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U.S. DEPARTMENT OF STATE
HONDURAS: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES
BUREAU OF ECONOMIC AND BUSINESS AFFAIRS





                             HONDURAS

                     Key Economic Indicators
                  (Millions of U.S. dollars 1/)

                                    1992       1993      1994 2/

Income, Production and Employment:

Real GDP (1978 Prices) 3/          2,791      2,889     2,830
Real GDP Growth (pct.)               5.6        3.7      -2.0
GDP (at current prices) 3/         3,221      3,092     2,950
By Sector:
  Agriculture                        607        754       N/A
  Mining                              67         50       N/A
  Energy/Water                        91         83       N/A
  Manufacturing                      474        489       N/A
  Construction                       181        195       N/A
  Rents                              180        197       N/A
  Financial Services                 216        288       N/A
  Other Services                     991        735       N/A
  Government/Health/Education        205        192       N/A
  Net Exports of Goods & Services    -70        -57       N/A
Real Per Capita GDP (1978 prices)    500        503       493
Labor Force (000s)                 1,477      1,521     1,770
Unemployment Rate (pct.)            15.5       15.8      16.0

Money and Prices:  (annual percentage growth)

Money Supply (M2)                   24.7       12.3       0.5
Base Interest Rate 4/               23.4       26.4      35.0
Personal Saving Rate                19.3       18.8       N/A
Retail Inflation                     6.5       13.0      33.0
Wholesale Inflation                 10.1       14.6       N/A
Consumer Price Index                 6.5       13.0      33.0
Exchange Rate (USD/LP):
  Official                           5.8        7.8       8.8
  Parallel                           5.8        7.8       8.8

Balance of Payments and Trade:

Total Exports (FOB) 5/             833.1      846.0     904.0
  Exports to U.S.                  431.9      433.4     440.0
Total Imports (CIF) 5/             990.2    1,079.5   1,217.0
  Imports from U.S.                539.3      563.0     615.0
Aid from U.S.                       95.7       57.0      45.0
Aid from Other Countries           520.8      490.0       N/A
External Public Debt               3,403      3,607     3,612
Debt Service Payments (Paid)         332        296       300
Gold and Foreign Exch. Reserves    544.4      434.5     -81.1
Trade Balance 5/                  -157.1     -233.5    -313.0
  Trade Balance with U.S.         -107.8     -129.6    -175.0


N/A--Not available.

1/ Exchange rates used are the average official rate for each
year cited:  5.75 (1992), 6.82 (1993), 8.8 (1994).
2/ 1994 figures are all estimates based on available monthly
data in October 1994.
3/ GDP at factor cost.
4/ Figures are actual, average annual interest rates, not
changes in them.
5/ Merchandise trade.



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 1980'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 doomed Honduras to a decade of low growth rates and
declining living standards.

    From 1990 until 1993, the Government of President Callejas
embarked on an ambitious economic reform program, including
dismantling price controls, lowering import tariff duties and
removing many nontariff barriers to trade.  The Government of
Honduras adopted a free market exchange rate regime and
legalized/licensed foreign exchange trading houses.  Interest
rate ceilings were removed.  Modern national investment
legislation was enacted which mandated generous,
nondiscriminatory incentives for local and foreign investment. 
To confront the chronic fiscal deficit, the Callejas government
took measures to increase revenues and slash credit and
exchange rate subsidies.  Unfortunately, in 1992 and 1993, a
sharp rise in public sector investment spending reversed the
progress on the fiscal front and raised the deficit to 11.2
percent of GDP for 1993.  External grant inflows financed part
of the fiscal gap, but the monetized fiscal deficit resulted in
a resurgence in domestic inflation.

    President Carlos Roberto Reina, inaugurated in January
1994, has taken a series of measures to deal with the fiscal
deficit.  Reina ordered a 10 percent cut in current spending
and negotiated with the IMF a series of economic measures
designed to cut the fiscal deficit by four percent.  Under
President Reina, the restrictive (anti-inflationary) monetary
and fiscal policies of the Central Bank have been further
tightened.  Absolute limits have been imposed on public sector
borrowing.  The reserve requirement (currently 42 percent)
remains the favored policy tool to control money supply growth
and inflation. 

