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TITLE:  HONDURAS ECONOMIC POLICY AND TRADE PRACTICES
DATE:  FEBRUARY 1994
AUTHOR:  U.S. DEPARTMENT OF STATE

                             HONDURAS
                                 
                     Key Economic Indicators
        (Millions of lempiras, unless otherwise noted)/1/


                                  1991      1992      1993
Income, Production,
 and Employment

Real GDP (1978 Prices)             4,775     5,034     5,210
Real GDP Growth (pct.)              3.0       4.9       3.5
GDP at Current Prices             16,072    18,166      n/a
By Sector:
  Agriculture                      3,176     3,436      n/a
  Energy and Water                   497       580      n/a
  Manufacturing                    2,250     2,628      n/a
  Construction                       823     1,123      n/a
  Rents                              909     1,018      n/a
  Financial Services               1,109     1,286      n/a
  Other Services                   1,434     1,543      n/a
  Public Administrations           1,050     1,167      n/a
Net Exports of Goods
 and Services ($ million)           -360.6    -385.5    -370.0
Real Per Capita GDP 
 (1978 Prices) /2                    978     1,001     1,007
Labor Force (000's)                1,514     1,569     1,614
Unemployment Rate (pct.)           14.2      15.0      15.8


Money and Prices
(Annual percentage growth)

Money Supply (M2)                  20.0      24.7      15.0
Lending Rates /3                   25.2      23.4      26.4
Deposit Rates /3                   12.6      11.8      13.7
Personal Savings Rates             18.9      19.3       n/a
Retail Inflation /4                34.0       8.8      14.0
Wholesale Inflation /5             34.3      10.1      14.6
Consumer Price Index              375.1     408.0     448.9
Exchange Rate (lempiras per $)
  Official                          5.58      6.47      7.05
  Parallel                          5.67      6.51      7.00


Balance of Payments and Trade
 (Millions of U.S. dollars)

Total Exports (FOB) /6              823.0     828.6     867.8
  Exports to U.S. /6                418.9     434.2     454.7
Total Imports (CIF) /6              996.1   1,072.6   1,131.1
  Imports from U.S.                 480.1     448.4     478.8
Aid from U.S.                       157.3      95.7      55.7
Aid from Other Sources              281.2     520.8     n/a
External Public Debt              3,227.7   3,412.3   3,466.1
Debt Services Paid                  146.9     226.3     n/a
Foreign Exchange Reserves /7         93.4     180.1      83.3
Trade Balance /6                   -173.1    -244.0    -263.3
  Balance with U.S.                 -61.2     -14.2     -18.1


Notes:

1/  1993 Figures are all projections.
2/  Lempiras.
3/  September.
4/  August 1992 - August 1993.
5/  June 1992 - June 1993.
6/  Merchandise trade - in country data.
7/  Liquid foreign exchange reserves at the Central Bank 1991
    and 1992 data is as of December 1992; 1993 is as of
    September, 1993.



1.  General Policy Framework

    Despite abundant natural resources and substantial U.S.
economic assistance, Honduras remains one of the poorest
countries in the hemisphere.  In the 1990's, the Honduran
economy was buffeted by declining world prices for its
traditional exports of bananas and coffee.  The unfavorable
terms of trade, high external debt levels, and flawed economic
policies seemed to doom Honduras to a decade of low growth
rates and declining living standards.

    In January 1990, the newly elected government of President
Callejas and the National Party faced a deteriorating economic
situation.  Moving quickly to confront the crisis, Callejas
embarked on an ambitious economic reform program.  To stimulate
production and investment, the Callejas government dismantled
much of Honduras' elaborate system of price controls.  The
program also consisted of opening up the economy to foreign
competition by dramatically lowering import tariff duties and
removing most non-tariff barriers to trade.  To promote
export-led growth, the Government of Honduras adopted a free
market exchange rate regime and later legalized/licensed
Foreign Exchange Trading Houses.  Also, modern national
investment legislation was enacted providing generous,
non-discriminatory incentives for local and foreign investment.

