment Facility (ESAF) programme in June.The most important of these concern management of the fiscal deficit, loanrecovery in the state banks, and net international reserves.

The government is committed to bringing the global public-sector deficit downfrom last year’s 11.2% to 8.3% of GDP in 1996, and in particular to achievingcurrent savings of 7% of GDP. The latter target compares with 3.9% achievedin 1995. Current savings of the central government came to around 2.5% ofGDP in 1995 (see The economy). The passage of tax legislation is consideredcrucial in meeting these goals, but specific efforts must be made additionally topare down the public-sector workforce and curb the operating deficit of theEmpresa Nacional de Electricidad (ENEL, the state electricity company).

State banks must recoverbad debts—

In addition to continuing with public-sector restructuring plans, under theagreement with the IMF the Banco Nacional de Desarrollo (BANADES, the stateagricultural development bank) and the Financiera Nicaragüense de Inversio-nes (FNI, the state investment bank), are to recover C200m ($24m) and C100mrespectively from their debtors for payment to the Banco Central de Nicaragua(BCN, the Central Bank). In addition BANADES must raise its capital reservesby some C60m to meet existing requirements. The Central Bank is working todevelop clear legal and administrative mechanisms, so far absent, for recoveryof the state banks’ portfolios in arrears, which total some C1.2bn.

—and reserves must riseslowly

By comparison, the international reserves target for 1996 is relatively modest.With major ESAF-linked loans withheld during 1995, net international reservesclosed the year at $65m. They are to be raised to just $81m this year. Receipt ofnearly $40m in financing from the World Bank, Germany and Japan has tem-porarily boosted net reserves to above $100m at the end of February.

Part of BANIC is to be sold In mid-February the government announced that the state-owned BancoNicaragüense de Industria y Comercio (BANIC, the state industrial and com-mercial bank) will be capitalised via the issuance of new shares for sale to

Income 15.6

VAT 21.0

Luxury goods 0.1consumption 55.4

Other taxes 7.9

Income 19.8

VAT 20.2consumption 53.7

Other taxes 6.2

Origin of domestic tax revenue% of total

Source: Official sources.

SpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecific

SpecificSpecific

SpecificSpecificSpecificSpecificSpecificSpecificSpecificSpecific

SpecificSpecificSpecific

SpecificSpecificSpecificSpecificSpecificSpecificSpecific

1994199419941994

Specific

19941994199419941994199419941994199419941994 19951995

SpecificSpecificSpecific

1994

SpecificSpecific

19941994

SpecificSpecific

1994 1995

Nicaragua 19


foreign investors, who could end up with 51% of the total. The governmenthopes to conclude the sale by June 30. As in the case of BANADES, outstandingdebts in arrears to the bank are to be passed to the collection agency, CobranzasNicaragüenses (COBRANICSA, 1st quarter 1996, page 17). The authorities hopethat the bank’s capital will increase by up to $100m as a result of the shareissue. But the FSLN is opposed to the sale, arguing that the proposed capital-isation is privatisation in disguise and that under the constitution such achange must be approved by the National Assembly.

The governmentnegotiates debts—

In March, after protests by farmers’ associations, the government announcedterms for the restructuring of debts owed to the state banking system. Intheory, these have been transferred to the collection agency, COBRANICSA,but the agency has not yet been legally constituted. The government is insist-ing on repayment of the principal plus the last year’s accrued interest. Repay-ment terms vary from four to five years, at interest rates from 8-14% on thenewly capitalised total. Debtors will not get access to new loans in either publicor private banks until they pay up a substantial portion of their arrears. Offi-cials indicate that real repayment expectations during 1996 are minimal, nomore than C50m-60m. But thousands of small producers will be deprived ofaccess to credit.

State bank debt arrears

Share of Amount Share ofNo of total owed total

Amount (C) clients (%) (C m) (%)

0-100,000 14,814 88.9 165.2 13.4

100,000-500,000 1,356 8.1 298.0 24.1

500,000-1,000,000 292 1.7 200.0 16.2

1,000,000-5,000,000 185 1.1 361.3 29.3

5,000,000 & above 22 0.2 209.5 17.0

Total 16,669 100.0 1,234.0 100.0Source: Superintendencia de Bancos, cited by FIDEG. Totals include BANADES, BANIC, and the Banco de Crédito Popular.

—but producers proposemoratoria

The president of the Central Bank, José Evenor Taboada, argued that the termsoffered represent maximum flexibility on the government’s part. But leaders ofagricultural organisations have rejected the terms and say they will continue toprotest against them. In addition, they have introduced several initiatives inthe National Assembly to force the government to renegotiate the debt terms.In February producer groups led by the coffee growers union, UNICAFE, andsupported by small traders’ associations, proposed their own measures, basedon the restructuring of state bank debts over seven years with three years grace.In April cotton and other farmers in León and Chinandega introduced a sepa-rate proposal to restructure their debts over a 15-year term with five years grace.The initiatives pose dilemmas for the authorities, who wish to avoid alienatinglarge constituencies in an election year. The total amount of farm debt inarrears is C794m.

Coffee growers proposelegislation

UNICAFE has submitted a draft coffee law to the National Assembly, which isintended to regulate relations between coffee producers on the one hand, andprocessors and exporters on the other. With official credit availability declining

20 Nicaragua


in recent years, coffee growers say they have become dependent on thecountry’s ten export houses to finance their operations, making them vulner-able to manipulation of sales prices and arbitrary charges for processing andmarketing. To counter the former, the law would impose the use of a uniformsales contract stipulating minimum export prices for the different grades ofcoffee consigned to the exporters. In order to protect small producers frommarket swings, the legislation would also revive the coffee stabilisation fund, tobe administered by UNICAFE, into which producers would pay 1-2% of theirearnings, depending on the level of world prices.

Mining concessions comeunder scrutiny

Regional and municipal governments are expressing increasing opposition tonatural resource concessions granted by the central government without localapproval and with potentially harmful consequences for the environment. Inone recent case the mayor of El Castillo rejected petitions from the Canadiancompany, Placer Dome, to allow mineral prospecting in the Río San Juan area.Local officials want to preserve this area for ecotourism development. Mean-while, the environment and natural resources ministry has given assurancesthat the Canadian company, MINISA, will not be allowed to mine the Cerro ElMojón gold deposits in Chontales until it offers environmental safeguards. Tohead off opposition, the economy and development ministry has met with theNorth Atlantic Regional Council to establish orderly procedures for theapproval of concessions in order to meet local community concerns.

Crawling peg may slow Officials are reappraising the current 1% monthly average crawling peg devalu-ation of the córdoba after a meeting in February in which independent econ-omists urged change. Some economists argued that the crawling peg system isa major contributor to inflation and high interest rates. The government haskept to its policy for the first three months of the year, taking the parity toC8.20:$1 at the end of March, but private exchange houses were negotiatingpurchases of dollars at C8.15:$1 representing slower currency depreciationthan at the official rate. This trend reflects reduced demand for dollars becauseof the government’s tight monetary policies. The authorities will probably waituntil mid-1996 to make a decision on whether to adjust the peg.

Nicaragua signs the ParisConvention

In mid-February the National Assembly ratified Nicaragua’s adhesion to the1967 Paris Convention on Industrial Property, which affords protection forcommercial names, trademarks, industrial designs and other intangibles. Thegovernment is also grappling with intellectual property issues as part of itstrade negotiations with Mexico, offering to ratify the Bern convention onliterary and artistic works, the Geneva phonograms convention, and theBrussels convention on the distribution of satellite transmissions.

The economy

Figures on inflation vary According to official estimates, the rate of inflation during the first two monthsof 1996 continued at a similar pace to last year, with prices rising by 1.8% overthe period. But the Fundación Internacional para el Desafío Económico Global(FIDEG, a private think-tank) disagrees, estimating inflation at –1.8% inJanuary and 0.6% in February, giving an accumulated change in the price level

Nicaragua 21


of –1.2% over the period. FIDEG says that deflation has been caused by a severerestriction on liquidity imposed in late 1995, offset somewhat by the inertialinflation caused by the crawling peg devaluations. The Central Bank’s prelimi-nary March data would seem to confirm the slowing trend in inflation, withprices rising by just 0.5% in that month to give an accumulated rate of 2.3% inthe first quarter of 1996.

Consumer price inflation(%)

1995 1996 Monthly Annual Monthly Annual

Jan 0.7 11.9 0.7 11.2

Feb 0.9 12.0 1.1 11.4

Mar 0.5 12.0 0.5 11.4

Apr 0.0 11.7

May 0.7 11.8

Jun 1.8 11.3

Jul 1.0 12.5

Aug –1.6 8.9

Sep 1.2 8.2

Oct 3.8 10.4

Nov 2.6 11.8

Dec –0.9 11.7Source: Banco Central de Nicaragua.

Monetary and fiscaldiscipline is tightened

Reflecting last year’s large public-sector deficit (see Economic policy), net creditfrom the Central Bank to the non-financial public sector rose by C694m($92m) in 1995, compared with an ESAF target of C590m. The overshoot in netcredit reflected spending on public investment; this was to have been financedby foreign aid inflows, but they did not materialise. By contrast, during the firsttwo months of 1996 net Central Bank credit to the public sector has contractedby C364m, according to FIDEG. This exceeds the bridge plan target of C340m.In addition, the bank has not granted any credit to the commercial banks orthe FNI. Similarly, the Central Bank appears to have overshot the bridge plantarget for liquidity contraction through open market operations. These resultshave contributed to the IMF’s positive evaluation of recent macroeconomicpolicy performance.

