Honduras - Second Structural Adjustment Loan

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-5355-HO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED SECOND STRUCTURAL ADJUSTMENT LOAN IN AN AMOUNT EQUIVALENT TO US$90.0 MILLION TO THE REPUBLIC OF HONDURAS AUGUST 10, 1990 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as of August 10, 1990) Currency Unit = Lempira (L) US$ 1.0 = L 4.2 L 1.0 = US$0.24 FISCAL YEAR January 1 to December 31, 1990 ABBREVIATIONS BANADESA - Banco Nacional de Desarrollo Agricola (Agricultural Development Bank) BANASUPRO = Suplidora Nacional de Productos BAsicos (National Supplier of Basic Products) BCH Banco Central de Honduras (Central Bank of Honduras) CEFEX Certificado de Financiamiento Externo (Tax Return Certificates) CETRA = Certificado Transferible de Opci6n a Divisas por Exportacifn (Trading Certificates), COHDEFOR = Corporaci6n Honduretia de Desarrollo Forestal (Honduran Corporation for Forestry Development) CONADI = Corporaci6n Nacional de Desarrollo Industrial (National Industrial Development Corporation) ENEE = Empresa Nacional de Energia Electrica (Electric Power Company) IHMA = Instituto Hondureflo de Mercadeo Agricola (National Agricultural Marketing Institute) HONDUTEL = Empresa Hondurefia de Telecomunicaciones (National Telecommunications Company) SANAA = Servicio Aut6nomo Nacional de Acueductos y Alcantarillado (National Water Company) UNDP = United Nations Development Program  HONDURAS FOR OFmFCIAL USE ONLY SECOND STRUCTURAL ADJUSTMENT LOAN LOAN AND PROGRAM SUMMARY Borrower: Republic of Honduras Amount: US$90.0 million equivalent Terms: Repayment in 20 years, including five years of grace, at the standard variable interest rate. Description: The proposed loan would support the Government's structural adjustment program. The main areas covered by the Government's medium-term program include measures to: (i) improve incentives to stimulate private savings and investment in export oriented activities; (ii) increase public savings and the efficiency of the public sector; (iii) improve the commercial banks' mobilization and allocation of resources; and (iv) improve the productivity of the private agricultural sector. Proiect Benefits: The adjustment program would accelerate export growth and increase domestic savings while creating the pre- conditions for a recovery of economic growth and employment. The program is expected to support the country's recovery and creditworthiness facilitating the country's access to external financial flows needed to attain long-term sustainable growth. Project Risks: The principal risk centers on the Government's ability to maintain the required political consensus to avoid slippage in the pace of implementation of the reforms. Another major risk centers on the Government's ability to generate the required public savings, on negative shifts on Honduras' terms of trade and on the country's capacity to obtain sufficient foreign capital during the initial years of the program. Estimated Disbursements: The proceeds of the loan would be disbursed in three tranches: US$45 million equivalent upon effectiveness, US$20 million equivalent after a satisfactory performance review in February 1991, and the remaining US$25 million equivalent after a satisfactory performance review to be held in the last part of CY91. Appraisal Report: This is a combined staff appraisal and President's Report. MapS IBRD 19771 LThis document has a restricted distribution and may be used by recipients only in the performance Of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  HONDURAS SECOND STRUCTURAL ADJUSTMENT LOAN Table of Contents Page No. Loan and Program Summary PART I THE ECONOMY ............................ 2 A. Background .......... ........................... 2 B. Recent Development and Prospects .... ........... 3 C. Major Adjustment Issues ...... .................. 4 PART II THE GOVERNMENT's ECONOMIC PROGRAM .............. 4 A. Balance of Payments ....... ..................... 5 B. Public Finances ........ ........................ 7 C. Agricultural Incentives ...... .................. 10 D. Financial and Credit Policies ..... ............. 11 E. Social Issues ........ .......................... 13 F. Medium-Term Prospects and Financing Plan ....... 14 PART III THE PROPOSED LOAN ................................. 17 A. General ............ ............................ 17 B. Program to be Supported ...... .................. 17 C. Poverty Impact ........ ......................... 21 D. Loan Amount ......... ........................... 22 E. Proposed Tranche Conditionality ..... ........... 22 F. Implementation Assistance ..... ................. 26 G. Other Conditions ....... ........................ 26 H. Accounts and Audits ...... ...................... 26 I. Cofinancing Arrangements ..... .................. 27 J. Program Benefits and Risks ..... ................ 27 PART IV COUNTRY ASSISTANCE STRATEGY AND BANK OPERATIONS ... 28 PART V BANK/IMF RELATIONS ........ ........................ 29 PART VI RECOMMENDATIONS ......... .......................... 30 ANNEXES: I Economic Indicators: National Accounts, External Trade, Balance of Payments, External Capital and Debt, Public Finance and Credit, Social Indicators II Status of Bank Group Operations III Supplementary Loan Data Sheet IV Matrix of Actions V Government Letter of Development Policy Map : IBRD 19771  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED SECOND STRUCTURAL ADJUSTMENT LOAN IN AN AMOUNT EQUIVALENT TO US$90 MILLION TO THE REPUBLIC OF HONDURAS 1. I submit the following report and recommendation on a propose.. loan for the equivalent of US$90 million to the Republic of Honduras. The loan would support the second phase of a structural adjustment program aimed at achieving balanced and sustainable economic growth. The loan would have a term of 20 years, including 5 years of grace, with interest at the Bank's standard variable interest rate. Cofinancing from other multilateral and bilateral agencies has been arranged in an amount equivalent to US$60 million. 2. On September 15, 1988, the Executive Directors approved a US$50 million SAL (Loan 2990-HO) to Honduras in support of the Government's medium-term adjustment program. Initial implementation of actions agreed under the SAL--in liberalizing the exchange system, freezing public sector expenditures, and implementing a three-month monetary program--allowed the disbursement of the SAL's first tranche during the last quarter of CY88. But the unwillingness of the Government to reduce public expenditures and its inability to put through Congress a package of fiscal measures to increase revenues, resulted in a projected public sector deficit far greater than the one agreed with the Bank under the SAL program (7.3Z of GDP), and made it impossible to finalize negotiations with the IMF on a Stand-by arrangement. As a consequence, progress under the SAL aborted, and the second tranche of the SAL was not disbursed as programmed. To finance the large public sector deficits, the Government resorted to accumulation of arrears in servicing its external debt, including that owed to the Bank, during 1988-1989. Bank disbursements were suspended in December 1988, and the country's portfolio was placed in non-accrual status as of April 1, 1989. The IMF declared the country ineligible on November 30, 1989. The IDB placed the country in non-accrual status in December 1989. 3. On January 20, 1990, a new administration was inaugurated. Since taking office, the Government of President Callejas has stressed its belief in the importance of renewing the adjustment process for the country's political and social stability. On March 2, 1990, the Government initiated the implementation of strong stabilization/adjustment measures, and requested IBRDIIMF/IDB support. On June 28, 1990, Honduras cleared all outstanding arrears with its multilateral creditors. A Paris Club Meeting to reschedule bilateral official credit has been scheduled for September 1990. Basic understandings between the IMF and Honduras' authorities were reached, and a Stand-by arrangement was approved by the IMF Board on July 27, 1990. Based upon the actions mentioned above, on July 3, 1990, the Executive Directors approved disbursement of the first SAL's second tranche. The program to be supported under a second SAL was appraised by a World Bank/IDB mission that visited the country in May 1990. The Government's economic program and the specific policy actions supported by the second SAL are summarized in Annex IV. Country data sheets are attached as Annex I.  PART I - THE ECONOMY A. Background 4. Honduras' economic performance in 1989 reflected the fundamental structural weaknesses in the economy that made long-term growth unsustainable unless a major economic reform program was implemented. Real GDP growth fell from 4.7? in 1988, to about 2? in 1989. Gross domestic investment declined to less than 132 of GDP, and national savings dropped to 5.8Z of GDP. The overall public sector deficit remained high at 9.2Z of GDP despite sharp declines in public investment, and public sector savings were negative(-2X of GDP). The current account deficit of the balance of payments reached 7.2Z of GDP, and the Government's use of arrears in servicing the external debt to maintain an overvalued exchange rate continued deteriorating the competitiveness of Honduras' exports. Net external financing, including grants was not sufficient to cover the fiscal deficit, and the Government recurred to domestic financing in an amount equivalent to 4.5Z of GDP and an accumulation of external arrears amounting to 4.7? of GDP. The rate of domestic inflation as measured by the WPI increased to about 20? (10? in 1988), and Honduras' arrears on its external debt reached US$640 million. By the end of 1989, Honduras had entered into a stagflation process and the black market exchange rate had reached over L4/US$l (L2/US$l official). 5. On March 2, 1990, the Government of President Callejas announced an economic program to address the economy's major problems. A new exchange rate regime that brought the average official exchange rate to L4/US$l was implemented. Foreign exchange transactions are conducted in a free interbanking exchange market except for Central Government debt service and debt conversion operations which will remain at the official exchange rate of L2/US$l. In addition, the Government sent to Congress a revenue package that by introducing changes in the rate of the sales and other taxes, by eliminating exemptions in the trade regime, and by imposing temporary taxes on exports, was expected to increase Central Government revenues from 16? of GDP in 1989 to 21? of GDP in 1990. Finally, in April 1990, the Honduran Congress approved a budget submitted by the Government which limits current expenditures to about 21? oi GDP, turning around the consolidated public sector savings to about 0.5? of GDP (-2Z in 1989). Despite the effect of the devaluation on the service of the public debt (an increase of about 2? of GDP), the overall public sector deficit will be reduced to 6.9Z of GDP, permitting its financing with only slight recourse to domestic credit (0.5? of GDP). 6. The Government remains committed to the stabilization and adjustment program. Preliminary statistics for the first quarter of CY90 show public sector current expenditures below the targets defined in the public sector budget agreed with the IMF and Bank, and approved in April 1990 by the Honduran Congress. Additional measures which should further improve the balance of payments and public sector deficit prospects for 1990, were implemented on May 24, 1990, with the Central Bank announcing an adjustment on the exchange rate from L4/US$l to L4.20/US$l, closing the gap between the official interbanking and parallel exchange rate systems to less than 5X, and improving incentives for export growth. Also, an increase  - 3 - in the ceiling for the active interest rate from 172 to 192 was announced and, with exception of credit lines for basic grains, interest rates for all Central Bank-funded credit lines were increased to 19Z. Besides improving the balance of payments and public sector deficit prospects, these actions should improve the credit allocation in the economy, as well as savings prospects for 1990. If maintained during the rest of the year, the flexible mahagement of the exchange rate and interest rate will strongly help the Government in meeting the fiscal and balance of payments targets. B. Recent DeveloDments and Prospects 7. As the initial impact of the March measures filtered down, employment ar.d growth levels deteriorated. Agricultural production is expected to increase only slightly this year. Manufacturing, which is just beginning to absorb the impact of the March adjustments, is slowing down its production levels. A forecast of zero GDP real growth may be the upper limit for the year. Inflation also picked up. The CPI increased at an annualized rate of 35Z in the first four months of the year. As the full impact of the measures occurs, a slow-down is expected in the inflation rate for the second half of the year. Nevertheless, the average yearly inflation rate may well be over 25? before stabilizing around international levels by 1991; quite above Honduras' historical levels. 