Honduras - Second Industrial Credit Project

Document of The World Bank FOR OFFICIAL USE ONLY FILE CgPv Report No. P-3166-HO REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF HONDURAS FOR A SECOND INDUSTRIAL CREDIT PROJECT December 1, 1981 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.  HONDURAS SECOND INDUSTRIAL CREDIT PROJECT CURRENCY EQUIVALENTS L2.00 = US$1.00 Ll.OO = US$0.50 WEIGHTS AND MEASURES Metric System GLOSSARY OF ABBREVIATIONS BANADESA National Agricultural Development Bank (Banco Nacional de Desarrollo Agricola) BCH Central Bank of Honduras (Banco Central de Honduras) CAAFIID Central American Agreement on Fiscal Incentives to Industrial Development (Convenio Centroamericano de Incentivos Fiscales para el Desarrollo Industrial y su Protocolo) CABEI Central American Bank for Economic Integration (Banco Centroamericano de Integracion Economica) CACM Central American Common Market (Mercado Comun Centroamericano) CDI Industrial Development Center (Centro de Desarrollo Industrial) CET Common External Tariff COHDEFOR Honduran Forestry Development Corporation (Corporacion de Desarrollo Forestal) CONADI National Industrial Development Corporation (Corporacion Nacional de Desarrollo Industrial) EFF Extended Fund Facility FONDEI National Industrial Development Fund (Fondo Nacional de Desarrollo Industrial) GDP Gross Domestic Product IDB Inter-American Development Bank IMF International Monetary Fund INFOP National Institute for Vocational Training (Instituto de Fomento Productivo) PI Participating Intermediary SMI Small and Medium Industry  FOR OFFICIAL USE ONLY GLOSSARY OF ABBREVIATIONS (Continued) SSE Small Scale Enterprise SSI Small Scale Industry UNDP United Nations Development Program UNIDO United Nations Industrial Development Organization USAID U.S. Agency for International Development Fiscal Year January 1 to December 31 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.   HONDURAS SECOND INDUSTRIAL CREDIT PROJECT LOAN AND PROJECT SUMMARY Borrower: Republic of Honduras Executing Agency: National Industrial Development Fund (FONDEI), established and administered by the Central Bank of Honduras (BCH). Amount: Loan - US$30.0 million equivalent Terms: Loan - 20 years, including 5 years of grace, at 11.6 percent interest per annum. Relending Terms: The proceeds of the proposed loan (to be relent to Participating Intermediaries (PIs))would be onlent by BCH (acting as a fiscal agency of the Government) to FONDEI on the same term and grace period as above but with an interest rate of 12.6 percent 1/ per annum. The proceeds of the proposed loan for technical assistance would be passed on to FONDEI, the Industrial Development Center (CDI) and the National Industrial Development Corporation (CONADI) through BCH on a grant basis. Project Description: The proposed project would support the Government's industrial strategy to promote rapid efficient growth of industrial output, exports and employment by: (i) provid- ing much needed medium- and long-term credit for finan- cially and economically sound industrial investment projects of small and medium sized enterprises; (ii) help- ing to develop a system for the generation of sound industrial investment projects; (iii) upgrading the project appraisal and supervision capabilities of PIs, as well as FONDEI's administration; (iv) strengthening CDI's lending capabilities and technical assistance services to smaller industrial enterprises. US$28.7 million of the proposed loan would be allocated for onlending to industrial enterprises and US$1.3 million to technical assistance. A total of about 4,200 new jobs are expected to be generated at an average invest- ment cost per job of about US$11,300. The proposed 1/ This includes 1.0 percent premium for the exchange risk assumed by BCH.  - ii - project does not involve any special risks, although increased lending to smaller enterprises (calling for additional financial resources) and new responsibilities of PIs for appraisal and supervision may cause some subloan processing delays, and the generally unsettled situation in Central America may postpone some invest- ment decisions. However, the project's technical assistance and training, BCH's guarantee fund for lending to smaller enterprises, the emphasis given to strengthening supervision procedures by PIs, and the focus on small and medium firms, which are less susceptible than larger firms to political events, would all reduce these risks, including the risk of domestic resources being substituted by external funds. Estimated Cost: - US$ million ---- Local Foreign Total Credit Program 18.7 28.7 47.4 Technical Assistance 0.7 2.1 2.8 Total 19.4 30.8 50.2 ProJect Financing Plan: -------- US$ million -------- Local Foreign Total IBRD - 30.0 30.0 BCH 2.5 - 2.5 Government 0.2 - 0.2 UNDP 0.5 0.8 1.3 FONDEI 1.5 - 1.5 PIs 4.9 4.9 Subloan Beneficiaries 9.8 - 9.8 Total 19.4 30.8 50.2 FONDEI's Financing Plan: -------- US$ million -------- Local Foreign Total IBRD - 29.1 29.1 BCH 2.5 - 2.5 UNDP 0.1 0.3 0.4 FONDEI's Internally Generated Funds 1.5 - 1.5 Total 4.1 29.4 33.5  - iii - Estimated Disbursements: ----------US$ million------------ IBRD/IDA FY: 1982 1983 1984 1985 1986 Annual 1.5 7.0 9.0 7.5 5.0 Cumulative 1.5 8.5 17.5 25.0 30.0 Economic Rate of Return: Not applicable Appraisal Report: 3596-HO dated November 23, 1981   INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF HONDURAS FOR A SECOND INDUSTRIAL CREDIT PROJECT 1. I submit the following Report and Recommendation on a proposed loan to the Republic of Honduras for the equivalent of US$30.0 million for the Second Industrial Credit Project. The loan would have a term of 20 years, including 5 years of grace, with interest at 11.6 percent per annum. The proceeds of the Bank loan would be on-lent to the Central Bank of Honduras (BCH) at the same interest rate, term and grace period as to the Republic of Honduras, except for US$1.3 million equivalent for technical assistance which would be passed on as a grant. BCH would onlend the loan proceeds to the National Industrial Development Fund (FONDEI) on the same term and grace period as above, but with an interest rate of 12.6 percent 1/ per annum. FONDEI, in turn, would onlend to PIs at interest rates of 12, 13, and 14 percent per annum for enterprises with fixed assets of less than US$50,000, between US$50,000 and US$150,000, and over US$150,000, respectively. PIs would charge enterprises an interest rate of 17 percent per annum. The repayment terms for enterprises would be up to 15 years, including up to 3 years of grace. PART I - THE ECONOMY 2. A report entitled "Current Economic Memorandum on Honduras" (3312-HO) was distributed to the Executive Directors on July 29, 1981. Bank missions visited Honduras during May and July 1981, to discuss the report and review recent economic performance. The main findings of these missions are summarized below. Country data sheets are attached as Annex I. 3. Honduras is a poor country, mostly a land of small farmers. Per capita GNP was about US$560 in 1980, one of the lowest in the Western Hemisphere. Although population density is 32 per square kilometer, only one-fourth of the country's area is arable, and the population is growing now rapidly at about 3.3 percent a year. A large number of Hondurans live in poverty. Malnutrition is severe; infant mortality is over 10 percent of live births; and the literacy rate is only 60 percent. One-half of the population is without safe water and three-quarters of the households are without access to sanitary waste disposal and electricity. 4. The Government is showing some awareness of the population problem. Family planning information and services are provided at Government health clinics to anyone requesting them. In addition, a local, private affiliate of the International Planned Parenthood Association supports two urban clinics covering about 3 percent of the fertile female population. External assistance to these and other smaller programs comes from the United Nations, private organizations, and USAID. 1/ This includes 1.0 percent premium for the exchange risk assumed by BCH.  5. During 1950-75, the real growth rate of the Honduran economy was 3.7 percent per year; per capita income grew by only about one percent per year. A number of factors contributed to this poor performance. A major reason was the continued dependence on banana exports, and deteriorating terms of trade. 6. The risk of dependence on one a two export crops was illustrated dramatically during 1974-75 when extensive destruction of the banana planta- tions by one of the worst hurricanes in Honduras' history resulted in a sharp reduction in exports and GDP; the latter of about 7 percent. Furthermore, the terms of trade deteriorated by about one-fifth owing to large increases in petroleum prices and rising prices for imported goods. As a result, the resource gap grew from about one percent of GDP during 1972-73 to an average 5 percent during 1974-75, and the rate of inflation accelerated from 2.7 percent a year during 1966-73 to 11 percent a year in 1974-75. 7. Subsequently, real GDP recovered remarkably during 1976-79, as it grew by 7.7 percent per annum. Real investment--public and private--and exports were the most significant growth factors. The quantum and value of exports grew rapidly at 11 and 25 percent yearly, respectively, as a result of a one-third expansion of coffee production, partial recovery of banana production, and higher coffee prices. However, the terms of trade deteriorated significantly after 1977 owing to rapidly rising import prices coupled with a decline of coffee prices. Rising import prices prevented a return to the traditional price stability of the economy and adversely affected real wages. Prices increased at 7 percent a year during 1976-79, mostly because of imported inflation. 8. The favorable growth performance of the economy during 1976-79 was partly a result of more aggressive Government development policies in the 1970s. Serious infrastructure deficiencies in transport and power were eased when a basic network of trunk highways and ports was built. As a result, private activities expanded rapidly taking advantage of the externali- ties provided by the public sector. Improved Government planning and executing capacity was behind the infrastructure expansion; public fixed investment increased from 3.3 percent of GDP in 1972 to 6.6 percent in 1974 and to 8-9 percent in 1978-79. In another major development, the Government nationalized timber rights to deter wasteful exploitation practices leading to a depletion of the large pine reserves and also undertook large public investments in sawmills in the Olancho area, which will increase lumber exports in the 1980s. 9. In response to rural unrest in late 1972, land reform measures were introduced in 1972 and 1975. These aimed at improved land utilization through the transfer of unused or poorly used land from large landowners to landless rural families. About 210,000 hectares had been transferred by 1980 of which about 80 percent was cultivable (8 percent of the total farmland). Although land had been distributed to over 48,000 families, only about 36,000 remained on the land at the end of 1980. 