The central governmentdeficit narrows in 1995

The central government raised current revenue by significantly more thancurrent expenditure in 1995 to generate current savings for the first time. Thisallowed the government to raise capital expenditure on fixed assets and finan-cial investments while still bringing down the borrowing requirement fromC600m (4.8% of GDP) in 1994 to C515m (3.6% of GDP) in 1995.

22 Nicaragua


Central government operations(C m)

1994 1995 % change

Total income 5,038.2 7,182.5 42.6Revenue 2,542.9 3,146.2 23.7 Current revenue 2,510.8 3,082.0 22.7 Capital revenue 32.1 64.2 100.0Borrowing 1,889.2 3,453.4 82.8 Domestic 646.9 2,565.8 296.6 External 1,242.3 887.6 –28.6Grants 606.1 582.9 –3.8

Total expenditure 4,924.8 7,101.3 44.2Current expenditure 2,605.6 2,719.8 4.4 Salaries & wages 834.8 866.4 3.8 Goods & services 589.1 485.0 –17.7 Domestic interest payments 42.5 21.5 –49.4 External interest payments 602.4 544.0 –9.7 Current transfers 536.8 802.9 49.6Capital expenditure 2,319.2 4,381.5 88.9 Fixed investment 598.2 727.7 21.6 Financial investments & transfers 545.1 796.2 46.1 Domestic debt repayment 682.7 2,282.6 234.3 External debt repayment 493.2 575.0 16.6

Domestic debt adjustment –149.6 –214.3 43.2

Use of cash balances –36.2 –133.1 267.7

Memorandum items Current savings –94.8 362.2 % of GDP –0.77 2.52Balance excluding borrowing –599.9 –514.6Source: Banco Central de Nicaragua, Indicadores Económicos.

Agriculture

Agricultural credit isscarce

As a result of the steep decline in lending operations at BANADES, the agricul-tural development bank which is being restructured (see Economic policy),credit availability for the 1996-97 agricultural cycle is likely to be far belownormal. According to official calculations, the shortfall will be about C500m($59m), only half of the estimated credit needs of the agricultural and livestocksectors. Leaders of the principal producer organisations warn that large areaswill not be farmed this year if the shortage is not resolved.

Coffee producers seekindependence

With most of the harvest completed, the economy and development ministryestimates that 1996 earnings from coffee exports will be about $108m, down by$10m from last year. Greatly increased export volume—920,000 46-kg bags asopposed to 750,000 in 1995—has partly offset the steep decline in world prices.Nicaragua’s average selling price was 158 cents/lb in 1995. It is likely to bearound 117 cents/lb this year. UNICAFE officials complain that at this pricelevel, and with manipulation by what they describe as a cartel of export houses,producers have seen little profit. UNICAFE has therefore proposed new legis-lation (see Economic policy) and announced plans to set up its own processingand exporting company, which it hopes will market around 10% of the1996-97 harvest.

Nicaragua 23


New banana contractexpands production

In March the US-based multinational, Dole, signed an agreement with thegovernment to invest $6m to expand banana production on 300 ha inChinandega. Dole will also assume $10m in debts owed by Nicaraguan bananaproducers to BANIC, the state industrial and commercial bank. Dole, formerlyknown as the Standard Fruit Company, left Nicaragua in 1982, returning in1994 in the wake of the government’s negotiation of preferential access to theEuropean Union (EU) market. Since then, Dole has assisted with the rehabilita-tion of Nicaragua’s banana industry, whose exports—currently consisting ofre-exports of fruit from Colombia—are likely to exceed $20m in 1996.

Industry and services

Energy outlook improvesslightly

Despite last year’s abundant rainfall, the country may not escape electricityrationing in May and June when its two hydroelectricity plants are temporarilytaken out of service for maintenance. However, some improvements are ex-pected in the near future. In March the Singapore-based company, AMFELS,signed a contract with the state electricity company, ENEL, to build a 30-mwthermal power plant costing $30m on the south coast near Puerto Sandino.AMFELS claims it will bring its investment on stream within six months. ENELis negotiating a similar project with a US company, Coastal Energy. In addi-tion, it has begun a German-financed programme to rehabilitate 250 km ofpower lines in Managua at a cost of $7m. But renewed seismic activity at theMomotombo volcano, where existing geothermal plants are located, under-scores continuing uncertainty about energy supply.

Cargo route options arestill open

In February, after six months of deliberation, a mixed commission of theexecutive and the National Assembly announced that Nicaragua is exploringpossibilities for constructing an inter-oceanic transport route from the Atlanticto the Pacific. Similar proposals have been considered before, but the latestflurry of interest started in March 1995 when an international consortiumproposed building a $1.3bn railway or “dry canal” to carry container cargobetween new ports to be built on the Atlantic and Pacific coasts. The commis-sion’s announcement indicates that in addition to this proposal, the govern-ment would consider other suggestions including that of a sea-level canal, aslong as they meet its criteria for economic benefit and environmental sustain-ability. A member of the former Somoza regime visited Nicaragua recently,promoting a scheme for a sea-level water route.

Loan arrears contribute toprivate bank losses

The annual report of the Superintendencia de Bancos (banking regulator) for1995 reveals that several of Nicaragua’s private banks are having trouble withbad debts. While none is as weak as BANADES, the state agricultural develop-ment bank, the following banks have significant percentages of their portfolioin arrears: Banco Europeo de Centroamerica (3.75%); Banco de la Producción(4.83%); Banco de la Exportación (6.52%); Interbank (7.69%); and Banco delCampo (17.63%). Several of these and other small banks reported losses varyingfrom $150,000 to $450,000 last year. This trend has sparked suggestions that thebanking market is saturated, after growing very rapidly in recent years. To dealwith this situation, the banking regulator will shortly issue more rigorous regu-latory norms, in particular raising the total required capital-to-risk-assets ratio

24 Nicaragua


from 6% to 8%. There may be mergers or takeovers as banks struggle to meetthese new regulatory requirements.

Banco Mercantil becomesCDC’s partner

The Commonwealth Development Corporation (CDC) has announced that itwill set up a $22m Central American Investment Fund (see The region). Thefund’s agent in Nicaragua will be the privately owned Banco Mercantil. TheCDC has operated in Nicaragua since 1991, making funding available mainlyto Nicaragua Sugar States and its associated distillery.

New hotel projects are inthe pipeline

According to tourism officials, the Holiday Inn hotel chain of the USA hasplans to build a large hotel in Managua. Meanwhile, El Salvador’s Poma familyis reportedly planning to construct a 5-star hotel behind Managua’s Metrocen-tro shopping centre, which is owned by the same group. Both projects willcommence shortly after the 1996 elections. A Canadian company has mean-while broached plans for a beach-front hotel at Playa Marsella on the Pacificcoast near San Juan del Sur.

Foreign trade and payments

Exports will continue toexpand

In 1996, despite lower earnings from coffee (see Agriculture) and stagnantearnings from beef, the economy and development ministry is projecting a20% rise in overall export earnings. The optimism centres on sectors that haveshown rapid growth over the last two years: fish and seafood products (withearnings expected to rise by 41%), sugar (30%), bananas (41%), sesame (57%)and cotton (164%). In addition, value added from the Las Mercedes free-tradezone is expected to surge from $28.2m in 1995 to $38.2m this year. The min-istry forecasts that the fob-cif trade gap will continue to decline, by 8%.

Foreign trade($ m)

1994a 1995b 1996c % change

Exports fob 363 525 650 20.0

Imports cif –875 –961 –1,050 6.7

Trade balance fob-cif –512 –436 –400 –8.3

a Actual. b Estimates. c Forecasts.

Source: Economy ministry.

Trade strategy may change Talks on a Nicaragua-Mexico free-trade deal have been delayed recently byMexico’s unwillingness to free up imports of Nicaraguan meat, sugar and otheragricultural products and Nicaragua’s desire to protect its beer industry. Moregenerally, Nicaragua’s industrialists insist that the country is not ready to com-pete on equal terms with Mexican imports, citing the country’s high tax bur-den as an impediment. Nicaragua will negotiate with Mexico bilaterally onlyuntil mid-1996, after which it will join with El Salvador, Honduras andGuatemala, the so-called Northern Triangle countries, in free-trade negoti-ations with Mexico (see The region). Meanwhile, the private sector is exploringthe possibility of expanding trade and investment relations with Venezuela.

Nicaragua 25


Talks securebreakthrough on Russian

debt

In mid-April a decisive round of bargaining with Russia over terms for forgive-ness of Nicaragua’s massive $3.5bn debt to the former Soviet Union took placein Moscow. Although the Russian attitude has become more flexible since latelast year, Nicaraguan officials were not confident that agreement could bereached. At the last talks in November 1995 (1st quarter 1996, page 23) Russiaoffered only 88% write-off while Nicaragua wanted 95%, at the official ex-change rate of one rouble to one dollar.

This time the Nicaraguan negotiators expected a top offer of 92% from theRussians. Instead Russia appears to have accepted a valuation of the debt at anexchange rate of 1.9 roubles to the dollar, and a 90% write-off. The EIU esti-mates that this is equivalent to a write-off of 94.7% at an exchange rate of onedollar to one rouble. The remainder of the debt will be rescheduled over 15years at the London interbank offer rate (LIBOR) plus 40 basis points.

