Caribbean & Central America - June 2019

The role of the International Monetary Fund (IMF) has been a key focus of the latest violent protests against the Honduran government led by President Juan Orlando Hernández, with claims that the IMF is demanding cuts to education and health budgets and pushing forward with a privatisation agenda. In Ecuador, Honduras and Argentina, anti-government protests this year have all strongly denounced the IMF, underlining the continued depth of feeling against the Washington-based multilateral lender, almost 40 years of the ‘lost decade’ of the 1980s, when IMF adjustment programs were adopted all across Latin America – to very mixed results.

On 6 May, the IMF announced that it had reached a staff-level agreement with the Honduran government on a 24-month blended Stand-By Arrangement (SBA) and Standby Credit Facility (SCF) for US$311m. The conservative Partido Nacional (PN)government led by President Hernández intends to treat the arrangement as precautionary, meaning that it will not draw down the funds. This approach also means that the Tegucigalpa government will not be formally bound by macro-economic targets set with the IMF.

At a time of intense public protests against the Hernández administration – initially sparked by the government’s plans for reforms of the education and health sectors that the Left perceived as a route to backdoor privatisation – the government is in no position to sell additional fiscal reforms to Honduran citizens. While the government has now dropped (and congress has archived) its contentious reform proposals the street demonstrations have continued across the country, morphing into a more generalised protest against the country’s US-allied but heavily discredited political leadership. According to the local press, some 70 protests took place between 29 and 30 May alone – in the capital Tegucigalpa as well as the industrial hub San Pedro Sula (the capital of Cortés department) and other departments such as Comayagua, Yoro, Choluteca, and Francisco Morazán among others.

Indeed, it has emerged that President Hernández himself had been the subject of investigations by the US Drug Enforcement Administration (DEA) from 2013. (The president’s brother, Antonio Hernández Alvarado was arrested in 2018 on charges of drug trafficking and weapons offences.) The strong public perception in Honduras that political corruption remains entrenched, at severe costs to ordinary citizens in terms of lost public services, has further fuelled the protest movement.

As such, the IMF statement avoided all mention of fiscal targets, instead focusing on measures within the new program “to strengthen governance and improve the business climate to foster sustainable and inclusive economic growth”. It also noted that the economic program supported by the Fund aimed to maintain macroeconomic stability through reforms to secure the sustainability of the public electricity company (ENEE) – which is heavily indebted in part due to public corruption – and to allow more space for investment and social spending while safeguarding fiscal sustainability.

An IMF mission (led by Esteban Vesperoni) visited Tegucigalpa and San Pedro Sula on 22 April-6 May to carry out the annual Article IV consultation and hold talks with authorities on an economic program that could be supported by the Fund.

Upon conclusion of the mission Vesperoni commented on the current economic conditions in the country, noting continued moderate growth and broad stability in the main macroeconomic indicators. The benign and optimistic scenario painted by Vesperoni appears somewhat at odds with the demands of the anti-government protestors, who claim that socio-economic conditions on the ground for the vast majority of Honduran citizens have continued to deteriorate, while violent insecurity remains as bad as ever.

The reality on the ground is that around 60% of Hondurans remain in conditions of poverty, with limited life opportunities, high unemployment and next to no social security net. For example, while the official rate of unemployment is reported at no more than 6% by the national statistics institute (INE), youth unemployment is at least double the official rate. Moreover, underemployment was put at 63% in 2018, up from 56% in 2017, according to a report released in early 2019 by the social security secretariat (STSS). That equated to just over 2.7m people in perilous employment conditions.

Gangs, organised crime and drug traffickers easily recruit this pool of labour and thus effectively control much of the country, which is awash with weapons. Violence against women and girls is endemic. Security force corruption also remains a major issue. These dire and very dangerous social and economic conditions are what drive thousands of vulnerable Hondurans to make the perilous journey north up through Central America and Mexico to the southern US border as illegal migrants.

Yet, according to Vesperoni, “macroeconomic conditions in Honduras remained stable in 2018. GDP growth slowed from the buoyant performance in 2017 to 3.75%, due to weaker terms of trade, but remained close to potential, supported by private consumption amid strong growth in remittances”.