8. Despite the Government's austerity, however, the fiscal situation has not improved as expected. Revenues in the first quarter of CY90 from the temporary export taxes and new import tariff structure have fallen below expectations as revenues from trade-related taxes had a weak response. While import and export levels appear to be on target, trade- related tax revenues have failed to fully materialize, because of administrative deficiencies in the collection process. To revert the first quarter trend in revenues, the Government is proposing to Congress tariff increases for the major public sector utilities which could yield an estimated increase of about L45 million during the remainder of the year, permitting fulfillment of the deficit and savings targets for the consolidated public sector established in the Government's economic program, without recurring to further cuts in current or investment expenditures. 9. The stabilization/adjustment measures have improved the country's long-term balance of payments and growth prospects. If the Government continues implementing the program started in March, non-traditional exports such as shrimp farming, melons, vegetables, and garments could strongly expand. Along with increases in banana production these reforms could enhance the economy's export prospects rapidly. In addition, the trade and exchange rate management reforms may also increase production of basic grains, helping in reducing the balance-of-payments deficit and in increasing the rates of economic growth and employment creation. The recession should bottom up by late 1990 and medium-term prospects for sustainable growth should strongly improve.  -4- C. Maior Adiustment Issues 10. As mentioned, looking to the medium to long-term, Honduras' development prospects are strong. The country has just begun to exploit the potential which its rich agricultural resources offers, in particular in the production. of tropical fruits, shrimp farming, and vegetables. In addition, potential in hydrocarbons and in tourism augur well for future activities. This potential clearly offers the opportunity for diversified growth in many sectors of the economy, with excellent prospects for exports given Honduras easy access to the United States market, and its strong comparative advantage in agricultural production. 11. To take full advantage of this potential, however, Honduras needs to set its development strategy taking into account the major long-term priorities of human resource development, addressing the problems of unemployment and widespread poverty, diversifying the economic base, and ensuring that incentives exist for a private sector led economic growth process. Thus, despite the progress already made by the Government since its assumption of power, much remains to be done before Honduras' long-term growth prospects are sustainable. In particular, the required long-term adjustments to be addressed include: (i) trade reforms to further reduce the anti-export bias in the economy; (ii) public sector management reforms to increase public sector savings and to improve the efficiency of the public sector current expenditures and investment program; (iii) elimination of distortions in pricing and marketing policies affecting agricultural production; and (iv) policies to liberalize credit and interest rate policies and to strengthen the regulatory and supervisory framework in the financial sector. The key actions contemplated by the Government's program in these areas and the proposed SAL II conditionality are discussed in the following sections. PART II - THE GOVERNMENT'S ECONOMIC PROGRAM 12. The Government of President Callejas, which took office in January 1990, set out to redefine fundamentally the role of the state through a radical, but long overdue, economic reform and restructuring program. The essential aim is to reduce the complex regulatory framework and costly subsidies which pervade the economy, to encourage private sector investments through trade reforms, public sector reforms, changes in pricing and credit policies, financial sector reforms, and establishment of a long-term macroeconomic framework free of distortions. The reforms which have already been implemented and those underway reflect the Government's commitment to extend the stabilization effort to one that will fundamentally change the structure of the economy. In addition, the reforms in the management of the public sector are designed to improve the effectiveness of the Government's public enterprises and social programs, to serve both long-term adjustment goals and to cushion the temporary short-term negative social effects that inevitably accompany such far- reaching reform efforts. 13. The medium term strategy represents a fundamental change from the traditional economic policies followed in Honduras. It will eliminate  controls in the trade system and pricing policies, it will maintain a flexible management of the exchange rate, it will deregulate the financial system, and will substantially improve the public sector finances and investment processes. Upon its completion, the policies espoused under the new economic strategy will reduce the dependence of the economy on coffee and banana exports through an expansion of non-traditional exports, that will permit Honduras to achieve a sustainable current account deficit in its balance of payments consistent with real economic growth of at least 4-52 a year, and to reduce the country's unemployment levels in a sustainable manner. A brief presentation of the Government's actions and future policies is given below. A. Balance of Payments 14. Exports of coffee and bananas represented 50Z of the total exchange earnings of the country in the early 80s, and about 60? in the last couple of years. The concentration of exchange earnings in two products with unstable international prices has generated wide swings in Honduras' export earnings, aggravating the country's cyclical balance of payments crises. Excluding transfers, Honduras' current account deficit of the balance of payments remained around 10? of GDP until 1985; even after official transfers, it reached 6.1? of GDP in 1989. Thus, a critical element to attain a sustainable deficit in the current account of the balance of payments, lies in the country's capacity to expand its exports. This could only be achieved by adopting a flexible exchange rate, and by reducing the anti-export bias of the trade regime. Table 1: HONIURAS - MAIN BALACE OF PAYMENTS COCEPTS (U GDP) 1987-73 1974-79 1980 1981 1982 1985 1987 1988 1989 Resource Balance -1.9 -8.4 -4.2 -7.3 -6.4 -4.6 -2.7 -2.7 -2.8 Current Acct.Bal.(excl. off.transf) -6.2 -10.0 -13.3 -12.0 -10.1 -9.5 -7.9 -7.5 -7.2 Current Aect. (Incl.off.transf.) -4.4 -8.7 -12.4 -11.0 -7.8 -5.7 -4.9 -4.8 -8 .1 Long Term Cap. (incl.off.transf.) 2.7 8.2 10.8 8.6 4.4 7.6 8.8 7.7 7.9 E & 0 0.2 -0.3 -1.6 -0.7 1.5 2.7 1.2 0.9 -0.8 Accumulated Arrears -0.1 0.1 0.0 0.5 1.5 n.a 9.1 9.2 13.1 15. As noted in para. 5, on March 2, 1990, the Government modified the exchange rate system and sent legislation to Congress to reduce the maximum import tariff rate from 90? to 40X and to eliminate all exemptions and surcharges (with the exception of Decree Law 18-54) to foreign trade. Before these actions were taken, a fixed exchange rate system with a rate of L2fUS$1 had prevailed for over 60 years. To allow greater flexibility in the exchange rate system, trading certificates (CETRAS) had been introduced in 1988. CETRAS were issued to exporters by commercial banks in exchange for deposits of their foreign exchange earnings up to a level of 502 of the value of the overall transaction in US dollars. CETRAS were then redeemable at the official exchange rate by any holder of them, closely reflecting the parallel market exchange rate value. The modifications of March 2, 1990, eliminated the CETRA system and established a free inter- banking parallel exchange rate market for all transactions, de-facto  - 6 - liberalizing the exchange rate regime. The Government has committed itself to follow up with a flexible exchange rate system as part of the agreement reached with the IMF on a Stand-by. Fulfillment of this policy will be considered an essential element in the SAL II program. 16. On March 1, 1990, the minimum nominal import tariff was 1X, the maximum was 90Z, the average tariff was 202, and the dispersion measured by the coefficient of variation was 0.96. When surcharges were added, the maximum import tariff became 1251, the average tariff 442, and the coefficient of variation was 0.65. Weighting by domestic production, the average protection rate was 562 and the effective protection in manufacturing was estimated at 942. In 1989, the hypothetical revenue derived from import tariffs and surcharges should have been 322 of the total value of imports. Due to exemptions actual collection was significantly lower (22Z). 17. The trade reform approved by Congress on March 2, 1990, substantially changed the trade regime. The range in nominal tariffs was reduced to 2-402, only two surcharges remain (51 for customs services and 102 for imports of cars, tires and some consumer goods) and, with the exception of exemptions provided under bilateral arrangements which comprise less than 5Z of total imports, all exemptione were eliminated. In the short run the effect of the devaluation on customs valuation compensated for the tariff reductions. From a long-term perspective the new protection structure is more transparent and efficient than it was before. This improvement in transparency and efficiency was made without worsening, but rather improving fiscal collection. 18. In addition to the improvements mentioned, the Government is committed to continue the trade reform. The process of trade liberalization set in motion will be intensified. Import tariffs and surcharges will be merged into a single tariff to prevent having separate regimes for tariffs and surcharges; the trade regime will be redefined accordingly. 19. There are no formal quotas or import prohibitions in Honduras except in the case of basic grains where imports are authorized only if domestic demand exceeds domestic supply. However, all imports require prior licenses approved by the Central Bank in a discretionary manner. Until March 1990, the exchange rate differential between preferred and non- preferred imports made import licenses act as a variable tariff surcharge in non-preferred imports. The Government has indicated its unwillingness to use import licensing to define an official and non-official external trade regime. Import licenses, as well as quantitative restrictions on basic grains will be totally eliminated. As a first step, the Government has reduced the period for granting -n import license from 30 days to a maximum of 15 days in July 1990. The Government intends to continue this process by eliminating all import restrictions and by replacing Central Bank import licenses with a system of import registration by which imports are automatically authorized once they are registered for statistical purposes. 20. Prior to March 2, 1990, Honduras used three kinds of export incentives: (a) temporary admission; (b) CEFEX (Tax return certificates); and (c) free zones. Under the temporary admission regime, exporters are exempted from import tariffs and surcharges and from sales and other  domestic indirect taxes incorporated in the domestic price of imports. In addition, profits are exempted from income taxes. These benefits only accrued to exports outside the Central America region. The CEFEX was a tax rebate of between 10-152 (depending on domestic value-added), of the value of non-traditional exports in excess of the historical export level registered by the producer. The CEFEX and temporary admission system were not mutually exclusive. Free export zones are regulated by two laws; one applies to the areas francas of Puerto Cortes and La Ceiba on the Caribbean coast run by the Government, the other promotes privately managed parpues industriales. In both cases the legislation exempts 'maquiladoras" from paying trade and any other domestic taxes. 