Renegotiation with theBCIE is more likely—

Nicaragua’s attempt to scale down its $540m debt to the Banco Centroameri-cano de Integración Económico (BCIE—the regional integration bank) also ap-pears to be headed toward success. Nicaragua claims it can only pay a small partof this year’s $75m in prioritised debt service, and demands a write-off of $240min principal which has its origins in a capitalisation of back interest imposed bythe bank in 1988. With arrears currently totalling $60m, the bank continues tohold up disbursement of loans to the government (4th quarter 1995, page 25).Publicly, BCIE officials insist that forgiveness of any part of Nicaragua’s debt tothe institution would set a bad precedent. But a recent meeting in Buenos Aireshas paved the way for negotiations to commence in May.

Nicaragua’s foreign debt, by creditor(end-1995)

$ m %

Eastern Europea 4,250 41.7

Latin America 2,390 23.4

Multilateralb 1,580 15.5

Paris Club 1,280 12.5

Other bilateral 290 2.8

Commercial banks 320 3.1

Suppliers 90 0.9

Others 40 0.1

Total 10,240 100.0

a Includes Russia. b Includes the BCIE.

Source: Ministry of Foreign Cooperation.

—and other multilaterallenders may cut debt

The progress made in talks with Russia and the BCIE is a sign that Nicaragua’saggressive debt-reduction strategy, launched last year, is beginning to bearfruit. The IMF and World Bank are considering the idea of scaling down morethan $1bn in debts to multilateral creditors. According to the foreign cooper-ation minister, Erwin Kruger, Nicaragua has been included on a list of sixcountries which may be accorded special treatment given their manifest inabil-ity to pay their debts. Although the terms on which any restructuring wouldoccur have not been made public, the governing boards of the IMF and the

26 Nicaragua


World Bank will consider the proposal in May. No actual write-off would takeplace, however, until 1997.

Soft loans for ruraldevelopment

After a visit in February, the World Bank has announced a decision in principleto make a $40m loan available for the sustainable development of rural areas inLeón province. The 50-year, interest-free loan will channel money to localcommunities for infrastructure and environmental conservation projects.Meanwhile, the Inter-American Development Bank (IDB) has signed a $18.8mloan, co-financed with Sweden, for forest protection and soil conservation.However, the IDB has warned that poor countries should not expect access tonew concessional financing after 1996 when its Special Operations Fundruns out.

The Japanese are activedonors

The Japanese government and private Japanese contractors have begun workon a $30m aid project to expand Managua’s water supply. The project involvesbuilding an aqueduct to pipe water from Ticuantepe, some 20 km south of thecapital, where 15 deep wells are being drilled. Japan is also continuing a $6mannual programme of donations of equipment for rural road and waterworksconstruction, focusing on the areas to which demobilised Contras have beenrelocated.

Nicaragua 27


Political structure: Honduras

Official name: Republic of Honduras

Form of state: unitary republic

The executive: president, elected for four-year term by general election

National legislature: National Assembly consisting of one member and one substitute member elected forevery 35,000 people or fraction over 15,000

Legal system: US-style Supreme Court system

Electoral system: universal adult suffrage

Last national elections: November 1993 (legislative and presidential)

Forthcoming national elections: November 1997 (legislative and presidential)

National government: cabinet, appointed by president

Main political organisations: government—Partido Liberal (PL); opposition—Partido Nacional (PN), Partidode Innovación Nacional y Unidad-Social Demócrata (PINU-SD), Partido Demócrata Cristiano (PDC)

The cabinetPresident Carlos Roberto Reina

Key ministers attorney-general Edmundo Orellana communications, public works & transport Jerónimo Sandoval culture, tourism & information Rodolfo Pastor Fasquelle defence & public security Colonel José Luis Núñez Bennet economic planning Guillermo Molina Chocano economy & trade Fernando García environment Carlos Medina finance Juan Ferrera foreign affairs José Delmer Urbizo Panting health & social affairs Enrique Samayoa interior Efraín Moncada Silva labour Cecilio de Jésus Zavala natural resources Ricardo Arias Brito public education Zenobia Rodas de León Gómez

President of the Central Bank Hugo Noé PinoNational Assembly president Carlos Flores Facussé

28 Honduras


Economic structure: Honduras

Latest available figures

Economic indicators 1991 1992 1993 1994 1995a

GDP at market prices La m 16,314 18,800 22,689 28,067 37,723

Real GDP growth % 3.1 5.6 3.9 –1.4 3.6b

Consumer price inflation (av) % 34.0 8.7 10.8 21.7 29.5c

Population m (mid-year) 5.26 5.42 5.59 5.77 5.95

Exports fob $ m 841 839 857 922 1,137b

Imports fob $ m 913 990 944 882 1018

Current account $ m –258 –351 –309 –355 –270b

Reserves excl gold $ m 105 198 97 171 261c

Total external debt $ m 3,395 3,614 4,075 4,418 4,553

Debt-service ratio % 30.2 36.2 33.9 37.7 34.9

Exchange rate (year-end) La:$ (official) 5.40 5.83 7.26 9.40 10.34c

April 26, 1996 La11.02:$1 (official)

Origins of gross domestic product 1994 % of total Components of gross domestic product 1994 % of total

Agriculture 20.4 Private consumption 66.6

Mining 1.7 Government consumption 10.6

Manufacturing 15.2 Fixed investment 25.9

Construction 5.5 Change in stocks 0.2

Transport & utilities 7.1 Exports of goods & services 37.7

Commerce 8.8 Imports of goods & services –41.0

Banking, finance & insurance 7.6 GDP at market prices 100.0

Government 5.7

Total incl others 100.0

Principal exports 1995d $ m Principal imports cif 1994d $ m

Coffee 344.2 Manufactures & industrial raw materials 436.1

Bananas 196.4 Machinery & equipment 314.5

Shrimp & lobster 158.6 Fuels & lubricants 180.3

Zinc 21.4 Food & animal products 114.9

Total incl others 1,060.7 Total incl others 1,055.9

Main destinations of exports 1994 % of total Main origins of imports 1994 % of total

USA 65.8 USA 58.4

Japan 6.7 Guatemala 5.1

Germany 3.8 Japan 5.0

Spain 3.3 El Salvador 3.1

Benelux 1.7 Mexico 2.6

a EIU estimates. b Preliminary official estimate. c Actual. d Customs basis.

Honduras 29


Honduras

Outlook

The president’s positionwill remain fragile—

The position of the president, Carlos Roberto Reina, will be strengthened bythe cabinet changes he has implemented in the past few months. Mr Reina haswon public approval recently by standing up to the armed forces (see Thepolitical scene), but the military will continue to resist efforts to try theirmembers for human rights cases dating from the 1980s. The president says hewill not be intimidated by acts of violence. But those who hope to see themilitary brought to account for past failures will criticise Mr Reina for appoint-ing the retired armed forces commander, General Luis Alonso Discua Elvir, as adelegate to the UN, giving him immunity from prosecution.

—as the consensusmovement splinters—

Efforts to create national consensus through the Consejo Nacional de Conver-gencia (CONACON, a council bringing together diverse political parties andgroups) are likely to falter this year. CONACON has been of little help inresolving disputes with public-sector employees and banana workers in early1996. Meanwhile, indigenous groups are unhappy with the administration,claiming that it has repeatedly broken promises to invest in their communities.Popular discontent will be exploited by the opposition Partido Nacional (PN)and those within the ruling Partido Liberal (PL) who have left the Mr Reina’scamp to begin campaigning for the 1997 general election. The government canexpect less cooperation from the National Assembly president, Carlos FloresFacussé, who is the front-runner in the presidential election race.

—but reforms will stay ontrack

Candidates for the 1997 elections are likely to be increasingly hostile to thegovernment on the issue of compliance with IMF and World Bank cond-itionality, since the stabilisation and structural adjustment programme backedby these institutions is unpopular with the electorate. Nevertheless, thegovernment intends to stick to its programme of economic reforms and itsconservative fiscal and monetary policy. Lowering year-end inflation will be apriority in 1996. But there is increasing pressure to meet inflationary wagedemands. The administration’s recent decisions to raise public-sector employ-ees’ and teachers’ wages at the same time as introducing income tax cuts couldrepresent a 2% increase in the fiscal deficit this year. The government is deter-mined to avoid this outcome by making savings in other areas.

Growth will strengthenthis year—

The EIU expects GDP growth to rise from an estimated 3.6% in 1995 to 4% thisyear. We expect the fiscal deficit to remain under control, macroeconomicstability to improve, inflation to slow and real interest rates to decline. Confi-dence will strengthen, and international lenders will back the government’sefforts with increased capital inflows, boosting credit availability. Private

30 Honduras


investment will benefit from these changes; it will also be encouraged by taxcuts and other incentives included in the administration’s reactivation plan(see Economic policy). Production of banana and shrimp for export shouldrespond particularly well. Maquila (offshore assembly) should see moderategrowth, despite delays in obtaining US congressional approval for the bill togive textiles and clothing exports to the USA parity with the North AmericanFree Trade Agreement (NAFTA; see The region).

—and fall off in 1997 Next year business confidence will falter somewhat as the general election ap-proaches. Mr Reina will be tempted to raise public expenditure as well as allowingwage increases ahead of inflation, to improve voters’ purchasing power and createa climate favouring the PL’s candidates. This will lead to fears of a rising fiscaldeficit and higher inflation. GDP growth is forecast to fall slightly to 3.5%.

