Caribbean & Central America - April 2022

Honduras’s new president, Xiomara Castro, has made dealing with public finances a priority in the first few months of her leftist Partido Libertad y Refundación (Libre) government, moving to enable more borrowing by declaring a fiscal emergency in mid-February.

On 16 February the 128-member unicameral legislature approved a fiscal and financial emergency decree which will allow the government to borrow up to US$2bn in 2022 and 2023 both domestically and internationally. The government was also able to access support from the International Monetary Fund (IMF), which is held by the central bank (BCH) in order to meet a 15 March sovereign bond maturity worth US$166m.

The declaration of the fiscal emergency stems from alleged issues with the 2022 national budget which was approved on 17 December 2021 under the previous government led by former President Juan Orlando Hernández (Partido Nacional, 2014-2022).

According to officials from the Castro administration, which took office on 27 January, the budget doesn’t make provisions for debts incurred by state-owned electricity company Empresa Nacional de Energía Eléctrica (ENEE); state-owned telecoms company Empresa Hondureña de Telecomunicaciones (Hondutel); or the water authority Servicio Autónomo Nacional de Acueductos y Alcantarillados (Sanaa) and other sources.

Castro has claimed that debt increased by 700% under her two conservative predecessors, nearing 60% of GDP, up from 48.7% in 2019. And the Guatemala-based thinktank Central American institute of fiscal studies (Icefi) projects that debt will reach 62.9% of GDP by the end of 2022.

Some 60% of the existing budget would have been spent servicing debt, with insufficient funds left for the day-to-day functioning of public institutions, said presidential secretary Rodolfo Pastor de María y Campos. This lack of funds means that every government department is working “with its hands tied,” De María y Campos told local outlet Contra Corriente in an article published on 18 February.

However, opposition figures have criticised what they say was a rushed decision to declare the emergency, and former BCH president (2019-2022) Wilfredo Cerrato said the move is unnecessary as there is more money available than the government said. In addition, Cerrato, who also served as finance minister from 2012-2018, said the move will make borrowing more expensive for Honduras. But while debate over the merits of the move rumbles on, Castro is forging ahead with plans to increase borrowing.

On 16 March the president’s private secretary, Héctor Zelaya, announced that an IMF mission would visit the country the following week, but meetings have been delayed until April. On 22 March local outlet El Heraldo reported that IMF officials were planning to meet with finance minister Rixi Moncada to discuss the ENEE and foreign debt.

The IMF will want to know whether the Castro administration wants to restructure its debt, according to Mauricio Díaz Burdett of the Foro Social de Deuda Externa y Desarrollo de Honduras (Fosdeh) thinktank. Ismael Zepeda, also of Fodseh, said that public spending would be the main focus of talks. Under the previous government the number of public employees increased, and there could be reforms to pay and staffing, he added.

Aside from issues with the budget, Castro has also introduced fuel subsidies to lessen the impact of increasing oil prices. At the beginning of February, she announced a L10 (US$0.40) per gallon subsidy at the pumps for the rest of the year, and from 15 March the government will also cover 50% of price increases to diesel.

Other initiatives in the works include plans to widen the tax base to address what De María y Campos called a “regressive fiscal policy” which encourages inequality, and a drive to attract foreign investment. Building relationships with the US government appears to be a key part of this strategy, and Héctor Zelaya mentioned efforts to “strengthen” that relationship at an event with Honduras’ main private sector lobby Consejo Hondureño de la Empresa Privada  (Cohep) on 15 March.

There is some evidence of these efforts too, with a string of US officials travelling to Honduras in recent months. Honduras’s new foreign minister, Eduardo Enrique Reina, met both US international trade administration under-secretary Marisa Lago and US deputy secretary of state Wendy Sherman at the end of February, while Jose Fernandez, US subsecretary for economic growth, energy and the environment, arrived in Honduras on 17 March for meetings to discuss transparency and investment. 

Then, on 24 March, officials from the US Department of the Treasury met with Honduran counterparts in Tegucigalpa, agreeing to provide technical assistance in areas such a tax collection, the budget, transparency, and debt restructuring. The debt crisis at the ENEE was also discussed, and US officials will provide technical assistance in matters such as restructuring the company’s debt and renegotiating expensive energy contracts. At present the company is paying private generators US$0.135 per kilowatt, whereas the average cost in Central America is US$0.07-0.09 per kilowatt. Renegotiating these contracts will help to bring down electricity costs for consumers and industry, economic development minister Pedro Barquero told El Heraldo in an article published on 24 March. 

Honduras is also looking further afield for investment. In an article published 21 February, Vice-President Salvador Nasralla told the Financial Times that the country has approached Japan, Taiwan, and Qatar, adding that investments in the agricultural sector will be a priority.

However, the success of efforts to attract investment will depend on demonstrating that the rule of law holds in Honduras, said Libre legislator and congress vice president Hugo Noé Pino, in the same article. While Castro has already requested help from the United Nations to establish a commission against corruption and impunity in Honduras (CICIH), this is a “medium-term task,” said Noé.

While Castro attempts to lay the groundwork for wider changes in Honduras, she also has to face down pressing short-term issues such as a high rate of inflation. On 25 March analysts from Cohep presented proposals including an emergency energy policy, modernisation of public transport, and a hybrid working model for public and private employees to encourage people to work from home.

Other proposals include improving access to finance for farmers and subsidising fertilisers, which have also increased in price due to Russia’s invasion of Ukraine. Energy Minister Erick Tejada told El Heraldo in an article published on 25 March that government officials agree with the majority of Cohep’s proposals and are working on implementing measures, without giving any further details.

• Mining

Other measures announced by the government include the 28 February decision to cancel environmental permits for metal and non-metal mining and prohibit open-pit mining. It remains unclear whether the cancellations will apply to new projects, or whether they will also apply to existing ones. Either way, it appears a relatively affordable way to fulfil an election pledge. According to Fosdeh, since 2000, mining has contributed on average less than 1% annually to Honduras’s GDP. It cites BCH figures that in 2019 mining generated L3.693bn, barely 0.60% of GDP.