10. To finance these expanded activities, the Government made efforts to strengthen public finances through tax reforms in 1975, 1979, and more recently in April 1981. Nevertheless, public finances weakened in 1980 and 1981 as noted below.  -3- Recent Developments 11. In 1980-81, economic growth slowed down as exports and investment lost their dynamism. Private investment was adversely affected by political events in Central America and tight credit. Furthermore, the country's financial position deteriorated. In 1980, the current account deficit of the balance of payments was over US$300 million (12.7 percent of GDP), and net official foreign exchange reserves declined by about US$60 million to US$59 million (less than one month of imports), in spite of significant inflows of foreign official capital. Public finances also deteriorated; Central Government current expenditures increased rapidly, reflecting salary adjustments and large increases in the areas of education and health. Revenues from a 1979 tax reform were insufficient to cover these increases. Weak public finances brought about a larger than usual increase in the use of domestic credit by the public sector and a tightening of credit to the private sector. Agreed targets of an EFF arrangement, negotiated with the Fund in mid-1979, were not met in late 1980. To remedy the situation, the Government, in April 1981, doubled some sales taxes and raised import taxes by 10 percent for consumer goods and by 5 percent for most of the rest. In addition, the Government raised telephone and port rates, and is expected to increase water rates. As part of a renewed EFF agreement, the Government also plans to restrict current expenditure growth to less than 14 percent in 1981 and 1982; reduce the size of the overall public sector deficit from about 9 percent of GDP in 1980 to 7.5 percent in 1981 and less than 7 percent in 1982; and restrict external and domestic borrowings of the public sector. Furthermore, to increase private savings and resource mobilization by private banks, interest rates were freed on savings deposits and on loans financed with foreign credits. Prospects and Development Programs 12. Economic growth during the 1980s is uncertain. The large Govern- ment investment effort together with the good prospects for increasing export volumes of lumber and other traditional exports, as well as possible diversi- fication efforts by the private sector could result in significant growth in the mid to late 1980s. Nevertheless, the outlook for 1981-82 is less optimis- tic because of the political climate and low coffee prices. As a result, real GDP growth may be only about 4-5 percent a year during 1981-85. Maintenance of domestic demand levels, proper policies and investment climate could help revitalize the private sector so that it can contribute to further growth of the economy and take advantage of the new opportunities opened by the Government investment effort. However, private investment prospects are now negatively affected by the unsettled situation in Central America. 13. The current account balance of payments will likely show moderately high deficits because of the large public investment program's import require- ments and higher prices for capital imports. The quantum of exports, would likely expand at 8 percent a year during 1981-85, but lower export prices will affect foreign exchange earnings from exports. This growth rate would be lower  - 4 - than in the recent past because banana production has almost recovered to pre- hurricane levels, and coffee production will most likely not expand as rapidly as in 1976-80, when it grew 40 percent. The most dynamic exports will likely be lumber--which is expected to double in volume once two new sawmills become fully operational in 1982 and 1984--and beef, sugar, minerals, and seafood products. 14. The public investment program for the next few years shows a continued large expenditure on infrastructure projects, particularly for on-going power and transport projects, which are still crucial given the country's development stage; and heavy investments for export diversification, mainly through forestry development. Also likely are major expenditures for agricultural and rural development as well as for primary education and health, particularly water supply and urban and rural medical facilities. Parallel increments in current expenditures will be needed to staff and equip the education and health centers. Full implementation of this program is not likely because of limitations in administrative capacity to prepare and imple- ment projects, particularly in the rural and social sectors. Nevertheless, the public sector's administrative capacity to prepare and execute projects has shown a marked improvement in the past few years. This is reflected in the increased share of public investment in GDP and has made it reasonable to expect that the major components of the program, some of which have been under preparation for a number of years, will be implemented in a relatively timely manner. 15. Power investments will be the largest of the proposed program, averaging about 40 percent of public fixed investment, mostly because of the large, lumpy investment required for the El Cajon hydroelectric project. This high share seems justified, since imported oil costs reached US$171 million (16.8 percent of merchandise imports) in 1980 compared to only US$14.7 million (6.6 percent of merchandise imports) in 1970. Higher prices and the expanded domestic demand would bring about a much larger bill for imported oil in the future. The El Cajon project will reduce significantly the country's dependence on foreign energy sources. Moreover through a project financed by a recently approved Bank loan (Loan 1861-HO, signed on June 23, 1980), the Government will step up efforts to promote oil exploration by private companies. The Government is also examining areas which appear to have potential for geother- mal development, is studying the use of woodwaste for small steam power plants and is investigating gasohol possibilities. 16. Forestry investments include two relatively large sawmills with completion expected in 1982 and 1984. The large transport investments include roads for the sawmills, further rural roads, a modest expansion of the trunk highway system and a new port for wood product exports. Agricultural investments will be focused on rural development projects for three major valleys: Aguan, Guayape and Comayagua. Health investments will be concen- trated on water supply and medical facilities for Tegucigalpa, San Pedro Sula and provincial towns, as well as for expanded health services in rural areas.  Special efforts are underway to train nurses and other auxiliary health personnel, which will facilitate stepped up health and family planning activi- ties in the future. Educational investments are mostly for primary schools, the university and agricultural and vocational training institutions. A nutritional planning unit has been established to provide for widened food distribution and vaccine coverage for school children and expectant mothers. 17. The Government's investment and financial program, the latter supported by the IMF through a three-year extended fund facility (EFF) arrange- ment, should strengthen the balance of payments in the mid-1980s by reducing significantly the fuel import requirements of the economy, generating in- creased exports, particularly lumber and wood products, and by containing excess domestic demand. Honduras' adherance to a prudent financial program, its relatively careful demand management so far, and still low debt service make it creditworthy for a relatively hard blend of Bank Group lending. How- ever, given the present and foreseeable poverty of the country, even with these measures, the Government will need external assistance -- and much of it as concessionary as possible -- in excess of the foreign exchange component of development projects suitable for international finance. The large size of its public investment program, the uncertainty which now prevails in the Central American region and affects also Honduras, and past volatility in Honduras' export receipts, have led the authorities to agree with the Bank on annual reviews of the investment program and its financing prospects. We plan to continue monitoring closely Honduras' progress. External Financing 18. As the import needs of the economy expand, in particular the imports related to the public investment program, the current account deficit is expected to remain at the high levels of 1980-81. The 1985 current account deficit is projected at US$310 million (about 7 percent of nominal GDP) and, as a result, large capital inflows will be required. The bulk of the external financing requirements is expected to be met through public borrowing. Honduras will require an estimated gross capital inflow of US$1.5 billion during 1981-85, of which about half will be disbursed from commitments made through the end of 1980. 19. Honduras' disbursed public external debt repayable in foreign currency amounted to US$892 million at the end of 1980 or 35 percent of GDP; US$1.6 billion if undisbursed commitments are included. In the past, Honduras has managed to keep its external debt service ratio fairly low, because foreign loans were almost all on concessionary terms. Although the debt service ratio in 1980 was less than 11 percent, it is important that the country continue to borrow on reasonably soft average terms in view of its poverty, its dependence on a few export commodities with volatile price prospects, and because, historically, natural disasters have sharply reduced the volume of exports every few years. Even if Honduras is successful in obtaining about two-thirds of the financing it needs for its investment program on terms similar to those offered by the international lending agencies, the debt service ratio is likely to rise to about 14 percent in 1985. Continued maintenance of Honduras' creditworthiness will depend on the efficiency with which it chooses and implements its major public investment projects; on careful, continued demand management, including cautious use of non-concessionary borrowing; and on export promotion policies.  - 6 - 20. The Bank Group holds about 24.2 percent of the disbursed public debt outstanding and repayable in foreign currency; excluding IDA, the Bank's share is about 17.0 percent. These shares are expected to increase significantly in the next few years. About half of the Inter-American Development Bank's (IDB) total loans disbursed and outstanding are repayable in local currency, so that IDB's share of the disbursed public debt repayable in foreign currency is only 13.6 percent. The Central American Bank for Economic Integration (CABEI) accounts for 10.9 percent of the total, the US Government for 11.5 percent, Venezuela for 12.2 percent, privately held debt for about 20.9 percent and other debt for 6.7 percent. 