Inflation will remainunder control—

The EIU expects year-end inflation to fall to 20% in 1996. This will be ahead ofthe official 16% inflation target, but considerably lower than last year’s 26.8%figure. The authorities are maintaining a tight control over liquidity, offsettingreductions in the minimum reserve requirement for commercial banks withopen market operations and the introduction of an “obligatory investmentrequirement” (see Economic policy). In 1997, as the government indulges insome pre-election spending and relaxation of monetary tightness, year-endinflation is forecast to rise to 23%. However, neither the fiscal deficit norinflation is likely to surge as they did before the 1993 general election.

—and so will currencydepreciation

According to the IMF, the country’s international reserves have remainedsteady in the first two months of this year, reaching $266m at the end ofFebruary, compared with $261m in December 1995. However, depreciation ofthe lempira has been rapid in the first three months because of a recent liberal-isation of the dollar auction system. Currency depreciation should slow some-what as export earnings from the 1995/96 coffee harvest, which has beendelayed by growers’ unwillingness to sell at current low prices, begin to flow in.The lempira will also benefit from the climate of greater macroeconomic stabil-ity and business confidence. Nevertheless, in 1996, as the external accountsremain weak, the exchange rate will depreciate ahead of the inflation differen-tial with the USA to end the year at La12.52:$1. This trend will continue in1997, with a slight real currency depreciation. If necessary, the authorities willprevent a slide of the lempira in the run-up to the elections by tightening thedollar auction system. The exchange rate will end 1997 at La15.27:$1.

Forecast summary($ m unless otherwise indicated)

1994a 1995b 1996c 1997c

Real GDP growth (% change) –1.4 3.6 4.0 3.5

Consumer price inflation (%; year-end) 28.9 26.8a 20.0 23.0

Merchandise exports fob 922 1,137 1,115 1,170

Merchandise imports fob 882 1,018d 1,035 1,113

Current-account balance –335 –270 –290 –380

Exchange rate (La:$; year-end) 9.40 10.34a 12.52 15.27

a Actual. b Preliminary official estimates. c EIU forecasts. d EIU estimate.

Honduras 31


The external accounts willremain weak

The EIU’s estimate of the 1995 trade surplus has been revised down from $150mto $119m, based on revised official figures for export growth last year (seeForeign trade and payments). This year the trade surplus will fall to $80m.Coffee from the 1995/96 harvest will earn less than that from the 1994/95harvest as a result of lower prices and bad weather damage to the crop; we expectcoffee to bring in $265m in 1996, compared with an estimated $335m last year.As a result, export earnings are forecast to fall slightly in 1996, despite healthyincreases in export volume for bananas and shrimp. But growth in the importbill should be curbed by limited foreign exchange availability and falling oilprices. In 1997 export revenue will pick up, but so will the import bill, as strongdomestic demand boosts import volume while world prices of manufacturesstrengthen. This will result in a trade surplus of only $57m.

The invisibles deficit will be kept in check in 1996-97 by moderate growth ofrevenue from maquila and tourism. There will be some benefit, too, from lowerforeign debt-service obligations to the Paris Club (see Foreign trade and pay-ments); however, the reduction in these debt-service obligations will be lessthan previously expected, since the Paris Club deal was less favourable thananticipated. Therefore, as the trade surplus falls, the current-account deficit willrise to $290m in 1996 and $380m (8.8% of GDP) in 1997.

Review

The political scene

New cabinet members areappointed

In mid-February the president, Carlos Roberto Reina, announced a cabinetreshuffle, in an effort to give new life to his administration in the second halfof his four-year term. The general manager of the Empresa Nacional de laEnergía Eléctrica (ENEE, the state electricity company), Jerónomo Sandoval,took over the Ministry of Communications, Public Works and Transport fromGermán Aparicio. Mr Aparicio claimed that his dismissal was linked to a cam-paign by Mexican construction companies, after he cancelled contracts signedwith them by the previous administration (see Industry and services). Mr Reina

-2

-1

0

1

2

3

4

5

6

1993 94 95(a) 96(b) 97(b)

Honduras

Latin America

Gross domestic product % change on previous year

(a) Preliminary official estimate. (b) EIU forecasts. (c) Nominalexchange rates adjusted for changes in relative consumerprices.Sources: EIU; IMF, International Financial Statistics.

0

20

40

60

80

100

120

1990 91 92 93 94 95 96(b) 97(b)

Lempira: real exchange rate (c)1990=100

La:$La:$La:$La:$La:$La:$La:$La:$La:$La:$La:$La:$La:$La:$La:$La:$La:$La:$La:$

La:¥

La:$

La:¥La:¥La:DMLa:DMLa:DMLa:$

La:¥

La:$

La:¥La:¥La:DMLa:DMLa:DMLa:$

La:¥

La:$

La:¥

La:$

La:¥

La:$

La:¥

La:$

La:¥

La:$

La:¥

La:$

La:¥

La:$

La:¥

La:$

La:¥

La:$

La:¥La:DM

32 Honduras


replaced the defence and public security minister, General Reynaldo AndinoFlores, with Colonel José Luis Núñez Bennet. There were objections to ColonelNúñez Bennet’s appointment from the military hierarchy, which supported thecandidacy of another officer; but the president stuck to his decision. A lack ofcommunication led to Colonel Núñez Bennet missing his swearing-in ceremony,causing a momentary, unfounded, panic over possible foul play. On April 1 theminister of natural resources, Ramón Villeda Bermúdez, resigned from his post todedicate his time to campaigning for the presidential nomination of the rulingPartido Liberal (PL); he was replaced by the vice-minister, Ricardo Arias Brito.

Party candidates vie forsupport

On March 25 a wealthy San Pedro Sula businessman and leading member ofthe PL, Jaime Rosenthal, officially launched his campaign to succeed Mr Reinain 1998. He claimed that if he were elected president in the 1997 elections, hewould run the country without interference from the IMF. His decision to seekthe nomination widened divisions within the party. At the party primaries, tobe held on December 1, members will have to choose a presidential candidatefrom between Mr Rosenthal; the National Assembly president, Carlos FloresFacussé; the former minister of natural resources, Mr Villeda Bermúdez; and anassembly deputy who launched his campaign for the party nomination inmid-April, Jorge Roberto Maradiaga.

Meanwhile, at a Partido Nacional (PN) convention held in February, partyleaders decided to hold a primary election on December 1, the same day as thePL. This will be the first time in the history of the PN that a presidentialcandidate will be chosen by party primaries. In the past, PN leaders havenominated the candidate. Oswaldo Ramos Soto, who lost to Mr Reina in the1993 elections, was thought to have done badly in part because he was nevertested in a primary election. The retired colonel, Héctor René Fonseca(4th quarter 1995, page 32), is still fighting PN insiders to be allowed to run forthe opposition party’s presidential nomination for 1997. The PN leadershipwants to ban him on the grounds that only those with ten years’ active mem-bership of the party can be nominated. But the country’s constitution prohibitssuch limits on political participation.

The president’s security isquestioned

On the night of March 26 a grenade was thrown from a passing car into thegarage at Mr Reina’s Tegucigalpa residence. The explosion was the second gre-nade attack on the president; the first was in San Pedro Sula last year. Thepresident was unharmed, but serious questions have been raised about laxsecurity. Mr Reina stressed that his chief-of-staff, General Alvaro AntonioRomero, was not to blame.

The chief of the armedforces faces a challenge

The new commander-in-chief of the armed forces, General Mario Raúl HungPacheco, wants to retire some generals so that the military budget can beredirected to new recruits, mid-level officers and army operations. The armedforces is top heavy, with many highly paid but inactive older officers. Sinceforced conscription was abolished in April last year (2nd quarter 1995, page32), there have been efforts to attract voluntary recruits. But plans have beenheld back by lack of funds for clothing, food, education, medical care and theminimum wage for those who sign up. On March 20 Mr Reina and theNational Assembly president, Mr Flores Facussé, denied the military’s request

Honduras 33


for a budget increase, saying that all government sectors are cutting expend-iture in an effort to reduce the fiscal deficit. There were rumours that somehigh-level military leaders were plotting against General Hung Pacheco.

Meanwhile, General Luis Alonso Discua Elvir, who retired as commander-in-chief of the armed forces in January, has been named as an alternate ambassa-dor to the UN. This has angered human rights activists, since the position giveshim immunity from prosecution against charges of human rights abuse origi-nating in the 1980s.

The case against tenofficers proceeds—

In late January the Supreme Court rejected an amnesty plea by ten militaryofficers accused of participating in the kidnapping and torture of six universitystudents who were “disappeared” in 1982 (1st quarter 1996, page 29). An armycaptain, Billy Joya, emerged from hiding briefly in February to deny that thestudents were tortured and to claim that the excesses of the 1980s were com-mitted by both the left and the right; he has published a 500-page book back-ing up his claims. Captain Joya is still evading arrest, together with Lt ColonelAlexander Hernández, the 1980s operations commander for Battalion 3-16 (amilitary intelligence unit notorious for human rights abuse), and MajorManuel de Jesús Trejo, who was an officer of the Fuerzas de Seguridad Pública(FUSEP, the military police). In March officials arrested Jorge Antonio TorresPadilla, a former agent of the Dirección Nacional de Investigación (DNI, theintelligence unit of the military police); the DNI was dissolved in 1994.

