Honduras - Sixth Power Project

FILE COPY. DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. F-1545-HO REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE EMPRESA NACIONAL DE ENERGIA ELECTRICA WITH THE GUARANTEE OF THE REPUBLIC OF HONDURAS FOR A SIXTH POWER PROJECT December 17, 1974 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  Currency Equivalents US$ 1.00 = 2 Lempiras L 2.00 = US$1.00 Fiscal Year January 1 - December 31  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPME;N REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE EMPRESA NACIONAL DE ENeRGIA ELECTRICA WITH THE GUARANTEE OF THE REPUBLIC OF HONDTJRAS FOR A SIXTH POWER PROJECT 1. I submit the following report and recommendation on a proposed loan to the Empresa Nacional de Energia Electrica, with the Guarantee of the Re- public of Honduras, for the equivalent of US$35.0 million to help finance a Sixth Power Project. The loan would have a term of 25 years, including 4-L/2 years of grace, with interest at 8 percent per annum. PART I - THE ECONOMY 2. A report entitled "The Economic Position and Prospects of Honduras" (Report No. 339a-HO), dated April 29, 1974, was distributed in May, 197L. A Country Data sheet is attached as Annex I. 3. Honduras, with a per capita income of about US$320 in 19721/ is the poorest country in Central America. The majority of the population ob- tains a bare subsistence income. The adult literacy rate is only about 50 per- cent and the average national calorie and protein intake is well below minimum requirements. Progress in overcoming these deficiencies is difficult owing to the rapid population growth rate, presently estimated at 3.5 percent per year. 4. Honduras is a predominantly agricultural economy; in 1973 about 35 percent of GDP at factor cost originated in the agricultural sector, 65 per- cent of the economically active population was employed there and about ff6 percent of all exports were agricultural products. Four products made up 80 percent of total exports: bananas (37 percent); coffee (19 percent): wood (15 percent) and meat (9 percent). All four have grown fairly rapidly during the last ten years, with meat and wood showing the highest growth rates. 5. Following a few years of rather rapid economic growth during the mid- sixties, the Honduran economy entered a period of low growth and serious economic difficulties from 1969 through 1972. Several factors contributed to the relative stagnation of the economy during these years. Among them were the severe hurricane damage to banana and other crops in 1969, a widespread drought which resulted in a large loss in agricultural production in 1972, and the armed conflict between Honduras and El Salvador. The latter resulted in a reduction in private investment and the withdrawal of Honduras, in December 1/ At 1972 prices, calculated according to World Bank Atlas methodology.  - 2 - 1970, from the free trade arrangements of the CACM, a move which adversely affected a number of export industries. These difficulties were accompanied by balance of payments and fiscal crises and contributed significantly to the circumstances which resulted in a coup in December 1972 and brought the present administration to power. 6. Some improvement in the economic situatior. was apparent by the end of 1972, following Government adoption of a stabilization program, and in 1973 a general economic recovery appeared to be taking place, led by a boom- ing growth of export earnings of meat, coffee and wood. Some progress towards the reopening of the CACM was also made through the signing of bilateral trade agreements with Nicaragua in 1972 and with Guatemala and Costa Rica in 1973. Fiscal revenues increased sharply in the latter year, public current expend- itures were kept under control and there was a moderate increase in the net international reserves. With private investors regaining confidence, private investment increased strongly during 1973. Public investment, whiLe up from the preceding year, continued at undesirably low levels because very few projects had been initiated in the previous few years and, partly because of the restructuring of several executive units, the preparation of projects by the Government had been slow. 7. The medium-term outlook for the Honduran economy at the start of 197h was encouraging. The Government was making progress in the preparation of its medium-term Development Plan and i^-vestment program, which stressed agrarian reform and utilization of the country's extensive forest resources. In spite of the oil price increase of late 1973, which is expected to increase Honduras' net oil import bill from US$22.0 million in 1973 to US$56.0 million in 1974, and the subsequent increases of Honduran import prices generally, it appeared possible for Honduras to carry out its development program and mail.- tain balance of payments equilibrium over the medium-term, especially as wo:Id market prospects for some of its main expor+ nrodacts 1were eznco'agu-g.