Honduras - Agricultural Sector Adjustment Credit Project

Dmument of The World Bai FOR OmCAL US ONLY Rqut N. P-5923-HO REPORT AND RECOMENDATION OF THE PRESIDENT OF E INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED AGRTCULTURAL SECTOR ADJUSTMENT CREDIT IN AN AMOUNT EQUIVALENT TO SDR 43.3 MILLION (US$60.0 MILLION) TO THE REPUBLIC OF HONDURAS JULY 14, 1993 MICROGRAPHICS Report No: P- 5923 HO Type: PR This document has a restricted distribution and may be nsed by recipients only in the performance of their official duties. Its contents may not othenrise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as of June 30, 1993) Currency Unit = Lempira US$1.0 = L7.00 L 1.0 = US$0.18 SDR 1.0 = US$1.38612 On June 19, 1992, the Central Bank introduced a freely floating exchange rate regime. FISCAL YEAR January 1 to December 31 GLOSSARY OF ACRONYMS AFE - Public Forestry Sector AMDP - Agricultural Modernization and Development Program AMI - Intensive Management Program AGSAC - Agricultural Sector Adjustment Credit BANADESA - Agricultural Development Bank BANASUPRO - National Basic Products Supplies BAS - Business Advisory Service BCH - Central Bank BMI - Mother and Child Coupon BMJF - Woman Head-of-Household Coupon CACM - Central American Common Market CEM - Country Economic Memorandum CFF - Compensatory Financing Facility CG - Consultative Group CIDA - Canadian International Development Agency CODA - Committee for Agricultural Development COHDEFOR - Honduran Corporation for Forestry Development CONAMA - National Enviromnental Commission CPAR - Country Procurement Assessment Review CSIR - Country Strategy and 1Iplementation Review EAP - Environmental Action Plan EEC - European Economic Community ENEE - National Power Company ESAC - Energy Sector Adjustment Credit ESAF - Extended Structural Adjustment Facility ESW - Economic and Sector Work FFI - Formal Financil Intennediaries  101R OIICM& USE ONLY PHIS - Honduran Soci Invesmen Fund FLAS - Foreig vestment Advisory Service GATT - General Agree_m on Tariff and Trade GDP - Gross Domestic Product GNP - Gross Nadonal Product G00H - Government o Hondas GT: - Germa Association for Technical Cooperation IlDB - hnter-American Development Bank IDF - Is Development Fund IFPC - International Finance Corporation HHMA - Hondura Agricultural Market Instute IMP - Interational Monetary Fund INA - National Aga Instite LMA - Law for the Modernization and Development of the Agriculral Sector LIA - Agrrian Reform LAw MIGA - Multlateral Inveatm Guarntee Ageny NAFTA - North Amedcan Free Trde Agreement NEAP - National Environmnl Action Plan NGO - Non-Goveramental Organization PFMU - Public Forest Management Units PFP - Policy Framework Paper POA - Anual Opeating Program PRAP - Family Assistn Program PS? - Policy Support Program RUTA - Regional Unit for Technical Assistance SAC - Stuctural Adjustme Credit SAL - Strucral Adjustment Loan SANAA - Public Water Udlity Company SlTC - Standard International Trade Classification SOE - Statement of Expendures SRN - Secretriat of Naural Resources TOR - Terms of Reference UNCTAD - Unied Nations Confer on Trade and Development UNDP - United Nations Development Prgrmme UPSA - Agriultural Sector Planing Unit USMD - United States Ageny for Ieational Development WID - Women in Developmet Thb document hs a resucted distribution and may be used by recipients only in the prfornwnce of their officW dutis Its contents may not otherise be diclosed without World Bank authorLi.,~  HONDURAS AGRICULTURAL SECTOR ADJUSTMENT CREDIT PART I - COUNTRY POLICIES AND BANK GRO)UP ASSISTANCE STRATEGY ........ 1 A. Historical Perpective and Recent Performmce ........................ 1 B. The External Environment ..................................... 4 C. Country Development Objectives and Policies ......................... 6 D. Bank Group Country Assistance Strategy ............................ 14 E. Summary Assessment ........................................ 19 PART II - THE AGRICULTURAL SECTOR PROGRAM ........................ 19 A. Sector Overview ........................................... 19 B. Sectoral Development Program and Recent Reforms ...................... 20 C. Land Tenure ............................................. 21 D. Forestry ................................................ 23 E. Rural Fimmce ..................... ........................ 26 F. Government Expenditure and Public Administradon ..................... 28 PART III - THE PROPOSED AGRICULTURAL SECTOR ADJUSTMENT CREDIT ....... 29 A. Bank Experience and Rationale for Lending for Agriculture ................ 29 B. Tranche Release Conditions .................................... 30 C. Procuremet, Disbursement and Auditing ............... I ............. 31 D. Benefits, Impa on Environment and Risk ........................... 32 PART iv - RECOMMENDATION ....................................... 35 LIST OF TABLES AND BOXES Table 1 - Selected Macroeconomic ndicators .................................. 4 Table 2 - Honduras Country Portfolio ...................................... 17 Box 1 - Women in Development ......................................... 7 Box 2 - Safety Net Operations . ......................................... 8 Box 3 - Environmen Strategy ......................................... 12 LIST OF ANNEXES 1. Standard Macroeconomic Data 2. Policy Matrix 3. Letter of Agricultural Development Policy 4. Agricultral Sector Reforms 5. Policy Support Program 6. Environmental and Economic Impact Assessment c 'the Changes in Forestry Policy Embodied in Law 31-92 7. Supplemental Loan Data Sheet 8. Action Plan. Implementation Progress This report was prepaed by Ms. G. C a (Task Manager, LAAG), with conribu n from Ms. C. Kimes and Mesrs. D. Cotlear and J. Kuhn (LA2C2), Messrs. A. Peller, H. Hevia, R. Ravettio, G. Sclrooder, D. Blaer and T. Downing (Consudta). Ms. Patricia Gross asised with the wordrocessig of this reporL The Divs Chief is Michael Baxter and the Countrv Denartmet Dirtor is Edliht Sesua.  HONDURAS AGI[CULTORAL SECTOI ADJUSTM T CRlDIT CREDIT AND PROGRAr SUMMR Borower: Republic of Honduras Amount: SDR43.3 million (US$60.0 million equivalent) E 4 1eoft Agac: Ministry of Natural Resources Baes: Rural pouiaton engaged directy or indirecdy in agriculural and forestry activities. Terms: Repayment in 40 years, including a 10 year grace period on standard IDA terms. Descripio: The proposed credit would support the Government's medium-erm Agricultura Sector Modenation and Development Program which is designed to: (a) improve land use by supporting modifications to the Agrarian Reform Law (LRA) to seure land propeny rights, sUppoIt the development of land markets and consolidate the process of the agrarian reform; (b) lay the basis for a sustinable management of the countrs rich forest resources by improving forestry property rights and reorienting the role of the public foestry sector towards the protection and management of the forest and the promotion of biodivesity conservadon; and (c) help improve sector planing and coordinaton by strngein and making better use of the budgeing process. It will also consoldate reforms in trade, agricultural pricmg policy, gran markeing, and rural finamce implmented during 1990-1992 and supported by the Second Strucural Adjustmnt Loan (Loan 3257-HO). The proposed Agriculturl Sector Adjustent Credit (AGSAC) is exected to benefit Honduras' agicultural sector through: (a) improved resource ailocaion resulting from the elimination of disortions associed with price and trade policies, credit subsidies, and regulations and legislation related to land use and forestry; (b) improved inv climate by supporting cages in the land and frestry legislation to guarantee security of land tenure and private property rights in forest resources; (c) inreased employment as a result of the expected acceleation of agricultural growth and the expansion of more labor intensive activities; (d) laying the basis for a more rational management of forest resources and better protection of the forest !y improving the system of land and timber property rights and lminatn legal provisions that promote deforestation; and (e) supportg equal rights for womet i the agrrian reform process and credit by elimiing discriminatory provisions in the acces to land. As a result of past and proposed adjustment actions in Honduras, the agriculual sector is expected to grow at an average rate of  - ii - more than 4.0 pecent per year during project implementation compared to 3.0 percent experienced during the previous decade. ML. There are three major risks associated with the proposed operation. First, the introduction of policy reforms may prove difficult to implement becase of public opposition, particularly since the country has entered its presidential election year. To minimize this risk, the introduction of of key policy reforms were required prior to Board Presentation. (Satisfactory modifications to the land tenure and forestry laws and regulations have been sanctioned, and te institutions responsible for overseeing the implementation of the new policy implementation are being restructured satisfactorily). Govemment (GOH) held extensive discussions with farmers' groups and azsociations and the private sector to seek consensus on the proposed reforms of the Law for the Modernization and Development of the Agricultural Sector (LMA) and its regulations. In addition, GOH has been conducting a series of seminars explaining the objectives and implications of the proposed policy changes. Second, GOH has a weak institutional capacity. Policy reforms supported under the AGSAC will substantally reduce the role of the state by ehiiinatng functions related directy to production and marketing. Scarce GOH manpower resources would be better utilized in a regulatory role and as a ptrveyor of key services. GOH has requested the donor community to readjust their existing technical assistance projects to strengthen its capacity to implement the new agricuiral legislation. In addition, GOH is carrying out a Policy Support Program (PSP) to strengthen its policy planning, management, implementation and donor coordination capabilities. A third possible risk is that initially, the process of returning property rights of the forest to landowners could accelerate harvesting until the new system is trusted and Honduran Corporation for Forestry Development (COHDEFOR) is fully restucured and empowered to monitor and enforce rational harvesting on public and private forest lands, and safeguard protected areas. In addition, and due to the poor land information system and deficiencies in land regisration, the process of reurning forest rights to forest landowners could induce illegal occupancy of government land and the displacement of settlers from private lands. To minimize such possible impacts, supported by the AGSAC, GOH: (a) is supporting the implementation of an arbitration system to protect famers' legal and de facto rights; (b) has spelled out in the regulations to the LMA the steps for individuals and communities to take to caim forest rights; (c) will intensify cadastral work and the identification of areas suited for forest development; and (d) is reorganizing the public forest administtion empowering it to monitor and enforce the new policy. 1 X _ : The proceeds of the IDA credit would be disbursed in ftfree tranches: SDR18.1 million (US$25.0 million equivalent) upon effectiveness, SDR10.8 million (US$15.0 million) after a satisfactory performance review anticipated for June 1994, and the remaining SDR14.4 million (US$20.0 million equivalent) after a satisfactory performance review anticipated for March  1995. RPoative fincing wi be peottd for eligible expedu Inced beginig four months prior to the credt siging date up to an amount equivaet to SDR8.66 mdllion (US$12.0 million equivalent). The Clesing Date will be June 30, 1995. Schedue d D;sbwse_ : llDA FdYear T T -SS milion Anual 40 20 Cumulative 40 60 Financing Plan: The loe-American Devdeopmnt Bank is co-financing the same Agriculural Modenization and Delopment Prom to be supported by the proposed AGSAC with a loan of US$50.0 million A pfrod kReporit: This is a combined Staff Appras u Presiden's Report. L- 14HNISACARSAYUP Juy14. 99  PERT AND RECOMMENDATION OF THE EDENT OF THE ATIONAL DEVELOPNT ASSOCIATION TO THE EXECTIVE DIRECTORS ON A PROPOSED AGRICULTURAL SECTOR ADJUSTNT CREDIT IN AN AMOUNT EQUIVALENT TO US$60.0 MILLION TO THE REPUBLIC OF HONDURAS 1. I submit the following report and recommendations on a proposed Agricultural Sector Adjustment Credit (AGSAC) to the Republic of Honduras for the equivalent of SDR43.3 million (US$60.0 million equivalent) in support of the implementation of an Agricultural Modernization and Development Program (AMDP). This program is described in the Letter of Agricultural Developmert Policy (Annex 3). The credit would be on standard IDA terms, with 40 years including a grace period of 10 years. The program is being cofinanced with a US$50 million loan from the Inter-American Development Bank (IDB). PART I - COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEGY A. Historical Perspective and Recent Performance Background 2. Honduras ranks among the least developed countries in the Western Hemisphere. The economy is relatively small (with an estinated GDP of about US$3 biflion), and highly sensitive to changes in the external environment because of its dependence on a few vommodities and on donor assistance. Per capita GNP (1992) is estimated at U'$580, and poor social indicators reflect this low level of development. About one-third of the population is estimated to live in extreme poverty. Agriculture accounts for almost 25 percent of GDP and generates over 80 percent of merchandise exports. Banana and coffee account for over 60 percent of export receipts, although the economy has been diversifying rapidly over the past three years into non-traditional export commodities such as fruits, vegetables, and shrimp. Forestry potential is substan- tial, but requires sound policies and careful management to ensure sustainable development. Manufacturing and mining combined also account for about 25 percent of GDP. Manufacturing was traditionally dominated by agro-industries, but has diversified in recent years to include apparel, electric appliances, leather goods, and other exportables, produced mainly for the US market. Honduras has considerable mineral resources and hydrocarbon potentiai, but oil exploration has been limited. The service sector (including public adminis- tration) accounts for about 50 percent of GDP. Historical Perspective 3. 