The government has announced that the human rights ombudsman, LeoValladares, has been confirmed in his office for another six years. He wasoriginally appointed in 1992, and has worked hard to resolve kidnapping andtorture cases of the 1980s. In February the authorities paid compensation to thefamilies of “disappeared” persons Manfredo Velásquez and Saúl Godínez Cruz,in compliance with a decision by the Inter-American Court of Human Rights.In March the attorney-general, Edmundo Orellana, travelled to Canada tointerview exiled former members of Battalion 3-16 who have been linked to the1980s “disappearances”.

—as do corruption cases— Mr Orellana is also pursuing cases against government officials suspected ofcorruption and fraud. In March he presented a formal accusation against theformer president, Rafael Leonardo Callejas (1990-94), for fraud. He also chargedCésar Augusto Rivera, the ex-director of the Instituto Nacional de Jubilacionesy Pensiones de los Empleados Públicos (Injupemp, the public employees’ pen-sion fund), for his involvement in the controversial Ciudad Mateo project(1st quarter 1996, page 30). Also in March police arrested a customs depart-ment official, Gustavo Arguelles, who is accused of organising a major fraud.

—but a Callejas official isfound innocent

On March 21 courts found the former finance minister in the Callejas admin-istration, Benjamín Villanueva, innocent of any wrongdoing in the “Carrazo”scandal; this involved the illegal import of $4m of Italian vehicles and machin-ery. Meanwhile, assembly deputies are calling for a thorough investigation ofanother racket, which took place under the Callejas and Reina administrations,involving the illegal sale of passports to Chinese citizens (1st quarter 1996,page 30).

34 Honduras


Strikes continue to plaguethe government

The government has continued to face labour unrest, although in March itagreed to raise minimum wages by 25 percentage points (see Economic policy).In March air traffic controllers held a three-day strike to demand a pay increase.Two aeroplanes narrowly avoided a collision above San Pedro Sula as the resultof an error by substitute controllers. In April a round of walk-outs and protestsby school teachers brought the Ministry of Public Education to a standstill.Other ministries were badly affected by sympathy strikes. Three public workers’unions, representing around 23,000 public employees, demanded a 50% wagerise, which the government said it could not afford. In mid-April the authori-ties reached an agreement with the public employees, worth La120m ($11m).Later in the month they agreed to a 20% increase for the country’s 45,000teachers, effective on June 1 and costing La163m. However, the governmenthas still to negotiate an agreement with doctors and health workers; its “final”offer to them, worth La230m, was rejected in early April.

COHEP’s new leader takesa tough stand

The Consejo Hondureño de la Empresa Privada (COHEP, the private-sectorassociation) has elected Juan Bendeck as its new leader to replace the outgoingpresident, Adolfo Facussé (1st quarter 1996, page 30). After his election, inMarch, Mr Bendeck said that the private sector would refuse to work with thegovernment on a price-wage pact unless the authorities halt the depreciation ofthe lempira or freeze petrol prices (see Industry and services). He also assertedthat bonuses, consisting of an extra month’s wages, which have to be paid toworkers in December and, since last year, in July, make the recent minimumwage increase unnecessary.

Indigenous leaders voicetheir demands

Indigenous peoples’ groups are again protesting at the lack of progress inproviding land and services for communities in the departments of Lempiraand Intibucá. They claim that little has been done since they received promisesof assistance after making a pilgrimage to Tegucigalpa last year. An organisinggroup for the indigenous communities threatened to stage another protestunless a high-level commission from the National Assembly addressed theircomplaints. It wants swifter granting of land titles and progress on road-building and sanitation projects in villages where the Lenca peoples live.

The government facescriticism

In April the Inter-American Commission on Human Rights of the Organisationof American States (OAS) complained to the Honduran government over theconditions of minors being held in adult prisons. Casa Alianza (CovenantHouse), which shelters street children, asked the commission to intervene andpersuade the authorities to transfer youth offenders to separate facilities. In its1995 annual report on human rights abuses, the US State Department alsohighlighted alleged violations of criminals’ rights, saying that the governmenthas failed to investigate extrajudicial killings of suspected criminals.

Economic policy

An IMF mission reviewspolicies

In March an IMF mission visited the country. The visit was prompted byconcerns about the possible repercussions of pre-election spending and public-sector wage increases, which could raise the fiscal deficit, undermine inter-national reserves and reduce the country’s capacity to service its foreign debt.

Honduras 35


The president of the Banco Central de Honduras (BCH, the Central Bank),Hugo Noé Pino, promised the IMF delegation that Honduras would continue tocut the public-sector fiscal deficit and would increase foreign reserves by$180m in 1996. Mr Pino also told the IMF representatives that he expects to see4% growth this year.

A report published by the IMF in March points out that Honduras is one of thepoorest countries in the southern hemisphere, with a heavy foreign debt bur-den and export earnings which are vulnerable to changes in commodity priceson international markets. It says that the country should receive Paris Clubsupport (see Foreign trade and payments). It praises the efforts of the adminis-tration of Carlos Roberto Reina to implement structural adjustment and en-force fiscal conservatism. It points to some encouraging signs, including a fallin inflation in January and payment of $100m of debt obligations to theInter-American Development Bank (IDB) at the beginning of this year. Thereport forecasts a reduction in the current-account deficit of the balance ofpayments to 7.5% of GDP in 1995/96 and 6.7% of GDP in 1996/97.

The authorities outline1996 goals—

At the end of March the Central Bank published its 1996 monetary pro-gramme, containing the same targets as those outlined to the IMF delegation.Mr Pino is aiming to keep the central government fiscal deficit from risingabove 3.2% of GDP in 1996, compared with an estimated 3% of GDP last year,despite increased public-sector wage commitments (see The political scene). Healso intends to implement a seven-point reduction in the minimum reserverequirement for commercial banks this year, helping to bring down real inter-est rates. When combined with other elements of the government’s reactiv-ation plan (1st quarter 1996, pages 32-33), it should raise GDP growth to 4%.Mr Pino hopes to achieve 16% year-end inflation. In January he talked of aprice-wage pact with employers and unions to help control inflation.

—lowering the reserverequirement—

On April 15 the Central Bank began lowering the minimum reserve require-ment for commercial banks, cutting it by 2 percentage points from 34% to32%. The requirement is due to fall by another 2 percentage points on June 1and again by 3 points on October 1, to 27%. Private banks welcomed the cut.Arturo Alvarado, the president of la Asociación Hondureña de InstitucionesBancarias (AHIBA, the private banking association), said the move would boostproduction by lowering nominal lending rates, which were around 40% inMarch.

However, there is some debate about whether the minimum reserve require-ment is really being lowered, since the Central Bank is offsetting the cuts withan equivalent “obligatory investment requirement” (stipulating that a certainpercentage of commercial bank deposits must be held in the Central Bank,which will pay a competitive rate of interest on them). The minimum reserverequirement and the obligatory investment requirement, together, will remainat 34%. Some private-sector leaders, including Ricardo Maduro, the CentralBank president during the Callejas administration, say the monetary squeezeshould be loosened more rapidly. But at the end of March, there was an esti-mated La176m ($16m) of excess liquidity in the banking system. The authori-ties have decided to absorb liquidity by engaging in open market operations,

36 Honduras


Certificados de Absorción Monetaria (CAMs, monetary stabilisation bonds)and Treasury bills, worth La600m ($52m) this year, with interest rates of be-tween 34% and 35%. In 1995 La305m of CAMs were issued. Critics were con-cerned that this would force private banks to raise interest rates.

—and hoping for a 16%depreciation of the

lempira

In early March Mr Pino said that the government aims to limit currency depre-ciation in 1996 to 16% in nominal terms against the dollar. This compares witha nominal depreciation of 10.7% in 1995. Some local analysts speculate thatdepreciation in 1996 is more likely to be around 26%, because the official dollarauction system now allows a 0.5% weekly adjustment (4th quarter 1995,pages 36-37). However, Central Bank officials anticipate an influx of coffeedollars in the second half of the year, allowing the bank to offer more dollars atauction and stabilising the exchange rate.

In the first three months of 1996, the Central Bank sold between $3.5m and$6m per day. The auction is reported to be meeting about half of demand,indicating that there is still quite a lot of pressure on the lempira. However,some observers believe that demand is exaggerated because some of thosewishing to purchase dollars inflate their claims in order to avoid being leftshort of hard currency.

Tax reforms are approved On April 18 the National Assembly passed a series of reforms to income taxlegislation, based on proposals by the economic cabinet. They raise the incometax threshold from La20,000 to La50,000, and reduce the top tax rate from 42%to 30% for people earning more than La1m. At present, Honduran nationalsearning between La20,000 and La50,000 are subject to a 12% tax rate. Theincrease in the taxable income threshold to La50,000 is expected to reduceTreasury receipts by La107m in the 1996 tax year, which runs from January toDecember. But government officials expect to recoup some of the losses byfighting tax evasion more effectively. The reforms also eliminate the 10% taxon coffee sales at prices of over 80 cents/lb, and replace the dual-structurecapital gains tax, which differentiated between individuals and companies,with a universal 10% tax.

12.0

11.5

11.0

10.5

10.0

9.5

9.0

8.5

Jan. . . . . . . . . . . . . . . . . . . . . . . .Jul. . . . . . . . . . . . . . . . . . . . . . . . .Jan. . . . . . . . . .Apr. . .