21. The CEFEX regime was abolished on March 2, 1990. Fiscal subsidies on non-traditional exports will not be reestablished. The Government understands that export subsidies inhibit real exchange rate depreciation and, given the scarcity of fiscal resources, they could not be granted to all exporters. Thus, the Government will ensure an adequate incentive system by maintaining a competitive real exchange rate. A flexible management of the nominal exchange rate, continuation of the trade liberalization process, and sound fiscal measures will be better policy alternatives that the Government will follow, rather than granting excessive fiscal incentives to exporters. 22. At the same time that the exchange rate system and trade regime were modified, the Government sent to Congress a package of fiscal measures which, although required for short-term stabilization purposes, affects export prospects. Indeed, the imposition of temporary taxes on the value of exports (9% to non-traditional and 122 to traditional products) should be eliminated as soon aa possible, and the reduction in fiscal revenues derived from these taxes will have to be substituted with alternative tax measures. 23. In sum, the Government's reform program for the trade system consists of: (i) elimination of the taxes on non-traditional exports during 1990, and on traditional exports by December 1991; (ii) elimination of the Central Bank import permits by mid-1991; (iii) adjustment of the tariff system to a maximum of 202 and a minimum of 5X over a two year period; (iv) elimination of all quantitative restrictions during 1991; and (v) the implementation of a revamped export incentive system by end-1991. B. Public Finances 24. Honduras' most pressing problem is its ongoing fiscal crisis. Low public savings and large public sector deficits have been financed with increasing levels of external debt and, for the past two years, with increased levels of money expansion. As a result of this, the country's major economic asset, its price stability, is in danger of being lost, hampering the implementation of a private sector-led growth strategy as the large public sector borrowing requirements squeeze out private sector investment. 25. Public savings (excluding transfers) fell from more than 5 of GDP in the late 1970s to -22 in 1989, as current expenditures grew faster than current revenues from 1980-89 (Table 2 ). Fixed public investment dropped  from 102 of GDP in the late 1970s, and in the early 1980s during the construction of the large E1 Caj6n hydroelectric project, to 7a of GDP in 1989. The reductions in the public sector deficit from a peak of over 12X of GDP in 1983 to 7.42 in 1988, took place at the expense of public investment. The estimated increase in the consolidated non-financial deficit to around 9.2S of GDP in 1989 augurs difficult times ahead, since it did not correspond to an increase in public sector investment. The increase in public savings needed to permit sustainable growth in the medium term will require both increased revenues and modifications in public expenditure patterns. Table 2: HONURAS - CONSOLIDATED KWD-FIWANCAL PUBLIC SECTOR (Percent of Current GOP) 1980 1984 1986 1988 1987 1988 1989 Current Revenues 22.9 258 28.3 25.8 28.5 26.0 25.7 (of which Taxes) 14.2 14.2 14.8 13.4 14.2 13.9 14.0 Current Expenditures 20.1 23.9 24.9 24.7 26.8 28.1 27.6 (o/w) Wages A salarioe 17.0 19.4 19.3 18.9 19.8 19.4 19.6 Interests 2.2 38? 4.1 5.7 8.2 8.2 6.4 (on ext. debt) 1.6 - - 2.8 1.9 8.3 4.2 Public Sector Savings 2.8 1.7 1.4 0.6 0.7 -0. -1.9 Capital Expenditures 11.9 12.8 9.0 8.7 7.3 7.3 7.3 Overall Balance -9.1 -11.2 -7.6 -8. -8.6 -7.4 -9.2 External Financing, Net 6.7 8.5 5.8 2.8 8.8 3.5 4.0 Domestic Financing, Net 8.8 0.8 0.3 1.5 2.0 2.8 4.6 Foreign Grants 0.1 1.9 1.6 i.7 1.3 1.3 0.7 Source: Banco Central de Honduras. 26. As part of its economic program for 1990, the Government has limited wage increases to a maximum of 10? during the year and has budgeted a reduction in real terms of 102 in Government purchases of goods and services. In addition, in an effort to commence with further rationalization of current expenditures, in April, 1990, the Government laid-off 3,000 public employees, many of which had been hired as temporary staff. The effort is expected to limit total Central Government expenditures in 1990 to L3.1 billion and contribute to an overall reduction in the public sector deficit to 6.9? of GDP in 1990 and turn around public se-tor savings from -2Z of GDP in 1989 to O.5Z of GDP in 1990. An increase to at least two percentage points of GDP in 1991 in public sector savings is the initial target of the Government's program. 27. Reforms in the tax system are key to strengthening the medium-term finances of the central government; thus, they have become a central element in the Government's economic reform program. The main objectives of the Government's fiscal reform are: a) administrative improvements in management of the customs system anid in the collection of the sales tax; and,  b) a tax reform modifying the structure and rates of income, property and value-added taxes with a view to eliminating any distortions and disincentives to production that exist in the current structure and shifting more of the tax burden directly related to the external sector away from it. Such an adjustment will be extremely important to permit liberalization of the trade regime to take place with a minimum of fiscal sacrifice. Steps are already being taken to strengthen customs administration through the establishment of computerized procedures and improving the quality and increasing the remuneration of the staff. An 18-month program of administrative reforms has been agreed with the Bank and a study, needed to set the basis for the tax reform required to support the long-term viability of the Government's adjustment program, will be initiated in September 1990. 28. The Government is also committed to maintaining a public investment program with an appropriate balance between the limited priority investments needed for strengthening non-traditional exports and necessary basic social infrastructure. To help the Government identify additional possibilities for efficient expenditure cuts, as well as to evaluate the existing list of possible projects for formulation of a public investment program, the Bank undertook a public sector expenditure review (PSER) in FY89. Agreement on a 1990 public investment program between the Bank and the Government has been reached. The Government has requested a new Bank mission to review the 1991/1992 public investment program. Such a request will be satisfied as part of the SAL II program. 29. The public enterprises in Honduras have added to the burden of the fiscal deficit and external public debt service. The public enterprise sector grew at an extraordinary rate in the 1960s and 1970s, reflecting the Government's effort to spearhead economic development, create employment, and promote the growth of underdeveloped areas. However, the sector has performed erratically, and its contribution to the national economy has not been commensurate with the amount of resources it has absorbed. Some public enterprises have developed an excessive and unsustainable dependence on public financing. At the same time, a rapid build-up of Government arrears to some public utilities threatens their financial viability. 30. A program for the restructuring and adjustment of the major public enterprises is under preparation at the Ministries of Finance, Economy and Planning. Basic 1990-1991 financial programs for SANAA (water and sewerage), and HONDUTEL (telecommunications) have been defined within the Government's fiscal targets. The Government is considering several actions to redress these inefficiencies, for example, permanent staff employment has been frozen and employment of temporary staff cut in 1990; financial targets to increase the revenues of public enterprises to at least 1? of GDP in 1991 and each of the next two years have been defined, and the investment program of public utilities is being redesigned, emphasizing utilization of existing capacity rather than development of new projects. The Government also contemplates, as an essential element, the refinancing of a significant fraction of the enterprises' external debt.  - 10 - 31. In addition to the attainment of financial targets as indicated before, the Government is committed to reduce the size of the public enterprise sector. As part of the agreements reached with the USAID, the Government is carrying out a rationalization program that, besides reducing the number of public enterprises, should provide valuable short-term revenues to the Central Government from the sale of some of them. The program began in 1987 and so far, eleven enterprises formerly belonging to the state investment corporation (CONADI) have been privatized, in part through a program of debt equity swaps. Through end-1990, the Government plans to sell to the private sector at least five more enterprises. In addition, the Government is evaluating the privatization of several decentralized agencies and public enterprises outside CONADI, such as the state wood monopoly (CODEHFOR) and a tourist development complex (DINOTUR). An evaluation of the estimated revenues derived from the sale of these enterprises during 1990 was made by USAID. If fully implemented, the process of privatization would yield L144 million, about 4.2? of total Central Government revenues for 1990. C. ARricultural Incentives 32. Agriculture is the most important sector of the Honduran economy, employing more than S0 of the labor force, accounting for over 20? of GDP, and generating over two thirds of export earnings. Fueled by favorable external markets, especially for bananas and coffee, agriculture production reached a peak in 1978. Non-traditional agricultural exports lagged, affected by the discrimination created by an incentive system which favored manufacturing over agriculture and by the Government's intervention in domestic markets for agricultural commodities and factors of production, which failed to prevent a fast deterioration of the agriculture/non- agriculture terms of trade. The Government's direct involvement in the marketing of basic grains through its purchasing and marketing institutions (IHMA, BANASUPRO), and of subsidized credit through its financial company (BANADESA) only compounded the inefficiencies of the overall agricultural policies. BANADESA, the Government owned agricultural development bank and the main source of institutional credit to small-scale farmers, faces significant losses and liquidity problems due to high operational costs, loss of credit discipline among its borrowers and therefore severe problems of loan recovery. Moreover, price setting for basic grains, intended to provide cheap food to consumers and remunerate farmers adequately, resulted in high fiscal losses. However, Government's agricultural services and credit, aimed at supporting production, had poor coverage and failed to protect farm income, particularly those of the lower income strata of the population. 33. The basic problem in agriculture was one of undoing the negative effects of the incentive system and the Government's intervention in the agricultural markets. Complementing the general improvement in the incentive framework derived from the adoption of a flexible exchange rate regime and the elimination of trade restrictions (paras. 15-23), the Government's program includes measures to gradually bring agricultural prices in line with international prices by eliminating price controls at the wholesale and retail levels, and by eliminating quantitative controls on imports of basic grains.  - 11 - 34. IHMA and BANASUPRO's purchasing and marketing activities will be increasingly transferred to the private sector. IHMA's profits derive only from its monopolistic power to import grains. Despite these profits, it kas accumulated a loss in its global operations of over US$15 million. After restrictions to import grains are eliminated, IHMA's losses will accumulate even faster. Since it is already suffering large losses and it is decapitalized, IHKA would need a major injection of capital to continue operating. This would imply a high fiscal cost which the Government knows it cannot afford. As part of its economic reform program, the Government has indicated to IHMA's management that a gradual reduction in Central Government transfers will take place in 1990/1991 and that unnecessary functions, such as some drying/storaging activities should be privatized. 