    On the fiscal front, the Callejas government faced a huge,
and growing, fiscal deficit.  The monetization of the fiscal
imbalance was fueling inflation and crowding out private sector
investment.  To confront the problem, the Government of
Honduras adopted a revenue-raising/expenditure reduction
package, beginning in 1990.  The deficit reduction measures
included increases in the sales tax, simplification of the
income tax structure, and removal of a number of tax and duty
exemptions.  In 1991-92, follow-up measures were taken to
improve tax collections, dollarize some export taxes, hike
public utility rates (water, telephone, and electricity), and
raise petroleum prices.  Throughout this period the, government
held the line on public sector expenditure increases, and
slashed credit and exchange rate subsidies to the non-financial
public sector.  The deficit reduction program bore fruit, with
the fiscal deficit as a percent of GDP declining from 7.1 (at
the end of 1990) to 4.3 percent in 1991.

    Unfortunately, in 1992, a sharp rise in public sector
investment spending reversed somewhat the progress on the
fiscal front--with the deficit rising to above five percent of
GDP.  In 1992, external grant inflows, at 5.6 percent of GDP,
financed most of the fiscal gap.  To remain within the bounds
of their IMF program, the Government of Honduras is attempting
to reimpose fiscal discipline by trimming the deficit to below
four percent of GDP in 1993.

  Since 1990, the Honduran Central Bank has adopted restrictive
(anti-inflationary) monetary and credit policies.  To promote
more efficient financial intermediation, the Central Bank began
to phase-in interest rate liberalization.  Interest rate
ceilings on commercial bank loans were gradually removed in
1990-91, and the Central Bank increased the rate charged to
commercial banks for reserve short-falls.  These measures led
to a rise in deposit rates and restored equilibrium to the
credit markets.  Currently, Honduras has a free market interest
rate policy.  Positive, real lending rates in excess of 20
percent have been induced by Central Bank maintenance of a high
reserve requirement (currently at 36 percent).  The reserve
requirement remains the favored policy tool to control money
supply growth and inflation.  The Central Bank, however, is
increasingly using open market operations (bond sales) to
control excess liquidity and money supply.  In November 1993
elections President Carlos Roberto Reina of the Liberal Party
was elected by a wide margin.  He had been critical of the
economic program and promised to put a more human face on it. 
He takes office on January 27, 1994.


2.  Exchange Rate Policies

    Beginning in 1990, the Honduran government abandoned the
fixed exchange rate system and gradually moved to a flexible
exchange rate mechanism.  These phased policy measures allowed
for a smooth transition to a floating exchange rate regime in
June 1992.  To provide a more transparent and efficient foreign
exchange market, the Honduran Central Bank legalized and
licensed the operations of Foreign Exchange Trading Houses
(Casas de Cambio) -- previously black market establishments. 
As of June 1993, there were 15 licensed Foreign Exchange Houses
actively competing in this market nationwide.  To further open
up the market, in 1992 the Central Bank authorized commercial
banks to operate foreign exchange trading windows and compete
with exchange houses.  The foreign exchange reforms have gone
far to improve Honduras' export competitiveness in a wide range
of industries.

    Since January 1992, the lempiras-per-dollar exchange rate
has moved from 5.6 to the current rate of 6.9 per dollar, or a
19 percent depreciation.  In July 1992, a major speculative run
on the lempira prompted the Central Bank to adopt a series of
restrictive monetary measures in support of the exchange rate. 
The Central Bank also charged a number of Foreign Exchange
Trading Houses with violation of margin and reporting
requirements.  The Central Bank temporarily suspended the
operating licenses of six exchange houses.


3.  Structural Policies

    Trade Policy:  A critical component of the structural
adjustment reforms has been to end the debilitating effects of
decades long import-substitution policies.  These remedial
policies were designed to open up the economy to global
competition, force local entrepreneurs to reduce costs,
increase productivity, and provide incentives for
export-oriented business activity.  Among the measures taken
was the reduction of tariff barriers to trade, by gradually
cutting import duties from a past range of 0-105 percent to
the current range of five to twenty percent.  The government
also removed restrictive and cumbersome import licensing and
prior deposit requirements.