Depreciation of the lempiraLa:$, inverted scale

Source: Bloomberg.199519951995199519951995199519951995199519951995199519951995199519951995199519951995 9696961995 961995 96961995 961995 961995 961995 961995 961995 961995 961995 961995 961995 961995 96

Honduras 37


COHEP, the private-sector association, strongly approves of the reforms, whichwill boost investor confidence and consumer buying power. The economicadvisor to the National Assembly, Gustavo Alfaro, says that the current taxstructure in Honduras puts its producers at a disadvantage compared withother Central American countries, in particular El Salvador, which has a maxi-mum income tax rate of 25%. Tax relief is central to the government’s reactiv-ation plan.

Income tax scale

Income (La) Tax rate (%)

0.01-50,000 Exempt

50,000.01-100,000 10

100,000.01-200,000 15

200,000.01-500,000 20

500,000.01-1,000,000 25

1,000,000.01 & above 30Source: Dirección Ejecutiva de Ingresos (DEI, the tax office).

The minimum wage israised

In early March the government agreed to raise the minimum wage by 25%,effective from March 1. However, the average minimum wage rose by only22%, from La20.20 per day to La24.65. Last year wages were increased by 20%.Unions had demanded a much bigger rise to keep up with inflation, but em-ployers argued that they must keep labour costs down. The government isseeking to establish a procedure for the annual wage review in January. Offi-cials believe that wage increases should reflect changes in the purchasingpower of the lempira.

A businessman proposes arevitalisation plan

In mid-March another plan to revitalise the economy was presented, this timeby a businessman, Miguel Facussé. The plan would take 25 years to implementand would cost $18m. It focuses on encouraging private investment and build-ing infrastructure, including an oil refinery at Puerto Castilla, a hydroelectricitydam on the border between Honduras and El Salvador and a north-southhighway. It also calls for more mining, development of tourism, diversificationof export crops, modernisation of telecommunications and vocational educ-ation programmes. Environmental and social action groups oppose the plan,arguing that it would seriously damage natural resources. They are particularlyconcerned about potential spills from the proposed refinery on the environ-mentally sensitive north coast.

The economy

Economy shows healthygrowth—

GDP reached nearly La37.35bn ($3.9bn) in 1995, and grew by an estimated3.6% in real terms, according to the Central Bank. Sectors which did well in-cluded electricity, gas and water, which grew by 10%, compared with a contrac-tion of 7.1% in 1994 when there was a serious drought and electricity shortage;mining and quarrying, which grew by 9.1%; agriculture, forestry, hunting andfishing (by 6.9%); and banking, insurance and financial services (by 6.3%).Housing, commerce and transport also showed strong growth, while manufac-turing was relatively flat, with 2.6% expansion. Construction contracted by

38 Honduras


2.2% and public administration and defence by 9.7%, due to public-sector cut-backs.

Growth in gross domestic product by sector(La m at 1978 constant prices)

% change 1993 1994 1995a 1994/93 1995/94a

Agriculture, forestry, hunting & fishing 1,404 1,415 1,513 0.8 6.9

Mining & quarrying 86 88 96 2.3 9.1

Manufacturing 813 798 819 –1.8 2.6

Construction 344 278 272 –19.2 –2.2

Electricity, gas & water 140 130 143 –7.1 10.0

Transport, warehousing & communications 456 476 497 4.4 4.4

Commerce, restaurants & hotels 572 579 604 1.2 4.3

Banking, insurance & financial services 449 475 505 5.8 6.3

Housing 347 363 378 4.6 4.1

Public administration & defence 334 279 252 –1 6.5 –9.7

Social services 451 469 466 4.0 –0.6

GDP (at factor cost) 5,396 5,350 5,545 –0.9 3.6

Net indirect taxes 589 547 566 –7.1 3.5

GDP (at market prices) 5,985 5,897 6,111 –1.5 3.6

a Preliminary figure.

Source: Banco Central de Honduras.

—while inflation slows In March consumer price inflation registered a 1.5% increase, compared with2.8% in February and 0.5% in January. Monthly inflation in February, whileabove target, was down compared with the 4.9% registered in the same monthin 1995. Annual inflation rates in February (21.4%) and March (21.6%) werearound 12 percentage points below the rates for the same months in 1995(33.3% and 33.8% respectively).

Consumer price inflation(%)

1995 1996 Monthly Annual Monthly Annual

Jan 2.9 30.8 0.5 23.9

Feb 4.9 33.3 2.8 21.4

Mar 1.4 33.8 1.5 21.6

Apr 2.6 33.5

May 1.8 30.8

Jun 0.9 29.3

Jul 1.3 27.6

Aug 1.3 27.4

Sep 2.1 28.4

Oct 1.9 28.5

Nov 1.4 26.4

Dec 1.5 26.8Source: Banco Central de Honduras.

Honduras 39


In January the highest price increases were seen in clothing (up 1.4%), housingand household products (up 1.3%) and personal care (up 0.9%). February’ssteep inflation was spurred mainly by higher transport costs (up 11.2%) whenurban bus fares were raised; the price of education, literature and entertain-ment rose by 5.4% due to higher monthly payments for schools and universi-ties and for books; and the cost of both personal care and health increased by5.1%. In March increases were mainly in personal care (up 2.3%), food(up 2.1%), and clothing (up 1.8%).

Food costs are stable Many of the public protests over inflation have focused on the increasing costof food. In 1995 the average annual increase in food prices was 28.3%, almostkeeping pace with overall consumer price inflation, which averaged 29.5%.However, food price increases have lagged behind the overall rate of inflationin early 1996. In March annual inflation for food was 16.5%, compared with21.6% overall, with price controls and subsidies, especially on basic grains,keeping increases in check. Increases in products like maize (up 7.1% inFebruary and 15.6% in March), have been balanced by stable or falling pricesfor other goods.

Agriculture and environment

Banana workers lose onebattle—

In February a lengthy confrontation between the government and workers laidoff at the Tela Railroad Company’s Tacamiche banana plantation ended whentroops evicted the workers, who were occupying the plantation. The workersclaimed they were legally entitled to the land, which had been abandoned bythe Tela Railroad Company, a subsidiary of United Fruit (Chiquita). They hadrepeatedly rejected offers by the administration of Carlos Roberto Reina torelocate them. Despite a last-minute appeal by the non-governmental humanrights committee, CODEH, a court found that the Tacamiche workers wereillegally occupying the land. The case was seen as a test of whether the govern-ment would respect property rights or side with the demands of labour groups,including the Comité Coordinador de Organizaciones Populares (CCOP, aworkers’ umbrella group).

-1

0

1

2

3

4

5

6

0

6

12

18

24

30

36

42

Jan . . . . . Jul . . . . . Jan . .

Month on month (left-hand scale)

Year on year (right-hand scale)

Food prices% change

Source: Banco Central de Honduras.199519951995199519951995199519951995199519951995199519951995199519951995199519951995 9696961995 961995 96961995 961995 961995 961995 961995 961995 961995 961995 961995 961995 961995 96

40 Honduras


—but win another In March the Standard Fruit Company (Dole) signed an agreement with itsunion, SITRASFCO, to allow 41 laid-off banana workers to farm 275 manzanas(1 manzana=0.7 ha) of unused land in Olanchito rent-free for the next 20 yearswith an option to buy after then. The workers, who lost their jobs when thecompany closed down a section of its Coyoles Central plantation last year, planto grow African palm, basic grains and vegetables.

Tela will increaseproduction

As a result of the Tacamiche conflict, the Tela Railroad Company and leaders ofits union, SITRATERCO, met Mr Reina and agreed to try to end labour conflictsand attract investment in palm, banana and other export crops. In March theTela Railroad Company promised to increase investment in its agroexportactivities by La100m ($9m) this year. The company said that it planned toincrease its output from 13m 18-kilo boxes in 1995 to 20m boxes this year and26m-27m boxes in 1997. Tela and SITRATERCO agreed to postpone bargainingon a new collective wage agreement until June.

Coffee prices cause tension Honduran coffee growers have remained firmly in favour of the Central Ameri-can coffee retention scheme (1st quarter 1996, page 5). They believe that therelatively low prices of arabica on world markets in early 1996 are due tospeculation on the New York exchange. In late March the Instituto Hondureñodel Café (IHCAFE, the coffee institute), estimated that the 1995/96 harvestwould produce exports of 2.2m 46-kg bags, compared with 2.1m in 1994/95.The price of arabica was 123.25 cents/lb at the end of April. Unless prices rise inMay-June, revenue from coffee exports could be $50m-75m lower this yearthan in 1995 (see Foreign trade and payments). In mid-April the president ofIHCAFE, Fernando Montes, accused the US Department of Agriculture of ma-nipulating coffee crop estimates for big producers like Brazil to keep prices low.

Greenpeace targets shrimpfarmers

In late March a Greenpeace ship docked in the Gulf of Fonseca at the invitationof local environmentalists, who are concerned about damage caused by cultiv-ated shrimp farming in the area. The shrimp farming industry is growingrapidly and encroaching on mangrove swamps, which are the habitat of nu-merous native species. Greenpeace did not call for an end to shrimp farming,but urged the government to abide by international agreements to protect theenvironment and to regulate the industry more closely.

Industry and services

An electricity plant isinaugurated

In February the president, Carlos Roberto Reina, inaugurated the Luz y Fuerzathermal electricity plant in San Lorenzo, Valle province. The plant will gener-ate 40 mw of electricity, with 20 mw going to meet the demands of the south-ern provinces of Choluteca and Valle and 20 mw being sold to other CentralAmerican countries. The plant cost La300m ($27m) to build, and was partlyfinanced by the Banco Centroamericano de Integración Económica (BCIE, theregional integration bank). It will be run by a company owned by the powerfulKafie business family.