35. Since 1980, BANASUPRO has operated with losses that in 1989 reached about 62 of total sales. Though grants from the EEC and other bilateral donors helped cover losses in the past, such donations have dropped sharply since 1987, eroding BANASUPRO's capital. BANASUPRO was created to become the main channel for distribution of basic goods to isolated areas of Honduras. It has grown to 110 distribution centers of which about half are in the two largest cities of the country: San Pedro Sula and Tegucigalpa. It has become, therefore, accessible to relatively well-off groups, resulting in subsidization of many consumers outside the target group at a high fiscal cost. The Government intends to discontinue BANASUPRO's activities in relatively well-off areas in urban centers, adjust its prices periodically to reflect market prices more closely, purchase its products in a competitive environment, and reduce its subsidies to targeted groups. 36. As part of the adjustment program, the Government has defined a restructuring plan for the next two years with specific targets to reduce BANASUPRO's non-rural stores, replace the current wholesale and retail price controls on agricultural goods and the guarantee price system for basic grains, eliminate IHMA's monopolistic power to import basic grains, and privatize some of IHMA's storage and drying operations. These reforms will substantially reduce the transfers from the Central Government to these institutions by end-1992. D. Financial and Credit Policies 37. In order for the financial sector to play a role in the development effort envisaged, it needs to increase its intermediation efficiency and strengthen its long-term viability. To increase the sector's efficiency, the Government's program contemplates measures to: (i) provide a flexible interest rate policy, and (ii) eliminate directed credit. To strengthen the financial system's long-term viability, the Government's program includes actions to: (i) strengthen the quality of the commercial banks portfolio; (ii) reach adequate provisions against bad debts ratio; (iii) reduce the concentration of credit in individuals and corporations related to the corresponding banks' shareholders; and (iv) strengthen the Superintendency of Banks. 38. Deposit rates in Honduras are unregulated, and in 1989, annual interest rates on savings deposits ranged between 4? and 10Z, while time deposits earned 8Z to 14Z. Lending rates are subject to ceilings,  - 12 - established according to the source of funds. For loans from commercial banks' own funds, the ceiling has been at 17? since February 1987; for loans from rediscount lines, these rates currently range between 5? and 16X. Interest rate policies have also been strongly influenced by management of domestic public debt. In an effort to attract financing, the Government issued tax-free bonds and made the bonds redeemable on demand at the Central Bank. When combined with the high reserve ratio requirements (15 to 35Z), and the availability of tax-free government bonds, the control of interest rates leads to financial disintenmediation and credit misallocation. First, real deposit rates are now highly negative, a fact which may lead to a reduction in financial intermediation during 1990. Second, the reserve requirements and the availability of tax-free, redeemable-on-demand government bonds limits the amount of deposits that the banks are willing to hold. On the other hand, the ceiling on lending interest rates reduces the incentives for banks to differentiate pricing of term deposits, reducing the incentives for the growth of term deposits in the economy. Third, negative real interest rates in the face of expectations of devaluation encourage capital flight. 39. The Central Bank of Honduras has been active in the credit allocation process through the use of rediscount lines. The share of Central Bank credit in the banking system's total resources increased from 19? in 1980, to 24? in 1989. Implementation of directed credit programs has led to several unfortunate results. First, it has reduced incentives for commercial banks to increase efforts in resource mobilization. Second, it has delayed the exit of many inefficient firms by subsidizing their activities. Third, it has increased the administrative costs for financial intermediation by imposing special conditions to administer the lines of credit. Finally, it has hampered the creation and growth of long-term credit and equity markets. 40. As part of the package of measures implemented by the Government since March 2, 1990, active interest rates were increased from 17? to 19?. As part of a medium-term adjustment program, interest rates are now to be determined flexibly, with the Central Bank Board meeting regularly to set ceilings consistent with the flexible exchange rate and monetary growth targets. Honduran law requires the Central Bank to set ceilings on active interest rates. Nevertheless, with a flexible exchange rate and specific monetary targets, the ceiling cannot be far from what would be market levels. 41. In addition, the Government's medium-term adjustment program contemplates measures to reduce the level of directed credit financed through the Central Bank, and a gradual reduction in the amounts of subsidized credit in the economy. 42. Honduras financial sector is limited in scope but relatively large for the size of the country. In 1989, the system included 14 commercial banks, three development banks, one industrial finance corporation and six savings and loan associations, for a total (excluding the Central Bank) of 24 financial institutions. In addition, limited information on non-bank financial intermediaries shows that there are about 2,800 informal non- financial intermediaries, of which about 400 are active. The formal banking system is monitored by the Superintendency of Banks, a semi- autonomous department of the Central Bank.  - 13 - 43. Private commercial banks are the most important segment of the financial sector. They hold 91? of the system's assets, nearly 91Z of its deposits, and more than 70? of its short-term liabilities. The commercial banks obtain 84? of their resources from private sectot deposits, and 16? from Central Bank rediscount and credit lines. About 69Z of the funds are used for lending: 46? to the private sector and 23Z to the public sector. 44. The recent stabilization measures, and the introduction of a strong adjustment program, may weaken the commercial banks' portfolios. Changes in the incentive system will affect many firms currently oriented to produce for the domestic market. The fall in domestic demand will aggravate their situation. As subsidies are phased out and interest rates raised, many firms will find it increasingly difficult to service their debt. Finally, the shift in relative prices may affect the real value of assets provided as guarantee in many loans. As a result, some banks may find their financial situation unsustainable and demand Central Bank subsidies to remain afloat. 45. Preventive solutions to these potential problems are indispensable for the country's long-term growth process. As part of its program the Government intends to strengthen the power of the Superintendency of Banks providing it with the capacity to: (i) impose remedial actions addressing non-compliance of prudential regulations regarding portfolio classification, capital adequacy, provisioning levels, and lending to related parties; and (ii) intervene in distressed financial institutions. E. Social Issues 46. The initial effects of the adjustment measures implemented by the Government may increase unemployment and poverty levels. The sharp reduction in domestic expenditures sought for 1990-1991 will transitorily reduce employment. The sharp price adjustments required for the stabilization process will fuel inflation in the initial stages of the program. Although no reliable statistics yet exist, preliminary indications show the CPI rising at an annualized rate of over 352 in the first three months of the year. Although the measures should slow down inflation towards the end of the year, the price increases will have negative consequences on real incomes of poor urban and rural consumers adversely affecting health and nutrition indicators. According to an informal study prepared by a private consulting firm, the initial loss of current jobs in the economy could range from 26,000 to 52,000, as the adjustment measures take their toll in public employment (10 to 20,000), highly protected industries (4 to 8,000), construction (7 to 14,000), and other sectors (5 to 10,000). Although the study does not take into consideration the job creation aspects of the adjustment program, it cannot be denied that in the short run unemployment will increase. 47. The Government is acutely aware of the initial negative social impact of many of the measures needed for long-term sustainable growth. It has made it a point to define public sector initiatives that will improve social services over the next two years, particularly to mitigate the consequences for the poor and vulnerable of the necessary economic adjustment measures. Given the scarcity of domestic resources, it will be  - 14 - critical to target them efficiently on the neediest groups. This is especially true of subsidy payments, which should be made explicit in Government finances, and restricted to the poorest. Honduras should try to attract the maximum possible resources from abroad to supplement domestic efforts in this sector. 48. As an initial step, in the 1990 budget approved by Congress, about LIOO million were approved to: set up an Emergency Social Fund (FHIS), which should provide emergency employment by funding small works in Honduras' municipalities, finance a targeted program of family subsidies which will provide school books and uniforms and targeted food programs for children of poor families, and temporarily subsidize fuel prices for public urban transportation which will help to limit increases in bus fares. The Bank has indicated to the authorities that it is willing to participate in the definition of a sound social program to ameliorate the impact of the adjustment effort on the poorest sectors of the population. The Authorities are aware of this, and requested Bank support in defining a comprehensive social emergency program to complement their economic adjustment program. Preparation of a Bank loan to support such a social emergency program is underway. F. Medium-term Prospects and Financing Plan 49. The full potential of the Honduran economy has been constrained during the 80s by the deterioration of the terms of trade and by the misallocation of resources created by the Government's macroeconomic policies. Although little can be done to avoid the effects of external shocks on the domestic economy, a shift in domestic policies away from protectionism and Government intervention in the economy should encourage the private sector to invest in activities where Honduras holds a strong international comparative advantage. With the appropriate exchange rate policy, trade liberalization should increase the real exchange rate, shifting resources toward the production of exportable goods where Honduras is internationally competitive such as banana, coffee, shrimp farming, vegetable production, and fruit to be supplied in the Northern winter period such as melon, watermelon, etc. Moreover, efficient import substitution would complement the effects of export expansion by reducing the country's imports of basic grains. Because of the high labor content of all these activities, Honduras' unemployment rate would gradually drop and employment would shift from subsidized jobs (in Government or supported by the Government's protectionist policies), to long-term sustainable jobs. 50. The adjustment of the exchange rate taken at the beginning of 1990 and the fiscal adjustment measures envisaged by the Government would result in a real devaluation that restores the purchasing power parity of the early 1970s. Although import volumes are initially squeezed as their domestic currency price rises, Honduras' cost competitiveness strongly rises as the Government's trade liberalization measures are implemented. Conversion of non-tariff barriers to tariffs will increase public sector revenues. Over the medium-term, however, trade liberalization reduces the revenue impact of this and changes the pattern of imports. Border pricing will eliminate distortions affecting the agricultural sector productivity. Interest rate liberalization and an ending to credit allocation policies will increase private savings and private investment. Honduras growth  _ 15 - would be sustained by more diversified export-oriented activities and a higher generation of domestic savings. 