    Honduras became a member of the General Agreement on Trade
and Tariffs (GATT) in April 1994, and the accession was
ratified by the Honduran Congress that same month.  Honduras 
ratified the Uruguay Round in May 1994 in Marrakesh.  Honduras
has ratified the Uruguay Round agreements and became a founding
member of the World Trade Organization (WTO) on January 1, 1995.

2.  Exchange Rate Policy

    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
(cases de cambio).  As of June 1992, the Central Bank
authorized commercial banks to buy and sell foreign exchange at
freely-determined rates.  These foreign exchange reforms
improved Honduras' export competitiveness in a wide range of
industries.

    In June 1994, the Central Bank changed to a more
restrictive foreign exchange regime.  A foreign exchange
auction system was introduced by which all foreign exchange in
the formal financial system was auctioned daily by the Central
Bank.  The auction rate then became the legal exchange rate for
foreign exchange transactions.  This rate is revised with every
auction, but is permitted to rise by not more than one percent
every three weeks.  Commercial banks and exchange houses are no
longer allowed to retain foreign exchange purchased from the
public, but are required to sell this foreign exchange to the
Central Bank within 24 hours.  In January 1990, the
lempira-per-dollar exchange rate had been two to one for many
decades.  Since January 1994, the lempira-per-dollar exchange
rate has moved from 7.3 to the current rate of 9.2 lempiras per
dollar, a 26 percent depreciation.


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.  An important byproduct of
trade liberalization is the promotion of technology transfer. 
Among other measures taken was the reduction of tariff barriers
to trade, by gradually cutting import duties from a past range
of 5 to 20 percent.  The Government also removed many
protectionist/cumbersome import licensing and prior import
deposit requirements.

    Pricing Policy:  In an effort to boost production
incentives, the Government lifted price controls on several
hundred consumer and industrial products in 1990 and suspended
the operations of the State Marketing Board.  In the period
1990-92, price hikes were adopted on gasoline, electricity,
water and telephone services.  In December 1992, the Government
moved to a flexible petroleum pricing system reflecting changes
in world market prices.  As of September 1994, the only
existing government controlled prices were for utilities,
public transport, fertilizer, cement, ground roasted coffee and
air fares.  In October 1994, the Honduran Congress enacted
legislation mandating price controls on 26 basic market basket
items through the end of 1994. 

    Tax Policies:  Honduras has long maintained a high
corporate tax rate.  This rate has been generally considered a
major disincentive to direct foreign investments not covered by
the tax exemptions for export-oriented firms operating in free
trade zones and industrial parks.  Early in his term, President
Reina lowered the top marginal corporate tax rate from above 40
percent to 35 percent.  The most important sources of
government revenue are the seven percent sales tax and various
consumption taxes.


4.  Debt Management Policies

    Since early 1990, the Honduran government has been working
to restore the country's creditworthiness, reschedule its 3.3
billion dollar external debt and regain support from the
multilateral development banks.  In early 1990, negotiations
began with the World Bank (IBRD), Inter-American Development
Bank (IDB) and International Monetary Fund (IMF) to pay off
arrears and reestablish pipeline disbursements being withheld
by these institutions.  The payments of 245.7 million dollars
in arrears 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, later extended for seven additional months.  The
standby provided Honduras with 30 million dollars in balance of
payments support funds.  In the second half of 1990, the IDB
and IBRD renewed pipeline disbursements.  The IMF program, and
repayment of international financial institution (IFI) arrears,
paved the way for favorable debt rescheduling terms for 350
million dollars of debt.  The Paris Club accord strengthened
Honduras' capacity to service its debt with a number of other
creditors, including Venezuela, Mexico and OPEC.  In 1991, the
U.S. government also provided 430 million dollars in debt
forgiveness for Honduras.  The Honduran government reduced its
debt obligations with international commercial banks from 245
million dollars in 1982 to 45 million dollars in 1992.  A
series of privatizations and conversion mechanisms was used to
settle these obligations.