    Pricing Policy:  In an effort to boost production
incentives, the government moved fast (beginning in March 1990)
to lift price controls on several hundred consumer and
industrial products.  Price deregulation were implemented on
such sacred cow foodstuffs as beans, cooking oil, milk, corn
and wheat flour.  The government also suspended the operations
of the State Marketing Board (IMSHA).  In the period 1990-92,
painful but necessary price hikes were adopted on gasoline,
electricity, water and telephone services.  In December 1992,
the Government of Honduras moved to a flexible petroleum
pricing system that reflects variations in world market
prices.  As of January 1993, the only existing government
controlled prices are for utilities, public transport, and
cement.  However, in December 1993, the Callejas Administration
reimposed price controls on a market basket of 44 basic
products.

    Tax Policies:  Honduras maintains, even by Latin American
standards, a high corporate tax rate.  The current marginal
corporate rate is 52 percent.  This rate is generally
considered a major disincentive to direct foreign investments
not covered by the tax exemptions for export-oriented firms
operating in free zones and industrial parks.  The chief source
of government tax revenue is the seven percent sales tax.


4.  Debt Management Policies

    On the international front, the main thrust of the Callejas
government's reform program aimed at restoring the country's
creditworthiness, rescheduling its $3.3 billion external debt,
and regaining support from the multilateral development banks. 
In early 1990, negotiations began with the World Bank,
Inter-American Development Bank and the IMF to pay off arrears
and reestablish pipeline disbursements being withheld by these
institutions.  The payments of arrears to the tune of $245.7
million were made possible by a bridge loan from the U.S.
Treasury Department.   This bridge loan was complemented by
additional financing from Venezuela, Mexico and Japan.

    In July 1990, the IMF approved a 12-month Standby
Arrangement, that was later extended for seven more months. 
The Stand-by provided Honduras $30 million in balance of
payments support funds.  Also, in the second half of 1990, the
IDB and World Bank renewed pipeline disbursements.  The IMF
Program and repayment of arrearages to international financial
institution paved the way for rescheduling of $350 million of
its official debt.  The Paris Club deal strengthened Honduras'
capacity to service its debt with a number of other creditors
including Venezuela, Mexico, and OPEC.  In 1991, the United 
States also provided $430 million in debt forgiveness for
Honduras.  Finally, the Honduran government reduced its debt
obligations with international commercial banks from $245
million due in 1982, to $45 million as of June 1992.  A series
of privatizations and conversion mechanisms was used to settle
these obligations.

  In 1991, Honduras classified as an IDA-only country.  This
opened the door to concessional loans from the World Bank's
soft loan window.  In July 1992, the IMF approved a three-year
(1992-95) Enhanced Structural Adjustment Facility (ESAF),
allowing Honduras to obtain a second Paris Club agreement in
October 1992.  Reflecting the improved debt picture, in 1992
Honduras' debt-service-to-export ratio was a respectable 28
percent.


5.  Significant Barriers to U.S. Exports

    Import Policy:  While the Callejas reforms have gone far to
open up Honduras to U.S. exports and investment, a number of
protectionist policies remain in place.  For example, although
all import licensing requirements have been eliminated (with
the exception of the consular legalization requirement),
Honduras has resorted to an onerous phyto-sanitary system that
effectively denies market access to U.S. chicken parts. 
Similar phyto-sanitary requirements are being used to limit
U.S. corn exports to Honduras.  The Government of Honduras also
maintains a discriminatory automobile import regime, based on
engine size, that imposes a steep selective consumption tax on
many U.S.-made vehicles.

    Labeling and Registration of Processed Foods:  Honduran law
requires that all processed food products be labelled in
Spanish and registered with the Ministry of Health.  The laws
are indifferently enforced at the present time, however, these
requirements may discourage some suppliers.

    Services Barriers:  Under Honduran law, special government
authorization must be obtained to operate tourism, hotel, and
banking service investments.  Foreigners are not permitted
majority ownership of foreign exchange trading companies. 
Foreigners cannot hold a seat in the Tegucigalpa and San Pedro
Sula Stock Exchanges, or provide direct brokerage services in
these local exchanges.