1980W1989. During the 1980s, Honduras experienced a steady deterioration in the rate of economic growth, accompanied by increasing trade and fiscal imbalas. In the 1970s, GDP growth averaged 4.5 percent annually, stinulated by high public and private expenditures. While exports grew at an average annual rate of only 3.7 percent, imports grew rapidly throughout the 1970s, reaching more than 40 percent of GDP by the early 1980s. The combination of strong domestic demand and sluggish exports resulted in the emergence of balance of payments problems, which were managed in the early 1980s by recourse to bilateral and multilateral credit. However, in the absence of sustained policy reforms, economic performance deteriorated. During the 1980s, real annual GDP growth declined to an average of 2.5 percent, national savings dropped significantly, and public sector deficits averaged 8 percent of GDP. Between 1980 and 1989, Honduras' total external debt more than doubled, from US$1.5 billiou to US$3.3 billion, of which 70 percent was owed to official creditors. When exernal sources of finance began to dry up in the late 1980s, the Government resorted to external arrears and domestic sources to finance the public sector deficit. This intensified pressure on the balance of payments and provoked an increase in inflation. By the end of 1989, annual inflation had reached 20 percent (wholesale price index), the parallel exchange rate was twice the offi-  -2 - cial rate, external arrears amounted to US$620 million, and the country was cut off from intemnational credi- tors. 4. Behind the poor economic performance of the 1980s and the crisis of 1989 lay deep-seated structural problems. Honduras' development strategy had been based on import substitution behind high protective barriers and had relied on extensive Government intervention via credit subsidies, price controls, and tax incentives. This had resulted in: (a) a large and inefficient public sector; (b) extensive administative controls over economic activities, discouraging efficient private sector development; (c) an export sector dependent on a few agricultural products; (d) a trade regime that discouraged the growth of ntn-traditional exports; and (e) inefficient financial uatermediation, contributing to low domestic savings. Little attention had been given to investing in human rescurces with the consequence that labor force skills and capacities were largely underdeveloped. Successive governents were slow in taking corrective measuies to address these structural problems, because Honduras received record inflows of foreign assistance throughout the 1980s, that camou- flaged the seriousness of underlying economic trends. As much of the assistance was linked to the 'Contra War" being fought along the Honduras-Nicaragua border and structural constraints were not addressed, it did relatively lilde to contribute to an expansion of the country's productive capacity and economic advancement. It did, however, support an expansion in the size of the military establishment and help increase the latter's already considerable influence in domestic politics. The Government elected in November 1989 was therefore faced with the delicate task of introducing long overdue economic reforms while forging a new political balance between civilian and miltay authorities. 5. 1990-1992. The current Government, which took offlce in January 1990, was committed to implementing a far-reaching economic reform and poverty alleviation program. The basic goals of the adjustment program were to: (a) re-establish macroeconomic stability; (b) reduce the size of the public sector and strengthen public sector management; (c) improve the incentive framework for private investors through deregulation, trade liberalization, and financial sector reform; and (d) shift resources into priority social programs, and establish a safety-net for the poor during the adjustment period. The Govermment was also interested in normalizing its relations with the international financial community as quicldy as possible, with the objective of resuming needed inflows of capital for investment, restructuring the country's external debt, and having access to technical and financial assistance for its reform program. 6. The first phase of the economic reform progrm was introduced in March 1990 when the Government substantially reduced maximum import tariffs, eliminated most tariff exemptions and surcharges, devalued the lempira by 100 percent, approved major tax increases to enhance revenues, and attempted to rein in current expendituras. The impact of these measures, when combined with worker strikes, flooding, and oil price increases linked to the Gulf crisis, was a contraction in economic output in 1990. The economy registered only 0.1 percent real growth in 1990, the fiscal deficit reached 8 percent of GDP, the current account deficit grew sharply to 11 percent of GDP, and inflation rose to about 36 percent, fueled by price adjustments and expansionary fiscal policies. In 1991, the Government deepened and extended its reform cfforts, with major policy changes including: introduction of flexible exchange rate management and further reduction of tariff levels and dispersion; elimination of most restrictions on domestic and foreign trade; removal of price controls on agricultual commodities; reforms in pricing of public services and improved tax collection; liberalization of lending interest rates; eliination of subsidies on all Central Bank rediscount credit lines; and reclassification of commecial bank portfolios and strengthening of loan loss provisioning requirements. Restructring programs were introduced for major public enterp.ises which had been signifi- cant contributors to the fiscal deficit. In mid-1992, the Government authorized coimmercial banks and foreign exchange houses to freely buy and sell foreign exchange, moving for all intents and purposes to a floating foreign exchange regime.  7. The cumulative impact of these reforms began to show positive results during the second half of 1991. In 1991 real GDP grew by an estimated 3.2 percent, the fiscal deficit shrank by more than 4 percentage points to about 3.7 percent of GDP, and inflation fell to about 22 percent. The current account deficit remained virtually unchangeJ, however, at 11 percent of GDP. Data for 1992 indicate that economic performance continued to improve. Inflation only amounted to 6.5 percent, and CDP grew by 4.3 percent. The fiscal deficit, however, deteriorated daring the course of the year to about 4 percent, due to an increase in public investment equivalent to 0.6 percent of GDP. Selected macroeconomic indicators for 1990-92 are presented in Table 1. 8. The Government complemented its macroeconomic adjustment efforts with a series of detailed sectoral reform programs. Common to the different sector reform initiatives has been the emphasis on scaling back direct State imervention and creating a favorable environment for private sector development. A comprehensive energy sector reform program was introduced in late 1991. Its major elements comprised strengthening sector planning and policy coordination, aligning electricity tariffs with long-run marginal costs, improving management and operational efficiency of the national power company (ENEE), and gradually liberalizing the petroleum sub-sector. To create a more favorable environment for private sector development, Congress approved a new Investment Code in May 1992 that streamlined administrative procedures for investors, conferred the same rights and privileges on foreign and domestic investors, and lib- eralized dividend and capital repatriation regulations. The Government has also begun implementing a major reform progiam in the agricultural sector to complement the trade and pricing measures introduced under the structural adjusmexnt program. This program, to be supported by the proposed AGSAC, is discussed in Part n. 9. The Government cleared Honduras' accumulated external debt arrears in two stages. The vast majority of multilateral arrears was paid off in mid-1990, and the bulk of bilateral arrears was handled in the context of a Paris Club rescheduling agreement in September 1990. Honduras had been declared IDA-eligible in August 1990 on the basis of its heavy indebtedness, low income level, and marginal creditworthiness. In rescheduling arrears and debt service, the Paris Club extended its most generous terms for highly-indebted, lower middle-income countries. Honduras was reclassified as an IDA-only country in September 1991, and in February 1992, the International Monetary Fund (IME) placed it on the list of countries eligible to borrow from the Extended Structural Adjustment Facility (ESAP). Following the approval of a 1992-95 ESAF program in July 1992, the Paris Club agreed in October 1992 to reschedule debt service falling due during the ESAF period, on enbanced-Trinidad terms. As part of that agreement, the Paris Club offered to cancel one-half of Honduras' US$1 billion outstanding debt at the end of the ESAF period, if the Government satisfactorily implements the three year ESAP program. The Government has also worked with commercial bank creditors to retire external commercial debt via debt conversions, and has recently applied to the IDA Debt Reduction Facility for assistance in implementng a commercial debt reduction operation. Recent Performance 10. The significant progress made since 1990 in eliminating major macro- and sector-level distortions pro- vides a good foundation for cond improve in economic performance during 1993 and beyond. GDP growth in 1993 is expected to be reasonably solid at 4.3 percent. However, fiscal performance deteriorated sharply in the first half of 1993, reflecdng in part pressures arising from elections scheduled in November. Public sector expendituMs (both current and capital) rose to unsustainable levels, resulting in a fiscal deficit equivalent to 5.9 percent of GDP on an anual basis and reflected in an increased inflation rate of 12 percent. Once this predicament became apparent to them, the Authorities acted swifty to bring the fiscal situation back under control. In close collaboration with the IMF, they developed a set of corrective measures which are expected to reduce the deficit to 3.8 percent of GDP for 1993 as a whole. Principal actions include introdhution of a tax on revalued assets, a major reduction in fuel subsidies, selective cutting  '-4 - of capital expenditures, and increasing reveme from import duties through a higher customs evaluation factor .(this is, in essence, the exchange rate at which imports are valued for duty collection purposes). Furtier meur will be taken to reduce the 1994 fiscal deficit to 2 perent of GDP. These will include the virtual elimination of fuel subsidies, a broadening of the sales tax, and the introduction of toll charges on main roads. D. The 1E tnlEnonme 11. The outcm of Honduras's economic progrm is closely linked to developments in the external t ,irnmm given the coutry's dwepdence on twfo prkany export oomodities and on large foreign capital infows fhom private investors and the donor community. The critical variables for the remainder of thi8 decade inclue price movemens for banant and coff*e (as tbe account for over 60 percent of export earnhng), a-ado policies of its mqjor trding parmer, foreign investr decisions, anld tellds in officia m8is e, pardculaly from bilateal sources Overall, edW ftreds in the eatml environmenlt would appea to placserious cons bt on Honduras' developmet prospects over the mediun term,wt potenly sevee iVmpat on domestic fincme and Governmen revemlue. Cbmequetly, sounld ecownumc  - - management and continued domestic reforms will be even more critical than would be the case in a more favorable external environment. 12. Bana exports will be affected by the current European Economic Community (EEC) plans to impose import quotas on Latim American exporters. Although estimates of the net impact of these measures on Honduran exports vary, the banana industry has canceled substantial investment plans in the pipeline for Honduras, and the Government anticipates dtat the volume of exports will stagnate at its 1992 leve' (which was substantially lower than that achieved in 1988). It is also likely that the EEC import restrictions will depress world prices, leading to the possibility of firther revenue losses. Banana exporters are aggressively pursuing alternative market outlets in the Far East and in Eastern Europe, but even with these expansion possibilities, market prospects appear bleak in the medium term. 13. International prices for Honduran coffee were at their lowest average ever in 1991 and 1992. Present indications suggest that they will remain at this low level for 1993, and that they will recover at a slow pace thereafter. However, any possibility of a significant price increase during the first half of the 1990s is likely to be dampened by the release of stocks in the coffee importing countries. Real prices are projected to strengthen in the second half of the 1990s. 14. One of the major factors that will determine the success of Honduras' economic program will be the ability to attract private fore investmnt for export-oriented ventures (e.g., agriculture, tourim, m , apparel) as well as for domestic production and service delivery (e.g., power, telecommunications). Although there has been growing foreign investment in Honduras in recent years, particularly in Free Trade/Industrial Processing Zones, there are now concerns that potential new investment might be diverted to Mexico if the North Amencan Free Trade AReement (NAFTA) is ratified and implmented. To increase Honduras' atractiveness as an investment site and facilitate internationl trade opportunities, the Government has been activc in pursuing membership in the General Agreement on Tariffs and Trade (GATI) (its membership application is under review) and in negoiDang free trade agreements with other Central American countries in the famework of the Central American Common Market (CACM). While these trade initiatives will help, Honduras' export prospects will remain limited for the foreseeable future. 15. With competing demands for assistance from Eastern Europe and the former Soviet Union, as well as for supporting the peace process in El Salvador and Nicaragua, official transfers to Honduras are declining and are expected to continue to fall during the rest of the decade. Debt rescheduling will be an important complementary ttvi iur relieving pressures on the balance of payments and releasing fimds for productive investment. The Paris Club has rescheduled Honduras' official bilateral debt on highly concessional terms, and, as indicated in para. 9, has offered to forgive one-half of its official debt in 1995, subject to successful completion of the ESAF. Multilateal lending, primarily from the Iter-American Development Bank (IDB) and IDA, has been increasing in recent years, but is not expected to be sufficient to compea for the drop in bilateral assistance and to close the external financing gap (see para. 41). 16. Given the fragility of the balance of payment position, a marked deterioration in any one of these external variables could significantly affect the country's ability to invest for the future and to service its sizable external debt. ConseqUenty, HondUras will continUe to depend heavily on the international community and on contnued IDA assistance for at least the next 3-5 years. To meet the challenges posed by the difficult exeral enviroment, the Government has been actively promoting trade liberalization and private sector investment policies that are resting in export diversification and increased revenues from non- traditional exports. IDA has encouraged this policy orientation, and worked closely with donors through the Consultative Group (CO) to increase concessional aid flows.  -6- C. Country Development Objectives and Policies 17. Honduras' leaders recognize that they face difficult internal and external challenges as the country approaches the twenty-first century. Key among these are Honduras' widespread poverty, low social indicators, severe indebtedness, institutional weaknesses, and economic dependence on two major export commodities. Moreover, although the economy is heavily dominated by agriculture-related activities, the natural resource base is deteriorating rapidly. Significant progress has been achieved in eliminating major macroeconomic and sector level distortions, but remaining inefficiencies in the marketplace and in the public sector are keeping the country from realizing its full potential. 18. The Government is committed to continuing the reform process in order to consolidate achievements to date and to implementing a medium-term action pln (reflected in the 1992 Policy Framework Paper, PFP), that gives priority to maintaining a sound macroeconomic framework and to addressing critical development challenges. The major elements of the Government's medium term program are outlined below and would: (1) maintain a stable macroeconomic environment, (2) reduce poverty and increase social development indicators, (3) increase public sector efficiency, (4) stimulate private sector development and competition, (5) improve adequacy of economic and social infrastructure, and (6) protect the environment and promote sustainable management of the country's natural resources. The complementary actions in the agricultural sector (see Part II), constitute an important component of the program. 19. Elections will be held in November 1993 to elect a new President, Congress, and municipal leaders, and a new Government will take office in January 1994. IDA has initiated contacts with the two major presi- dential candidates, and these discussions have revealed that there is basic agreement on the critical devel- opment challenges facing the country and general support for the medium-term strategy outlined below. Both presidential candidates have indicated that the upcoming elections should not delay work on major elements of the medium-term program (e.g., public sector reform, education sector modernization, environmental protection) and have requested that IDA missions maintain contact with their advisors during the pre- and post-election period in order to facilitate the transition and enhance program continuity over the medium term. Macroeconomic Policy Framework 20. The current Government is making efforts to prevent the types of expansionary macroeconomic policies that often accompany the last year of an outgoing administration. The Government's aim is to hand over to the new Government a relatively stable macroeconomic environment in order to maintain the recent growth momentum and enhance prospects for the deepening of the structural reform effort. During its rem time in office, the Government will focus on implehnentation of the corrective measures agreed under the ESAF program (see para. 10) in order to prevent a resurgence of inflation and excessive fiscal pressures. in addition to maitaining a flexible exchange rate policy and market detrmined interest rates, the Government will continue steps to strengthen prudential supervision of the financial system. Legislation has been submitted to Congress to establish adequate Centrai Bank supervision and regulatory powers over financial intermediaries. It is expected that these macroeconomic policies and the reform effort will be continued during the next administration, as both presidential candidates have expressed support for the adjustment program. 21. As soon as the new Government team is in place, and building on contacts already established, IDA will exchange views on a broad range of economic issues, using as a framework for discussion a Country Economic Memorandum (CEM) that is being prepared in collaboration with Govermnent staff. The main focus of the CEM would be how to achieve growth with equity in the Honduran context, based on an assessment of developments in the economy, the progress and impact of the reform program, and remaining  - 7 - constrints to growth. Support for macroeconomic management is expected to be provided primarily through public sector reform operations, although structural adjustment lending could be considered after an assessment of the situation with the new Government. Poverty Reduction and Human Resource Development 22. Honduras face s a series of social problems which are aggravated : 1 by the country's widespread poverty and still unfavorable conditions . . m. ... e..... affecting women (see Box 1). Total ocrr Miattu hw Irafim. fertility is high for Latin America ~ , ~ )~d (about 5 per woman), and maternal mortality rates are also amnong the bRt*hUjIXIM i*f{ CV) highest in the hemisphere (221 per ...eI.. 100,000 live births). hnfant mortality _ 7 g _ _ averages 65 per 1,000 live births, and E malnutrition affects 45 percent of ~~ .... . children in the under-five age group. -Rvso ~ According to the most recent data, .. I) e0IWi Io Ot~~~4 h *n AIDS incidence is the highest in Central America and is spreading by a heterosexual transmission into bothi rural and urban areas. Adult literacy pme.ao4 Pb and years of schoolin are among the ~Ute 4m~~i 9$* r lowest in Latin America, averaging about three years of primary educa- tion. These national averages mask I i sharp regional disparities, especially in rural areas. Rural-urban migration Aou. 4 into fth capital exceeds 5 percent per to1# K8$O year, fueled partly by unsustanable b ou.m agricultural practices and environmen- _p ; tal degradation. At the same time that k... these ftreds place an increasing e burden on already strained social. services and infrastructure, they mean U = = _ that the current and future labor force r _m a is not weli able to respond to new opportunities as the economy modernizes, due to il health and poor education. 23. Poverty reduction and investment in human resources have been a major emphasis of the current Government over the past three years. At the same time that implementation of the structural and sectoral adjustment programs was getting underway, the Government created the Honduran Social Investment Fund (FRIS) and the Family Assistance Program (PRAP) as targeted poverty alaon insuments to cushion the soial effects of reform measres on the very poor (see Box 2). The FH1S was established in March 1990 to implement an emergency employment generation strategy by financing: (a) social infrastructure (such as rebabilitation of health posts, schools, water and sewerage systems); (b) targeted projects in health, nutrition  - 8- and education; and (c) a limited nmmber of productive activities. The HIUS has proved I 0 to be an effective targeting mechanism, for ~19)~W reaching poor comunities and strengthening grassroots organizations. The PRAF was llk . ....~~e~soa created in July 1990 to provide nutritional ~~5OS 4~3a assistance to the most vulnerable members of 4 s oia: .8 = society during the adjustent period through a X i i . income transfers in the fonn of food coupons. S m i e . ! 1 Operated initially through the primary school s system in the very poorest departments, a g i irewl z _tcri. pilot program was introduced in 1991 to test 2 ii de.livery of food coupons through the basic ~. health network. The pilot program proved.~*~~)5 effective, and implementation of a second # v__~ phase expansion program for PRAF activities and for strengthening preventive health care services began in early 1993. IF 24. In parallel with these safety-net operations, the Goverament, under the aus- pices of a bi-partsa Presidentia Commission ~ n r .:~.~ bai for Public Sector Modernization, has been ~ b. 5 ~ analyzing in-depth how to reform delivery of ~. education and health services with the goal of .W$c~~adw.'h mncreasing equity and program quality. With-. in the fr-amework of Commission deliber- tions, the Government has defined reform programs for the education and health sectors that would increase operational efficiency and ~ shift resources to priority activities, such as primary education, basic health, targeted t 3 i | | _ nutritional assistance, and reproductive care. 5iO Medium-term goals, which are shared by both presidential candidates, are to increase access to water suply and basic sanitation in rural areas by 50 percent and to reduce adult 111- . .... teracy (particularly in rural areas) by one third, repetition rates at all education levels by at least 15 percent, maternal mortality by almost 30 percent, iniint mortality by 20 percent, and the prevalence of early childhood undernuton by one-tird. Enabling families to manage family size according to their preferences and health status, by increased access to contraceptive methods, is also a public health goal. Underpinning the social sector reform effort will be a redefinition of institutional relationships between line minisries, the municipalities, community groups, and autonomous entities, such as the FHIS. Supported by the proposed AGSAC (see Part II), the GOH is also introducing reforms to land tenure policy and the rural financial system, with the goal of improving the poor's access to land and capital, and increasing the returns to their labor. 25. IDA is supporting implementation of the Governmen's poverty reduction and human resource development strategy through credits to the HIUS (Cr. 2212-HO and Cr. 2401-HO) and for the Nutrition and  -9- Health Project (Cr. 2452-HO). Future lending will be channelled to support additional reforms and priority investments in the education, water supply and saitation, and health sectors. Project design and targeting, to the extent appropriate, will be guided by the poverty assessment work being carried out in the framework of the CEM under preparation (see para. 21). Following completion of the CEM, the Government has requested that the findings of the poverty assessment and the poverty profiles be disseminated locally so that they can be the subject of a seminar to be attended by representatives of the Government, private sector, academia, and NGOs. Public Sector Reform and Insttutional 26. The period of heavy administrative controls and State intervention in the economy has left a legacy of an overized and poorly structured bureaucra, with programs and fimctions that no longer correspond to the economic and social policy framework that the current Government has introduced. Public sector implementation capacity is generally weak, and program quality often suffers from inefficient use of available resources. A particularly delicate issue faces Honduras' civilian authorities with respect to the appropriate role and size of the military establishment, which expanded significanly during the "Contra War" years. The military has seen its budgetary allocations eroded since 1990, resulting in fierce behind-the-scenes competition for scarce public resources. Increasingly, the military is openly entering private sector activities via military pension fund investments in privatized public enterprises as a means to secure alternative revenue sources. Lack of accountability in the public sector, and the judicial system's inbility to provide redress (whether economic or social issues are involved) are subjects of increasing public concern. 27. The Goverment has taken steps during the past three years to begin addressing these issues. In the context of sector reform programs, istitutional restucting has focussed on eliminatng unjustified programs and withdrawing from activities that could be better managed by the private sector. For example, in the transport sector, road mannance is now largely executed by private contaors, and uneconomic railway lines have been closed and staff laid off. Resuctuing plans for major public enterprises in the electricity and agricultural sectors are under implemation and have included sbtmlining of employment, among other measures, to increase operational efficiency and focus resources on primary mandates. With respect to public sector accountability, an ad-hoc Presidental Commission was established in March 1993 to examine security police abuses and the functioning of the court system. The estabishment of such a commission was considered an indication of the evolution that has taken place over the past three years in redefining the balance between civilian and military authorities, and in establishing government accountability. The Commission's recommendations, presented in April 1993, included abolishing the security police force, seting up a new civil police force, and creating an independent Mnistry of Public Affairs. Congress is now considering the creation of the new Ministry. 28. The Government recognis that a more fundamental restuctuing of the public sector apparatus, management procedures, and persomel policies is required if the State is to become more efficient and defi- cits are to be kept to manageable levels. Therfore, in its remnin time in office, the Govermment plans to develop a comprehensive public sector reform program, to underpin its fiscal reform efforts and enable the public sector to perform its essential fumctions more efficiedy. The Presidential Commission for Public Sector Modemization, responsible for rg options and specific implementation actions, has focus- sed on decentralization and central government re rig, the judicial system and the police, electoral reform, and the role and size of the military. Of this broad agenda, the reform program would need to con- centate on the following issues during the 1993-95 period: (a) redefining the essential fimctions of the public sector and restuctuing the institonal apparatus to be consistent with that redefinition; (b) clarifying the respective roles of the central and municipal levels of government, and establishing an effective revenue and expendiue management system to underpin the new division of labor; (c) implemendng a civil service re- form (including modem personnel management practices and improved wage policy) that would permit decen-  - 10- tralization of functions and of professional staf; and (d) stngthening the public sector financial system, including investment program prioritization, to ensure that scarce public resources are allocated to priority programs. Within this general framework, priority will be given in the short term to implementing ieforms in the education and health sectors. Both presidential candidates have indicated that they support such an approach and would contnue implementation of public sector reform efforts. 29. IDA is working closely with the Government in the development of its public sector reform program, providing technical advice and expertise whenever possible. As requested by both major presidential candi- dates (and supported by the Government), IDA missions will keep them briefed on program development as preparation progresses during the pre-election period. IDA lending in support of public sector reform would include adjustment lending and capacity building operations focussed on the priority themes enumerated above. In the immediate term, IDA and the United Nations Conference on Trade and Development (UNCTAD) have jointly prepared a program to strengthen external debt management capacity in Honduras, and program implementation is expected to proceed during 1993-94 (pending mobilization of concessional financing). Private Sector Development 30. Efficient private sector development and diversification of the export-oriented sectors are key objectives of the Government's reform progmm. M res taken to date in support of these goals have included moving to a flexible exchange rate regime, liberliing trade policies, negotiating free trade agreements, and liberalizing the financial sector. In addition, the Investment Code and Regulations have been substantially revised and improved with the goal of facilitating investment by both domestic and foreign investors. Key elements of the Investment Code Legislation, as approved by Congress, include streamlined administrative procedures, grantng of the same rights and privileges to foreign and domestic investors, and liberalized dividend and capital repatriation regulations. 