    In 1992, Honduras was classified as an IDA-only country. 
This opened the door to concessional loans from the IBRD's soft
loan window.  In June 1992, the IMF approved a three-year
(1992-95) enhanced structural adjustment facility (ESAF),
allowing Honduras to obtain a second favorable Paris Club
Agreement in October 1992.  In 1993 the Callejas government
took on substantial new commercial debt obligations for public
investment projects and began to fail to make scheduled debt
service payments to the United States and other Paris Club
creditors.  The Paris Club agreement was technically suspended
in August 1993, pending agreement with the IMF on an economic
program and payment of all Paris Club arrears.  The Reina
government is currently negotiating with the IFIs and the Paris
Club.  In 1994, Honduras' total external debt obligations total
3.6 billion dollars, well in excess of the country's annual
gross domestic product (GDP).


5.  Significant Barriers to U.S. Exports

    Import Policy:  While 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,
Honduras has resorted to an onerous phyto-sanitary system that
effectively denies market access to U.S. chicken parts. 
Similar phyto-sanitary requirements are used to limit U.S. corn
exports to Honduras.

    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 present.  However, these
requirements may discourage some suppliers.

    Services Barriers:  Under Honduran law, special government
authorization must be obtained to invest in the tourism, hotel
and banking service sectors.  Foreigners are not permitted
majority ownership of foreign exchange trading companies. 
Foreigners cannot hold a seat in Honduras' two stock exchanges,
or provide direct brokerage services in these exchanges.

    Investment Barriers:  Several restrictions exist on foreign
investment in Honduras despite the 1992 Investment Law.  For
example, special government authorization is required for
foreign investment in sectors including forestry,
telecommunications, air transport and aquaculture.  The law
also requires Honduran majority ownership in certain types of
investment, including 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 cases
of investments, at least 90 percent of a company's labor force
must be national, and at least 80 percent of the payroll must
be paid to Hondurans.  Finally, while a one-stop investment
window has been instituted to facilitate investment, this
office does not provide complete information or assistance to
the foreign investor.  

    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.  These
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 Policies

    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 Central America.  This law
also provides a 10 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 the ZIPs are
exempt from state and municipal taxes.  Firms operating in ZIPs
are exempt from income taxes for 20 years and municipal taxes
for 10 years.


7.  Protection of U.S. Intellectual Property

    Until recently, Honduran legislation on intellectual
property rights (IPR) dated back to the early 1900s, and
provided inadequate protection.  In August 1992, a United
States government 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 TV
companies, forced the Honduran government to move seriously to
modernize its IPR regime.  On August 31 - September 1, 1993,
the Honduran congress approved comprehensive, world class
copyright, trademark, and patent laws.  Honduras is a signatory
to the Berne Copyright Convention and, in May 1993, became a
member of the Paris Industrial Property Convention.  As part of
its application for membership in the GATT, Honduras has
committed to the "TRIPS" standard established under the Uruguay
Round negotiations.  Honduras' recent enactment of modern IPR
legislation and its active support of international IPR
conventions and agreements pave the way for substantive
progress in this area.  As part of the GSP review, however,
Honduras will have to demonstrate a serious commitment to
enforcing IPR protection.

    Patents:  The Patent Law enacted in September 1993 provides
full and effective patent protection for up to 20 years.  The
exception is patent protection for pharmaceuticals, which are
protected for 17 years from the date of patent application. 
The Patent Law also contains stiff fines and jail sentences for
violators.

    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 has strict regulations on the
registration and use of notorious trademarks, and provides
strong penalties against violators.

    Copyrights:  The piracy of books, music cassettes, records,
video tapes, compact discs, cable TV and computer software is
widespread in Honduras.  The new Copyright Law provides strong
protection for copyright owners, however.  The Honduran
government has committed itself to legalizing the activities of
its cable TV companies and video store operators.  There are no
reliable data on the cost of local piracy to U.S. industry. 
Before the Honduran cable industry legalized most of its
operations, the Motion Pictures Exporters Association of
America (MPEAA) estimated the annual loss of revenues from
local cable piracy at 2.5 million dollars.