51. Bank projections (Annex I) indicate that implementation of the scabilization and adjustment measures would preserve Honduras' price stability, strengthen long-term growth prospects, and improve the balance of payments situation. Public savings would turn around from negative in 1987-89 to around 4.5Z of GDP in 1995. Despite an increase in capital expenditures, the overall public sector deficit would fall to 2.8Z of GDP by 1995, allowing a drop in the net domestic financing to the public sector from 4.5Z in 1989 to less than 12 in 1995. Led by the private sector, total investment would recover, reaching 20X of GDP in 1995. 52. Acceleration in the growth of non-traditional exports would result from the liberalization of the trade regime, and the flexible management of the market exchange rate which would provide incentives for private sector investment in export-oriented activities. Real exports would grow at about 7Z per annum after 1992, with non-traditional exports increasing at a rate of almost 9? per annum. The rate of GDP growth would slowly increase, reaching almost 41 in 1993 and after initially jumping in response to the exchange rate adjustment of 1990, the current account deficit of the balance of payments would fall to around 5? of GDP. 53. The 1990-1995 financing requirements for this scenario are shown in Table 3, along with the likely sources. The projected requirements assume that Honduras' outstanding commercial arrears are eliminated by full refinancing during 1990. Although gross fund requirements would remain large (because scheduled amortization is expected to be quite heavy--on the order of US$ 150 million until 1994, 32 of GDP in 1989 -91), the economy becomes less dependent on foreign transfers. All debt indicators would improve. Inflows from grants are projected to drop from US$175 million in 1990 to about US$80 million in 1995. A large portion, however, remains financed by bilateral sources, indicating the importance of Honduras' Consultative Group in mobilizing resources from bilateral and multilateral sources (if the Government's commitment to policy adjustments is carried out) to ensure the success of the program.  - 16 - TABLE 8: HONDURAS PROJECTED FINANCING PLAN (USS million) 1989 1990 1991 1992 1993 1994 1995 I. Gross Financing Requirements 462.9 428.4 480.8 388.8 862.9 868.2 s86.6 A. Current Account Balance 350.4 800.8 818.8 282.2 224.0 195.7 187.0 o/w MLT Interest 167.0 172.5 198.2 202.4 194.2 197.0 199.5 B. Amortization Payments 137.5 81.7 89.0 11.2 107.3 122.8 138.2 C. Buildup of Reserves -26.0 40.0 75.0 25.4 81.8 88.2 53.3 II. Sources 482.9 428.4 480.8 388.8 382.9 868.2 358.6 A. Official Grants 52.1 175.0 100.0 100.0 100.0 80.0 80.0 S. Net Direct Investment 87.4 60.0 60.0 46.0 40.0 40.0 40.0 C. Public MLT Disbursements 206.2 848.2 311.0 228.2 189.6 195.8 204.3 !. World Bank Group I.8 106.0 99.2 38.7 18.9 13.8 20.4 2. IDB 34.9 70.0 94.6 60.5 48.0 60.5 78.0 8. IMF Net Flow -0.4 19.4 21.6 15.0 0.0 -5.8 -8.3 4. Bilaterals 81.8 95.8 49.1 57.9 66.7 89.8 60.6 S. Other Public DBT 87.L 58.0 48.8 54.1 57.0 57.5 58.8 D. Private Source 1 168.2 -154.9 19.8 17.8 38.8 40.5 84.2 Memo Item: Accumulated DS Arrears 2 641.0 0.0 0.0 0.6 0.0 0.0 0.0 I/ Includes net short term, errors and omissions and arrears. 2/ Arrears to the Bank, Fund and IDB have been cleared; the rest are assumed to be rescheduled.  - 17 - III. THE PROPOSED LOAN A. General 54. The proposed Structural Adjustment Loan would support the Government's 1990-91 action program of economic adjustment and recovery. The loan was prepared with the Government during February 1990. Appraisal took place in May/June 1990. Negotiations were held in Washington D.C. between July 19 and 20, 1990 and completed on August 9, 1990. The Honduran delegation was headed by Mr. Ricardo Maduro, President of the Central Bank. The following paragraphs describe the components of the SAL program, which are summarized in Annex IV. Annex V contains the Government's Letter of Development Policy addressed to the Bank. The Supplementary Data Sheet is provided as Annex III. 55. The loan of US$90 million equivalent would be disbursed in three tranches over a period of about 18 months. The SAL program addresses the most critical medium-term structural issues affecting the domestic competitive environment, the management of the public sector, issues of the agricultural and the financial sector, and the overall macro framework for the adjustment program. The Government's program is also being supported by the IMF and IDB through a Stand-by and the cofinancing of the agricultural portion of the SAL respectively. The IMF program is focused primarily on aggregate macro-economic performance issues and targets, notably the exchange rate regime, levels of fiscal deficits, and overall monetary policies. Close cooperation between the IMF, IDB and the Bank has been essential to ensure consistency and avoid overlap. Satisfactory progress on the overall economic program, with specific reference to the macro-economic targets established for 1990-91 (maintenance of exchange rate flexibility, flexibly determined interest rate ceilings, fiscal deficit levels) will be monitored closely as conditions for tranche releases of the SAL. B. Program to be Supported Trade Reform Actions 56. Exports of new products remained small through 1987. Recently, however, development of these exports has accelerated, reaching an estimated US$210 million in 1989 (21.7? of total exports). Shrimp farming, garments and fruits and vegetables dominate this item in the balance of payments. In combination with an expected reorientation of basic manufacturing goods, these items will provide the bulk of new exports. This assumes the maintenance of a satisfactory package of incentives, including a realistic exchange rate and a significant reduction of effective protection in import competing activities. 57. The initial reform of Honduras' trade and foreign exchange regimes, described in paras 15-23, improved its trade prospects. The real  - 18 - exchange rate has depreciated by over 25Z. As part of its agreement with the IMF, the Government has confirmed its decision to follow macro-economic and exchange rate policies aimed at maintaining, and improving the competitiveness of its exports. As part of the reforms supported under the second SAL, the dispersion and level of import tariffs will be further reduced. With the adjustment of March 2. 1990, Honduras' trade regime has a tariff range of 40-2% and no exemptions, or country surcharges. A further adjustment to 35-4Z will be defined as a condition for second tranche disbursement. A final adjustment to 20-5? will be defined as a condition for third tranche disbursement. 58. Elimination of all Central Bank import permits will be another major element of the SAL II program. Elimination of all Central Bank import licenses will be a condition of the SAL's second tranche. In addition, all quantitative restrictions for imports of agricultural products will be eliminated before disbursement of the SAL's second tranche. In addition, the temporary taxes on exports imposed in March 1990, will be eliminated during the program. As a condition of second tranche disbursement, temporary export taxes on non-traditional products (9Z) will be eliminated, and all temporary export taxes on traditional products (122) will be eliminated during 1991. As a condition of third tranche disbursement, satisfactory progress in the elimination of temporary taxes in traditional exports will be required. 59. Fiscal export subsidies to nontraditional exports are a poor substitute for real exchange rate depreciation, one that complicates the incentive system and discriminates against some exporters who, given the scarcity of fiscal resources, do not have access to those incentives. The incentive framework for promoting exports to markets outside the region needs to be strengthened and new legislation provided in accordance with internationally accepted procedures. The Government has already eliminated the CEFEX system and committed itself to a flexible management of the exchange rate regime; it now needs to introduce a new Export Incentive Law. Under the new law, only import taxes on inputs and capital goods should be exonerated, eliminating the current exempticns from domestic indirect and direct taxes. Agreement on recommendations of a study for a new export incentive system and an action program will be a condition for the second tranche disbursement. implementation of the new export incentive system will be a condition for third tranche disbursement. Public Sector Actions 60. Limitations on the growth of current expenditures, care in defining and implementing an efficient public investment program and strengthening of the cost effectiveness of public enterprises are major objectives of the Government's medium-term adjustment program. As an indication of its commitment to implement them, the Government has defined annual public savings targets of 0.5Z of GDP for 1990, and of 1.7? of GDP for 1991. Fulfillment of the 1990 target and a 1991 Central Government Budget with targets to increase the non-financial consolidated public sector savings to 1.72 of GDP in 1991 are conditions for the disbursement of the SAL's second tranche. Satisfactory compliance with year-to-date consolidated non-financial public sector savings and expenditure targets, as established in the 1991 public sector budget, will be conditions for the SAL's third tranche release.  - 19 - 61. Administrative improvements on management of the customs system and the collection of taxes could quickly provide increases in public sector revenues. The Bank has reached agreement with the Government on a 1990/1991 action program to improve the administration of the tax system's collection. Satisfactory progress in the implementation of this action program will be the conditions for the disbursements of the SAL's second and third tranches. 62. To ensure the long-term sustainability of the economic program, a tax reform will be needed to substitute revenues from trade taxes to income and consumption taxes. Disbursement of the loan's second tranche would depend on a satisfactory agreement between the Bank and the Government on recommendations of a study on tax reform and the action plan to implement them. Submission of legislation for such a tax reform is a condition for the disbursement of the loan's third tranche. 63. A projected 1990 investment program was agreed during appraisal of the loan. The program contains major improvements over the one previously reviewed by the Bank in the 1988 PSER mission which visited Honduras in October 1988. Taking into account the magnitude of projected public savings and capital inflows, the sustainable size of the program agreed was estimated to be about 7.5 percent of GDP annually. Compliance with the agreed 1990 financial targets for the public investment program, and agreement on a 1991 public sector investment program are conditions for the disbursement of the loan's second tranche. Disbursement of the SAL's third tranche would be contingent on verification that year-to-date capital expenditures fell within the targets agreed in the 1991 investment program agreed with the Bank and agreement on a 1992 pvblic sector investment program. 64. During appraisal of the loan, the Bank's assessment was that, in addition to the Government's privatization program, reform of the public enterprise system requires strengthening of the internal organization and management of the enterprises themselves. Administrative reforms for the main public enterprises to be carried out by the Government are being supported by USAID, IDB, UNDP, and the Bank. A financial program defining targets for tariff adjustments, reductions in current expenditures, and external debt service was defined during appraisal for the two largest decentralized institutions (HONDUTEL, SANAA). Achievement of savings of 0.3Z of GDP in 1990 for SANAA and HONDUTEL will be a condition for the disbursement of the SAL's second tranche. Achievement of projected savings of 1Z GDP in 1991 will be a condition for the disbursement of the SAL's third tranche. Agricultural Policies 65. The Government intends to reverse its pre-1990 policies for agriculture. The guarantee price system and quantitative restrictions on basic grains currently administered by IHMA will be eliminated and in the case of corn replaced by a flexible tariff system. Public sector interference in marketing of other agricultural goods will be phased out. To that end, IHMA and BANASUPRO's purchasing and marketing activities are to be increasingly transferred to the private sector, with prices  - 20 - determined competitively. The Government. however, still feels a commitment to protect certain groups (small farmers, poor urban dwellers) that benefitted from the old strategy. Under the actions to ensure protection to the neediest groups of the Honduran society, the Government is committed to implement a targeted assistance program. The action program to implement such assistance will be agreed upon as part of the Bank's social sector loan under preparation. 