3<1. While these reforms have resulted in increased private sector dynamism, competition in the domestic market is still in its early stages as entrepreneurs adjust to an enviromnent characterized by less protection and public largesse. The transition to greater competition and market efficiency has been slowed by the fact that the private sector is characterzed by considerable concetration of wealth in a few key corporate groups and families with privileged relationships to private banks. This has created a market structure where entry by newcomers is difficult and collusive price fixing in selected markets is common. Although the dismantling of quantitative trade restrictions, liberalization of the financial markets, and floating of the exchange rate has limited the scope for rent-seeking behavior, the regulatory apparatus and associated adinisrative requiements are still burdensome in many cases, and have in practice reinforced the privileged position of established economic groups and discouraged efficient business practices. 32. To address these remaining constraints to comption and efficiency, the Government is studying exist- ing restrictions to entry in selected sectors (e.g., truckng) with the goal of developing a deregulation policy to stimulate competition. Financial sector legislation recently submitted to Congress would also encourage competition in the domestic market by establishing standards for shareholder borrowing from private banks, that would, inter alia, limit prefeential access to finance and diversify non-shareholder access to available funding. The Govermnent should also review in the near future its corporate income tax policy to ensure that it does not discourage potential foreign investors, as well as examine the labor code, existng minimum wage policy, and the functioning of the labor market to ddemine the need for reforms to encourage employment creation. 33. IDA's primary role in promoting market efficiency/private sector development would be to provide policy advice based on selected studies. As the IDB has conducted preliminarY analysis in this area with a  - 11 - Private Sector Assent, IDA staff and Honduran officials have discussed the desirability of initiating work on a second CEM in mid-FY96 that would focus on consrints to private sector development and market effi- ciency and would identiij additional measures to promote competition and stimulate economic growth. In addition, provided that eligibility criteria are met, funds could be made available for a commercial debt reduc- tion operation from the IDA Debt Reduction Facility, based on the Government's recent request (see para. 9). Such an operation would contribute, over the longer term, to improved creditworthiness and renewed private sector access to medium- and long-term international credit. Economic and Social 34. Social and economic infrastucture in Honduras is inadequate to meet the current needs of the population and economy, much less future needs. An estimated 60 petcent of the population is inadequately housed, and the lack of potable water and sanitation facilities is acute. Primary schools and first tier health clinics are in a poor state of repair and inadequately equipped (and staffed) to provide basic services. Seventy percent of energy consumption comes from fuelwood, linked in part to inappropriate pricing and underdeveloped distribution networks. Telecommunication services cannot keep pace with demand, due to outmoded equipment and concentration in a few urban centers. Transport infrastucture is generally adequate but has suffered from poor mantenance and management practices in the past. There is an absence of well- located airports with modern refrigeration facilities that would permit timely transport of fruit and vegetable exports, which are growing rapidly. These infiasucture consaints have a debilitating impact on both social development and the economy's ability to modernize and compete in world markets. 35. The Govermnent attaches high priority to rehabilitaing and, where needed, expanding the country's economic and social infucture. As part of this effort, emphasis has been placed during the past three years on transort infrastuc , water supply and sanitaion systems, primary schools, and basic health cen- ters. This emphasis is expected to condinue under the next Administraion. Attention would also be given to developing power facilities and distribution lines and to upgrading telecommunication services. To attain its infrasucue goals, the Government recogizes that it will be necessary to rely heavily on the private sector for construction and operation of facilities, and where possible, for investment funds and ownership of assets. In cases where operation of facilities or provision of services remains in public hands, upgrading of the physical infrastructure would be dependent on putting in place budgetary or fee-based mechansms to ensure reliable funding of operton and mateace costs over the long-tem Expansion of social infrastruce would be largely limited to rural areas and marginal urban neighborhoods that are currewly underserved. 36. IDA is currently supporting inrasucture rehabilitation in the transport and energy sectors, under the Morazan Dam Emergency Project (Cr. 2417-HO) and the recently approved Transport Sector Rehabilitation Project (Cr. 2458-HO). In future, IDA support for rasu improvements will be limited to those called for under the Govermnent's poverty reduction and human resource development strategy, with an emphasis on education, water supply and sanitation, and health. In addition, IDA could assist Government efforts in settig inrstuct reabilition priorities by conducting an iastuctu assessment. EnvIonet Protecon and D 37. Honduras' natumal resource base is deterioratng at an increasingly rapid rate as population and economic pressures inrease. The country is heavily forestd and predominantly montainous, with narrow coastl plains and nmrous inland valleys. Honduras' topography dictates that arable land available for cultivation is ihnited. This factor, when combined with a high concentradon of land ownership, past "anti- forestry" policies, and high population growth rates, has resulted in the exqmsion of the agricultural fiontier into marginal areas as well as in no-selective timber extraction practices. The conseqence of these tends  - 12 - has been accelerating defrvstaton and soil erosion, and secondary impacts on climate (rainfall pattems) and water sources. Water conta on (both fresh and coastal) resulting from poor human sanitation practices, agricultural chemical use, and industrial processes is already affecting health negatively, and if not addressed, could have significant economic consequences for industry as well (particularly tourism and shrimp farming). Disposal of solid wastes is not generally managed according to sanitary standards, and the resulting contamination of water and soil resources is becoming of greater concern as the urbanization process accelerates. Environmental institutions and policies designed to promote sustainable resource use are recent additions to the political landscape, and have not yet established an effective track record. 38. Public awareness is growing in Honduras of the importance of protecting the country's valuable timber, soil, water, and coastal resources and of improving natural resource management in general. Supported by the AGSAC (see Part U), the Government has begun a major reform of its forestry management and land tenure policies, and implementation of these policies will be critical to sustainable development over the medium- and long-term. More broadly, Congress approved in June 1993 basic environmental legislation that clarifies institutional responsibilities and policies as they apply to natural resource management and environ- mental protection. Under the new law, the National Environmental Commission (CONAMA) will be upgraded to ministerial rank to -ensure that it has sufficient administrative authority for effective action. A national Environmental Action Plan MAP) has been completed by the Government that establishes institu- tional, policy and investment priorities and provides the basis for Honduras' medium-term environmental strategy (see Box 3). The Govemment is now organizing a three month consultation process with NGOs, academic circles, the private sector, and local muiiaiisand community gopsp in order to better identify and establish consensus on national priorities. Commets and - suggestions received during this process will be used to prepare the fuml revised version of the EAP. The Govenament intends to periodically .wu update the EAP and to use it to guide future investment decisions in the area of enviromental protection. = 39. IDA has provided extmnsive support over the past few years for the development of the . natural resource management miniatives to be OS j Uu .ii supported by the AGSAC. More recently, the Bank approved an 18-month IIDF gran last October 199 that is providing assistanc to CONAMA for developing a prioritized work ___ program a Undtrann plan, defining the scope and requirements of a national Environimental Impact Assessment sys5tem aW1 drafig t regulatons called for under the new environ-. mental law. The grant also supported the ~ prearaionof the EAP, through poiso of . techncal expert. In future, IDA would. t t lo rt consolidate progress in both these areas by supporting furthe institutionalstethng.r d related to broad eniomna oiyand strategy and to natural rmsurce mangement. ~  - 13 - Medium-term Prospects 40. Implementation of the medim-term strategy oudined above would consolidate recent improvements in economic performance and contribute to the long-term sustainability of economic and social development efforts. The Government's development strategy, which is expected to be continued by the next Administra- tion, would lead to increased agricultural productivity, expanded private investment, continued diversification of the agricultural and manufacturig sectors, and growth in job formation. Over the medium-term, these trends would result in an economy characterized by a better public/private sector mix, a dynamic export sector, reduced dependence on exceptional foreign financing, and gradual declines in poverty levels. Investments in education and health services would produce, over time, a healthier, more literate workforce, and sustainable use of the natural resource base would make possible continued economic and social development. In quantitative terms, implementation of the Government's program is expected to result in real GDP growth of around 4.3 percent a year, stabilization of inflation, and a reduction in the current account deficit from 11 percent in 1991 to about 6 percent of GDP by 1995, with further reductions bringing it to about 3 percent by the year 2000. Central to the achievement of these targets will be a reduction of the overall public sector deficit, and an increase in domestic savings and investment rates. Macroeconomic indi- cators for 1990-1992 and projected estimates for 1993-2001 based on the RMSM model are presented in Annex 1. 41. Extea Fhianng Rque t. Continued implementation of the Government's stabilization and structural reform program will require large inflows of grants, concessional assistance, and debt relief, amounting to US$290-310 million per year between 1993 and 1995. On the basis of likely disbursements from major multilateral and bilateral donors, there would be annual financing gaps ranging from US$15 to US$55 million between 1993 and 1995. It is expected that these gaps would be covered by debt relief resulting from Paris Club and non-Paris Club reschedulings and further commercial debt reduction. 42. Creditwortdoess. Honduras is severely indebted, with a heavy concentrtion of official and preferred creditor debt. It is currendy classified as an IDA-only country and is not eligible for Bank lending. Total exteral debt, amounting to US$3.2 billion at the end of 1991, represened 105 percent of GDP and 330 percent of export earnings. By the end of 1991, total debt service to export earnings had increased to about 35.4 percent, of which 16 percent was for interest payments. Honduras' long term debt (about 93 percent of the total stock) is almost all public or publicly guarnteed (98 percent), ad of that, roughly 90 percent was owed to official creditors. Preferred creditor debt amounted lo almost two-thirds of official debt in 1991, and accounted for about 70 percent of 1991 long term debt service. The lBRD/IDA share in Honduras' stock of medium and long term debt in 1991 was 20 percent, representng about 40 percent of preferred creditor debt. Debt service on outstanding IBRD/IDA obligations in 1991 represted about 9 percent of export eaniings, and about 45 percent of preferred creditor debt service. Honduras is not expected to become creditworthy for Bank lending during the foreseeable future. Similarly, access to foreign financing on commercial terms is not expected to become a possibility over the medium term. 43. Risks. The economic prospects described above are ainable, provided that the external environment does not deteriorate substntally from current conditions and that there is continmity in the implementation of economic and development policies. Risks that could jeopardize program success are related to the fragil- ity of the economy and its vulnerability to enemal shocks, in particular, to further price declines of its major exports and/or additional restrictions to market access by its major trading parters. Continuity in economic management over the medium term could also be at risk, due to presidential elections in November 1993 and the subsequent change in goverment in Janury 1994. While both major party candidates state publicly that they do not question the need to continue with the adjustment program, they have also emphasized that they may wish to take firther measures to soften Its impact on the poor by stengbthi and expanding social pro- grms. If this desirable emphasis were to spill over into populist policies with significant fiscal implications,  - 14- the progress achieved in recent years could be seriously eroded. In such circumstnces, it is mhtikey that the international financial community would be willing to provide exceptional financial support for Honduras or that foreign investors would consider the country to be an attractive investment site. Under such condi- tions, it is likely that Hondurs would return to intermittent periods of non-payment of extnal debt service and accumulaon of arreaus to multinational and bilateral creditors. 