8.  Worker Rights

    a.  The Right of Association

    Workers have the legal right to form and join labor unions
and, with few exceptions, the unions are independent of the
government and political parties.  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 by the constitution and honored in practice.  The
Civil Service Code, however, stipulates that public workers do
not have the right to strike.  

    A number of private firms have instituted "solidarity"
associations, which are essentially aimed at providing credit
and other services to workers and management who are members of
the association.  Organized labor strongly opposes these
associations.

    b.  The Right to Organize and Bargain Collectively

    The right to organize and bargain collectively is protected
by law, and collective bargaining agreements are the norm for
companies in which the workers are organized.  In practice,
management often discourages workers from attempting to
organize.  Workers in both unionized and nonunionized companies
are under the protection of the labor code, which gives them
the right to seek redress from the Ministry of Labor. 
Depending upon the decision of the labor or civil court,
employers can be required to rehire employees fired for union
activity.  Such decisions are uncommon.  Generally, however,
agreements between management and their union contain a clause
prohibiting retaliation against any worker who participated in
a strike or union activity.

    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 for Employment of Children

    The constitution and the labor code prohibit the employment
of children under the age of 16, but the Ministry of Labor
lacks resources to exercise its responsibility to ensure
enforcement.  Children between the ages of 14 and 16 can
legally work with the permission of the parent and the Ministry
of Labor.  Violations of the labor code occur frequently in
rural areas and in small companies.  High adult unemployment
and underemployment have resulted in many children working in
small family farms, as street vendors, or in small workshops to
supplement the family income.  According to the Ministry of
Labor, human rights groups and organizations for the protection
of children, there were no significant child labor problems in
Honduras in 1994.  

    e.  Acceptable Conditions of Work

    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.

    The law prescribes an eight-hour day and a 44-hour
workweek.  There is a requirement for at least one 24-hour rest
period every eight days, a paid vacation of 10 workdays after
one year and 20 workdays after four years.  The regulations are
frequently ignored in practice as a result of the high level of
unemployment and underemployment.

    f.  Rights in Sectors with U.S. Investment

    The same labor regulations apply in export processing zones
(EPZs) as in the rest of private industry.  U.S. firms
employing garment workers are active in several EPZs.  Working
conditions and wages in the EPZs are generally considered
superior to those prevailing in the rest of the country. 
Unions are active in the government-owned Puerto Cortes Free
Trade Zone, but factory owners have resisted efforts to
organize the new privately-owned industrial parks.

    While progress has been made in some maquiladoras towards
unionization, a hard line in other, mostly Korean-owned,
maquilas has led to plant seizures and blockage of public
highways.  

    Blacklisting is clearly prohibited by the labor code, but
nevertheless occurs in the privately owned industrial parks. 
Some companies in the industrial parks have dismissed union
organizers before union recognition was granted.

    There are still as many as 50 deaths per year resulting
from serious health and safety hazards facing Miskito indian
scuba divers employed in lobster and conch harvesting off the
Caribbean coast of Honduras.  The seafood is destined primarily
to the U.S. market. 



  Extent of U.S. Investment in Selected Industries.--U.S. Direct
Investment Position Abroad on an Historical Cost Basis--1993

                    (Millions of U.S. dollars)
                                                                
              Category                          Amount          

Petroleum                                             (1)
Total Manufacturing                                   144
  Food & Kindred Products                   (1)
  Chemicals and Allied Products               3
  Metals, Primary & Fabricated                3
  Machinery, except Electrical                0
  Electric & Electronic Equipment             0
  Transportation Equipment                    0
  Other Manufacturing                       (1)
Wholesale Trade                                        15
Banking                                                 5
Finance/Insurance/Real Estate                          23
Services                                                0
Other Industries                                      (1)
TOTAL ALL INDUSTRIES                                  223      

(1) Suppressed to avoid disclosing data of individual companies

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

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