21. During 1970-80, the principal official lending agencies committed some US$1.4 billion at FY80 prices, of which the Bank Group provided 36 percent, IDB 34 percent, CABEI 21 percent, and U.S. Agency for International Development (USAID) 9 percent. IDB has concentrated on manufacturing, agri- culture, power, transport, and water and sewerage, CABEI on transport and power, and USAID on agriculture and education. 22. Mexico and Venezuela are financing 30 percent of the value of petroleum imports for the next five years, or over US$45 million yearly. The agreements provide for initial five year loans to the Central Bank at an interest rate of 4 percent. These loans can be converted to a 20-year maturity and 2 percent interest if the counterpart generated is used to finance development projects, particularly energy projects. PART II - BANK GROUP OPERATIONS 23. Beginning with a loan of US$4.2 million for roads in 1955, Honduras has to date received 27 Bank loans totalling US$408.5 million and 12 IDA credits totalling US$85.1 million, both net of cancellations. The most recent operation, a US$28.0 million loan for the Eighth Highway Project, was approved on August 26, 1980. Bank Group lending to Honduras was unusually large during 1979 and 1980, both because of the Government's stepped-up investment program and because of the major investment in the El Cajon Power Project, for which a US$105.0 million loan and US$20.0 million credit were approved on March 11, 1980 (Loan 1805-HO signed on March 27, 1980, and Credit 989-HO signed on April 10, 1980). While we hope to continue to support actively Honduras' development efforts, the annual Bank Group lending level will be lower now that El Cajon operation has been approved. An important factor which will be taken into account in determining the pace and size of future lending will be the Government's capacity to implement its large ongoing program and to absorb further operations (para. 14). As of September 30, 1981, a total of US$212.1 million remained to be disbursed on 14 operations for electricity, roads, education, agricultural credit, ports, regional development, industrial credit, tourism and petroleum exploration. Execution of projects financed by the Bank Group has, on the whole, been satisfactory. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of September 30, 1981, as well as notes on the execution of on-going projects. 24. In the past, Bank Group lending was heavily concentrated in transport and power, where inadequate facilities hampered the development of the country. The First Livestock Development Credit approved in 1970, however, marked a  first step towards the diversification of our lending. Since then, while lending for power and transport has continued, diversification of our lending has increased through operations for a Second Livestock Project; a First Education Project, which included as major components primary and secondary teacher training schools, and support for vocational training centers and the national agricultural secondary school; a First Agricultural Credit Project to finance livestock and crop development with emphasis on assisting agrarian reform settlements through investment credits and a substantial technical assistance program; a Second Education Project to help finance rural primary schools and agricultural vocational education; a Regional Development Project to assist small farmers and agrarian reform settlements in the Guayape Valley; an Industrial Credit Project to provide funds primarily to small and medium manufacturing firms and firms proposing priority projects in the wood industry; a Tourism Development Project to contribute to the diversification of the sources of Honduras' foreign exchange earnings; a Second Agricultural Credit Project to continue financing livestock and crop development, with increasing attention to small-scale and agrarian reform farmers, and to initiate a pilot reforestation program; and a Petroleum Exploration Promotion Project to help attract more private investment in offshore petroleum exploration. 25. In future lending to Honduras, we plan to support the Government's objectives to increase production, employment and exports, and to raise living standards of the poor by emphasizing projects in the productive and social sectors. On the productive side, in addition to the proposed project, we would continue to provide credit to the agricultural sector, with special attention to diversification efforts, and also help finance a major pulp and paper project in the Olancho area. On the social side, we would attempt to complement the active programs of other agencies, such as USAID and IDB, by lending for water supply/sewerage and housing projects aimed at improving living conditions for the urban poor, and would also continue to emphasize rural development to support the Government's agrarian reform efforts. While new lending for infrastructure is not immediately contemplated, it would be included in later years where necessary to overcome bottlenecks, for example through the financing of a new hydropower project to reduce the fuel import dependence of the economy. 26. It is expected that the Bank's share of total external public debt disbursed and outstanding will remain at about 18 percent during the mid-1980s. The IBRD share of public external debt service has dropped substan- tially since the early 1970s because of increasing lending by other external agencies and a slight increase in commercial borrowing. The Bank's share is now about 14 percent and is projected to increase to about 20 percent by the mid-1980s. 27. IFC's activities in Honduras include a 1964 loan and equity invest- ment, of US$295,000 and US$55,000, respectively, in a tannery, Empresa de Curtidos Centroamericana, S.A. In 1966 an additional equity investment of US$27,500 was made in this company. In 1969 and 1970 equity investments totalling US$75,000 were made in a pilot company, Compania Pino Celulosa de Centro America, S.A., which was established to develop an industrial project based on timber from the Olancho Forest Reserve. Although this company is  - 8 - no longer involved in this project, IFC has assisted the Government of Honduras in creating an organizational structure and selecting a technical partner for the project. In 1978 IFC approved a loan of US$9.0 million and an equity investment of US$1.0 million in Textiles Rio Lindo, S.A. de C.V., a locally owned textile company, to help finance an expansion and diversification project. PART III - THE INDUSTRIAL SECTOR Growth and Structure 28. Honduras' industrial sector is less well developed than in the rest of Central America; it grew in real terms only about 3 percent per year be- tween 1960-75. Nevertheless, it expanded rapidly during the second half of the 1970s, averaging 9.6 percent per annum growth between 1975-79. During the 1970s, employment in industry increased by 5.6 percent on average annually, significantly above the country population growth rate of 3.3 percent a year. In 1979, manufacturing accounted for about 17 percent of GDP at factor cost, 12 percent of employment and 36 percent of total merchandise exports, including processed agricultural and livestock products. More recently, the growth of private industrial fixed investment has been somewhat depressed due to the lack of investor confidence and the tight credit situation of the banking system; the industrial sector's growth rate dropped to about 6 percent in 1980. 29. The Honduran industrial base has been relatively small. Production of heavy intermediate and capital goods is minimal; processing of local raw agricultural and forest products into consumer goods represents about two- thirds of industrial value added; and intermediate goods production consti- tutes about one-third of value added. Industrial enterprises in Honduras are relatively small. Most firms employ fewer than 50 workers, producing consumer goods. 30. Various factors have contributed to the structure of industry: the domestic market is small; transport and power infrastructure have been inadequate; there is a shortage of qualified managers, technicians and semi-skilled workers; illiteracy is widespread and there are only limited training facilities. The relative backwardness of Honduran industry also kept it from taking greater advantage of the opportunities offered by the creation of the Central American Common Market (CACM) in 1961. While intra-regional trade, the bulk of which was in manufactured products, increased rapidly from US$30.0 million in 1960 to US$252.0 million in 1968, Honduran exports to its CACM partners rose only from US$8.0 million to US$30.0 million in the same period. Its share of intraregional trade thus fell from 27 percent to 12 percent, and this trade was largely in basic grains. 31. Honduras withdrew from the CACM following its conflict with vl Salvador in 1969, and in 1973 Honduras signed bilateral agreements with each CACM country except El Salvador. 1/ These agreements, while providing for 1/ A peace treaty was signed with El Salvador in late 1980, which resulted in the resumption of diplomatic relations and some trade. A bilateral trade agreement is currently being prepared.  - 9 - partial restoration of free trade along CACM lines, offered certain advantages to Honduras, which was permitted to charge tariffs on some manufactured goods from CACM countries. Signing of these agreements was followed by the renewed granting of industrial incentives, originally established under the Central American Agreement of Fiscal Incentives to Industrial Development (CAAFIID), which triggered a process of modernization and expansion of industrial capacity. Other factors during the 1970s also contributed to faster industrial growth: significant investments in infrastructure; industrial promotion by the National Industrial Development Corporation (CONADI); and the elimination of Salvadorian competition with the cessation of trade after 1969. In addition, Honduras has been taking measures to improve labor force training through the National Institute for Vocational Training (INFOP). Under the Bank's First Education Project (Loan 954-HO/Credit 452-HO of January 9, 1974), vocational training centers were built one each in Tegucigalpa and San Pedro Sula. 32. Investment in industrial fixed assets accelerated to an average growth rate of 14 percent per annum in real terms during 1976-79, in contrast with the 7 percent annual growth during 1965-70. There have been corresponding increases in labor productivity and capacity utilization. Larger and more efficient factories have been established, and Honduran manufactured exports - over 20 percent of which go to CACM countries - increased substantially to 38 percent of industrial output in 1975-79. In addition, a major structural transformation has taken place. Once a major supplier of agricultural products to the rest of the region, Honduras slowly became an exporter of manufactured products, which by 1979 represented over 80 percent of Honduran exports to the CACM. Prospects 33. In 1980, economic conditions, including industrial investment and exports, deteriorated. Industrial value added increased by only 6 percent compared to an average of almost 10 percent annually during 1975-79. Credit available to the private sector was reduced, which in part can be explained by high interest rates abroad and uncertainties in the area. Honduras now faces difficulties in exporting to CACM countries because of the generally unsettled situation in the area. However, despite this less optimistic outlook, the demand and capacity creation effects of the large Government investment effort currently underway, along with increased credit availability for the private sector provided under the Government's 1981-82 program could increase private sector confidence and provide an improved environment for private sector growth. This, together with the improved prospects for increasing exports, particularly food, wood and paper products, is expected to lead to higher manufacturing growth rates (about 7-8 percent per annum) by the mid-1980s. Demand for manufactured goods should improve in line with the country's development. Honduras' relatively low wages, stable investment climate and good labor-management relations in comparison to its neighboring and trading partner countries, should keep Honduras reasonably competitive. Nevertheless, it must be recognized that the industrial outlook will continue to be influenced for the next few years by the overall situa- tion in Central America, and private investors are likely to remain relatively cautious in the entire region.  - 10 - Government Policies 34. The Government took two institutional measures in 1974 to facilitate productive investment in industry. First, it created CONADI to fill a gap in industrial equity and term financing, supply technical and managerial assis- tance to new industrial projects and facilitate joint public/private participa- tion in large-scale enterprises. CONADI's operations grew rapidly, but by the end of 1980, it faced a difficult financial situation (para. 41). Second, it established the Honduran Forestry Development Corporation (COHDEFOR) to manage all forest lands, develop Honduras' extensive forest resources and finance forest industry. COHDEFOR has grown into an organization whose exports are now established in European and US markets. However, frequent managerial changes have hindered its development. 35. More recently, Government policies have focused in the stimulation of small- and medium-size industrial firms. These enterprises have been the target group of the National Industrial Development Fund (FONDEI), created to channel funds under the Bank-financed First Industrial Credit Project (Loan 1659-HO of March 8, 1979). To provide further support, the Government is upgrading the Industrial Development Center (CDI), which had been assisting individual artisans, to provide broader technical assistance services and financing to small-scale enterprises (SSEs). CDI's budget has been substan- tially expanded, and it started lending to SSEs under the First Industrial Credit Project in late 1980. The Government agreed that CDI would continue to be provided with adequate human and financial resources to enable CDI to carry out its responsibilities under the project (Loan Agreement, Section 3.01). In addition, in 1978 the Government enacted a law to promote the development of SSEs, including the extension to SSEs of the incentives (tax and duty exemp- tions) available to larger firms under the bilateral trade agreements with other Central American countries. 36. Honduras' tariff structure has been closely related to the CACM's Common External Tariff (CET) and in general has not encouraged uneconomic manufacturing. Nominal protection rate is low by Central American standards. While the effect of tariffs and other incentives, particularly that of a liberal system of tax exemptions, has encouraged industrial investment overall, it has been costly in terms of revenues foregone, and it is likely that much investment would have taken place with lesser incentives. While the Government is aware of some of the limitations of its incentive policy, it has been reluctant to alter it before a revision of the regional system (CAAFIID) because of the competition within Central America for new investments. 37. In order to increase exports, the Honduran Government is also estab- lishing a more systematic approach to export promotion. In view of Honduras' declining balance of payments situation and the apparent inability of the CACM countries, at this time, to formulate a common regional export incentive policy, the implementation of an effective national strategy has become increasingly important. The Government is preparing an export promotion law, and the Bank has commented on its first draft. The Government has agreed that, before taking any action concerning incentives for the promotion of exports, it will give the Bank all reasonable opportunity for exchanging views on such incentives (Loan Agreement, Section 3.08).  - 1 1 - Government Development Plan 38. Under the 1979-83 Economic Development Plan, the Government's targets for industry are: (i) an average real growth of 9 percent per annum, increasing industry's contribution to GDP from 17 percent in 1979 to 19 percent in 1983; (ii) growth of manufactured exports by 15 percent per annum in current terms, with the proportion of domestic value added in exports progressively in- creasing; and (iii) more rapid development of labor-intensive small- and medium- sized enterprises. To achieve these targets, the Plan envisages: (i) a more selective import substitution strategy focusing on efficient industries; (ii) increased promotion of exports outside the CACM; (iii) identification of new industries in which Honduras might have a comparative advantage; and (iv) provision of increased credit and technical assistance to small and medium- sized industrial firms. While the industrial growth rates envisioned in the plan appear optimistic at this time (para 33), the rapid development of labor- intensive small- and medium-sized enterprises is taking place through the First Industrial Credit Project, and would continue under the proposed project. Industrial Finance 39. Institutions providing finance to industry in Honduras include the Banco Central de Honduras (BCH), the aforementioned CONADI and COHDEFOR, 15 commercial banks including one financiera and, until recently, the Government-owned National Agricultural Development Bank (BANADESA). 40. BCH, established in 1950, is a well-managed and adequately staffed organization. It has been active, apart from its normal responsibilities as a central bank, in economic development. BCH has established rediscounting facilities, available to a variety of financial intermediaries, which have helped to finance inventories of export commodities and to meet short-term liquidity requirements for agriculture and, to a lesser extent, industry. BCH also operates a guarantee fund for small-scale enterprises and a rediscount facility for financing non-traditional exports, and has administered effectively four Bank Group supported agricultural credit projects, the First Industrial Credit Project, and the credit component of a tourism development project. The last two are responsibility of FONDEI, through which the industrial credit resources of the proposed project would be channelled (para. 50). 41. In recent years, reflecting BCH's efforts to increase competition in commercial banking, important changes have occurred which have given the banking system a broader base, an enlarged clientele, and an improved geographic spread. As a result, the number of commercial banks has increased, and the system is channeling an increasing amount of resources into agriculture and industry. Honduras' 15 commercial banks have provided about 59 percent (US$96.0 million) of new industrial credits during 1980. These credits, on average, account for 20 percent of the commercial system's total new loans. While commercial banks are engaged mainly in short-terms lending the situation is changing appreciably. In 1970, loans for less than 18 months accounted for 67 percent of resources loaned and by 1980 only 48 percent. This has been mainly as a result of the increased availability of longer term financing, such as under the First Industrial Credit Project. CONADI has become the most important industrial financing source, accounting for 41 percent of industrial  - 12 - lending, but currently CONADI is in financial difficulties and its lending level for the next one to two years is expected to be modest. In the recent past CONADI has been promoting through long-term loans and equity invest- ments large-scale projects which have involved it in the management of individual enterprises and which take years to achieve profitability. Moreover, these projects have been financed through commercial foreign borrowing with short- and medium-term maturities, thus creating serious liquidity problems for CONADI. In addition, CONADI has extended substantial guarantees to firms some of which are defaulting on the secured loans, and CONADI may need to cover them. Through the on-going UNDP-financed project, and the technical assistance under the proposed loan, CONADI would be assisted in resolving its immediate and longer-term problems (para. 64). 42. Internally generated resources have traditionally been relied on for the financing of industry. Until 1971, equity, undistributed profits, and depreciation reserves provided over two-thirds of industrial resources, while loans and credits accounted for less than one-third of financing. Since then, however, debt financing has grown in importance and now accounts for about 50-60 percent of industrial financing. Over the long run, Honduras will have to mobilize a larger supply of domestic capital to finance industrial development than it has so far. The new regulations on interest rates should allow the commercial banks to charge rates attractive enough to provide an incentive for a shift to term financing. Monetary Policies 43. Monetary policy in Honduras has traditionally focused on three principal objectives: (i) maintaining the stability of the Lempira within a system of free currency convertibility; (ii) seeking to achieve equilibrium in the balance of payments; and (iii) keeping the domestic inflation rate at or below the level of the US--Honduras' principal trading partner. These objectives have been pursued by modifying legal reserve requirements on deposits, regulating the percentage of commercial bank lending for a particular purpose, limiting discount and rediscount facilities mainly to agricultural crop and export financing, and levying surcharges on imports of non-essential items. Partly as a result of these Goverment policies, the historical rate of inflation in Honduras, as measured by the consumer price index, has been low compared to many other Latin American countries, and the Lempira-US Dollar exchange rate has remained at 2:1 for the past two decades. The annual average increase of the consumer price index rose from 3.4 percent in 1970-1973 to 7.7 percent in 1976-1979. In 1980, inflation rose to 19 per- cent as a result of increasingly higher prices of imported goods, the new round of oil price increases, and the failure of basic grains production to keep pace with growing demand. 