44. To minimize these risks, the Government is pursuing export promotion policies and encouraging private sector investment with the goal of strengthening the external accounts and smlating economic growth. IDA is encouraging the Govermnent to contimne these policies over the medium term, and, in addition, will be working closely with the Goverment and the donor commu!nity in the context of the CG to develop a strong project and program pipeline for external funding. Based on discussions with the two major presidential can- didates, it is our expectation that the programs and policies oudined above will be continued during the next Administraion. D. Bank Group Country Assstane Strate Assdstace Sraty 45. The Bank Group's future assistance program is designed to assist the Goverment in overcoming the country's critical development constraints. Given IDA resource limitations, the proposed approach is to be highly selective and to focus on areas where the Bank and IDA can play a catalytic role. In keeping with this philosophy, the proposed IDA assistance strategy would roncentrate on helping the Govenmen in its efforts to achieve three major objectives of its medi-term program - reduce poverty, modernize the economy and the publie sector (thereby creatng a busmess enviroment conducive to private sector development), and sustinably manage the country's natural resources. Implementation of such a strategy would be accomplished by means of: (a) economic and sector analyses, focussing on key structural, sectoral, and institutional issues; (b) design and implementation of a lending portfolio comprising policy-based, sector rehabilitation, and investment operations; (c) assistance for building institutional capacity in the public sector; and (d) aid coordination, to assist in mobilizing adequate fimding for economic and social programs, on highly conces- sional terms. IPC has a potental role to play in facilitating the transition to greater private sector provision of services previously reserved to the public sector (such as electricity, telecommunications, and ports/airports management). IDA would continue to work closely with the IDB and the IMF on sensitive reform programs to minimize conflicting policy advice and to increase aid mobilization for reform operations. Leading Levels and Compoddon 46. Past Operations. During the 1980s, Bank/IDA lending to Honduas was sporadic and disperwd across sectors. Twelve IEBRD and 2 IDA lending operations, for a total of US$399.3 million equivalent, were approved between 1980 and 1989, supporting investment needs in the power, educaion, transport, municipal development, water supply, industry, and agriculture sectors. When the economic situation deteriorated in the late 1980s, the Bank provided finani support for the implementation of an ecomic adjustment program through a first strucurl adjustment loan (SAL), but this assistance, as well as ongoing project siUpOort, was suspended for an 18-month period between December 1988 and June 1990, when the country accumulated arrears on its Bank and IDA debt. Lending was resumed in September 1990, initially on IBRD teWns and subsequenly on IDA terms. New lending commtments during FY91-93 have totalled US$292 million equiv- alent, and have focussed on three major areas: structural and sectoral adjustm, representig about 55 percent of total volume (SAL II, a supplemental Structurl Adjustment Credit (SAC), and Energy Sector Adjusmw Credit (ESAC)); poverty alleviaton and human resource development, representig about 20 percent of the total (IS I, FHIS II, and Nutrition and Health); and infratructurerabiLitation projects,  - 15 - for about 25 percent of the total (Morazan Dam Emergency, Transport Sector Rehabilitation). In addition, IDA Reflows amounting to US$64 million equivalent have been approved in FY92-93. 47. Future operadons. The core program proposed for Honduras between FY94-97 could include up to eight lending operations, complemented by studies and technical advice on the priority areas of emphasis identified above. While the current FY94-96 country IDA allocation is SDR84 million (US$120 million equi- valent), successful execution of the Government's economic and social program would establish a strong case for higher levels of support from the donor community. Over the medium term, it is expected that about 30 percent of the total credit volume would support human resource development/poverty reduction operations, about 50 percent would support public sector reform and economic policy reform, and about 20 percent would support environmental protectionand natural resource management activities. Providing that eiigibility criteria are met, Honduras would also be able to participate in IDA-only programs such as IDA Reflows and the IDA Debt Reduction Facility. IDA Reflows could potentially add SDR 15-20 million per year to the basic lending program allocation. Under the assistance strategy, net transfers from the Bank Group to Honduras would be positive in the early years, turning itegative in the outer years. In view of Honduras' severe indebtedness and low per capita income, continued lending on IDA terms is expected over the next 4-5 years. Proposed assistance in each of the priority areas is summarized below. 48. Over the next four years, povert reducton and hIuan resource developmet will be central to the IDA lending and ESW program. The overall thrust of IDA's poverty reduction and human resource development efforts would be to increase access to social services for the entire population, with a particular emphasis on improving operational efficiency, program quality, and institutional arrangements in the education, water, and health sectors. Priority will be given to expanding program delivery in underserved rural areas and addressing the needs of poor women and girls. Actions supported under the proposed AGSAC, through the LMA, wfll help reduce poverty in rural areas by amending certain provisions of the agrarian reform law (increasing smallhoklers' and women's ability to obtain title to land) and reforming rural financial policies and institutions. Technical advice on social sector reforms and poverty reducton efforts would be provided by RUTA Social (see para. 51). We are working with the Goverment in the preparation of water and educaton sector projects, and expect to work closely with the lDB on these operations. 49. Increasing public sector efliEicy and ondating ro in economic modernization will be priority themes for the IDA assistance strategy. IDA would aid the Government increase public sector efficiency through a combination of adjustment lending and capacity-building projects focussed on public sector management reform and on municipal development and decentralizadon issues. Proposed lending operations would help improve public sector management in the areas of personnel adminisi, financial management, and investment programmig, stgen municipal management and operational capacity, and introduce structural reforms in the public sector. EDB is expected to work closely with IDA in the development of the public sector adjustent operation and to provide co-financing. The need for a follow-up structural adjustment operation will be evaluated further into the next administration's term of office, when progress in implementing the different strucual and sectoral reform programs could be assessed and policy measures could be refined and reoriented, as required. Technical advice on constraints to private sector development and options for stimulatig competition would be provided through the preparation of a CEM (see para. 33). The proposed AGSAC would provide support for resructuin critical agriculture sector nstitutions and for reforming financial management and investment programming in the sector. 50. Support for emiromnental protetion and M e resource management will become increas- ingly important in the IDA program. The program supported by the proposed AGSAC would be consolidated in a few years through a follow-up operation that would focus on strengthening the sector institutions responsible for natural resource magement (such as forestry, agricultual research and extension, and land titling and registration). To orient speiffic activities of the proposed follow-up project, we plan to carry out  - 16- a Land Markets Study as part of the ESW program to update knowledge of land market dynamics in rural areas following the recent policy reforms. Building upon the capacity-building activities supported by the IDF grant and on the framework provided by the recety completed BAP, we plan to develop with the Govenmnent a proposed follow-on Enviroment Institutions project that would assist in strengthening CONAMA as it takes on its new functions, in developing a domestic strategic environmental planning capa- city (through the monitoring and periodic updating of the EAP), and in supporting priority investment or training activities identified in the EAP. 51. Capacity Building. In addition to specific institutional development components included in proposed lending operations and the proposed public sector management reform program, IDA is using a variety of instruments to strengthen operational and management capacity in the public sector. The IDF grant approved for CONAMA is one such example (see para. 39), and the IDA/UNCTAD debt management strengthenng program is another such (see para. 29). In the social sectors, a technical secretariat under the President has been established with support from a Japanese Technical Assistance Grant, to conduct policy analysis, program monitoring, and sector coordination. The Bank-exu Regional Unit for Technical Assistance in the Social Sectors (RUTA), which has been recently established, is based in Honduras and will provide technical support for institution building efforts. 52. Portfolio en-t. The lending p-rafolio comprises 12 operations tat have been either approved or are under implementation. A grant und.zr the IDF has also been approved. The portfolio is highly di- verse, and includes sector investment projects, adjustment operations, and safety net programs. The oldest project in the portfolio was approved in 1984 and the most recent one in 1993. The 12 projects have a total loan and credit value of US$392 million, of which US$211.6 million have been disbursed and US$184.3 mil- lion remain undisbursed as of May 31, 1993. Two receny approved lending operations are not yet effective. One of the most distinctive aspects of the Hondziras portfolio is that within the next 18-24 monfts, 10 of the 12 projects currently under implementation are expected to be completed. This means that by the end of 1994, the portfolio will have shrunk by about 85 percent in terms of number of operations and by about 50 percent in terms of undisbursed balances. Consequently, 1993-94 will be a critical period for developing a lending pipeline for implementation during the second half of the 1990s. 53. Project hnplemeion has been generally satsfactory over the recent past. Significant progress has been made in introducing structural and sector reforms agreed under the Second Structural Adjustment Loan (SAL II) and Energy Sector Adjusutent Credit (ESAC) programs, as well as under the proposed AGSAC. Execution of the safety net programs by the PHS and PRAP have been notable for the effectiveness of tar- geting mechanisms used to reach poor communities and families at risk of malnutrition. Implementation of on-going investment projects has continued to be satifactory, and four new lending operations were approved in the last year. No projects are crrenly rated as "3" or "4", and the average portfolio rating for the entire country program is 1.6. This represes a noticeable improvement compared to the country portfolio rating conducted during the FY92 ARIS exercise (from 1.75). Sunmy data on the lending portfolio with Hon- duras are presented in Table 2.  - 17- Table 2. Hondurs Couty Portfolio Projects Approved or under Implemeon PROJECT LN/CR APPROVAL LW/CR DISBURSED UNDISBURSED CANCELED OVERALL NAME NBR DATE ANOUNT (5/31/93) (5/31/93) RATING Water Supply/Drainage 2421-Ho 5-22-84 19.6 11.4 8.1 2 Industrial Credit III 2703-NO 5-29-86 37.4 31.9 3.2 2.3 2 Rural Primary Education 2804-NO 5-05-87 4.4 1.7 2.7 2 Agricultural Credit IV 2991-HO 9-15-88 25.0 23.5 1.5 2 SAL II 3257-HO 9-13-90 90.0 65.0 25.0 2 FRIS I 2212-HO 2-28-91 20.0 18.6 1.1 1 FHIS II 2401-HO 6-25-92 10.2 4.4 6.0 1 ESAC 2306-HO 10-31-91 50.6 37.4 16.2 2 IDA Reflows 2306-2 12-23-92 32.8 16.9 14.8 1 Morazan Dam 241.'-HO 8-04-92 12.0 0.8 11.8 1 Nutrition/Health * 2452-HO 1-05-93 25.0 0.0 25.3 NR Transport Sector Rehab. * 2458-HO 2-16-93 65.0 0.0 66.6 NR Environ. Institutions 2872-IDF 10-23-92 0.2 0.0 0.2 1 * Not yet effective NR Not Rated Loan/Credit amounts are given in US Dotlars. Inconsistencies between the Credit Amount and Disbursed/Undisbursed data are due to fluctuations in the SDR/USD rates since credit approval. 54. While implementation has been satisfactory overall, delays have been experienced in carryin out agreed activities for both investment projects and adjustment operations. These delays are reflected in lower disbursement levels than planned and in negative trasfers between the World Bank and Honduras that could have been avoided. Of particular concern are delays in completing Honduran procedures for credit signing and ratification, as this means that funds approved by the Bank and at the disposal of the Government cannot be accessed. At present a combined total of US$90 million, for two operations, is caught in such a limbo. Delays have also been encountered at times with respect to the submission of audit reports by independent auditors for project accounts. 55. These delays appear to be largely due to weak management capacity in the public sector and to budgetary constraints affectmng counterpart fund allocations for investment projects. With respect to management capacity, two trends appear to be at work: insufficient numbers of high-level professionals (particularly for the adjustment program) and frequent staff turnover in project management units (even at the directorial level). For the adjustment program (SAL U, ESAC, AGSAC), limited staff .apacity has negatively affected the Government's ability to coordinate among institutions, monitor implementa- tion, and keep to agreed timetables for tranche release, with serious consequences for the balance of pay- ments. Staff turnover at the investment project level has resulted in a loss of institutional efficiency, as new staff must be trained and brought up to speed. More i indamently, it has interfered with institution building within the public sector, as kmowledgeable individuals have left positions of responsibility. Cumbersome administrative procedures in the central government agencies also have contributed to observed delays. 