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  Number 160 | Noviembre 1994
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Honduras

The Impact of the "Red Package"

Thousands of small farmers pressed President Reina not to approve the new economic plan, and the liberal deputies of Reina’s party refused to approve it. For various reasons the “red package” has had to pass through a rocky road.

Mario Posas

On September 8, Minister of the Treasury Juan Ferrera sent the National Congress a series of fiscal measures the local press promptly dubbed the "red package," after the color of the ruling Liberal Party's flag. President Reina revealed the contents of the package to the nation the same day.

Five Controversial Bills

The package contains five bills for Congress to pass:
* Reforms to the monetary law and to Decree 18 90 authorizing the previous government's neoliberal economic measures. This bill establishes that the dollar exchange rate for local currency will be determined by supply and demand, within norms established by the Central Bank of Honduras. It also eliminates the Customs Value Factor (FVA), the official dollar exchange rate used for paying customs duty on imports. At the moment, the FVA is 7.30 lempiras to the dollar while the official exchange rate for other purposes is almost 9. Eliminating the FVA will make imported products even more expensive and thus generate more inflation.

* A restructuring of consumer taxes, simplification of the tax system and financing for social spending. This bill basically extends the list of goods and services for which consumers must pay a 7% sales tax, and hikes the tax on tobacco products and all alcoholic beverages to 10%. (The latter was the government's only concession to an International Monetary Fund recommendation to raise the tax to 10% across the board.) Pharmaceuticals, basic market basket items, diesel, books and magazines, agrochemicals and essential health, education, transport and sports services remain exempt.

Savings account interest will also be taxed 10%, highway tolls will now be charged, and taxes on luxury cars will be increased substantially to discourage their importation. The bill also contains a set of stipulations to simplify the filing of taxes. The language of the bill appears based on the idea that the state will finance its social programs with what is collected from all these restructured taxes.

* Taxes on net assets. This bill puts a 1% tax on businesses whose net assets are worth 500,000 lempiras or more. The declared objective is to get businesses to pay in to the state, since it is no secret that many either do not do so, or pay lower taxes than they should by using various loopholes or other forms of fiscal evasion.

* A separate system for the coffee sector. This bill eliminates taxes on coffee exports, instead making the payment of income tax obligatory for coffee growers.

* A tax code. This bill "establishes the general principles of the administrative, penal and legal norms to improve the country's tax administration."

And Behind All This? The Foreign Debt

One of the main declared goals of the "red package" is to reduce the fiscal deficit. The deficit left by the previous government is 11.2% of the Gross Domestic Product, and the current government is trying to bring it down to 7% in 1994 and 4.5% in 1995. Reina said the new measures will also stabilize the economy and halt the inflationary spiral. Inflation is already at 21%, and could go as high as 60% by year's end if the measures are not approved.

But Minister Ferrera revealed the deeper motives in the explanation he attached to the bill restructuring the sales tax. Behind it all and ahead of it too is Honduras' foreign debt and the commitments for paying it that the Reina government had to take on with the multilateral lending agencies.

Ferrera pushed Congress to approve the bills so the country can deal with the "afflictive situation state finances are in and the high amounts the foreign debt obligations are reaching." Hondu ras is supposed to pay $240 million in debt service for 1994.

"If for any reason the National Congress does not approve these measures," Ferrera told Congress, "the central government will lack the means to honor its obligations and the country will risk being declared ineligible for new credits or the disbursement of those already granted. If, on the contrary, the project is approved, a Letter of Intent with the International Monetary Fund and a Framework of Structural Reform Policies with the World Bank will be signed soon, permitting the credits for energy and agriculture already approved by both the latter and the Interamerican Development Bank to be disbursed, together with aid already in the pipeline from the Agency for International Development (AID). It would later also become possible to negotiate a debt pardon with Paris Club member countries. And in the medium run, approving the project would create the indispensable conditions for Honduras to continue receiving the aid needed for development from the international credit institutions and friendly governments." According to Minister of the Economy Delmer Urbizo Panting, just by approving the measures, the Paris Club will pardon around $700 million, which represents 9.3% of Honduras' total $3.7 billion foreign debt.

A Growing Budget

Yet another acknowledged motive for the measures is the need to "strengthen public finances so as to effectively see to health, education and the more vulnerable population groups, and thus maintain a social climate appropriate to the normal deve lopment of productive activity."
President Reina declared that the government needs at least 584 million lempiras to attend to the needs of the National Civil Registry; the ministries of foreign relations, defense and public security, education and public health; the Honduran Social Investment Fund, the Family Assignment Program; the Supreme Court and the Public Ministry for 1995. On September 14, the Council of Ministers approved the 1995 budget, which exceeds the current one by more than two billion lempiras.

The budget contains substantial increases for health, education, public works and transport, and natural resources, ranging from a high of 420 million lempiras more for health to a low of 93 million more for natural resources. The 23 million budget increase for the military has been seriously challenged, but the government justifies it on the grounds that it will "cover the expenses involved in putting the voluntary, educational, democratic and humanist military service into effect."
The government hopes to finance its new budget with income the state will receive from the new international coffee prices, loans and donations from abroad, and the 700 million lempiras it hopes to pull in with the "red package." Many see the latter as incongruent with the objective of shrinking the fiscal deficit.

