Caribbean & Central America - August 2014 (ISSN 1741-4458)

According to a new study by the Central American Institute of Fiscal Studies (Icefi), if Honduras’ high fiscal deficit is maintained in the next few years it will be impossible to reduce public debt in the medium term, with the risk that the country could fall into a vicious circle of unsustainable debt servicing. The study comes as the government is trying to finalise talks with the International Monetary Fund (IMF) on a new US$200m stand-by agreement.

The study, which was released on 8 July and entitled ‘Honduras, the dangerous route towards indebtedness. Diagnosis of public finances 2010-2013 and prospects for 2014’, singles out a soaring fiscal deficit and a fast-growing public debt as the two key financial issues faced by the country. In 2013 the fiscal deficit and public debt respectively reached 7.9% and 42.5% of GDP; and according to the study, estimates for both figures in 2014 are set to remain high, with the fiscal deficit projected at 4.7% of GDP and public debt expanding to 52% of the GDP. The study underlines that debt weighs so heavily on Honduran public finances that by the end of 2014 it will be necessary to direct more than 40% of fiscal revenues to fund its repayment. Public debt in Honduras has almost doubled over the last four years, going from US$4.8bn in 2009 to US$8bn in 2013. Last year the country raised around US$1bn through its first issue of foreign debt bonds in international markets.

The study also criticises the fiscal reform promoted by the government led by President Juan Orlando Hernández, commenting that even if it turns out to be “one of the most productive” of its kind, it will not significantly improve economic performance due to its focus on taxing basic consumption. Hugo Noé Pino, the study’s coordinator, said that Honduras needs to steadily diminish its fiscal deficit. Pino suggested that a possible solution would be to “substantially reduce the deficit in the framework of a fiscal pact allowing for the establishment of spending priorities, revenue uniformity and transparency in the use of resources”. Ricardo Barrientos, an economist who contributed to the study, echoed Pino’s words, calling for “a fiscal pact to trace a path to stabilisation and the improvement of public finances”.

Ethanol plant

President Hernández and the secretary general of the Organization of American States (OAS), José Miguel Insulza, inaugurated Honduras’s first ethanol producing plant on 15 July. Construction of the L10m (US$474,000) plant, located in the campus of the Universidad Nacional de Agricultura (UNA) in Catacamas, Olancho, was made possible thanks to technical assistance provided by the OAS and the Brazilian and US governments.

In a speech, President Hernández said that the plant, expected to produce 36 litres of ethanol per hour from African palm oils, will help to boost biofuel production in the country. “This will allow us to generate energy with resources that we already have,” Hernández said, pointing out that one of his objectives is to continue promoting the production of African palm oil in a bid to turn Honduras into a “highly productive source of energy resources”.

Honduras is currently the third largest African palm oil producer in Latin America, behind Colombia and Ecuador, and the world’s eighth largest exporter of African palm oil - which is widely used by the global commercial food industry - with 300,000 tonnes of raw of oil exported to the US, European and Mexican markets last year.

Hernandez said that the government plans to invest L1.35bn (US$71.9m) over the next four years to expand African palm oil plantations in the country from the current 135,000 hectares (ha) to 260,000ha, to boost palm oil production and diversify its uses into other areas including biofuels.

Insulza said that the plant was “a step forward for the development of a sustainable energy and for Honduras’s economic development”. He added that it would provide “energy security, create economic sustainability and promote the sector’s competitiveness in the region”.

• Prison service intervened

On 28 July President Hernández announced the dismissal of the head of the prison service, Santos Simeón Flores, and his replacement by Col. Francisco Gálvez Granados. A presidential press release gave no reason for the move but it is believed to be linked to the recent escape of 13 prisoners from the maximum-security prison, Tamara. Hernández also named Col. Kennet Odbulio Sabillón as the new deputy director and Col. Orlando Francisco Maradiaga as the new prison inspector.