56. IDA is addressing these weaknesses through intensive supervision at the project level, and perio- dic Comutry Stratea and -mplmntion Revew (CSIR) meetings at the country level. The first CSIR took place in September 1991, and a follow-up meeftng took place in June 1993. These meetings have provided a useful forum for reviewing both cros-cauing portfolio issues as well as project-specific  - 18 - questions. As a result of the latest CSIR consultations, the Government has taken several steps to institutionalize portfolio management procedur with a view to more timely monitoring and taking of corrective actions where necessary. Future CSIR meetings are expected to take place roughly every 12- 18 months. In addition to the CSIR mecbanism, in-country disbursement, procurement, and audit seminars are held periodically to ensure underst of Bank/DA procedures at the executng agency level. The most recent disbursement seminar took place in March 1993, and the most recent procurement seminar, in May 1993. Addressing the underlying causes of staff turnover and insufficient high-level professionals will require a much longer time horizon by means of concerted actions to reform civil ser- vice administration and public sector management practices. Similarly, introduction of an integrated financial management system for the consolidated public sector and strengthening of investment programmng performance would help correct some of the weaknesses observed in the allocation of bu(dgetary resources to investment projects and priority programs. These structural issues of personnel administration and financial management in the public sector would be addressed by proposed operations oriented to public sector reform (see para. 49). 57. lFC/MGA. Since 1964 IFC has made four loan and equity investments in Honduras totalling US$11 million in pulp and paper, leather tanning, textiles, and shrimp fanning. IFC's strategy in Honduras will focus on assisting private sector investors with: (a) plant expansions or refurbishments for selected industrial activities; and (b) export-oriented businesses, including those in export-processing zones. In addition, IFC is considering a possible credit line to a commercial bank and assistance for private sector infastructr projects. At the request of the Govemment, the Foreign Investment Advisory Service (PIAS) reviewed the Honduran legal and regulatory framework for private investment in mid- 1991 and made recommendations to the authorties for improving the country's investment code which were incorporated in the Investment Code legislation approved by Congress in May 1992. Honduras became a member of Multilateral Investment Guarantee Agency (MIGA) on June 30, 1992. MIGA has received three preliminary applications to support investment projects in Honduras. 58. Aid Coordnaton. Because of Honduras' external finaucing needs (see para. 41), aid coordina- tion will continue to play a crucial role in the success of the program. The principal mechanism will be the Consultative Group, in conjunction with informal donor meetings organized around specific sector themes. At the most recent CO meeting in Washington in March 1992, discussions focussed on the Government's implementation of the adjustment program and poverty alleviation efforts. The next CG meeting is tentatively scheduled for mid-1994 in order to give the new govermment time to define and present its program to the donor community. In addition to the CG, informl donor nmetg have been held in Honduras during the preparation and appraisal of the proposed AGSAC, mainly to disuss forestry sector reforms. These meetings have contributed to achieving a consensus on the program's policy orientation and to identifying measures to mage the transition and avert potential negative social impacts. Such informal meetings will continue to be used for the agricultural program as well as for other program initiatives, as appropriate. Potetia topics for futre informal donor meetings include discussions of the EAP and the conclusions of the poverty analysis to be conducted as part of the CEM. 59. C_ofidng. Co-financing with other muldlateral ins"tions and bilateral donors, particularly on concessional terms, has become a central feature of IDA support to Honduras. The US$292 million equivalent in new BanklWA assistance since lending resumed in FY91 have been largely exceeded by official co-financing moung to US$440 million. IDB has been one of the major co-financiers of Ban/IDA supported operations, and is the major multilateral donor in Honduras. In the past three years, the IDB has lent a total of US$467.0 million (US$268.0 million on market terms, US$198.0 million on soft terms, and US$1.0 million in tecdmical cooperation grants). The planned IIDB lendn program for 1993-95, projected at US$385 million, fowsses primarily on water and sanitation, road rehabilitation and social sector investment. In addition to co-financint on cash terms, the donor community is working  - 19- closely with IDA and the authorities to provide needed technical assistance upstream for project preparation as well as for project implementation support. As with the proposed AGSAC, IDA plans to work closely with co-financiers in futr operations through joint project preparation and supervision. 60. Cooperaton with the NIM. The Bank, IDA and the IMP have worked closely to ensure that proposed stabilization measures and medium-term structural reforms are consistent and appropriately sequenced. An IMP stand-by arrangement for SDR 30.5 million, approved in July 1990, was completed sa.isfactorily in February 1992 and aU planned purchases were made under the program. In February 1992, the IMP approved additional assistance to Honduras amounting to SDR 44 million under the Compensatory Financing Facility (CFF) for export shordalls experienced in 1990/91. Following agreenent on a PFP and detailed first-year program in early June, an ESAP for Honduras of SDR 40 million was approved in July 1992. Agreement has been reached between the Government and the IMP on a satisfactory macroeconomic framework for 1993-94, including specific performance targets for 1993. The authorities and the IMP expect to begin discussions on the progrm for the second year of the ESAF and to update the PFP in October 1993. The results of these disssions would be reviewed and confirmed with the new administron early in 1994. E. Summary Asment 61. The Honduran authorities have begun a long overdue process of economic and structural reform. Results of the progrm to date are encouraging, and medium-term prospects for sustainable growth are improving. Nevertheless, the country's economic and financial situation remains fraile, as the economy is still highly vulnerable to exenal shocks. In addition, continuity in domestic policy may prove dificult to maintain as the country goes through presidential elections in late 1993 and a newly elected government takes office in early 1994. IlDA's program of assistance, including the proposed AGSAC, plays a key role in supportig the Government's efforts to deepen the structural reform process and in ensuring that inadequate or untimely levels of extnal finance are not a contrbuig factor to policy backsliding. 62. IDA's planned assistance program depends on the continued willingness and ability of the Govern- ment to pursue sound macroeconomic management policies and to define and implement a major reform program that wiUl begin lo tackle the structnl problems in the Honduran public sector. Criteria to judge progress would include: maintenane of a supportive macroeconomic framework, including flexible mangement of the exchange rate an tight control over public finas; contiation of price liberali- zation and trade policy reforms; hiproved public enterprise performance, including generation of operational surpluses; implementation of agreed reforms in the energy and agriculural sectors; and gradual restucurng of social sector progrms in the direction of increased equity and operational efficiency. Gven the importance of macroeconomic policies to the success of any sectoral reform program, the proposed AGSAC inchld assurances on satisfactory macroeconomic wanagement and on continued adherence to relevant elements of the SAL n program (para. 70). PART ll - TEE AGRICULTURAL SECTOR PROGRAM A. Sector Ovaeviw 63. Agricultural activities are critical to the economy and to Honduras' long-term growth. Agriculture employs more than one-half of the labor force, accounts for 25 percent of GDP, and generates about 80 percent of export eanings. Over 1980-89, real agricultual GDP grew at an average of 2.9 percent per year. In 1990 it grew only by 1.1 percent mainly due to a strike by banana industry workers and flooding. However, during 1991 agricultual ouput grew at 5.4 percent and a similar rate is expected during 1992.  - 20 - 64. The development of the agricultural sector during the 1980s was constrained by distortions in reladve prices, natural resource misuse, institutional weakness, and inadequate investment. During the 1980s, agriculture was subject to considerable Govermnent intervention. Overvaluation of the lempira, supported by a growing battery of trade controls, discriminated against all exports, in particular those of an agricultural nature. Industa sector-oriented protection policies negatively affected agricultural terms of trade. The suport price system for basic agricuttural products implemented through the Honduran Agricultural Marketing Institute (IHMA), a grain trading agency which had the monopoly of all grain imports, was ineffective in protecting producer prices. Consumer price subsidies, implemented through the Government's retail outlet, the National Basic Products Supplies (BANASUPRO), did not protect poor consumers' real income. Credit subsidies through the Agricultural Development Bank (BANADESA) were intended to counteract lower prices for farm products, especially basic grains. In sum, these Government interventions misallocated resources, were costly and inhibited private investment. 65. Until recently, the legislation concering land and forest resources, land tenure policy and forest management inhibited and distorted private investment in agriculture and forestry. The Agrarian Reform Law (LRA) caused tenure insecurity as it allowed land to be easily expropriaXd. Titles provided to agrarian reform beneficiaries were provisional, thereby inhibiting land transactions in the form of sale, rental or mortsgae. The LRA imposed restrictions on owners' land use decisions. The forestry legislation and the LRA actually encouraged farmers to cut forest and replace it with pasture-even on fragile lands, hills, and areas already degraded-to regain control over their property. Vested with the ownership of all forest, COHDEFOR participated actively in wood processing and had the lumber export monopoly. 66. Public investment and expenditure in agriculture is low. It decreased sharply as a proportion of agricultural GDP over the 1980s, from 23 percent in 1980 to about 4 percent in 1991. During the 1980s, GOH expendit in the sector were primarily for: (a) generalized food subsidies; (b) credit and input subsidies; (c) an extensive system of Government enterprises in production, marketing, and storage of agricultural products; and (d) a large bureaucracy. Despite this unfavorable policy environment, agriculture had been undergoing a slow process of adjustment and resource reallocation which has accelerated as a result of recent policy changes. There has been rapid growth of nontraditional exports, especally pineWple, cantaloupe and seafood. Production of conmodities for the domestic market, such as palm oil, plnin, poultry, and cabbage, has also expanded rapidly, while corn yields have increased from 1 ton/ha in the mid 1970s to 1.75 ton/ha in 1991. B. Sectoral Development Po and Recent Reorms 67. Sedoral Devdopent Program. Supported by SAL IL, GOH embarked on a major program of economic reform early in 1990. As part of this program, GOH, assisted by the Bank/IDA, the IDB, and other donors, started to formulate a comprehensive agricultural sector development program to establish the basis for a modern, competitive agricultural sector. The program aims to establish incenives to: (a) foster sustainable, private sector-led growth; (b) improve natural resources mamagement; (c) expand export earnings; and (d) generate employment. The new sectoral strategy is outlined in the Secretariat of Natural Resources' (SRN) document entitled Agricultural Modernization and Development Program (AMDP, dated August 1991), which was approved by Congress in April 1992 (see para. 69). It includes refonns in the: (a) trade regime; (b) agricultural price policy and marketing regulations; (c) mral financial sector; (d) policies and legislation affecting private property rights over timber and land resources; (e) role of the state, specifically a move towards a regulatory role and purveyor of key services, in particular to small producers; and (t) public sector framework for formulating and implementing agricultural policy straty and budgeing.  - 21 - 68. Recent Sectoral Reforms. GOH started to implement the first stage of the AMDP in early 1990, supported by SAL H. Substanti reforms in agricultural price and trade policy have already been introduced, such as the: liberalization of all agricultural import and export regimes; reduction and harmonization of trade tariffs; liberalization of all agriculh -ral producer and consumer prices-guarantee prices for basic grains have been replaced with a price band (i.e., a variable levy); reduced Government intervention in agricultural commodity purchases and food distribution-IHMA's role has been limited to the management of a "strategic reserve" of basic grains (for natural disasters), while BANASUPRO is selling food at market prices; and the elimination of interest subsidies on all agricultural loans. Progress has also been made in restructuring the rural financial sector, in particular with regards to BANADESA (see Annex 4). These reforms, together with the improvement in the overall macroeconomic enviromnent, have strengthened agricultural terms of trade and made investing in the sector more attractive. 69. However, to further stinmlate private investment and ensure sustainable medium-term growth, these gains need to be complemened with reforms in: (a) land and forestry property rights and management, and utilization of land and forest resources; and (b) agricultural public sector management. Policy changes in these areas could not be implemented under the then prevailing land tenure and forestry legal framework. Therefore, early in 1990 and as part of the preparation of the AMDP (para. 67) and of the proposed AGSAC, the Government embarked on the preparation of a comprehensive biUl entitled "Modernization and Development of the Agricultural Sector." This bill also included legal changes to institutionalize the reforms on price, trade, grain marketing and rural finance that were being implemented under SAL II since 1990. The bill was submitted to Congress in December 1991 after substantial consultation (lasting more than 6 months) with the population expected to be affected most and with IDA, as part of the preparation of the proposed AGSAC; it was enacted by Congress as Law 31-92 (Agricultural Modernization Law, LMA) in April 1992. 