    Investment Barriers:  Several restrictions exist on foreign
investment in Honduras, despite the passage of a new National
Investment Law in May 1992.  For example, foreign investment in
a number of sectors requires special state authorization. 
These sectors include forestry, telecommunications, air
transport, and aquaculture.  Also the law requires majority
ownership by Honduran nationals in several types of
investments.  These include: beneficiaries of the National
Agrarian Reform Law; commercial fishing and direct exploitation
of forest resources; and local transportation.

    Honduran Law also prohibits foreigners from establishing
businesses capitalized at under 150,000 lempiras.  In all
investments, at least 90 percent of a company's labor force 
must be national, and at least 80 percent of the payroll must
benefit Hondurans.

    Government Procurement Practices:  The government
Procurement Law (Decree No. 148.5) governs the contractual and
purchasing relations of Honduran state agencies.  Under this
law, foreign firms are given national treatment for public bids
and contractual arrangements with state agencies.  In practice,
U.S. firms frequently complain about the mismanagement and lack
of transparency of Honduran government bid processes.  The
deficiencies are particularly evident in telecommunications,
pharmaceuticals, and energy public tenders.

    Customs Procedures:  Honduras' customs administrative
procedures are burdensome.  There are extensive documentary
requirements and red tape involving the payment of numerous
import duties, customs surcharges, selective consumption taxes,
consular fees, and warehouse levies.


6.  Export Subsidies

    With the exception of free trade zones and industrial
parks, almost all export subsidies have been eliminated.  The
Temporary Import Law (RIT), passed in 1984, allows exporters to
bring raw materials and capital equipment into Honduran
territory exempt from customs duties and consular fees--if the
product is to be exported outside of Central America.  This law
also provides a ten-year tax holiday on profits from these
exports under certain conditions.

    The export processing zones (ZIPS) exempt the payment of
import duties on goods and capital equipment, charges,
surcharges and internal consumption, and sales taxes.  In
addition the production and sale of goods within ZIPS are
exempt from State and Municipal taxes.  Firms operating in ZIPS
are exempt from income tax for 20 years and municipal taxes for
ten years.


7.  Protection of Intellectual Property Rights

    Until recently, Honduran legislation on Intellectual
Property Rights (IPR) dated back to the early 1900s, and
provided inadequate protection.  In August 1992, a U.S.
decision to review Honduras' status under the Generalized
System of Preferences (GSP), as a result of widespread piracy
of U.S. satellite signals by local cable television companies,
forced the Honduran government to move seriously to modernize
its IPR regime.

    On August 31-September 1, 1993, the Honduran Congress
approved new Copyright, Trademark, and Patent Laws.  Honduras
is signatory to the Bern Copyright Convention and in May became
a member of the Paris Industrial Property Convention.  While
the new laws represent an improvement, the U.S. Government has
identified problem areas and is working with the Government of
Honduras to address these problems.  A final decision on reveiw
of Honduras GSP benefits is expected by mid-1994.

    Patents:  Until the new Patent Law was approved, terms of
patent protection in Honduras were far below international
standards.  There were numerous exceptions where no protection
was provided, such as on pharmaceuticals, textbooks, and
certain types of foodstuffs.  The new Patent Law is an
improvement over the previous law, but it contains several
provisions that do not comply with accepted international
standards.  Most notably, the new law includes several
patentable subject matter exclusions, an inadequate patent term
for pharmaceutical products and processes, and deficient
compulsory licensing and revocation provisions.

    Trademarks:  The registration of notorious trademarks is
widespread in Honduras.  Several local firms have profited
greatly from the loophole in the old law excluding notorious
trademarks.  The new law is of generally high quality and
consistent with international standards in most respects.  The
U.S. Government is working with the Government of Honduras on
remaining areas of concern.

    Copyrights:  The piracy of books, music cassettes, records,
videos, and cable television is widespread in Honduras.  The
new Copyright Law provides improved protection for copyright
owners.  The Honduran government is committed to legalizing the
activities of its cable television companies and video store
operators.