66. During appraisal, an action program was agreed to change the current guarantee price system and marketing practices for basic grains. The program includes: (i) the elimination of IHMA's monopolistic trade restrictions; (ii) replacement of the guarantee price system for corn with a variable tariff system; (iii) a rationalization program for IHMA's storage and drying facilities; (iv) elimination of price controls on agricultural products; and, (v) a rationalization program for BANASUPRO's purchasing and marketing activities. 67. Second tranche disbursement will be contingent on: (i) elimination of all import restrictions for agricultural products; (ii) the replacement, starting with the crop year 1991/1992 of the current guarantee price system with a variable tariff system for corn; (iii) elimination of all other agricultural guarantee prices; (iv) elimination of all agricultural price controls; (v) satisfactory progress in the rationalization program for BANASUPRO and IHMA; and (vi) reduction of Central Government and/or Central Bank transfers and/or loans in support of BANASUPRO's operations to a maximum of L4 million for 1991. Disbursement of the third tranche will be contingent on: (i) satisfactory compliance with the implementation of the agreed guarantee price system for corn (ii) satisfactory progress in the BANASUPRO and IHMA rationalization programs; and (iii) reduction of Central Government and/or Central Bank operational transfers and/or loans to BANASUPRO to a maximum of L2 million for 1991. Financial Sector Actions 68. In May, 1990, the Honduran authorities initiated a financial program aimed at providing more flexible interest rates and eliminating credit allocation by increasing the maximum active interest rate from 17Z to 19Z, and reducing the credit subsidies given by the Central Bank. The financial system, however, still preserves many special programs for the allocation of credit. These programs establish credit to be allocated at subsidized rates from domestic and foreign funds. The distortions created in the Honduran financial intermediation process by Government intervention in interest rate setting and credit allocation should be completely eliminated. 69. The action program agreed under the loan includes measures to: (i) eliminate the difference between each rediscount interest rate presently applied to Central Bank rediscounts, as well as on credit lines administered by the Central Bank; (ii) quarterly review of interest rate ceilings beginning September 30, 1990 which, in so far as possible, would be adjusted in a manner satisfactory to the Bank to allow sufficient scope for market determination of lending interest rates; and (iii) administrative unification of all rediscount and credit lines (agricultural, industrial, export, and housing finance) under four Central  - 21 - Bank units; and (iv) limit subsidized credit funded with external resources to the amount existing at December 31, 1990. 70. To address the need to strengthen the banking system's financial health, the following actions will be supported by the Loan: (i) improvement of the portfolio classification system; (ii) pre- determination of provisions for the last three categories of loan portfolio under the new five category system (iii) impose a minimum capital to asset ratio for all banks; (iv) compliance with the established rules on interest accruals, loan concentration and loans to related parties; and (v) agreement on a program for the reorganization of the agricultural financial system, including a reduction in Central Government transfers to BANADESA in 1990 by lOZ from the level in 1989. 71. Disbursement of the SAL's second and third tranches will be contingent on the satisfactory progress in the implementation of the action programs defined above. Social Sectors 72. To address the Government's concern with the impact of the program in the social sectors area, the following actions will be supported by the loan: (i) provision of resources in the Government's budget for 1991 for the Ministries of Health and Education, and for programs to provide food and employment to the neediest sectors of the population equivalent to the levels in 1990; (ii) agreement on parameters for measuring progress in the implementation of the food and employment programs; and (iii) development of a social sector restructuring program to improve the efficiency and equity of social services. These actions would be a condition of disbursement of the second tranche. Satisfactory progress in implementing the food and employment programs along with submission to the Bank of a financing plan for the social sector restructuring program would be conditions of disbursement of the third tranche. C. Poverty Impact 73. As mentioned, the initial effects of the adjustment measures supported by the loan may increase poverty. However, when complemented by the PHIS and the Bank supported work in the provision of targeted social services, the adjustment program should help reduce Honduras poverty over the long-term. 74. First, the program would make a special effort to better target public social expenditures to the truly needy. Second, the opening of the economy should help improve productivity and therefore increase real wages and employment; the encouragement of non-traditionel exports should also help reduce poverty by increasing output of labor intensive commodities; and the proposed transfer of imports to the parallel exchange rate market will have a similar effect through efficient import substitution. Third, and maybe most important, poverty will increase more if the proposed program is not implemented. Under present circumstances, the financial disequilibrium is such that an inflation cum devaluation cycle will develop and poverty will grow more and stay higher without actions along the lines of those suggested.  - 22 - D. Loan Amount 75. The proposed loan of US$90 million equivalent would meet about 152 of Honduras' gross external capital requirements for 1990/1991. The loan will be disbursed in three tranches of US$45 million, US$20 million, and US$25 million respectively. The first tranche would be available for disbursement at loan effectiveness, and the other two would be made available following a satisfactory review of progress in implementing the program with the Bank. Adequate external financial support will be critical to the success of the adjustment program as explained before (para. 53) and the Bank will support the Government's requests for concessional aid through the Consultative Group for Honduras. E. Proposed Tranche Conditionality 76. The first tranche of US$45.0 million would be disbursed upon effectiveness. There are no special conditions for effectiveness other than those specified under the General Conditions applicable to the Bank's Loan Agreement. Before presentation of the loan to the Executive Directors, the Government has taken the following actions: (a) modified the exchange rate regime and adjusted the market exchange rate from L2/US$1 to L4.2/US$l; (b) obtained Congressional approval for a phased adjustment of the tariff regime that will reduce the range and dispersion of import tariffs from 120Z-02, to 20Z-5Z over a two-year period, the initial adjustment has eliminated all tariff exemptions and reduced the range to 40Z-22; (c) eliminated CEFEX incentives; (d) defined and obtained Congressional approval for a 1990 Central Government budget which will contribute to reach overall targets for public sector savings of 0.52 of GDP and for overall deficit of the public sector of 6.9Z of GDP in 1990; (e) reduced the public sector labor force by eliminating 3,000 redundant positions; (f) agreed on an 18-month tax administration reform program and a public sector investment program with the Bank to improve the efficiency of tax collection and public sector investment processes; (g) defined and approved 199011991 financial programs for public utilities SANM (water) and HONDUTEL (telecommunications), to increase the efficiency and savings of these utilities to 0.3Z of GDP in 1990 and 1% of GDP in 1991, and submitted to Congress a new budget including actions to meet the financial targets for HONDUTEL and SANAA. (h) allocated L98 million in the public sector budget for 1990 to support emergency food and employment programs;  - 23 - (1) increased lending interest rates from 172 to 192 and Central Bank-funded rediscount rates from a range between 6-12Z, to 152, with the exception of rediscount rates for credit granted to producers of basic grains. (j) agreed on an action program to replace guarantee prices system for corn with a flexible tariff system and agreed to eliminate all price controls and guaranteed prices on other agricultural products; and (k) prepared the 1990/1991 rationalization program for BANASUPRO and IHMA. 77. Release of the second tranche (expected to take place in early 1991) would be conditional on: (a) a supportive macroeconomic framework; (b) reduction of import tariffs to a range of 35-42; (c) eliminatiGn of Central Bank import licenses to any imported items and all restrictions to imports of agricultural products; (d) elimination of temporary export taxes on traditional and non- traditional products in accordance with the Decree Law 18-90 already approved by Congress; (e) agreement on recommendations and an action plan to implement a new export incentive system; (f) verification of public sector savings target of 0.5? of GDP in 1990, and a public sector investment program for 1991, satisfactory to the Bank, has been issued by the Borrower. (g) agreement on recommendations and action plan to implement a tax reform program; (h) submission to Congress for its approval of a 1991 budget with an increase in public sector savings to at least 1.7X of GDP; (i) verification of compliance with the expenditures targets of the agreed public investment program for 1990; (j) satisfactory progress in the implementation of the tax administration reform program; (k) achievement of 0.3? of GDP in 1990 of savings of HONDUTEL and SANAA; (1) replacement, starting with the crop year 1991/1992, of guarantee price system for corn with a flexible tariff system, and elimination of all other agricultural guarantee prices as well as other price controls for agricultural products;  - 24 - (m) reduction of Central Government and/or Central Bank operational transfers and/or loans in support of BANASUPRO's operations to a maximum of L4.0 million for 1991; and satisfactory progress of BANASUPRO's and IHMA's rationalization programs for 1990; (n) provision in the 1991 Central Government Budget for (i) a budget amount for the Ministries of Health and Education at the same proportion as the 1990 budget; and (ii) an amount at least equal in 1989 Lempiras to the amount provided in the 1990 budget for expenditures in targeted food and employment assistance programs; agreement on parameters to measure progress in the implementation of these programs; and submission to the Bank of a social sector restructuring program. (o) review and revision as necessary of the ceilings for interest rates in lending operations in Honduras on September 30, 1990 and December 31, 1990; (p) adjustment of Central Bank-funded rediscount interest rates for agriculture to the level of any other Central Bank-funded rediscount rates, with the exception of credit lines to farmers with total land holdings below 10 hectares; (q) agreement on a program to eliminate Central Bank-funded directed credit lines; (r) agreement to limit subsidized credit, funded with external resources, to the amount existing at December 31, 1990; (s) reorganize the administration of rediscount credit lines in four units: UPCA for agricultural credit (except BANADESA's); FOVI for housing credits; FONDEI for industrial credit; and the Departamento de Credito y Valores of the Central Bank for other credits. (t) reach, as an average for the commercial bank system, a ratio of capital and reserves, to total assets and off-balance sheet items (deducting holdings of Government bonds, cash, and deposits in other banks), of 5.OZ by December 31, 1990; and, (u) agreement on a program for the reorganization of the agricultural financial system. In particular, the program should reduce to 102 the Central Government transfers to BANADESA in 1991 from the levels provided in 1990. 