A petrol company fights atax claim

Petrotela, a private petrol company owned by the magnate, Henry Arévalo, ischallenging a demand from the economy and trade ministry that it pay back

Honduras 41


taxes worth La169m. The dispute led to legal and procedural wrangling inMarch and April. Petrotela has won a temporary reprieve based on the fact thatit holds documents signed by officials of the Callejas administration, whichgrant the company a 20% gross profit margin on imported fuel and favourableaccounting allowances for fluctuations in transport costs. The economy andtrade minister, Fernando García, has temporarily withdrawn the government’sclaim until the tax office can present its case more clearly.

Domestic petrol pricesmay stabilise—

The administration has tried to gain public support by linking payment of theLa169m by Petrotela to a promise to halt fuel price increases. Honduras iscurrently spending around $230m a year to buy petrol on the internationalmarket, around 20% of its total import bill. Devaluation of the lempira has ledto repeated fuel price rises over the past two years.

Meanwhile, the government is planning to introduce legislation to free the oilproducts market. The legislation would simplify import procedures and liftcontrols on refined product prices. At present there are only four companieswhich import and distribute oil products, the multinationals Shell, Esso,Texaco and a local firm, Dippsa. By freeing the market the authorities hope topromote competition and bring down prices.

—but electricity chargeshave risen again

In February the state electricity company, ENEE, implemented an increase inits tariffs. The increase was originally announced in December 1995. Tariffswere then scheduled to rise by 13.7-25.7% for residential consumers, and by24.2-29.3% for commercial and industrial customers. But a partial governmentsubsidy accompanied the implementation of the measure, effectively reducingthe percentages by which tariffs rose in February.

Road will be completed The Eterna and Condelta construction companies, local firms owned by JaimeRosenthal (see The political scene), have began work on the unfinished 50 kmof highway between the cities of San Pedro Sula and Puerto Cortés. They havepromised completion in September 1996. The cost of the work will be aroundLa200m. This is almost double the original estimated cost, and follows monthsof inactivity, legal battles and the cancellation of the original contracts withthe Mexican firms, Sada Rangel and Landa Rubio (1st quarter 1996, page 38).

Aid is granted to protectEl Cajón

In April the government announced a bilateral loan agreement with the USA toprovide $20m for watershed management near the Francisco Morazán hydro-electricity dam, known as El Cajón. Power generated by this dam meets abouthalf of the country’s energy needs. The money will finance soil and forestconservation efforts to prevent the silting up of El Cajón, which has limited itswater-holding capacity and aggravated recent energy shortages. The projectalready receives funding from the Inter-American Development Bank (IDB). Itis being executed by ENEE, the state electricity company, and the CorporaciónHondureña de Desarrollo Forestal (COHDEFOR, the forestry commission).

HONDUTEL cables arestolen

The Empresa Hondureña de Telecomunicaciones (HONDUTEL, the state tele-phone company), continues to have its cables stolen, especially in San PedroSula and Tegucigalpa. Company officials say that losses from cable theftreached La4.7m in 1995 alone; they estimate another La500,000 loss in the first

42 Honduras


three months of 1996. They suspect that the thieves are insiders or have expe-rience in telecommunications, since they are stealing specialised equipment.Large areas of the country’s two main cities have been repeatedly left withouttelephone connections due to cable theft. On at least three occasions thepresidential palace has been temporarily cut off.

Motorola is granted acontract

A US firm, Motorola, has been granted a ten-year concession to provide acellular telephone service in Honduras through its local subsidiary, InversionesRocafuerte. Inversiones Rocafuerte will operate on Band A. The company willbe the only operator for the time being, but the government could offer asecond concession on Band B in the future.

A Salvadorean bank buysinto BANPRO

The Salvadorean bank Banco Agrícola Comercial (BAC), one of the biggest com-mercial banks in Central America, has bought a 50% stake in the Honduran bank,Banco de la Producción (BANPRO). This alliance should provide greater savingssecurity and a broader line of credit. In 1994 the BAC had over $500m of loans ontheir books and was ranked number one in the region, holding 26% of loans in ElSalvador. BANPRO is a relatively small bank, but it is financially solvent andprovides an entrance for the BAC into the Honduran market.

Foreign trade and payments

Export revenue helpsexternal balances—

The Banco Central de Honduras (BCH, the Central Bank) has revised its 1995estimate for total exports down to $1.14bn, a 23% increase over the $922m totalfor 1994. Although export revenue rose less rapidly than originally estimatedlast year (1st quarter 1996, page 42), it rose faster than the import bill, whichreached $1.50bn in 1995, compared with $1.35bn in 1994. The 1995 tradedeficit of $364m remains a matter of concern, but is an improvement over theprevious year’s deficit of $429m. According to the Central Bank, the reductionin the trade deficit last year helped to narrow the current-account gap to $270m,strengthening the balance of payments and boosting international reserves by$118m. The IMF, which uses a different methodology, records a $90m increasein reserves from $171m at the end of 1994 to $261m at the end of 1995.

Balance of paymentsa

($ m)

1993b 1994b 1995c

Merchandise exports fob 856.6 922.1 1,136.9

Merchandise imports cif 1,203.1 1,351.1 1,501.0

Trade balance –346.5 –429.0 –364.1

Transfers 218.3 220.9 230.8

Current-account balanced –311.1 –354.9 –270.0

Capital-account balance 189.3 219.6 185.8

Errors & omissions –69.9 137.1 119.5

Overall balance –191.7 1.8 35.3

Change of international reservese 105.1 –17.0 –118.2

a Methodology differs from that of the IMF. b Preliminary. c Estimate. d Includes invisibles. e Minussign indicates increase.


Honduras 43


—as coffee and bananasperform well

The growth in export earnings in 1995 is attributable mainly to the surge inworld coffee prices. Coffee exports earned $344m in 1995, compared with only$200m in 1994. Prices paid for the country’s bananas also rose last year (by14.4%), while banana export volume was higher in 1995 than in 1994, thanksto an expanded European Union (EU) import quota and greater control of theblack sigatoka fungus which has damaged plantations in recent years. Bananaexport revenue was $196m in 1995, compared with $155m the previous year.A growing percentage of total exports is marketed in the EU, which buys coffee,bananas, wood and wicker furniture from Honduras. In 1995 Honduras ex-ported $428m of exports to Europe under its Generalised System of Preferences(GSP).

Principal exports(fob; $ m)

1993a 1994a 1995b

Coffee 124.6 200.1 344.2

Bananas 225.6 155.1 196.4

Shrimp 112.4 133.6 124.5

Lobster 26.8 31.9 34.1

Zinc 23.0 21.1 21.4

Lumber 21.9 21.3 19.0

Refrigerated meat 39.6 39.0 10.7

Unrefined sugar 5.2 4.8 6.8

Tobacco 6.4 5.8 5.5

Silver 3.5 4.4 4.4

Lead 1.8 1.7 1.6

Sub-total 590.8 618.0 768.6

Other products 217.2 254.0 292.1

Totalc 808.0 872.8 1,060.7

a Preliminary. b Estimates. c Customs basis.


Milk tariffs are raised In April tariffs on imports of powdered milk were doubled from 5% to 10%. Thegovernment said that it was imposing the increase in order to protect locallyproduced milk from competition from subsidised imports. It has long beenunder pressure from dairy producers to raise tariffs on powdered milk.

Debt restructuringdisappoints

At the end of February Honduran negotiators met Paris Club creditors for athird round of talks on debt restructuring, known as Paris Club III. The first tworounds (Paris Club I and II) were held in September 1990 and October 1992.There were high public expectations for the third round, after officials hadspeculated that up to $500m of the $1.2bn debt with the club would be writtenoff or restructured under the so-called Naples terms. But the government wasunable to obtain any reduction of debt stocks at Paris Club III.

Nevertheless, creditors did agree to restructure some $125m in debt service(interest and principal repayments) owed between August 1, 1995 andJanuary 31, 1997, including $18.7m which had already been restructured aspart of Paris Club I. The exact amount of saving which this implies will dependon the outcome of bilateral talks to determine the combination of forgiveness,

44 Honduras


reprogramming and refinancing which will be applied to the eligible debtservice; officials have referred to a probable saving of $103m.

The terms of Paris Club III also establish that some debt may be swapped fornature, cooperation, equity or local currency. Moreover, Honduras and theParis Club agreed to meet again in mid-1997 to talk about a write-off of debtstocks, when $650m of stocks may be eligible. But the government may berequired to renegotiate its IMF Enhanced Structural Adjustment Facility (ESAF)as a pre-condition for the talks. Since such a requirement would be unpopular,it would prevent the talks from going ahead in 1997, an election year.

US provides food aid— At the end of February the US ambassador to Honduras, William Pryce,announced that the USA would provide $23.1m in food aid for malnourishedchildren. The money will provide breakfasts for 300,000 schoolchildren in theprovinces of Intibucá, Lempira, Comayagua, La Paz and Valle, where povertyis worst.

—and the EU financesservices

In mid-March the state telephone company, HONDUTEL, announced that ithad obtained La300m ($28m) in EU financing for investment. The funds willbe used for a number of infrastructure projects, and for expanding telephoneservices in rural areas. They will also help to integrate Honduras into a digitalnetwork covering the Central American region and to introduce fibreoptics systems.