“Inflation is stable around the centre of the central bank´s 4% +/-1% target band”, he continued. “Owing to lower coffee prices and higher oil prices, the current account widened to 4.25% of GDP; but stayed close to its historical average. Despite a higher than expected deficit in the electricity company (ENEE), the nonfinancial public sector (NFPS) posted a deficit of 0.9 percent of GDP, in line with the target in the Fiscal Responsibility Law (FRL). The financial system is stable, liquid, and well capitalized, with NPLs at historic lows…Amid lower global growth and still weak terms of trade, growth in 2019 is expected to moderate slightly to around 3.5%, still close to potential”. To make inroads against poverty, however, Honduras needs to be growing at around 5% a year, and on a consistent basis, according to private economists.

Vesperoni, nonetheless, appeared confident that “policies in the economic program targeting an increase in productivity will sustain the macroeconomic performance in coming years and gradually create fiscal space for much-needed public investment and social spending”. As such, he continues, “a key objective of the economic program is to maintain macroeconomic stability, while enacting economic and institutional reforms to foster inclusive growth. Policies will build on previous achievements to strengthen the policy and institutional framework”.

In the sole reference to fiscal targeting, the Fund economist notes that “adherence to the Fiscal Responsibility Law (FPL) will be coupled with reforms aimed at creating fiscal space to reduce the infrastructure gap and increase social spending, including on important gender programs. The program will preserve previous revenue mobilization efforts, implement the electricity sector framework law, and put the financial situation of the public electricity company (ENEE) on a sustainable path”.

Finally, “priority has also been given to enhancing governance, including through measures to increase transparency. These reforms will aim at improving the macroeconomic policy framework, increasing the quality of public spending, and strengthening the rule of law. These reforms are fundamental to improving the business environment and fostering growth”, he concludes.

Nevertheless, despite the Fund’s attempt to soften its message, the public perception is that any relationship with the IMF implies adjustment, austerity and privatisation.

On 4 June, as the protests continued, the finance minister, Rocío Tábora, insisted that it was “totally false” that the IMF was demanding cuts to social spending on health and education. Tábora strongly rebuffed allegations to that effect made on a television program by the president of the Honduran doctors’ organisation

Colegio Médico Hondureño (CMH), Suyapa Figueroa. In reference to the government efforts to negotiate with the health and education unions, Tábora noted, “there is a basic principle in any dialogue, and that is not to lie, it is totally false that cuts in health and education are a requisite for the IMF agreement”, she stated.

“I want to say to Doctor Suyapa that it is false that the accord to the IMF implies a reduction in social spending, I can ratify as a member of the economic cabinet, and I was there in there in the negotiations with the IMF, that it is totally false”, she stressed.

The minister went on to note that, by contrast, the program is focused on improving the quality of budget control so as to better focus it on health, education, social investment, and spending on women’s empowerment programs. She added that she was happy to open up the budget to public scrutiny and invited Figueroa to go into the new government transparency portal to see for herself full details of the health and education budget plans. The government’s sole ambition, she insisted, was to guarantee free, high quality health and education for everyone.

Meanwhile, the private sector has warned that the protests will have a damaging economic effect that will further undermine the efforts to deliver equitable growth and sustain public services.

Organisations such as Fundación para la Inversión y Desarrollo de Exportaciones (Fide) have expressed concern about the impact of the strikes on the economy and investment. The president of the Tegucigalpa chamber of commerce and industry (CCIT), Guy de Pierrefeu, put the cost of economic losses as a result of the strikes at “over HL1.5bn (US$61m) a day”. He said that it was unlikely, as a result. that GDP growth projections for this year – put at between 3.3%-3.7% by the central bank (BCH) – will be met.

The IMF, for its part, is projecting real annual GDP growth of 3.4% in 2019. In its latest release, the BCR on 17 May reported a 2.9% accumulated rise in the monthly index of economic activity (Índice Mensual de Actividad Económica, IMAE) for the first quarter of 2019 (January-March), similar to the 3% reported in the year-earlier period.

Without giving precise data, the BCH said the result rested on growth in financial services, post & telecommunications and retailing. These sectors were followed by manufacturing (meaning textiles and the maquila sector), electricity & water and private construction, largely for commercial purposes (i.e. not residential). Finally, the agricultural sector grew on the back of export products including palm oil and fruits and vegetables (bananas, melons etc).

This points to the fact that Honduran economic growth rests largely on its longstanding trade & investment relationship with the US, its main partner. Much of this business is concentrated in the hands of the country’s small, US-facing business elite, plus US companies and investors operating on the ground. Average citizens, however, feel that they benefit little.

• Protests

This frustration was expressed in the protests, with attacks on the US embassy and on Dole, the US fruit company long established in the country. Palm oil plantations have also long been the target of popular ire.