78. Release of the third tranche (expected to take place by November 1991) would be contingent upon: (a) a supportive macroeconomic framework; (b) reduction of import tariffs to a range of 20-5Z;  - 25 - (c) elimination of all import surcharges for agricultural products. (d) satisfactory progress in the action program to eliminate temporary export taxes on traditional and non-traditional products in accordance with Decree Law 18-90; (e) successful implementation of the new export incentive system; (f) presentation to Congress of an agreed tax reform program; (g) verification of compliance of year-to-date expenditure targets for the agreed 1991 public sector budget and investment program; (h) achievement of a projected 12 of GDP in 1991 of savings of SANAA and HONDUTEL; Ci) satisfactory progress in the implementation of the tax administration reform program; Cj) satisfactory compliance with the implementation of the agreed flexible tariff system for corn; Ck) satisfactory progress in the implementation of targeted social assistance programs; C1) reduction of Central Government andlor Central Bank operational transfers and/or loans to BANASUPRO to a maximum of L2.0 million for 1992, and satisfactory progress of BANASUPRO and IEBA's rationalization target for 1990; 'm) satisfactory quarterly review of lending interest rate ceilings starting on March 31, 1991; (n) adjustment of Central Bank-funded rediscount rates for credit to farmers with total land holdings below 10 hectares to the level of other Central Bank-funded rediscount credit lines; (o) satisfactory progress in the year-to-date targets established in the program to eliminate Central Bank-funded directed credit lines; (p) verification of compliance with the limit established for subsidized credit funded with external resources to the level existing at December 31, 1990; (q) reaching, as an average for the commercial banking system, of a ratio of capital and reserves to total assets and off- balance sheet items, of 5.5Z; and, (r) verification of compliance of loan reclassification and loan provisioning for the banking system in accordance with the criteria agreed.  - 26 - F. Imolementation Assistance 79 The United Nations Development Program (UNDP) has been a major source of financing for strengthening the Governments program implementation capacity. During appraisal the Bank met with ONDP officials at the request of the Government to discuss the technical assistance requirements to support the Government's economic reform efforts. As a result, UNDP has defined with the Government a program of technical assistance focussed on institutional strengthening. support for the public investment planning, and project evaluation. The Bank will also be providing direct technical support in the preparation of the export incentive system and tax reform studies. G. Other Conditions 80. Honduras has undertaken an imaginative and far reaching economic adjustment program. However, the beneficial effects on the country's balance of payments and GDP are likely to take some time to materialize. Meanwhile, the 1990 import bill, exacerbated by the recent oil price increase, will remain significant. Furthermore. Honduras' debt service burden, which is heavy, is compounded by the exceptional efforts made to clear its arrears to multilateral creditors. The absence of adequate financing would place the economic adjustment program at risk, and therefore, retroactive financing up to an amount of 50Z of the Bank loan, well above the normal practice for adjustment operations, is being recommended for the expenditures incurred after May 15, 1990. Disbursements of each tranche would be made against import documentation received from the Central Bank, except for items on the standard negative list. The co-financing funds obtained would also be disbursed against general imports, along with the tranches of the proposed Bank loan. 81. Procurement will be carried out in accordance with the Bank's Procurement Guidelines. Contracts of the public and private sectors estimated to cost more than US$5 million equivalent will be procured through simplified ICB procedures. Contracts of the private sector, valued at less than US$5 million equivalent would be procured following established commercial practices, wbich should include, whenever possible, requiring quotations from eligible bidders from at least two foreign countries. Contracts of the public sector. valued at less than US$5 million equivalent, would be procured following Government procurement practices acceptable to the Bank. 82. The Central Bank will be responsible for the coordination and collection of relevant documentation and for preparing and submitting withdrawal applications under the loan. Disbursements against contracts valued at less than US$5 million equivalent would be made on the basis of a Statement of Expenditures to be submitted by the Central Bank, with detailed documentation being retained by the Central Bank for review by the Bank as required. Full documentation would be required for approval of individual contracts exceeding US$5 million equivalent. Applications for withdrawals to the extent practicable will be consolidated and submitted in amounts not less than US$5 million equivalent. H. Accounts and Audits 83 A separate account would be kept by the Central Bank for all expenditures made under the loan. The account and statements of expenditure would be audited each year by independent auditors acceptable to the Bank in accordance with the Bank's Auditing Guidelines, and the  - 27 _ -audit reports would be submitted to the Bank no later than four months after the close of the fiscal year. I. Cofinancina Arrantements 84. During the preparation of the loan, the Bank discussed with the Honduran authorities the possibility of obtaining cofinancing for the second SAL. Mr. Maduro, Honduras' President of the Central Bank, and Mr. Villanueva, Minister of Finance, agreed to the Bank's exploring such cofinancing possibilities with donors. The IDB has agreed to cofinance the agricultural policy reforms of the SAL with a US$50 million loan. The Government of Germany has expressed its intention to cofinance the SAL II program with DM15 million. Discussions with other governments are ongoing. J. Proaram Benefits and Risks 85. Honduras' creditworthiness indicators would improve because of the program's implementation. Bank projections indicate that the debt service ratio would decrease from 28.52 in 1988 to 172 by 1994. The economy vould also undergo a substantial transformation and diversification that would reduce the long-term risk of a new economic slump. Its capacity to respond to cutbacks in aid would be strengthened and Honduras' standard of living could improve at an accelerated pace in the late 1990s. 86. Despite the improvements mentioned before, Bank projections indicate that Honduras' creditworthiness would remain extremely vulnerable to changes in coffee and banana prices, and to increases in international interest rates. Moreover, a small hardening (of about 2-3 percentage points) in international coammercial credit terms quickly erases the marginal improvement in Honduras' creditworthiness that is assumed to be derived from the implementation of the adjustment program along the lines defined in the preceding paragraphs. Thus, prospects for sustainable improvements in Honduras' creditworthiness heavily depend on obtaining significant amounts of the required financing on concessional terms. 87. There are three main risks associated with the proposed operation. First, Government implementation of the adjustment program may fall short of what is necessary to lay the basis for sustainable growth. Second, the level or timeliness of external capital flows may fall short of what is required to restore finAncial balance. Finally, the Government needs technical assistance to define and implement many actions at the micro level and failure to obtain it in time could cause delays in the implementation of the program's measures which could hamper its successful implementation. The sequencing of adjustment measures, each programmed to strengthen prior policy reforms at both the macroeconomic and related sectoral levels is designed to address the first risk. To minimize the second risk, we propose to seek cofinancing as appropriate for each operation, and also plan to chair a consultative group of creditors and donors to assist the Government in mobilizing additional external financing, in support of the medium-team adjustment effort and public investment program. Financing of the program, however, may be more difficult than expected and will challenge the capacity of the multilateral and bilateral institutions willing to provide support. Technical  - 28 - assistance is being pursued with support of UNDP to address the last risk. The Bank, however, will have to play a major role in the supervision of this operation and later loans to minimize this implementation risk. Thus, it will be required to follow a tight supervision timetable in order to improve the chances of success of the program. PART 1V - COUNTRY ASSISTANCE STRATEGY AND BANK OPERATIONS 88. Since 1955, Honduras has received 35 Bank loans totalling US$610.9 million and 12 IDA credits totalling US$85.0 million, -both net of cancellations. Of the Bank Group's total lending to Honduras, 35Z has been for the energy sector, 22Z for transportation infrastructure, 192 for agricultural credit and regional development, 13Z for industrial credit and tourism, 7.2Z for structural adjustment, 32 for water supply; 22 for education; and 1Z for municipal development. Bank group lending initially concentrated on developing basic infrastructure in Transport and Power where inadequate facilities hampered the country's development. In the last decade, it has diversified to support the expansion of productive capacity in agriculture, industry and tourism and address major needs in education and water supply. 89. The Bank's strategy for Honduras emphasizes medium-term structural adjustment. In view of the urgent need to control the current financial crisis, however, the Bank's strategy is also focussed on support for the Government's program of macroeconomic adjustment in the short term, an effort which has been fully coordinated with the fl and IDB. This would permit the Bank to lay the basis for a comprehensive medium-term adjustment program. 90. The main objectives of the Bank's lending assistance strategy for Honduras over the medium term are to: (i) promote development of the country's growth and export prospects and strengthen its creditworthiness by supporting the suggested program of structural adjustment through a series of SALs and SECAIs; (ii) assist the Government in mobilizing and diversifying sources of the external finance needed for Honduras' public sector investment program especially on concessional terms through coordination of the Consultative Group for omaduras (iii) support a limited number of investment projects in priority sectors, especially in programs targeted to alleviate the ilmpact of adjustment on the poorest sectors of the economy; and (iv) resume regular investment financing around the second year of the program of adjustment as country creditworthiness is strengthened. 91. Bank support for the macroeconomic adjustment effort includes: the reactivation of SAL I (on July 3, 1990, the Executive Directors approved the release of the second tranche); this proposed second SAL; and sector adjustment loans in Energy and Agriculture currently scheduled for Board presentation in late CY90 and in CY91, respectively. 92. To complement the ongoing efforts under the adjustment program to streamline decentralized enterprises, the Energy SECAL will support improvements in the power company's finances and management and a reduction in its dependence on fiscal resources. It would also support a new energy sector policy and a program for petroleum exploration and supply management. Given the dominance of the agriculture sector in output and  - 29 - exports, the Bank will be preparing an agriculture SECAL which would continue with major reforms initiated under SAL II and would support policy reforms to take advantage of the country's comparative advantage in agriculture and strengthen agriculture growth in both traditional and non- traditional exports. The IDB has expressed interest in cofinancing the above operations and other international financial support is being sought. 