70. The proposed AGSAC will support implementation of the policies and structural reforms embodied in the LMA with respect to land tenure; forest rights, management and utiliaon; and agricultural public sector management. It will also consolidate reforms in trade, agricultural price policy, grain marketing, and rural finance begun under SAL II. These reforms, together with the overall macroeconomic strategy of GOH consistent with and supportive of the agricultural adjustment program for sustained growth-including efforts to reduce the fiscal deficit, flexibly manage the exchange rate and liberalization of interest rates, and improve the management of public enterprises-are included in the Government's Letter of Agricultural Development Policy, dated December 8, 1992 (Annex 3). The letter also includes action plans to implement the agreed reforms in the areas of land tenure, forestry, rural finance, and Government ewpenditure and Public fiance. In general, imple tn of the agreed plans are satisfactory. The Policy Matrix of key actions under the AGSAC is presented in Annex 2. C. Land Tenure 71. The LRA was enaced in 1962 to distribute land to the landless, and to provide them with services necessary to improve living conditions. To implement the agrarian reform process and coordinate policies and services with other public agencies, the National Agrarian Instiute (INA) was created. While in its nearly 30 years of opeaton INA has distributed 400,000 ha of land (15 percent of Honduras' farmed area) to about 70,000 beneficiaries, it has been duplicating services rendered by other agencies and neglecting its most important role-the distribution of land to the landless. In addition, the agrarian reform process has been at a high cost; public expendiur for the program tbrough 1988 (the latest year for which data are available) are estimated at about US$2,200/ha, equivalent to the investment required to irrigate one hectare.  - 22 - 72. The LRA actually caused tamre insecurity and imposed restrictions on owners' land use decisions, thereby discouraging Inestment and efficient land use. Tenure insecurity derived from potential expropriation by INA and invasion by peasnts. Although INA had not been active in expropriating land in recent yeas, the risk of expropriation remained and represented a disincentive to investment. (Landowners, including land reform beneficiaries, were subject to continuous "evaluation" by INA officials, and their property could be exproprited if they did not engage in "direct" and "efficient" land eiploitation.) The climate of insecurity was exacerbted by the legal impediments to titling farms of less than 5 ha (a way to discourage minlfundio). INA estima that at present the number of farms of less than 5 ha exceeds the number reported in the 1974 Census, the latest available land distribution data: LRA did not contain the proliferation of small landholders but deprived them of their de facto possession rights and hence of incentives to settle and invest in better management practices, both of which are necessary, though not sufficient conditions, for increased productivity. 73. Legal and administrative rules of the agrarian reform process hampered landowners' exercising property rights, itroduced distortions in land use efficiency, and obstructed the development of a land market. Legal safeguards against expropriation of land under perennial crops or livestock have shifted land use away from anmual crops. The definiton of "efficient" exploitation to mean that at least 90 percent of farm area should be under cultivation or pasture, encouraged the clearance of forest areas on private lands, with the predictable negative impact on soil and water resources. Because private land rental arrangements were prohibited until recenty, land markets are underdeveloped and land use efficiency low. Small farmers' access to credit continues to be limited becse rural land cannot be pledged as collateral due to the provisional nature of the titles given by INA or the lack of land ttling. Furthermore, land has been distributed under the land reform program almost exclusively as "collective" property to producers' associations or cooperatives. Thus, land reform beneficiaries have been defacto, although not de jure, limited to organize as production cooperatives or commnal farms. LRA also established the rules and regulations for the selection of land reform beneficiaries. Before the new law, a number of these rules and regulations made land adjudication and ttling very cumbersome, and discriminated against women (who were not allowed to hold title unless they were single mothers with dependent children). 74. Land market development is also affected due to the incomplete coverage of the cadastral, and hence of the titling, system. In addition, coordination between INA, the Depament of Cadastre (Cadastro), and COHDEFOR is inadequate, and the Public Registrar is not up to date. The rural cadastre has been completed only in 7 of 18 Departments. Tiding programs have been supported by external donors but with limited success due to the process embodi'4 in the LRA and the lack of inter-agency coordination within GOH. 75. The Refon Progam. The objective of the land tenure reform program to be supported under AGSAC is to improve land use and consolidate the process of land reform. To that end, Law 31-92 modifies the LRA to: (a) guarantee and secure flu land ownership rights; (b) legahe land rental arrangements, except for some types of share-cropping; (c) counteract provisions of LRA which distorted land use patterns; (d) revise and simplify the adjudication and titg process (e.g., by reducing the minim time for title eligibility from 40 to 3 years of contnuo operation); (e) eliminate the prohibition of titling to holders of less than 5 ha; (f) provide women with equal rights of access to land; and (g) ensure consistency between general sectoral policies and those of agrarian reform. These changes will provide a more secure land tenure basis and expand and accelerate adjudication and titling programs for individual and community (ejidl land. 76. GOH has recenly approved a set of satisfactory regultions to implement the reforms to the LRA under Law 31-92 after extensive disussions with farmer groups and IDA (para. 102.(b)). The  -23 - regulations ensure that all types of land rental other than a narrowly defined form of share-cropping will be allowed. GOH has also approved a satisfactory restuchatng of INA to have it focus primarily on land titlng; this includes the divesting of assets and activities not related to land titling, reducing its labor force to 800, and contracting-out some services. A Land Tenure Action Plan agreed between GOH and IDA and attached to the Letter of Agricultural Development Policy (para. 70 and Annex 3), is intended inter alla, to accelerate: (a) land adjudication and titling; (b) cadastre work; (c) the recovery of INA's dues from its land adjudication and titling program; (d) the divestiture of INA's assets and activities not related to land adjudication and titling program; (e) the restructuring of INA, in particular with respect to the reduction of its labor force; and to ensure (f) that funds for the 'seed capital" scheme budgeted under the SRN will not exceed 25 percent of INA's budget in any particuar season. During the first year, INA's activities will be centered on the Departments where cadastre work bas been completed. Priority will go to providing titles to women and smallholders previously deprived of such a right (holders of less than 5 ha), and on converting provisional titles into pmanent ones, in so doing allowing beneficiaries to decide whether to be titled individually or as a group. In forest lands, INA will closely coordinate its activities with Cadastro and COHDEFOR (para. 83). A pemanent coordinatng committee has been established between INA, COHDEFOR and Cadastro to define responsibilities and harmonize required information for the titig and regularization program. In addition, INA has started implementing the agreed action plan (paa. 102.(c)) (in particular with respect to its rtucring), and GOH has budgeted the financial requrements for the 1993 cadastral work required in support of the land titling program. Satisfactory implementation of the Land Temnre Action Plan would be conditions of Second and Third Trance rass (paras. 103.(a) and 104.(a)). Presentation of satsfactory terms of reference for a fnancial and operational audit of INA would be a condition of Second Tramlhe release (para. 103.(c)), while presentaton of a satisfactory audit report would be a condition for Third Trache release (para. 104.(c)). D. Forestry 77. Honduras bas significant forest development potential. However, output is limited due to distortions of incentives resulting from government interventions, absence of private property rights over the forest, and poor forest management practices. Undl March 1992 (when the LMA was approved), forestry laws and regulations discouraged imvestment, efficient resource use, commercial exploitation, and conservation and development of the natnral forest. Two-thirds of Honduras is classified as suitable only for forest pover but the actual forest area is only 45 peet of totl land area and severe degradation in some regions attests to widespread misuseY The annal rate of deforestation is estimated at 1.1 percent (about 80,000 ha), mainly of broadleaf forest. The forestry indutry is also in a state of decline. Lumber production in 1990 was 600,000 to 700,000 cubic meters, or about 30 percent below 1978-79 production; the export value of prmary forest products has decreased by more than 40 percent in the same period. Revenues and marketed volumes have declined faster than the harvestig of logs. The sector's regulatory frmeork has resulted in the producdon of low-value products, and considerable inefficiency in resource use: currenty, neither the objectives of susianable commercial foresty nor conservation of enviromnentally fragile areas are beig met. 78. The principal factors causing degradation of fort lands are the settemat of generally landless families in forested land and extensive livestock ranching. The LRA and forestry laws and policies 11 There is no accuae hfmaton on forest coverage. Esdcas Foresales 1989^ by CORDEFOR and PAOIUNDP and miion calcula estmate tat die present f a is 7.6 million ha, of whicb 2.4 mion ha is broadleaf noest and 2.9 miion ha is conifrows an 2.3 mSion ha (many broaf frest) is dortesXd. Slight over half of the people living in forest area occupy communal (o) land, and less thn 10 percn le on private lands. Most of the population on deforestd areas are on ejdo or non-ejdo public lands.  - 24 - prevailing until April 1992 established a perverse set of incentives which encouraged cutting the forest and replacing it with crops or pasture to avoid possible expropriation of land and lumber resources. The law that created COHDEFOR gave it legal rights and full control over all timber resources, even those on private lands. Commercial logging was also inefficient due to COHDEFOR's: (a) stumpage fee which resulted in "high-grading"; (b) practice of granting shott-term (less than one year) extraction permits, which failed to establish an incentive to increase yields through improved forest management; and (c) weak monitoring and enforcement of sustinable forest management. COHDEFOR's legal monopoly of timber exports, direct intervention in pricing and production, and controls over the production and marketing of wood products, reflected and encouraged the short-rn, extractive nature of the Honduran forest resource utilization, and inhibited the development of a sustainable private sector forestry industry. Excessive protection of the domestic sawmill industry through the 49 percent limitation on foreign capital participation in forestry-related venture discouraged improvements in forestry management practices. 79. In recent years, and with substantal support from the donor community, COHDEFOR has made efforts to address some of these problems. First, a new stumpage valuation system, based on standing- tree value, is being implemented. Second, it has started to re-direct its policies and activities away from forest exploitation towards resource management, stopping all its production activities and closing its sawmills. Third, it is divesting all assets related to production and processing of lumber; the five remaining enterprises have been offered for sale, and the divestiture process is expected to be completed by end-1993. Fourth, an intensive management program (AMIs) has been introduced on a pilot basis under the support of the Canadian International Development Agency (CIDA). In this, owners or settlers are incorporated into a management system that minimizes tree harvesting and has the potential of yielding results in terns of prevention and detection of forest destruction, as well as aireely benefiting the rural poor. 80. The Reform Progam. The objective of the forestry policy reforms to be supported by the AGSAC is to lay the basis for a sustinable management of the country's rich forest resources with increased participation of the private sector. To that end, Law 31-92 introduced modifications to the forestry laws to: (a) elminate any activity or function of the forestry public sector (AEE, i.e., COHDEFOR) related to the production, marketing and trade of forest products; (b) reorient the APE's role towards management and protection of public forests, regulation of private forests, fire pretection, and forest extension and research; (c) require management plans as a pre-requisite for all forest utilization; (d) return and guarantee ownership of tmber resources to landowners; (e) exenpt all forest lands from future expropriation under the LRA; and (f) allow private sector entry into forest production, industrialization and marketing. 81. GOH has recently approved satisfactory reguations to implement the enacted forestry changes under Law 31-92 (para. 102.(b)), that include: (a) the role and responsibilities of APE; (b) that public stumpage sales and other revenues generated by the public forest lands would be part of the Treasury's income; (c) standards for the mangemet plans to be submitted to AFE as prerequisite to utilize any forest resources; (d) procedures to demonstrate the right of use of forest resources by forest land owners; (e) transitional dispositions to identify public forest areas; (f) rules to establish dispute settlement mechanisms in forest areas; (g) policies and procedures to regularize communities in national forests and/or to compensae farmers in cases of involuntary resettlement; and (h) regulations to establish and manage Protected Forest Areas and to promote biodiversity conservation. The regulations stipulate also that the resources to implement the APE's anmual work program would have to be sanctioned by the Ministry of Finance and would be independent of the revenues generated by the public forest lands. 