44. While in the 1960s interest rates were modified infrequently, in the 1970s interest rates have played a more important role in monetary policy. The maximum interest rates on productive loans, which were constant between 1967 and 1971, were changed in 1972 and 1974 and again in 1980 and 1981. Interest rates on loans for consumption or commerce, however, have been restricted since 1974 when the free market rate was replaced by a 13 percent ceiling interest rate. In the face of a 66 percent increase in banking liquidity between 1975 and mid-1977, BCH raised legal reserve requirements on all bank deposits, from  - 13 - 25 percent to 30 percent thereby increasing the cost of resource mobilization by the banking system, and reducing incentives to raise long-term funds. Ceiling of 11 and 14 percent established in 1978 and in 1979, respectively on deposit.interest rates, hampered the mobilization of domestic resources. In addition, a lending rate ceiling (16 percent prior to March 1980 and 19 percent thereafter) limited the profitability of foreign commercial borrowings. As part of a financial program developed with the IMF in May 1981, which included measures to tighten the government's expenditures, improve tax administration, raise rates for services of public enterprises and reduce BCH credit to the Central Government, interest rates were freed on deposits, and a maximum spread of 3.5 percent was allowed on loans of commercial banks which were financed with foreign credit. Industrial Investment and Credit Demand 45. Taking into account the fluctuations in investment amounts which can be expected due to the "lumpiness" of some projects, the GDP and industrial investment growth rates during the last six years, and the GDP growth rate projected for 1981-85, 1/ it is estimated that industrial investment in fixed assets during the next four years would increase in real terms by about 4 percent per annum. Assuming an annual inflation rate of 12 percent for the next 2-3 years, this would correspond to an average annual investment level of about US$80.0 million, in current terms. 46. Based upon the recent trends in industrial financing (para. 42) on average about 50 percent of incremental industrial investment would be financed by lenders; thus, about US$40.0 million equivalent would be required each year. This figure is comparable with the results of a recent survey conducted by FONDEI to determine the potential demand for its financing. The survey, which covered seven of the major financial intermediaries, showed a pipeline of about 250 small- and medium-sized industrial subprojects requiring a total investment of about US$60.0 million over the next two years. The proposed Bank loan of US$30.0 million over the 1982-1984 commitment period of the loan would finance about 25 percent of the credit required. The remainder of the investment requirements would be met by short- and medium-term direct foreign loans, by new, and renewal of short- and medium-term loans made by commercial banks, and by other cofinancing resources, including export credit lines arranged by the BCH (para. 67). 1/ GDP growth for 1981-85 is projected at about 4.5 percent annually (July 1981, Economic Memorandum on Honduras).  - 14 - PART IV - THE PROJECT 47. A Staff Appraisal Report entitled "Second Industrial Credit Project," No. 3596a-HO dated November 23, 1981, is being distributed separately to the Executive Directors. Annex III contains a Timetable of events in processing the proposed project and a description of the special conditions of the proposed loan and credit. The project was appraised in March-May 1981. "'egotiations were held in Washington from November 12 to November 16, 1981. The principal representative for the Government was Mr. Roberto Pacheco (Legal Counsel, Ministry of Finance) and for BCH, Mr. Gonzalo Carias (Assistant to the President of BCH). Objectives and Project Description 48. The First Industrial Credit Project (Loan 1659-HO for US$15.0 million, approved on February 6, 1979) was designed to assist the government in meeting its objectives for developing the industrial sector, by establishing an effec- tive system to provide term financing to sound investment projects of small- and medium-sized firms. The loan was made to the Government of Honduras for onlending through FONDEI which has been established and administered by BCH. FONDEI operates as a second-tier financial institution, providing part of the financing for term loans made by the financial intermediaries (commercial banks and financieras, including CDI and COHDEFOR) for industrial investment sub- projects. As of September 30, 1981, US$14.2 million of the loan was committed and US$7.5 million disbursed by the Bank. The project's institution building objectives for FONDEI and the banking system are being achieved. Overall, this two-tier credit system through FONDEI has proved itself to be a very viable mechanism in Honduras for financing efficient industrial projects and assisting the government in reaching its development goals in the industrial sector. 49. The proposed project would be a follow up to the First Industrial Credit Project; it would continue supporting the government industrial strategy and help in promoting and maintaining rapid and efficient growth of industrial output, exports and employment. The project would strengthen the institutional capability created under the first project to select, prepare, and finance sound industrial investment projects, particularly of small- and medium-size manufacturing firms. It would increase the amount of medium- and long-term credit to industry, thus providing more appropriate financing for industrial expansion than is presently available. 50. The project would be carried out by FONDEI, which would review and approve medium-and long-term loans for industrial subprojects submitted by financial intermediaries. Commercial banks, CDI and COHDEFOR are expected to participate in the project as financial intermediaries. 51. Under the project FONDEI would finance the purchase of fixed assets, associated permanent working capital, installation of equipment, preinvest- ment studies and technical assistance services. Projects eligible for financing would entail the creation, expansion or modernization of the productive capacity of enterprises involved in manufacturing, agro-industry, forestry and wood processing, fishing and fish product industries, and industry related services.  - 15 - 52. The maximum financing for any single investment or enterprise would be US$1.25 million (Loan Agreement, Section 2.02(b)(iii)). This limit would be cumulative, taking into account any other outstanding amounts from previous FONDEI loans. This is intended to avoid concentration of project financing in a few firms. The project significantly benefits small industries, which would be defined as firms with fixed assets of less than US$150,000 equivalent, excluding land and buildings, but including new investments under a proposed subproject. This definition corresponds approximately to firms with up to 25 employees, and includes most firms which have had limited access to credit from the banking system. In addition, FONDEI would: (i) allocate at least US$4.0 million of the proposed loan for small-scale industries (Loan Agreement, Section 2.02(c)(i)); (ii) provide a differentiated spread to cover the higher costs of small-scale lending (Project Agreement, Section 2.04); and (iii) coor- dinate with CDI to ensure that small-scale projects are well prepared for submission to the participating financial intermediaries. 53. FONDEI would finance up to 65 percent of the cost of new industrial subprojects and up to 80 percent for expansion and modernization subprojects. Financial intermediaries would finance at least 10 percent of subproject costs and each sub-borrower the balance. FONDEI's financing would be for up to 15 years with up to 3 years grace. In the case of subprojects for to exports outside Central America, FONDEI would be entitled to provide an extended subloan grace period and repayment terms up to 2 additional years within the above limits. 54. Subloans financed by FONDEI would be denominated in Lempiras. Interest rates charged by financial intermediaries on the portion of loans with their own resources are subject to the regulations established by BCH. BCH has agreed on the initial onlending interest rate of 17 percent charged by financial intermediaries with FONDEI resources and on the specific criteria to be used for its periodic review and revision throughout the commitment period of the proposed loan. Such review and revision would be made ever- six months, based on the inflation rate, market rates and adequate spreads to FONDEI and financial intermediaries (Project Agreement, Section 2.04(d)). Currently, taking into account the abovementioned criteria, a 17 percent interest rate appears adequate as an initial rate. 1/ 55. FONDEI would onlend to participating intermediaries at initial interest rates of 12, 13, and 14 percent per annum for enterprises with fixed assets of less than US$50,000, between US$50,000 and US$150,000, and over US$150,000, respectively; since the initial interest rate to be charged by 1/ This rate is in line with existing lending rates for term lending in Honduras and is expected to be positive in real terms. The inflation rate in Honduras was about 7.3 percent average per annum during 1974-79. It accelerated during 1980 to about 19 percent but dropped to an equiv- alent annual rate of about 10 percent during the first four months of 1981, and is estimated to be 12 percent for 1981 and projected to remain at about 12 percent for 1982.  - 16 - intermediaries to all enterprises would be set at 17 percent per annum (para 54), intermediaries would receive higher differential spreads for subloans to smaller enterprises. These higher spreads, which proved to be adequate under the first project, are intended to encourage intermediaries to lend to SSI, which have relatively higher loan processing and supervision costs and associated risks. BCH has agreed to the abovementioned interest rates and spreads (Project Agreement, Section 2.04). 