93. Our analysis of the infrastructure required for the success of the export-oriented strategy indicates the need for strengthening the role of country'6 transport system, as well as for the development of transport policies to increase the effective use of the road and port facilities of the country. The Bank is considering an Infrastructure Rehabilitation Project which would serve to address these issues. 94. In support of the Government's program to alleviate the impact of the adjustment on the very poor, we are proposing a social sector project (FY91) which will support and expand on the Government's Social Investment Fund. The Bank is also carrying out an indepth analysis of issues in the social sectors and a second social sector project is being considered to improve and enhance the delivery of social services through the strengthening of the Ministries of Health and Education. The Bank-led Consultative Group will be providing a forum for mobilizing additional resources in support of Government efforts in the social sectors. 95. Depending on the progress made in implementing the key elements of the program, follow-up operations may be proposed during the five-year programming period, most likely in FY92-FY93. We also plan to support small, technical-assistance focussed projects to help strengthen specific areas of public sector management and to improve access of the poor to basic services, one of the Government's key objectives. 96. The above strategy is conditional on the continued willingness and ability of the Government to carry out the adjustment effort; it will require constant close monitoring and may require interim management reviews to adjust the strategy as events develop. Proceeding with each successive step would be contingent on satisfactory implementation of agreed actions. Each sector adjustment loan would be coordinated with, and tied to, the macroeconomic adjustment program, as well as to relevant elements of other sector loans, where appropriate. PART V - BANKIMF RELATIONS 97. The Bank and the IMF have been working in close collaboration in Honduras. The Fund and Bank programs are mutually consistent and reinforcing, with the Fund program focussed on macro stabilization concerns and the Bank program focussed on longer-term adjustment measures within a consistent macro framework. Continued close contact will be maintained during supervision of the program.  - 30 - PART VI - RECON44ENDATION 98. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the prcposed loan. Barber B. Conable President Attachments Washington, D.C. August 10, 1990  - 31 - At~ 1 IN@RAS - 14ATIO*.. ACCOJltS AmI% t 19S5 Pee C.ts @ la. USJ: 85o . ...- ---------------- A 1 N;8-lo oeuit.tIe (.sit*-) 4.0 (P- - - - 1 - 2) (A 8 .4 cu...t UP) 1970 1975 1960 1964 1n65 1986 17 8 1 1990 1991 1o"2 393 19s95 1ll5 a'.. O...tl Pa .dv ..a. IO.0 100.O 100.0 100.0 100.0 100.0 O 10 0.I 1I0 0 100.0 100.0 10.O 100.0 100.4 OO.0 R.a ndlirect Tuses 10. 9 6 10.6 10.9 12 1 12.4 12.2 12 0 12 0 12.0 1.0 12.0 12 0 12.0 12.0 A.eie.I.W 29.7 26.9 24.1 21.4 21.0 21.6 20.5 20.1 20.2 20.8 21.0 21.4 21.6 22.3 52 Ift4vot,7 t1.5 20.2 20.6 212 20.1 19 0 19 2 20 4 2D.6 20,. 20.8 20 t 20 5 20 4 20 4 So" 1te- 41.7 43.1 44 7 48.5 45.S 47.0 48.1 47.S 47.t 46.7 '4.3 4.1 45,8 45 4 45.4 Rt.ogrec %,ac. -S.8 -9.0 -7,2 -8 8 -s -1.4 -2.7 -2.7 -2.6 -3.1 -2.6 -0.5 0.5 2.0 1.8 b.ota of OfS 29.2 30.7 37.1 26.6 26 0 28.7 23.9 22.9 22.4 42 1 48.7 49.2 S1.l U.6 57.0 tm.ets, of1s 35.7 397 44.3 33.1 30.5 28.1 26 S 25.5 282 45.2 48.3 49.7 S.7 82 6 55.2 1*e.l E.-andla.o. 10.5 109.0 107.2 106.6 104.5 101.4 10271 10217 02.6 101.1 102.8 100.5 99.5 9.0 e8.2 Tetrl Ceno.*utlo 84.6 90.0 82.7 67.6 66.4 65.7 8S.0 86.6 69.9 6 9 8t5.2 82.9 81.1 78.0 76.6 P,i.tq5 Co_Qa.emtw 72.6 77.Q 69.4 1S.1 71.4 70.6 71.1 73.1 73.9 71.4 70.0 66.1 66.7 64.3 64 1 Public CoanwootiQ 12.0 12.4 13.5 14.7 15.0 15.1 16.9 16.5 16.0 15.6 15.2 14.6 14.4 1S.7 12.5 a'... Ogmati. la.4.tnt 21.9 19.0 24.5 19.0 18.1 15.7 14.7 13.1 12,9 16.2 17.4 17.7 18.4 20 0 21.6 plaed IUn..wcnt 19.4 21.2 24. 19.3 17.6 15.1 12.7 12.6 13.1 16.2 17.4 17.7 18.4 20.0 21 6 Cho-.& 2. Stock* 2.5 -2.2 0.2 -0.3 0.8 0.6 2.0 0.3 -0.2 0.0 0.0 0.0 0.0 0 0 0.0 0.,.. 0o...tie s5.,e 15.4 10.0 17.3 12.2 13.6 14.3 12.0 10 4 10.1 13.1 14.0 17.1 18.9 22.0 23 4 ft.t Fecto. Incom -3.3 -2.6 -6.0 -5.5 -5.8 -5.8 -5.6 -5 3 -4.8 -9.3 -10.0 -9.6 -6.7 -7.6 -6.2 Not Current Truef.r 0.9 1.6 0.6 2.5 4.2 4.2 0.4 0 4 0.4 1.0 1.1 1.2 1.2 1.2 1.2 Ora" NoXtboftl $*.e;o 13.0 9.0 12.1 9.2 12.3 12.9 6.6 5.6 5.7 4.6 5.9 8.7 11.3 15.6 16.4 ActUal P... Projected 8 National Accounts G...th -------------------------------------------------- --------------- ---- ------------------------------------------------- (Constant Prices) 70-75 75-t0 19t0 1984 1985 196 1987 196 1969 1990 191 1992 1993 1995 1998 0,*.. DOcstic Product m.O. 3.7 7.J 1.3 2.8 3.2 2.7 6.2 4 7 2.1 0.0 2.5 3.5 4.0 4.4 5 0 No.t 1.4.*.ct To"s, S.1 9.0 22.7 9.6 14.1 5.8 2.2 4.7 2.1 0.0 2.5 3.5 4.0 4 4 5 0 Aq,ie.ltu- 0.0 6.1 -1.7 2.0 2.9 1.4 2.7 1.9 2.3 2.0 4.5 5.5 6.0 4.4 5.0 1n4..try 6.4 6.1 -6.1 5.4 -1.6 0.2 3.0 7.3 3.1 1.0 2.5 2.5 3.5 4 4 a 0 ser.ices 5.4 7.3 2.7 0.4 2.9 3.9 6.1 4.9 1.7 -1.3 1.6 5.0 3.3 4.4 5.0 b,aoto of amS 3.2 6.4 -5.8 1.6 2.7 4.4 6 9 -3.3 6.5 5.4 6.9 7.1 6.8 6S5 8.2 toupoto Of CWS 1.0 10.0 3.6 16.6 0.4 -0.5 -2.3 1.3 5.1 -4.7 6.9 4.1 5.2 5.7 5.6 ftaW E Onwdture 2.8 6.7 4.8 7.9 2.4 1.0 1.9 6.7 1.6 -3.6 1.6 2.2 3.2 3.6 4.6 Total Ccoaejtion 3.3 7.7 8.3 1.6 3.2 3.1 0.3 9.7 1.8 -2.7 -0.1 1.5 2.1 2.6 4.2 P,;1.8e Coa..w.tio. 3.1 7.5 7.9 1.1 2.6 2.6 -0.4 11.4 2.7 -3.2 -0.1 1.6 2.2 2.6 4.6 PNbI. Co.cAntlon 4.5 6.7 10.3 3.7 5.3 5.2 8.3 2.2 -2.6 0.0 0.0 0.8 1.5 1.6 1.I 4 e. .. t. P4sat_nt 1.1 12.2 -4.9 41.1 -0.7 -7.1 9.1 4.0 0.5 -7.9 10.2 5.2 6.3 0.7 6.3 Pisod I"p&tmsot 5.8 9.7 9.9 19.6 -3.2 -9.0 -4.6 6.2 4.3 -9.3 10.2 6.2 6.3 8.7 6.3 Csety to Icao.t -0.1 11.7 -3.9 5.6 7.3 11.2 -6.0 -0.7 5.9 -19.2 -2.2 7.5 6.4 6.0 4.6 T*fts of Trad Adjusteent 17.6 -19.0 -20.5 -10.8 -13.1 -24.2 174.4 -14 9 10.1 127.0 20.3 6.5 7.5 7.2 6 0 arot Oo...tie Inc... 2.6 9.1 2.0 4.2 4.7 4.6 0.6 6.2 1.7 -6.2 -0.3 2.9 3.3 3.6 4.3 0.... National Ia 2.9 6.4 t.5 4.0 4.8 4.5 0.8 6 6 1.9 -16.8 -4.1 2.5 t.7 4.4 5.2 qe .tti.nl Product (o.n 4.0 6.6 0.7 2.5 2 7 2 3 5 7 5 2 2 4 -7.6 -0.3 3.3 8.2 5.0 5 8 0.o.. Do..tle S ell 7.0 1.9 -28.6 7.4 0 6 -1 Z _ -11 ^ I e -41.2 -2.8 17.3 14 8 it 9 4.8 F.ctor .aIco. -6.5 32.3 13.4 6.2 127 1 -1 . - 2 -2 4 129 5 21.6 4 7 -2 9 0 6 -1 1 list Cc.'.'.nt transfe. -- -- - - - _ - - - . 12 2 9 11 1 201 7 21.8 13 S 9 0 6 5 s.9 are" NktialoI $Ss.ng 9.6 -3.8 -55 7.1 -4 0 -87 5 1 -16.1 3.6 -161 9 .60.6 7 6 24.9 316 110.6 copp.'o.ohl 26-Jon-90  - 32 - tWtRAS - N87TIlP" A.TS Ecentimoa AI.dX I -_---------- *________ -- __ -- _-_-- ----_--- Attec%o..t 1I (Ptug 2 of 2) ACt, l Pro. "a.th %tb. S P.S. C. Price Imlca. (960.100) 1960 1964 198S 196 1967 1996 1999 70-7t 7t-0 6043 Ctaa.e,m Price. (In 64) ICO.C 11 2 lVi.' 145.8i 149.4 1ls.3 1I I 6.4 9.6 S 7 It;alt (P4#l.bse 100t0 124.4 130.2 137.3 )40.2 149.4 161 0 es3 e.7 8.2 IU IIc;ltt 8.ndtR.es aOlatow 1000 130 5 134 8 140.3 145. 3 l14 9 160 ? 7.7 8.0 3.2 0. otne. codate,*: 7o-75 is 75) 6-67 67-90 90-03 1970 14?5 183 19S6 O-whRts(9 P*) She* of Labor Poplultion (ItP 99:) 2.9 2.9 2.9 2.9 2.9 -------------- Labo, foec- 2.6 2.8 3.0 - -- Age; c. I t.t 63.88 6 O- 586S . 33 SS.n Cr.44 ft 1. In_.Cu sC. 0 3 -4 4 2 3 -4.S -6.1 Ind.utey 13.46 14. 9 17 06 17.95 P.irwta Co.,a.tbo.. P.c. 0 1 -S.6 1.9 -0.3 -2.7 Se..;to 23.1t 25 25 27t26 28.tiS lapo't tilacitpr Total 100.06 100.0 100.05 100 06 Iso.t. (a-tfS) / 0P(-P) 0.27 1.37 -1.20 1.22 1.96 tG,oinael S R; t R- (M uet. @47 0.S9 -0.0? 0.17 0.74 1.30 0D8 art. WY 0.88S 0.04 0.26 -0.04 1.08 IcOR (ttd): 8.2 3.7 12.7 3.6 3.9 F.~~~~~~~------------ -*o --- -n ----------------------------------------------------------------------~~-------- Act,us IPFe. P'*jota.td E. National Accounts --- ---------------------------- ------------------------------- (1960 mIn. Leaml,sw) 1960 1984 1968 1986 1987 1966 19 1990 199 1992 1993 1998 1998 oa" tmea-tle Preodct M.P. 5.086 5,192 5,356 5,803 5.790 6,063 6.193 6.193 6,347 6.570 6.632 7,433 8,560 Net In;roct Ta.s 839 56 648 663 696 731 747 747 766 792 624 694 1.035 A*ctieltQr- 1,22d 1.297 1.334 1.33 1.369 1.416 1,44t 1.477 1.544 1.629 1.726 1.919 2,216 tndust.t 1.047 1.064 1.047 1.049 1,080 1,159 1.195 1.207 1,237 1.26t 1.313 1.41t 1.637 (of whI.s. sonu?ctu,l) 667 736 722 741 784 -- -- -- -- -- -- -- -- se";eos 2.274 2,266 2.332 2.418 2.615 2.742 2.767 2.782 2.796 2.6181 2.976 3,213 3.709 RIb ,c.e Bala"ce (870) (79) (3#) SO 24S 149 167 402 4t7 862 633 770 944 Eo.te .1 OWS 1,8'd6 1.693 1,944 2.030 2.171 2.099 2.237 2.3S7 2.497 2.6t74 2,S6 3.249 *S.69 lsort of eF5 2,256 1.972 1.960 1,970 1.92t 1.930 2,080 1.934 2.030 2.112 2.223 2.476 2.943 Total tapditurw. $.&3 8.271 5.394 5,443 S.US S,914 .OO6 S.790 S,690 6.006 6,199 S6.62 7.634 Toul Cceauati0e 4.210 4,203 4,333 4,486 *,4t9 4,903 4,990 4.634 4,649 4,922 S.024 8,270 8,901 P..'t. Conuu..tlo. 3.S32 8.496 8.891 3.677 3.663 4.079 4.189 4.034 4,049 4.11S 4.204 4,425 S.010 Oene,al 51e.ma t 678 708 742 761 607 824 801 601 S01 807 819 64S 69 0... 0oa..t.e Ina-.ate-t 1.248 1.09 1.061 986 1.078 1.011 1.016 936 1.031 1,068 1.176 1,893 1,733 Fpi;. tlnatent 1,238 I a63 1,048 984 891 946 "I7 t9S 966 1,037 1.124 1.331 1,687 Chngrs Ir Stea 13 (14) 13 32 184 6S 29 41 4 46 S2 62 77 Capeaity to 1er3t 1,86 1.S33 1,69t 1.684 1.771 1.789 1,862 1.0S 1.473 1.83 1.668 1,900 2.166 Terms of T,*4. AdJust_..t 0 (310) (247) (146) (400) (341) (373) (632) (1.024) (1,091) (1.171) (1.349) (1.723) Q,oem ama*stle Inc.e. 8.066 4,862 8,112 5,357 5,390 s.23 5.618 S.341 8.323 5476 S.662 6.064 6.697 0Ora National Iloom 4.761 4.6S 4,7*, 4.969 5.028 5.372 S.475 4,SS4 4,366 4,476 4,669 8.096 S,906 0... National P.odoet 4.781 4.698 8,023 8.133 S,426 5,712 5.9Y0 S406 S.39t 5.386 5,8.9 6,448 7.429 0,C00 Doati.c 3St*. 876 660 779 900 921 91A e29 Q7 474 858 636 814 986 Nat Factor Inc*Me (307) (296) (335) (369) (362) (351! (43W (787) (957) (1.002) (973) (966) (9SI) Nat Current Tranafam -- -- -- __ _ . . _ _ __ _ __ 0.oss National S In.. 871 362 444 S31 836 469 485 (300) (413) (446) (335) (174) 8 easpp90.610 26-Jun-90  - 33 - @6NWA3 - PIT441. TRAMS Au6e I twutat - tDttE XWE X I~~~~Atae.an 2 _---- - --- - ------------- Afi" ettz lb Aefal pr.. ProJeet4d ._-- -- -- -- -- -- -- -- -- -- -- -- -- -- -- - - - -- - - - - -- -w- - - -- -- -- _-- - -- - -- -- -- - -_ -- - - - - - - - - -- ----- - ---- A. Vole. Volvo 1sd Price 1060 1064 1063 lU 1"67 tesd ioso 190e l0t 1002 1003 1095 1006 Fbolsod t is. Sport _ ___ __-- ------------------------------ ._ ---.---------- v......lode, 1080 ------------ -------------------- 8.h . 100.0 0 e 96.1 0.7T 1e042 "6.t 04.0 12 a S10.2 12i.S 121.0 134.2 154.7 Cff 100.0 It 5 126.0 140.0 153.3 153 4 150.0 1*S.3 1st 3 5SS e 181.0 173 0 105 t Stue- 1000 C 1 1o 0 146.4 TY S 117.3 84.3 25 5 a 7 25,2 25.7 27.3 28.4 30 8 8-.f 100.0 64.1 3.a3 30.2 26.9 27.7 24 I1 i &b 27 0 21.3 *1.7 34.3 42 3 L.- bo, 1000 65.0 70.2 I1? 84.3 62.2 s3 t 54 580 o 7 60.0 6409 ' 3a U.fa & Lobster 100.0 120.5 106.1 105.8 I3S 5 1 N6 8 lS 6 218 7 231.S 203.8 324.0 387 3 445 3 Total t#,ch. KEsost. Foe 100.0 93.3 07.1 105.4 11I e 107.5 114 6 1120 5 121 a 157.1 14.7 167.6 202 1 ----------------------- - --------- - - ------_-------_- - . PripeX*- (FqiI ;ltz 4) ------- --------- bowS 226 232 274 257 322 343 343 351 3$3 402 443 538 674 Coff. 204 169 iss 323 200 191 191 148 181 216 244 U17 426 ttu60- 29 26 22 13 19 1' 10 14 10 1o is 18 19 Beef 6t 21 16 20 23 20 t1 20 22 23 26 30 52 Water 36 35 34 32 35 26 26 27 29 31 34 40 50 Other E.oerto 202 254 257 248 247 206 378 405 434 582 617 619 1.t6s Total PF.ch. Iboast. FOS 6so 737 790 601 844 s63 eb7 964 1.0i8 1.223 1.384 1.767 2.406 M_erhndise tae'% - ------------------------------------------------------------Vol._ "d- 1.0 U0-t40 -------_-_------------------ _ -- ---.- ---Vol-..I.d.. 1----1- #84. 0e.,blq Ca..v_* aGd 100 0 1SS.3 e5.5 116.6 107.0 100.7 109.0 106 3 106.7 112.3 117.0 127.3 146.0 W,oebl C*.ouvo, GOd. 100.0 54 3 84.2 77.e 74.7 72.0 71.7 6l9 0 72.0 75.0 76.0 6l 7 104 0 Pt".olw"a and Lubrc.at 100.0 724 96 2 86.4 83.0 103.7 100.5 104.0 106.8 110.4 114 8 124.0 144.1 lot. rediet. sd Othb,. 100.0 04.S 05.0 107.8 105.0 106.7 116.3 112 4 115-7 120.8 128.9 141.5 6s0 A C.it.tl Ooed 100.0 46.9 65.1 83.4 66.7 65.5 84.7 50.6 83.7 80.1 74.0 6s.7 110.4 Total Merh. Imports CIF 10.0o 70.7 63.6 01.7 80.2 80.0 04.0 00.4 04.0 97.0 103.2 115.4 137.5 -----------------------------