Honduras 45


Appendix 1

Quarterly indicators of economic activity in Nicaragua and Honduras

1993 1994 1995 1996

4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr

NICARAGUA

Prices Annual av

Consumer prices: 1990=100 3,418a ( n/a ) ( n/a ) n/a

change year on year % 10a ( n/a ) ( n/a ) n/a

Money End-Qtr

M1, seasonally adj: Gold C m 804 851 817 902 1,075 1,004 1,006 n/a n/a n/a

change year on year % –7.8 7.9 4.9 16.7 33.7 18.0 23.1 n/a n/a n/a

Foreign tradeb Qtrly totals

Exports fob $ m 69.2 99.2 89.7 83.5 79.3 106.8 125.4 105.3 95.9 n/a

Imports cif “ 204.6 204.0 205.2 179.0 235.6 243.0 242.2 227.9 241.4 n/a

Exchange holdings End Qtr

Foreign exchange $ m 55.0 82.2 85.3 91.0 141.0 102.8 97.2 119.5 136.2 199.7c

Exchange rate

Market rate Gold C:$ 6.35 6.53 6.72 6.91 7.11 7.31 7.52 7.74 7.97 8.12c

HONDURAS

Production Annual totals

Coffee ’000 tons 121 ( 124b ) ( n/a ) n/a

Prices Monthly av

Consumer prices,

Tegucigalpa: 1990=100 169 176 190 204 215 234 250 260 274 n/a

change year on year % 13.3 15.7 20.3 22.8 27.6 32.6 31.1 27.5 27.2 n/a

Money End-Qtr

M1, seasonally adj: La m 2,559 2,991 2,973 3,158 3,486 4,128 4,180 4,162 4,245 n/a

change year on year % 12.4 25.1 20.2 19.1 36.2 38.0 40.6 31.8 21.8 n/a

Foreign trade Qtrly totals

Exports fob $ m 192.5 223.5 206.1 216.4 196.5 326.1 301.5 244.7 n/a n/a

Imports cif “ 280.2 241.8 283.0 269.2 261.9 286.2 322.2 311.0 299.2 n/a

Exchange holdings End-Qtr

Central Bank:

goldd $ m 5.9 6.1 6.0 6.1 6.1 6.0 6.1 6.1 6.1 6.3

foreign exchange “ 97.0 78.4 49.4 46.0 170.8 180.7 220.4 183.4 261.3 265.5c

Exchange rate

Market rate La:$ 7.3 7.6 8.7 9.0 9.4 9.1 9.3 9.7 10.3 10.6e

Note. Annual figures of most of the series shown above will be found in the Country Profile.a Average for 1992. b Estimate. c End-February. d End-quarter holdings at quarter’s average of London daily price less 25%. e End-January.

46 Statistical appendices


Appendix 2

Foreign trade of Nicaragua and Honduras($ m)

Nicaragua Honduras Jan-Dec Jan-Dec Jan-Dec Jan-Dec

1993 1994 1992a 1994

Imports cifFood 126.1 122.5 99.8 178.1 of which: cereals 40.8 54.2 31.7 69.7Petroleum & products 103.6 106.7 134.7 159.1Chemicals 116.5 141.2 206.5 229.2Paper & manufactures 19.7 18.9 59.7 61.6Textile yarn, cloth & manufactures 11.4 12.9 32.2 30.9Iron & steel 22.4 41.8 37.5 48.6Other metals & manufactures 22.6 28.4 41.1 53.9Machinery incl electric 129.3 169.5 184.4 260.3Road vehicles 66.3 54.8 99.4 120.0Clothing 11.0 12.1 34.4 37.5Scientific instruments etc 15.9 13.5 13.7 12.3Total incl others 755.1 852.5 1,056.7 1,334.6

Exports fobMeat & preparations 62.1 65.1 37.3 39.5Fish & preparations 28.5 53.1 42.5 74.9Fruit & vegetables 11.3 23.0 341.6 153.8Sugar & preparations 19.1 17.9 7.0 6.4Coffee 36.3 77.2 135.8 192.1Cotton 0.4 4.2 0.0 0.0Metalliferous ores & scrap 2.3 n/a 19.1 6.4Total incl others 267.5 351.1 737.4 614.0

a 1993 statistics are not available.

Statistical appendices 47


Appendix 3

US trade with Nicaragua and Honduras($ m)

Nicaragua Honduras Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

1991 1992 1993 1994 1991 1992 1993 1994

Exports fobFood & live animals 26.9 27.6 31.1 34.5 74.4 60.4 74.0 70.7 of which: cereals & preparations 14.6 16.3 17.4 24.0 39.9 19.8 29.5 31.6Petroleum & products 1.6 2.5 2.9 4.0 46.3 78.8 64.7 18.9Chemicals 17.9 13.1 9.3 17.0 73.6 73.2 73.4 87.2Paper & manufactures 5.7 5.0 3.5 3.8 42.1 41.9 40.1 45.5Textile yarn, cloth & manufactures 1.0 1.8 1.7 2.2 38.9 27.4 32.3 46.0Iron & steel 0.8 1.4 1.4 0.6 5.1 8.5 5.6 7.5Non-ferrous metals 0.1 0.5 0.1 0.6 0.9 0.9 3.2 3.3Metal manufactures 2.8 3.2 5.0 4.0 11.7 15.9 12.9 14.4Machinery incl electric 35.2 61.1 43.6 53.1 109.6 129.1 146.0 208.3Road vehicles 11.3 8.8 6.1 7.5 16.4 30.4 34.7 32.2Aircraft 0.1 0.0 0.1 0.2 4.0 1.5 1.9 1.9Scientific instruments etc 5.2 5.7 4.0 4.9 6.6 8.0 9.6 10.1Total incl others 146.1 180.4 141.5 178.3 615.4 790.0 867.0 982.1% share of USA in each country’s importsa 26b 43b 40b 54b

Imports cifMeat & preparations 0.0 17.3 55.1 53.2 30.0 42.4 42.5 42.3Fish & preparations 16.7 18.6 27.7 47.0 90.4 94.0 93.0 105.2Fruit, vegetables & preparations 1.5 3.4 4.7 7.2 183.4 182.8 187.2 209.9Sugar & preparations 40.4 22.4 17.1 19.8 10.7 7.1 1.4 7.2Coffee 0.3 3.3 1.0 2.5 26.8 56.1 31.2 20.7Tobacco & manufactures 1.1 0.9 0.6 0.6 15.5 19.4 24.1 19.0Clothing 1.3 3.6 11.5 24.7 201.7 377.2 522.1 666.3Total incl others 65.7 75.4 135.9 179.0 617.3 850.9 984.9 1,174.9% share of USA in each country’s exportsa 20b 26b 52b 54b

Imports cif Exports fasc Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

1992 1993 1994 1995 1992 1993 1994 1995

Nicaragua 75.4 138.6 179.4 251.6 185.1 150.2 185.7 250.1Honduras 850.6 984.3 1,175.4 1,541.7 810.6 898.9 1,011.8 1,280.7

a Calculated from each country’s trade statistics. b 1991 and 1992. c Including re-exports.



Appendix 4

German trade with Nicaragua and Honduras($ ’000)


1993 1994 1993 1994

Exports fobFood 1,325 137 1,808 164 Chemicals 1,637 2,194 9,072 8,896 Iron & steel 67 432 1,479 2,443 Metal manufactures 225 212 1,018 2,163 Machinery & transport equipment 4,093 6,737 24,134 24,341 of which: road vehicles 66 161 851 3,953 Scientific instruments etc 620 771 902 596 Total incl others 9,275 12,308 41,172 40,811 % share of Germany in each country’s importsa 4b 3b 4b 2b

Imports cifCitrus & tropical fruit 902 122 81,467 14,100 Coffee 22,452 31,300 28,405 47,284 Total incl others 28,161 36,580 118,967 68,030 % share of Germany in each country’s exportsa 12b 11b 9b 14b

a Calculated from each country’s trade statistics. b 1991 and 1992.

Statistical appendices 49


Appendix 5

UK trade with Nicaragua and Honduras(£ ’000)


1994 1995 1994 1995

Exports fobFood 495 592 5,470 2,215Beverages 236 211 863 663Chemicals 614 1,629 2,074 2,362Textile yarn, cloth & manufactures 109 207 275 20Non-metallic mineral manufactures 18 956 2 15Iron & steel 197 6 165 349Metal manufactures 57 37 106 115Machinery incl electric 1,198 2,696 3,617 6,020Transport equipment 120 223 544 522Scientific instruments etc 226 127 37 83Total incl others 3,969 7,334 13,861 15,537

Imports cifFish & preparations 409 642 3,787 1,008Fruit, vegetables & preparations 0 21 5,428 7,184Coffee, cocoa, tea & spices 2,116 5,844 2,178 6,679Oilseeds 1,360 1,626 0 14Wood, lumber & cork 19 0 645 564Metalliferous ores & scrap 0 0 4,872 1,530Chemicals 0 0 62 46Machinery & transport equipment 63 41 18 118Total incl others 5,185 8,265 19,157 18,130

Appendix 6

Japanese trade with Nicaragua and Honduras(¥ m)

Imports cif Exports fob Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec Jan-Dec

1992 1993 1994 1995 1992 1993 1994 1995

Nicaragua 3,053 230 137 1,128 5,598 3,878 2,940 3,399Honduras 10,599 8,362 12,167 11,960 12,810 11,881 8,844 7,246



Nicaragua HondurasSummary Nicaragua, Honduras 2nd quarter 1996 April 30, 1996 The region Outlook: There will be talks on free trade with Mexico. A Mexico-Brazil alli-ance will help

Documents