56. FONDEI's new statement of policies and industrial regulations as presently drafted would form a satisfactory basis for FONDEI's channelling of Bank funds for industrial lending under the proposed project. BCH has agreed on these policies and regulations, and their approval by FONDEI's Executive Committee would be a condition of loan effectiveness (Loan Agreement, Section 6.01(b)). 57. FONDEI is headed by a qualified director responsible for managing its day-to-day operations who reports to an Executive Committee established by BCH and consisting of the President of the BCH, a representative of the Minister of Economy, and a representative of the national banking system. The committee has overall responsibility for FONDEI's operations, and BCH provides technical staff and logistic facilities to FONDEI. Detailed organization and staffing arrangements have been discussed with the Bank and appear adequate to enable FONDEI successfully to carry out the project. FONDEI's Operations 58. FONDEI's operations have grown rapidly since its establishment in December 1978, particularly during 1980. As of March 31, 1981, FONDEI's total approved financing amounted to US$17.8 million of which 77 percent was under the First Industrial Credit Project. At that time, total investment cost of industrial subprojects amounted to US$24.0 million, of which FONDEI had committed US$13.8 million (US$11.2 with Bank loan resources). 1/ The majority of banks and financieras operating in Honduras have participated as financial intermediaries under the First Industrial Project. FONDEI lending is concentrated in relatively small enterprises, which have on average US$183,000 in fixed assets after the FONDEI financing, excluding land and buildings, as of March 31, 1981. At that time, FONDEI had financed a total of 127 industrial subprojects with an average subloan size of US$108,000, of which 46 subprojects are for SSIs with an average subloan size of US$28,000. FONDEI, in addition, has supported a large number of new firms which accounted for about 30 percent of the enterprises financed and 51 percent of total subloan amounts. Overall, the above-mentioned figures show the positive results of the FONDEI's operations in reaching relatively small enterprises and achieving a wide distribution of its resources among banks and indus- trialists. 1/ A balance of US$4.0 million had been committed out of the US$16.0 million credit component under loan 1673-HO (US$19.5 million), for tourism development in Honduras.  - 17 - 59. FONDEI's disbursed and outstanding portfolio has grown rapidly, amounting to US$ 7.5 million as of December 1980. The portfolio has minimal possibilities of arrears, due to FONDEI's policy of requiring subloans repay- ments by, financial intermediaries, regardless of whether payments by the sub-borrowers have been received, through the intermediaries' clearing accounts with BCH. For 1981-1984 FONDEI's profits are projected to average about US$0.5 million p.a. Operating income from loan portfolio would cover the financial expenses as well as administrative costs. FONDEI's projected net operating profit for 1981-1984 is estimated to average 6 percent of paid-in capital and retained earnings. Thus, provided inflation rates in Honduras return to their traditional low levels, FONDEI should be able to meet its policy objective of maintaining at least the real value of its capital, particularly beyond 1983, when operating profits are expected to increase rapidly. Participating Institutions 60. Participation in the project would be limited to financial institu- tions which meet FONDEI's eligibility criteria, to be defined in participation agreements (Project Agreement, Section 2.03(b)). 1/ To qualify, an institution would have to employ staff capable in FONDEI's judgment of performing project appraisals and of supervising projects to ensure that resources had been used for the purpose intended and that projects progress on schedule. It would be required also to adhere to specified lending and repayment terms, and procure- ment and disbursement procedures. The signing of participation agreements satisfactory to the Bank with at least three intermediaries would be a condi- tion of effectiveness of the loan (Loan Agreement, Section 6.01(c)). The intermediaries would assume the full credit risk on subloans. They would also provide short-term financing and working capital for sub-borrowers. The most any one intermediary would be permitted to commit of Bank loan funds would be US$7.5 million except that loans to SSIs would be exempted from this limita- tion (Loan Agreement, Section 2.02(b) (ii). 61. The intermediaries would have primary responsibility for preparing subproject appraisals and for subloan supervision. BCH has agreed on revised appraisal and supervision guidelines to be followed by both FONDEI and financial intermediaries, as well as on the corresponding terms of the draft participation agreements specifying the intermediaries' appraisal and supervision responsibilities. Approval of appraisal and supervision guidelines by FONDEI's Executive Committee would be a condition of loan effectiveness (Loan Agreement, Section 6.01(a)). Prior Bank approval would be required for all subloans above US$400,000 (Loan Agreement, Section 2.02(d)). On this basis, the Bank should review 30-35 subprojects covering 40-50 percent of the loan amount. For FONDEI subloans above US$250,000 the economic rate of return (ERR) would be calculated by FONDEI, using standard Bank guidelines for DFCs. Subloans to SSIs would be subject to simpler and more rapid appraisals, focusing on the market and technical aspects, repayment capacity and on the 1/ CONADI, which currently has a very difficult financial situation, would be eligible to participate as financial intermediary under the proposed project, only when and if its situation does improve.  - 18 - financial rate of return (FRR), which has been used adequately by FONDEI and financial intermediaries under the first project. All appraisals would include an analysis of certain key economic variables (e.g., employment, value added, exports) to assist in project monitoring, and also a discussion of the procurement procedures applied (Loan Agreement, Section 2.03(a)(b)). Costs and Financing 62. Based on estimates of the likely demand for industrial financing, the resources available to the participating institutions and their capacity to expand operations, the total cost of direct investment and technical assistance financed under the project is estimated at US$50.2 million. The proposed loan of US$30.0 million equivalent together with about US$0.8 million of the UNDP's contribution of US$1.3 million for technical assistance would meet all foreign costs which amount to 61 percent of the total project cost. The balance of the financing will be provided by BCH-FONDEI (about 8 percent of total costs), the sub-borrowers (about 20 percent), and the intermediaries (about 10 percent) and the Government (about 1 percent). BCH would make US$2.5 million equivalent available to FONDEI as paid-in capital prior to December 31, 1983. The Government and BCH have agreed on making this amount avail- able to FONDEI by this date (Loan Agreement, Section 3.05). The proceeds of the Bank loan would be on-lent by the Government to BCH at the same interest rate, term and grace period as for the proposed Bank loan, except for US$1.3 million which would be passed on to CONADI, FONDEI and CDI on a grant basis for technical assistance. 63. In view of the likelihood of many small subloans, the Bank loan would be repaid on a fixed amortization schedule (equal installments over a 20-year term, including 5 years of grace). BCH would assume the foreign exchange risk on FONDEI's operations, for which it would levy a fee of 1.0 percent per annum on the outstanding balance of subloans with Bank resources (Project Agreement, Section 2.05(a)(b)). Technical Assistance 64. The technical assistance component would be financed by the Govern- ment using US$1.3 million of the loan and US$0.2 million of its own resources. In addition, an expected UNDP grant of about US$1.3 million would be provided. 1/ The technical assistance is designed to strengthen the capabilities of par- ticipating institutions. The technical assistance program would include a training component, and would focus on (i) upgrading the FONDEI and financial intermediaries, including CDI, capacities on subproject preparation, appraisal and supervision, providing training through special seminars and on the job; (ii) upgrading FONDEI and CDI financial planning, information systems and loan administration; and (iii) designing and implementing an efficient system to provide technical assistance through CDI to small firms. The Government and BCH have agreed on the timing and the nature of the technical assistance and training for CDI, FONDEI and financial intermediaries. The program would also make available resources to assist CONADI to implement a plan of action that would be agreed with the Bank, based on recommendations of the study of its 1/ It is expected that the technical assistance program would require about 273 man-months of consultant services with an estimated average man-month cost of about US$7,000.  - 19 - financial situation being carried out by UNDP-financed consultants (Loan Agreement, Section 3.01(a) Part II. This assistance would be contingent on CONADI making no new investments, lending or guarantee operations until a decision is reached and agreed with the Bank on a program to restore the finan- cial soundness of the institution and on the arrangements for executing this component (Loan Agreement, Sections 2.02(e)(iii) and 3.06). UNIDO and the Bank would be the executing agencies for the CDI and the FONDEI components of the technical assistance, respectively. Procurement 65. The proceeds of the Bank loan would finance the foreign exchange costs of imported and locally procured equipment, materials, civil works and services. Consulting services for subprojects or technical assistance services for the project would be open to international recruitment. Par- ticipating intermediaries would satisfy themselves that procurement items were suitable for the respective investment projects and reasonably priced, and that the beneficiaries had canvassed the main sources of supply and were purchasing from the most advantageous source. Whenever justified, items would be procured on the basis of at least three different quotations. Since it may be difficult or relatively costly to obtain quotations from several suppliers in the case of small orders, the solicitation of at least three offers would be mandatory only for items estimated to cost US$50,000 equivalent or more (Project Agreement, Section 2.07(a)(ii)). All subproject appraisals would include a discussion of procurement procedures used, responses received, prices quoted and criteria for selection of suppliers. Commitment and Disbursement 66. The final date for submission of subloan proposals would be December 31, 1984 and the closing date for disbursements June 30, 1986. For subloans to small industrial enterprises with fixed assets of US$150,000 and under (excluding land and buildings but including the new investments under a proposed subproject), the Bank would reimburse FONDEI for 75 percent of FONDEI's total financing of individual subprojects representing their average foreign exchange content. Disbursement for small industry subprojects would be on the basis of a certificate of expenditure submitted by FONDEI, which would retain the supporting documentation in Honduras for inspection during Bank supervision missions. For medium-sized industry subprojects full documen- tation would be required and the Bank would disburse for (i) 100 percent of documented foreign expenditures for imported machinery, equipment, raw material inventories and services; (ii) 70 percent the c.i.f. cost of local expenditures for imported goods purchased off-the-shelf where the c.i.f. price cannot be ascertained; (iii) 50 percent of the ex-factory price of locally manufactured machinery and equipment representing the average of foreign exchange content; and (iv) 35 percent of investments in industrial buildings and related civil works representing the average foreign exchange content. For the technical assistance component of the project, the Bank would disburse for 100 percent of the Government's cost-sharing contribution for foreign expenditures. Retroactive financing up to US$1.5 million would be permitted for financing expenditures incurred between September 1, 1981, and the date of signing of the loan agreement. This is to ensure continuity of lending for medium-sized enterprises, since FONDEI had virtually fully committed its resources under  - 20 - Loan 1659-HO for these enterprises during the third quarter of 1981. Since the two-tier system involving FONDEI and the financial intermediaries (includ- ing CDI for SSE lending) requires a longer time for processing of subprojects than is usual for IDF-type loans, disbursements would be made for expenditures incurred up to 180 days prior to the receipt by the Bank of the subloan requests, in lieu of the normal 90-day limit. Cofinancing I/ 67. BCH is currently negotiating export credit agreements with several countries. The first such agreement which has recently been formalized with Argentina, will provide a line of credit for US$15.0 million equivalent for multi-sector use. BCH is expecting to conclude similar agreements with Brazil and Mexico and has initiated discussions with Eximbank of Japan. About US$5.0 million equivalent from these export credit lines would be utilized to finance industrial projects. These credit lines would be administered by the Central Bank's Credit Department and would be available to the Honduran commercial banks. Because these credit lines call for tied procurement, FONDEI would ensure that industrialists would only use these resources if the prices for goods and services procured through them are competitive. The Bank would review the operational guidelines to be developed under the cofinancing arrangements. Project Benefits and Risks 68. The proposed project would help fill a gap in the financing of efficient industrial projects in Honduras at a time when the financial system lacks long-term resources to cover industrial investment needs. The proposed project is expected to finance some 200-225 investment subprojects involving total investment costs of about US$47.4 million, focussing on a wide range of small- and medium-sized enterprises. The ERRs of subprojects are expected to exceed 25 percent on the average based on the experience under the first project. The subprojects to be financed are expected to have a substantial employment impact, generating a total of about 4,200 new jobs, at an average investment cost per job of about US$11,300 in 1981 prices. Indirect employment impact is also expected to be significant. 69. In addition to supporting the Government's development policies, the proposed project would strengthen the country's productive capacity and thus help sustain the financial burden of physical infrastructure and social development projects in the country. Based on results under the first project, total output of the subprojects is estimated at about US$45.0-50.0 million a year, of which about one-third would be for export. The impact of the project would be geographically dispersed, with agro-industrial subprojects focused mainly along the north coast and southwest region of the country and other manufacturing subprojects located mainly in the cities of San Pedro Sula and Tegucigalpa. Based on results of the first project and on FONDEI's subproject pipeline, the bulk of the financing is expected to go to the food, chemicals, apparel, metal mechanics, and wood subsectors. 1/ The term cofinancing is used in this report in its broad sense, to include supplementary financing provided by other external sources to BCH and/or commercial banks for industrial financing.  - 21 - 70. The project is expected to continue the positive institution development impact initiated under the first project. It would focus on the strengthening of the overall FONDEI system, by widening financial intermedia- tion and supporting FONDEI's efforts to build up subproject appraisal and supervision capabilities of participating intermediaries. The technical assistance services and lending to SSIs are expected to be strengthened considerably. 71. The proposed project, as conceived, does not involve any unusual risks. However, because uncertainty does exist about the degree to which financial intermediaries would increase their lending to the smaller firms and because some of the institutional arrangements established under the project would be new, especially the increased responsibilities of intermediaries on project appraisal and supervision, some delays in subloan processing may occur. The unsettled situation in Central America may also cause some firms to postpone investment decisions. The project's technical assistance and training component, the strengthening of the BCH's guarantee fund, the emphasis given to strengthening supervision procedures by participating intermediaries, as well as the focus of the project on small- and medium-sized industries, that overall are less likely to be susceptible to political events than larger firms in Honduras, would contribute to reducing project risks, including the risk of domestic resources being substituted by external funds. PART V - LEGAL INSTRUMENTS AND AUTHORITY 72. The draft Loan Agreement between the Republic of Honduras and the Bank, the draft Project Agreement between the Central Bank of Honduras and the Bank, and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement of the Bank are being distributed to the Executive Directors separately. The draft agreements conform to the normal pattern of loans for industrial credit projects, and their more important features and special conditions have been included in Part IV of the text and summarized in Section III of Annex III of this report. There are two special conditions of effectiveness of the Loan Agreement: (i) that FONDEI's Executive Committee approve FONDEI's Statement of Policies and Industrial Regulations and revised guidelines for subproject appraisal and supervision; and (ii) that at least three financial intermediaries have signed participation agreements with FONDEI. It would be a condition of disbursement for the proposed tech- nical assistance component for CONADI that agreement be reached between the Government and the Bank on the actions to be taken to improve the financial position of the institution (based on the recommendation of an ongoing study), on the arrangements for the execution of the proposed technical assistance, and on CONADI making no new investments, lending or guarantee operations pending agreement on the actions to be taken by the institution. 73. I am satisfied that the proposed loan would comply with the Articles of agreement of the Bank.  - 22 - PART VI - RECOMMENDATIONS 74. I recommend that the Executive Directors approve the proposed loan. A. W. Clausen President Attachments December 1, 1981  -23 - ANNEX I Page 1 of 6 TABLE 3A HONDURAS - SOCIAL INDICATORS DATA SHEET HONDURAS REFERENCE GROUPS (WEIGHTED AVE GES LAND AREA (THUUSAND SQ. KM.) - HOST RECENT ESTIMATE)Lr TUTAL 112.1 MOST RECENT MIDDLE INCKOE HIDDLE INCOME AGRlCULTURAL 29.2 1960 b 1970 /b ESTIMATE a LATIN AMERICA & CARIBBEAN EUROPE CNP PER CAPITA (US$) 180.0 260.0 me 1616.2 2609.1 ENERGY CONSUMPTION PER CAPITA (RIL(iRANS OP CWAL EQUIVALENT) 156.5 257.5 248.2 1324.1 2368.4 PUPULATIUN AND VITAL STATISTICS PUPULAIION, MID-YEAR (THOUSANDS) 1942.0 2640.0 3563.0 URBAN POPULATION (PERCENT OF TOTAL) 22.8 28.7 34.8 64.2 53.2 PUPULATIUN PROJECTIONS PUPULATION IN YEAR 2000 (NILLIONS) 6.7 STATIUNARY POPULATION (MILLIONS) 16.0 YEAR STATIONARY POPULATION IS REACHED 2090 POPULATION DENSITY PER SQ. EM. 17.3 23.6 31.8 34.3 80.6 PER SQ. KM. AGRICULTURAL LAND 7U.6 92.5 117.7 94.5 133.9 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 45.6 47.4 47.9 40.7 30.1 15-64 YRS. 52.3 50.1 49.5 55.3 61.5 65 YRS. AND ABOVE 2.1 2.5 2.6 4.0 8.3 POPULATIUN GRUWTH RATE (PERCENT) TOTAL 3.3 3.1 3.3 2.4 1.5 URBAN 5.8 5.4 5.5 3.7 3.1 CRUDE BIRTH RATE (PER THUUSAND) 51.0 49.2 45.6 31.4 22.9 CRiUOE DEATH RATE (PER THOUSAND) 18.5 14.5 11.2 8.4 9.1 GROSS REPRODUCTION RATE 3.6 3.6 3.3 2.3 1.6 FAMIlLY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 12.7 23.0 USERS (PERCENT OF MARRIED WOMEN) .. .. 9.0 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71-100) 83.0 97.0 78.0 108.3 119.8 PER CAPITA SUPPLY OF LALURIES (PERCENT OF REqUIREMENTS) 92.0 101.0 89.0 107.6 125.7 PROTEINS (GRAMS PER DAY) 56.0 61.0 53.0 65.8 92.5 UF WHICH ANIMAL AND PULSE 22.0 25.0 23.0 34.0 39.7 CHILL (AGES 1-4) MORTALITY RATE 31.7 20.4 13.7 7.6 3.4 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 46.5 52.9 58.1 64.1 68.9 lNFANT MORTALITY RATE (PER THOUSAND) 130.0 117.0 118.0 70.9 25.2 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL 12.1 34.0 46.0 65.7 URBAN 42.9 .. 82.0 79.7 RURAL 2.7 .. 27.0 43.9 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) IOTAL .. 24.0 .. 59.9 URBAN .. 64.0 .. 75.7 RURAL 9.0 30.4 POPULATIUN PER PHYSICIAN 12610.4 3793.1/c 3293.9 1728.2 973.3 PUPULATION PER NURSING PERSON .. 1132.6 1242.3 1288.2 896.6 POPULATIUN PER HOSPITAL BED TUTAL 622.8 581.0 712.9 471.2 262.3 URBAN .. .. .. 558.0 191.8 RURAL .. .. ADMISSIONS PER HOSPITAL BED .. 19.8 29.1 .. 18.2 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 5.7 .. URBAN 5.5 .. RURAL 5.7 .. AVERAGE NUMBER OF PERSONS PER ROOM TUTAL 2.4 .. URBAN 1.8 .. RURAL 2.7 .. ACCESS TO ELECTRICITY (PERCENT UF DWELLINGS) TOTAL 14.6 .. 