    There are no reliable data on the overall cost of local
piracy to U.S industry.  However, the Motion Pictures
Exporters' Association of America (MPEAA) puts the annual loss
of revenues resulting from local cable piracy at $2.5 million.


8.  Worker Rights

    a.   Right of Association

    Workers have the legal right to form and join labor unions,
and with the exception of some "parallel" unions formed by the
government, the unions are independent.  Although only about 20
percent of the work force is organized, trade unions exert
considerable political and economic influence.  The right to
strike, along with a wide range of other basic labor rights, is
provided for in the constitution and honored in practice.  The
Civil Service Code stipulates that public workers do not have
the right to strike.  A number of private firms have instituted
"solidarity" associations.  Solidarity is a labor/management
concept which provides an array of services through an
association and a joint employer/worker capital fund. 
Organized labor, including the American Federation of Labor and
the Congress of Industrial Organizations and the International
Confederation of Free Trade Unions (ICFTU), strongly opposes
these associations on the grounds that they do not permit
strikes and have inadequate grievance procedures.

    b.   Right to Organize and Bargain Collectively

    The right to organize and bargain collectively is protected
by law, but not always observed in practice.  Retribution by
employers for trade union activity is not uncommon, although
prohibited in the labor code.  There have been cases of
companies threatening to close down if unionized.  Some workers
have been harassed and, in some cases, fired because of their
efforts to form a trade union.  Workers dismissed for union
activity may apply to the Ministry of Labor for redress. 
Collective bargaining agreements are the norm for companies
where workers are organized.  Wages in non-organized companies
are determined by labor supply and demand, subject to the
constraints of the minimum wage which was last adjusted in June
1993.

    c.   Prohibition of Forced or Compulsory Labor

    There is no forced or compulsory labor in Honduras; such
practices are prohibited by law and the constitution.

    d.   Minimum Age of Employment for Children

    The constitution and the Labor Code prohibit the employment
of children under the age of 16 years.  Violation of the labor
code occurs frequently in rural areas and in small companies. 
High underemployment have resulted in many children
supplementing the family income by working in small family
farms, as street vendors, or in small workshops.  The Ministry
of Labor has the responsibility for enforcing child employment
laws, but it lacks the resources necessary to carry out the
task.

    e.   Acceptable Conditions of Work

    In May 1993, organized labor and the private sector
umbrella organizations agreed on a 14.4 percent increase in the
minimum wage, to become effective June 1.  The constitution and
the labor code require that all labor be fairly paid.  Minimum
wages, working hours, vacations, and occupational safety are
all regulated, but the Ministry of Labor lacks the staff and
other resources for effective enforcement.  Even after the
third consecutive annual increase, the minimum wage, which
varies by occupation and location, is considered insufficient
to provide a decent standard of living, particularly in light
of inflation.  The law prescribes an eight-hour day and 44-hour
week.  The labor code provides for a paid vacation of ten
workdays after one year and 20 workdays after four years. 
Employers frequently ignore these regulations.

    f.   Rights in Sectors with U.S. Investment

    There is sizable U.S. investment in Honduras in the
petroleum, manufacturing, and assembly sectors.  U.S. firms
meet minimum wage requirements and observe regulations
established in the labor code.



         Extent of U.S. Investment in Selected Industries

              U.S. Direct Investment Position Abroad
                on an Historical Cost Basis - 1992
                    (Millions of U.S. dollars)

Category                                    Amount

Petroleum                                                 D
Total Manufacturing                                      92
    Food & Kindred Products                     D
    Chemicals and Allied Products               2
    Metals, Primary & Fabricated                2
    Machinery, except Electrical                0
    Electric & Electronic Equipment             0
    Transportation Equipment                    0
    Other Manufacturing                         D
Wholesale Trade                                          14
Banking                                                   5
Finance and Insurance                                     D
Services                                                  D
Other Industries                                         31

TOTAL ALL INDUSTRIES                                    184


(D)-Suppressed to avoid disclosing data of individual companies

Source:  U.S. Department of Commerce, Bureau of Economic
Analysis.

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