Adolfo Facussé, president of the Honduran Council of Private Enterprise (COHEP), declared that the 1995 budget increase is "surprisingly large" and dangerously inflationary. He called on the National Congress to scrupulously review the budget figures and approve only those that are not inflationary.

Docile Unions

The reasures have been hotly debated since July. As the main interlocutors in the debate with the government, the Cabinet chose COHEP, which represents big business, and the unions, mainly represented by the Confederation of Honduran Workers (CTH).

The unions are wary of the new economic measures' inflationary impact, which will depress workers' real wages even further. The CTH laments the fact that the general salary adjustment that President Reina promised to implement as soon as possible has not even been touched on in the consultation over the measures. The fact is that the Honduran union movement, unable to articulate a coherent and persuasive position regarding the measures, has kept a low profile.

Feisty Business

COHEP has had more visibility and been feistier in the debates over the measures than the unions, which has earned it the role of key interlocutor with the economic Cabinet. From the outset, Adolfo Facussé, COHEP's main spokesperson, expressed the business associations' opposition to the tax on net assets, noting that if the government wanted COHEP's support for the whole tax package, it would have to reduce spending and its bureaucracy.

On August 8, COHEP sent the National Congress a counterproposal to consider and debate alongside the government package. COHEP is demanding a drastic cut in the state bureaucracy and in public spending. It also wants port services, the telecommunications and energy companies and the public institutes of social security and professional training privatized. In COHEP's judgment, if public spending is cut and these state businesses are sold, it will be unnecessary to punish people with new taxes.

In place of the tax on net assets, COHEP proposed taxing idle lands, but the Federation of Farmers and Ranchers of Honduras, also part of COHEP, openly rejected the proposal. COHEP's industrial sectors are willing to sacrifice their unproductive agricultural associates to free themselves from a tax they say will affect the competitiveness of Honduran businesses in the international market. But COHEP's counterproposal does not stop there. It also proposes that credit to the central government be gradually reduced, the sales tax be turned into a value added tax, the banks' reserve requirement be lowered and the country's small and medium industry be protected.

Down with the "Parachutists"

On September 2, Adolfo Facussé dropped his opposition to the package and publicly promised to support it. The shift came after meeting with President Reina and the economic Cabinet, as well as with congressional representative Jorge Arturo Reina, coordinator of the government's social harmonization program. Facussé explained that he changed his position because the government leaders had convinced him they were taking steps "in the right direction to reduce the public sector, combat corruption and support free enterprise."
Satisfied that the government was seriously studying COHEP's counterproposal, Facussé used the occasion to reiterate his rejection of the net asset tax. To get COHEP's public support for its measures, the government had previously announced that it would lay off 7,200 public employees in the future, adding that many of those who would get the ax were "parachutists" political activists who collected wages without working in the state offices that paid them and to which they were assigned.

And the "Blue Package"?

The Honduran College of Economists has rejected the "red package," arguing that other sources of alternative financing to resolve the state's financial difficulties should be considered. Among them, the economists mentioned the tax on luxury goods and tax evasion controls.

The opposition National Party also opposed the package, "in the name of the dispossessed majorities." It was a curious reaction since, in 1990, the National Party's then majority bench pushed through President Callejas' severe program of neoliberal economic measures a "blue package," to borrow from the current argot in the wee hours of the morning with no serious debate.

Even though the ruling party enjoys a comfortable majority, getting the new measures through Congress will be no easy trick for several reasons. Unlike when the obedient and non deliberating National Party bench passed the "blue package" in the wink of an eye, most Liberal Party representatives are using this debate to renegotiate quotas of power with President Reina so they can put their political clientele in some of the state institutions. Reina could end up with a new parachute squad.

Presidential Aspirations

The prudent posture that Congress president Carlos Flores Facussé has adopted toward the new measures makes their automatic and uncritical approval even less likely. Flores, who heads one of the Liberal Party's strongest internal currents, is a presidential aspirant. If most Hondurans identify him as largely responsible for the package, it could kill him politically. He has become the main critic of Reina and his economic Cabinet on behalf of those who demand a vision of the future. He wants to make the Liberal Party and him as its official presidential candidate a real option in the next elections.

Using his privileged position as congressional president, and the differences some Liberal representatives have with Reina, Carlos Flores has requested broad political negotiations with Reina and his economic Cabinet before agreeing to the measures. On September 27, Flores announced that they will be passed, but with "substantial modifications."
This worries the economic Cabinet, which fears that approval could be delayed. It is reminding Congress that delays could cause the IMF to declare Honduras "uncreditworthy." But Flores and the Liberal bench members backing him appear immune to such pressure. The sectarianism dividing the Liberal Party currents has given Congress unexpected autonomy from the executive branch, one not seen in Honduras' recent political history.

Whatever other modifications Congress introduces, it is obvious that the elimination of the FVA will be approved as will some of the taxes. From the perspective of most Hondurans, this will only spur speculation and inflation, and deteriorate their living standards even more.

Greater impoverishment, in turn, will fuel the crime wave that the police has already declared itself unable to control. The country will remain dark and all the anti popular aspects of these measures will make the darkness even more dense.

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