25.0 URBAN 56.7 .. ,67.1 RURAL 1.9 .. 5.5  - 214 - ANNEX I Page 2 of 6 TABLE 3A HONDURAS - SOCIAL INDICATORS DATA SHEET HONDURAS REFERENCE GROUPS (WEIGHTED AVERA9ES - HOST RECENT ESTIMATE) a MOST RECENT MIDD E INCOME MIDDLE INCOME 1960 /b 1970 /b ESTIMATE /b LATIN AMERICA & CARIBBEAN EUROPE EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL 67.0 87.0 85.0 101.7 105.9 MALE 68.0 87.0 85.0 103.0 109.6 FEMALE 67.0 88.0 84.0 101.5 102.2 SECONDARY: TOTAL 8.0 12.0 13.0 35.3 66.3 MALE 8.0 12.0 13.0 34.9 73.2 FEMALE 7.0 11.0 13.0 35.6 59.5 VOCATIONAL ENROL. (D OF SECONDARY) 24.0 18.0 25.0/f 30.1 28.4 PUPIL-TEACHER RATIO PRIMARY 32.0 35.0 35.0 29.6 26.8 SECONDARY 10.0 .. 17.0/f 15.7 23.6 ADULT LITERACY RATE (PERCENT) 45.0 57.0/d 60.0/f 80.0 75.4 CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION 3.0 4.8 6.4 42.6 83.9 RADIO RECEIVERS PER THOUSAND POPULATION 64.4 55.7 49.1 215.0 181.6 TV RECEIVERS PER THOUSAND POPULATION 0.7 8.3 14.5 89.0 131.1 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION 21.0 .. 43.7 62.8 123.8 CINEMA ANNUAL ATTENDANCE PER CAPITA .. .. .. 3.2 5.7 LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) 616.9 793.3 1037.7 FEMALE (PERCENT) 12.3 12.7 13.7 22.6 32.9 AGRICULTURE (PERCENT) 70.2 66.5 63.2 35.0 34.0 INDUSTRY (PERCENT) 10.6 12.5 14.4 23.2 28.7 PARTICIPATION RATE (PERCENT) TOTAL 31.8 30.0 29.1 31.8 42.3 MALE 55.3 52.3 50.0 49.0 56.5 FEMALE 7.9 7.7 8.0 14.6 28.5 ECONOMIC DEPENDENCY RATIO 1.5 1.7 1.7 1.4 0.9 NCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS .. .. HIGHEST 20 PERCENT OF HOUSEHOLDS .. 67.8/e LOWEST 20 PERCENT OF HOUSEHOLDS .. 2. 3T . LOWEST 40 PERCENT OF HOUSEHOLDS .. 7.3 . POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. .. 255.0 RURAL .. .. 180.0 187.6 ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN .. ,. 251.0 513.9 RURAL .. .. 80.0 362.2 385.1 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN .. .. 14.0 RURAL .. ., 54.9 Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1976 and 1979. /c Registered, not all practicing in the country; Id 1974; /e 1967; If 1975. may, 1981  ANNEX I - 25 - Page 3 of 6 DEFINITtIONS OF SOCIALt INDIOOiAS Not..: Aitboogh the dat art draw ito. sorcs4otri odo oh. mast a.thbitoti-a cad reibl,i ebhod alc ha noted obht they Nay tat be itar- ataiooallycoapera.bls b . of ct la of stodeaited dfioitit te. d ctoap.4t . by dtff ...attootia it colcin .b data. Th. data atl.ta thI..., oseful to descr.ibe oraaofegtod, Indicate orsoda, cad hb..autarise certafo eajor ditffsraao. !bstvs.oc tt Tb.ofh oc snoop ar h1 . sees ootty grou.p of tbo sobjeot outry aed (2) a country grop ait h, cia ibraaasltoete h tar r of te tojeotuooory (toet fohCptliogh.i.apns. ropae.'ids ooatrb rt d tdl ae is tb tbee b o s_tronger sotocltoe fiios.ltoh e tt.gopdatba a ofte are pulttio weighted Irlitbee tomas for nob indicator ted abat oaly wha eaodrIty of the oore iii A grouP hot 'datafor obt iodoat_. Stoa tba co-a-g of -otocrir e i.tetdicators depteds - ot -.1aalabiliay af data oa aiao t toA sol b cilltyt .0 oaf ereoctt Boonus.h. LAND0 A00 (cthoo...d sq.ke.) pplto . oprltd-ttl ta,tdrrl-Ppleo ti Totl -Toaeofreta. c ,apritc leod ae to ,ild wate.,obe,odraldtitbyherepciv tmerf hosital hads. hAvioultur.. -E. itomta of arcloslae_ sdtaprri o amaolysslb_ opbi ad piirActgert n eula-biasd baspita1 bd.at - rros.peut, earht cod kitchoc gdteo to tIel fallot; 1978 tdeyte. bbltto otee opo aI.rescheetpm acy stffd by st Isaac oea physiia... . aebiiaba-c p-tidiag pcioctpa.ily cost- ISP 7t0d CbIA(5)-tf o apt etet tctet e"that priose, al1- dial _.rrar to itolodd. tota bcepitole, bolne, iolods health coI tdbytmeororeo machod at. Octld Sackt ki1lo (1977-79hels; 1960, n.n clcaaettprottysafSb bece htb If 71. aud jgyp data. tad~~~~~~~ical.. aeittat noI, midwif aI---o) ahib offsr ce-pacitto Or tmeRGY CONSUMPTION Pit Cd ITI, - A._tul cuapocof c__cial s_agy (coal dtca purpotte urhot. boeitale-g toodadi. f, Jwo itaopalgatrl bai end lig`oita, pstroleoa oaorl1 gat tod bydro-, oociaa sod totbaryl aln- tod rura hoepitt lclwroa hopt leotamdiaadmtaiy orciy)t hiogaa-flol oo teo per ctPita; 1960, 17, tod199 ottr.Seiali-d hospitele -o italded ool1oda totl. data. Adaistiote~~~~~~~~~~~~P,P re Oac~ia tad - Tota . tobar of admiati.e.t. o diecharste 'IT TIP AND VIT~~~~~~~ IIATI."'CS ~~~foot hotPito1e dIVidad by the aube- of bade. Tatl Proucic.Kidter (hoasoe) - As f JolY i; 1960, 1970, cod 1979 0HOUS0IN ljhoPoPu1etiot (rPrceot of cocci - Rtict of urba to trial papltioo; A ouohldcne.ee f group oinvIdoldh br lve tt t ettdrfiuiftioo of orb. anar Y o ffect -ooP.-baility of data and thei noeas oedro ogrm or ma tt ha i.oldAd to atoog coocrios;I960. iO7, atd 1979 date, th hloeod tof- tttolpopea FooatoPotocr.- AvIliolrofrroo e tore- tota. orhet. aod towl1 - Averge . Porolatoo to yar 200 -. Cu ..o ....ulotioc proeic ar hated oa 1980 her of persona Pr coo to all urbe, sod ro.rIa .. ocPte -coaetica.l totalpopotcioc y agesod ea au4their motltlot ftrt_t tcytss.d-tllioga, r-P-ctlaly. D-1iit5aeaclods oo-p=roet eorrAcad Prrjtocto p-re .ter fur -ontaity ae cooia f tirr level. tes OOOttdprs tog lift t-p-ctocy at birth incre..alag rich rcor'apr. tpica tao. AIte t ife tritctn(eon fdtlaa aa,uha n oa lana, ad fealtliftam eceacy otbiitis at77. ynaa. hs ~ ionroocaea dwellings Iith etottioc ~it ..viog qo.enr As pa 'ttec tocr for ferciliyrac alto hove three lane1. tatoig dectioe So of toe, urban, and rural deali1agSrapciep f-clicyacc_odiaa to to-e la-a tod Pace faily plo...tig p-anrorace. Techf-ootrY ie thee aseip-d ott of t,hese tics -obiootOooe of curtalioy 0DUCATIOS9 _ttferily treo.de fry projccoo orpet. Adfueid Enrolat..t Utaios 1ttcaionrr rocultoio-I e. I Itatiroory ppltr thna tet groach si.t. Prilorn school - total, male end tamal - Grace total al a1t l th. birth _tac ia IqoaI to ah, doeth ros IAn tier the ag e--c-t w- solerto lle a th rmrylvlt pect_e of reaparcv ottitoond otcbs bealt o cbs troitrAd ftr Y triocer apouato eoita,t I soa poila ar haPloi..; or hev th oficiat aheol aga in - -yer000 a the ret. of dapdotiof f-tilit hrat ccrpaei_cdr col-ttl ae n ata-Caoe saoe eodr taci lent. tdcooreoranIntfo yaao dp.I riaySesrttn Poroleciao Otmatty so i 111 1 t..tlodedI Ppetio th. y nooot errnl -00 . b ..o Cdildao (0f-tb yecns . oukSgos-(5 pomr ta rioayeecdia byCatihara td eanher ta dthe lecco t!Zl9hi 1970. - and h" 1979.ata. dult icfon e.. fe. l -X Lisataol "(blet fcsdoe Miice Porolctri Grwth taa pfacrant) prha - droukilgrothtns of0 urban poo- . CO5titItT0tof...S_P V.t_li -atoo forI 19100-6. V7l-ld tod t1970L-79.Pacattn Cre ra thuad.at utaIon). -b. prsecger oats ctpw.. .itmater Crud - Sitc tote fre ttosad) - Cotoad lin hitc. par 1boendo mi-tsroa. ecig -tt tte sih personad ctdo.moaoa.hareyn poplacc; 16.19k,170,o 17 adit79 dat....t.c.rbt.. Cnuds Death tot (oar thooeaod) - Cotil d-th per1 tho-).d -kofmid.(1-sa Saiotesvta (nhtosadtrlnte 11tpsa rc iv tontec lopaiou; 1960, 1970. n 1970 data, brodcast to 1 genra po ti par -toad.1of popoletino eaidas -i. her t oota t eprdoc tn peio if. a - aopent -aa prseat f ag-aetflicd t- tpspetlf at-dt orrratya. my art be l aemarl star t-ipicy lta ...efaly ft9ne-yar av6a0o70s aodtgo 190-960 Vt o 99 enoonrc biihdicmi of hrib-oatrl daiceeunde sopceo- ainlftydccigpoon orlpbi a 197o0ad 9oplat iot; Pa.d.* otliencd T raivts ladra of toad yroductioo ...oICea tta ( Ik-Onll) thodadrof ptcptata Cit.. .o..ktcRdnc Ott... Can1t. pe Ta- at a t h. E .. I...e at l4 .pcrducionof 90 90 all dfond oo dtcle. yooto aldtsa n ee c ikc oddo h pblin, itolda ...dmlfeiae1to ro" to i tar Ott ealupdd(tiv . Aggregate prodootitoff.of;edtc f coon_ryy-it IIaedoatb 1.0101bPOOC otiialnrttn prtouc pric- --ighte -igh i- 196,170. so d 1979 dc. Tota taboo Force botihooedcl -tcnmialyacio aton ei Pe atoarl ofol-ie rron o enioa s -Illpote f-o I arme fR nc- sod htmooyd bu eooda t hegatw1ve.. fatoosd.te eeco "rYnqinlteo fs foodl -oPpi...eve.io..lI fin aoy pwri. bept rtigppla'tio at al"logt Deinition. id various coo ltrie tO necde. celais cuplescoptin omstc rodccro tpoca ee tt t~tOhP;190,190 gdf97fdta quatctieeusd i foudprorttIog_c osst itniutg. f eqirt- Aeioutotto-oot)i. . LY- laorfoc itg fetiag, faety. boio cad att-lic der eIaa.d hy PAD herd.p 00pyaoogctisd too ol fisingesc lctga oftota -sotfoce 160 197 and 190 p-data. niyadhelhcoadtientraoaltmAocM.bdyvihs NUgRITIdNcto b (rerolyot) -t labor fots ntto,cttoaic aaatr cod. eta .diorio IifppoC Ioo 7 en loig1 eco o e.atadeecoiy ao n a P" Ce pareoas do t talho farce 1960 hoP htdlnl;16-6,170dn 17 ao"17,ad199dt . LIr cat. uayo ... ocobto. Cgoame ra da)- ProtIn goocda of.g pert.. pica -btctailn Sas(acc) .oa.ml. oi-l eeiiaht quicmt- Totd all Aoc9 eris.l aecdbiead . by .t.ltlponidab f.. ndioi . A FRtCEnaa fttl aamdtsi opltr fsle opoiay alti t_c of,.60 Pca.-of cocal protith. par day, 19od loftra n97 dr l cod 190 1970. and 1979 ,data T se-r ae nIt-' patt irip diarte _oimo protie a. t cag 0d or ohs nr td prpc. bty PAl t iho mind tcootc anndoc Scof -1 Santo o.fpooieto.- L.a 15i sa 65. and over Worldy ford ilrvty 190pp-i, 197ltt 97 do-te,io Ohs. p.t I. tota.lblabo forc 170ad. 99 Childt(etsby-c) oote ..t Sas -e phoueold)-gd.nol Adet. per t..-Io ..it Porceoco-etwg of Pnce ost.thn1 libo cash. en 0knd - atno by7 dichc 0ig.:gno h-u reta to ...ildrn tchtig.tor fpl.or mee bdeveloinh g cot-b.nnac.rfino20pecec poo.t 20pren.adpors 0 er ccttdet dninad btins life p...ishlo 10.d .191 et 00 at,of dhuuganh-o1d t .. hitch 1960, 1970 ant 19790ot, oaf97 ...17 shud ha7 d.taree itloedssi coit of agn pat thouecdplint births.AEcluci oet o ao ste incom-leve beo htiob atiaSma herofpoplyo ftotal Porhaoy. Ngodirural) rich ttaerouhltIscoeeea tottaft affordable. eaaau teta foo prot bce hohdls 'pIDgAp.. tod seteynil)a-oa releci-ne. : poverty iticoma lw saetidofsrneptcpt p11cao-ne o 0 -oftheirP-nepeccdvs pouaioe oon a _ha f ern1eapub960 1e970oe incod of7 dthaoo hnr. Itlan ..ys is darn ed from the_ twl proucato ct ecndoo locacad, oct oon h.tld 100 mecira pface. aThouse mayd itlenelticgju -t-fo hhof cost pf ltiving in lohg tree..a coetrdad htgnti h.. iol oca a t house 23cro tttt tafarcd Proltio Sa- f slcaPvrnboe aa (col- rba reaionbI lseceanldi.i 7chtihfpua . cc meber Fof is thooTahld toO Druna d.- Peo ti.o pRpairi (urbante .ir d) wh ens debs lo dW tot hoot to-cptod19spt6prti1o70 pert19 o7 dthe dayto h.citth tot. _Pt lto ocac isacel, (raRceo of doaulacuc- pla rbr en rural :- Mother of. pspl (toal urh, E .And - coal seod by9 toa6t dipo7ee17ed-eCMDITIBTO thaciltoiot nd dapothildotc ior thitoot tosaatp c lof hduteteoret... FoonoetoV S,%6 aDI Soia O ,ad rtiata lao tOtallatOos. Ky 190 aeod.t qa1fid- trot a lificel sblol ec1o60 asify7 local Poruleotc ret taclot Pneco- Ppulatto divide by toner ot phot1din B taittcf0cueeaRaTuYTs. ratoGEToea._datRtacrites  -26 - ANNEX I HONDURAS - ECONOMIC INDICATORS Page 4 of 6 Population: 3.7 (mid-1980, millions) GNP per Capita: US$ 560(1980) Amount (million USs Share of GDP at Market Prices (2) Average Annual Increase (X) Indicator at current prices) (at current prices) (a) (at constant prices) 1979 _-9