82. A simple workable scheme for the development of forest managemen plans to safeguard public interest and the eaviroment on one hand, while providing incentives to the owners to husband the  - 25 - resource on the other, is critical. The rules, regulations and standards of the management plans have been developed by GOH with technical assistance from the donor conmmunity under close consultation with IDA. These regulations minimize requiements for the numerous, small landowners who are not located in environmentally critical areas, while concentrating attention and effort on the fewer larger owners and environmentally critical areas (e.g., nucleus of protected areas). GOH's policy, as stated in the Letter of Agricultural Development Policy (Annex 3), is that in the majority of the public forest area, settlers would need to be regularized (e.g., through conditional long-term leases) and incorporated into management systems which minimize or avoid harvesting. In critical areas, owners and/or settlers may have to be bought out or moved in land swaps. In general, however, GOH policy is to mininize involuntary resettlement, and it will only be exercised in cases of urgent need and only as a measure of last resortY The extent of the population that might be resettled will only become apparent as individual management plans are prepared and approved. Resettlement rules and regulations, consistent with Operational Directive 4.30 on Involuntary Resettlement, are part of the regulations to the LMA (para. 81). In particular, the latter states: (a) the cases in which resettlement will be considered; (b) the irstitutions responsible for resettlement; (c) that a resettlement plan must be prepared as soon as the need for resettlement is identified; (d) that any resettlement action must include an appropriate comnpensation package as part of the plan; and (e) that comnmnity participation must be an important element in resettlement activities. GOH has agreed to present to IDA for its approval, a plan for any proposed resettlement before any resettlement action is initiated (para. 101) and carry out such actions in accordance with such plan. Implementation of such plans would be monitored pror to Second and Third Tranche releases as part of the Forestry Action Plan (para. 84). 83. The regularization of forest land settlers and the return of LMA ownership of the forest to landowners will have to be done carefuilly in cooperation with the INA and Cadastro (para. 76) because of the precarious status of the land transaction recording system and the limited coverage of the cadastre (para. 74). To mitigate possible risks associated with the above, GOH has issued clear rles for: (a) reinrning forest resources to landowners; (b) the establishment of an efficient arbitration system; and (c) the imposition of a strict control by APE of the validity of the titles to claim forestry property rights and of possible fuure edcroachments in state land. Rules to implement such measures are spelled out in the regulations to the LMA that were recently approved by GOH (para. 84), and the execution of such policy would be monitored before Second and Third Tranche releases as part of the Forestry Action Plan (paras. 84, 103.(b) and 104.(b)). Also, to accelerate the regularization and titling process, it is imperative to expedite the development of a land capability system to identify the forest areas (included degraded forest) most suited for forestry (i.e., "potential forest areas"), and to accelerate cadastral work in forested areas with higher population concentraIons. According to Law 31-92, potenti forest areas are not subject to expropriation or adjudication and hence state forests cannot be privatized. Gt)H will be assistd by the German Association for Technical Cooperation (GTZ) in identifying potential forest areas, a task expected to be completed during 1993. 84. A satisfactory Forestry Action Plan agreed between GOH and IDA is attached to the Letter of Agricultural Development Policy (pam. 70 and Annex 3) and includes, inter alfa, actions for the: (a) restructuring of AFE; (b) identification of potential forest areas; (c) auctioning of forest resources from public lands eligible and suitable for commercial forestry; (d) establishment of public forest management units (PFMUs); (e) formalization of usufiu rights of communities or implementaton of resettlement plans, if any; (f) preparation of management plans; (g) establishment of a Protected Forest Area system; and (h) implementation of a program to monitor the social and environmental impact of the forestry 2/ The LMA does not change the legal stus of protecd areas and tre does not ree GOH to resettle ocupant of protected areas. However, GOH could decide to exerche ias acrr righs to preserve legally- established protected areas, in which case it might consider defraying the cost at resettemenit  - 26 - reform program (Annex 6). GOH has initiated implementation of the agreed plan (para. 102.(d)), in particular: (a) satisfactory restrucring of APE has been approved by GOH; (b) stumpage in all public lands has been increased to parity level with private lands; (c) an auctioning system of timber sales has been initiated; and (d) funds to implement the agreed social-enviromental monitoring system have been ensured. Satisfactory implementation of the agreed Forestry Action Plan will be monitored prior to Second and Tdb Tranche releases (paras. 103.(b) and 104.(b) and Annex 3). In addition, presentation of satisfactory terms of reference to undertake a financial and operational audit of COHDEFOR would be a condition of Second Tranebe release (para. 103.(c)), while presentation of a satisfactory audit report would be a condition for a Third Tranche release (para. 104.(c)). An economic and environmental statement of the possible impact of the forestty policy reforms contained in Law 31-92 and to be supported by the proposed operation is in Annex 6. This sXtaement was prepared by IDA based on information provided by COHDEFOR and has been discussed with GOH officials and the donor conmunity. E. Rural Fiance 85. GOH, with substntial support from international agencies, tried to compensate farmers for the adverse terms of trade for agriculture (para. 64) by giving subsidized credit through: (a) a large number of Central Bank (BCH) credit lines for agricultre; (b) a first-tier state-owned bank, BANADESA, which catered mainly to rural borrowers at highly concessionary terms; and (c) INA, a nonfinancial institution that provided financial resources to agrarian reform beneficiaries. By the end of the 1980s, total agricultural interest subsidies from the banking system (including BANADESA's own operations but not its trust funds) alone were equivalent to about two percent of agricultural sector value-added. 86. Commercial banks provide credit primarily to medium- and large-scale commercial farmers, using BCH rediscounts. Citing lack of collateral, they often turn down small rural producers. Low-income nrr producers' difficulties in obtaining formal finance have been due to: (a) their inability to mortgage land since they lack title to it; (b) high costs of monitoring borrowers in distant locations; (c) economies of scale in commercial bank operations which penalize small accounts; and (d) deficiencies in the collateral system which force lenders to require extremely high collaterals. Ceilings on interest rates and other service charges did not allow formal intermediaries to cover transaction costs or higher risks. Informal markets are generally more flexible but have higher costs and do not intermediate effectively among rural areas. 87. BANADESA, the main source of formal credit for small farmers, was created in 1982 as the successor to an agricultural bank that went bankrupt. Since its inception, BANADESA has faced solvency and liquidity problems due mainly to insufficient capital and loan losses. Political interference in credit allocation and approval frequently resulted in loans of dubious quality. The more than 30 trust funds managed by BANADESA, each requiring its own management and with varying, ambigous credit regulations, contribute to BANADESA's excessive int tion costs of about 10 percentage points. Moreover, BANADESA was given a nunber of tasks unrelated to its primary mission. 88. As nart of the Fourth Agriculural Credit Project (Ln. 2991-HO, approved in September 1988), GOH agreed to take the first steps towards rationalizing the rural financial sector. The main objective of the agreed rationalization program was to stgthen the incentives for the financial sector to allocate resources more efficiently in rural areas. This policy commitment was complemented and deepened under SAL It. Fulfillment of financial sector policy conditionality under these two operations has been satisfactory. In particular, commercial bank lending rates have been liberalized and rediscount rate subsidies eliminated (Annex 4). In addition, in 1993, and funded under Ln. 2991-HO, GOH will initiate  -27 - a study to idewt major deficiencies in the collateral system and to propose short- and medium-term couses of action to overcome such constraints. The study is epected to be completed duing 1993. 89. Under SAL 11, the Bank and GOH agreed on a restrcturing plan for BANADESA. In accordance with that plan, BANADESA has: (a) laid off 45 percen of its personnel; (b) increased to market levels lending rates on a portion of its portfolio; (c) stow lending to public sector instiutions and providing loans in excess of US$50,000 equivalent to a single borrower; and (d) started to divest from its non-fcial activities. However, during 1991-early 1992 (GOH failed to improve overall loan recovery (mainly due to the announcement of a debt forgiveness program In mid-1991). Since mid 1992, the Goveent has generally complied with the financial comnitments (para. 90). 90. The Reform Progrm. Liberalization of interest rates (pan. 88) and improvements in the agriculunral terms of trade and land teue property rights (paras. 68 and 75) will substantially improve farmers' access to formal fiancial credit in the medium- and long-run. Therefore, the objective of the mral financial sector reform program to be supported by the AGSAC is to help improve the efficiency of rural financial intermediation and to increas access of small farmers to credit facilities as reflected in the Rural Financia Sector Action Plan attached to the Agreement's Letter of Agricultural Development Policy (para. 69). GOH has shown its commtment towards this objective by satisfactory implementation of BANADESA's restuct plan agreed under SAL II since April 1992, in particular with respect to maintaining the August 30, 1991 Central Bank rediscount level, adjustd by inflation, and providing no additional Tray fimding to the insituon throughout 1992 (par. 102.(e)). The Government has committed itself to mahinn such financing limit and not to provide any additional debt forgiveness to agricWultal credit beneficiaries (Letter of Agricultual Developmn Policy; Annex 3). These financing commments will be closely monitored prior to Second and Third Trandw releass (pa. 103.(d) and 104.(d)). In addiion, GOH has agreed to divest BANADESA to facilitate gre r participation and to develop more efficient finmcial intermeaes in rural fiacig and has prepared satisfactory terms of reference (TORs) to evaluate diveste alteraves. Initiation of concrete agreed actions to divest BANAD13SA (e.g. havng completed the sales of a portion of BANADESA's portfolio or of some branches, or having completed the preparation of tender documents to sale the institution as a whole) based on the study carried out under agreed TOR would be a condition of Second Tranche while substntial progress on the divesdtur process would be a condition of Third Tranhe release (para. 103.(e) and 104.(e)). In the short run, there is a need to ident and develop ways to increase the participation of formal financial insttutions in rural financing. Therefore, GOH has also prepared and approved satsfactory TORs for a study to ident a scheme to promot the increased participation of for fal financial imedi in agricultural credit. Satisfactory implementation of the agreed action plan to promote increased participation of fancal itmediaries based on eons of the study, would be monitored prior to Second and Tlird Tranche releases (aras. 103.(e) and 104.(e)). 91. To better attend fte needs of small fiamers, Law 31-92 has established the legal basis for two new types of entities in the rural financial system: rural credit banks (Cajas Rurales) and a land credit fund. The main objective of GOH in the creation of rural crit banks is to improve credit access to small ural borrowers by making fiam groups responsible for their own finances. The main objective of the land credit fund is to facilitate small farmers' access to financial resources to purchase land. IDA has agreed with the SRN and the BCH regadi the nature and function of these new entities and the need to establish suh h a network of rral credit bans with adequate fan supervision and managerial skills. Similarly, it has been agreed to limit treasy esources for the land credit fund to those stipulated in the LMA, that is, to the recoveries fom the lani adjudication and titing under such law. The basic principles under which such schmes would operae are spelled out in the Rural Credit Action Plan agreed between tg GOH 0and IDA and attaced to the Letter of Agricultural Developmet Policy (pan. 70 and Ann 3). In summary it was agreed tatthe land credit fund scheme wod: (a) be a line of credit open  - 28 - to all qualified financial intermediaries; (b) lending will be at market interest rates; and (c) financial intermediaries will be filly responsible for credit risks. The rural credit banks will be: (a) private financial institutions tightly controlled by a competent regulatoy entity; and (b) financially self-sufficient. GOH has recenty approved the regulations to operate the Land Credit Fund (para 80.102.(f)) while the deta on how the rural credit bns will operate are beig developed by GO with assistnce from the United States Agency for International Development (USAID). Prior to Second Tnhe Release (pam. 103.(1), GOH would approve satisfactory schemes, rules and regulations to implement the rural credit banks, based on the principles laid out in the Rural Credit Action Plan; implementation of these two schemes according to agreed rules and regulations would be monitored prior to Second and Third Trenche releases (paras. 103.(t) and 104.(D). F. Government Ependiture and Public Administration 92. The organization, functions, and regulatory systems of the agricultural public sector need immediate and broad-based reform, both to adapt it to the proposed new policy environment and to correct the following administaive and managerial deficiencies and major sector management problems. 93. A complex system of decenlized, functionally overlapping government institutions and paastals involved in all aspects of the production-distribution chain was developed to enforce price and trade controls, and other regulations. Most were inefficient and operated with minimum or no cost recovezy, so contributing to significant fiscal deficits. In addition, due to GOH's weak budgeting system, sectoral agencies are not well informed about planning parameters or financial restictions for the budgeting process; the system does litfle more than track the movement of money in a rudimenty way. Expendt classifications are obsolete and the absence of common standards prevents uniformity in budgeting classification. Under these conditions, budgeting control becomes difficult, if not impossible, as it does not allow monitoring of achievement of the objectives stated in the Annual Operating Programs (POAs), or of the cost efficiency of activities. 94. Law 31-2 provides the institutional framework for overall sector coordination, and allocates responsibility to formulate and implement the agricultural policy, strategy and budgeting to the SRN. Under this system, the Agricultural Sector Planning Unit (UPSA) within SRN provides technical support to the Committee for Agricultural Development (CODA). This new instittional framework provides the basis for managing stmctur administrative reforms and implementing the overall policy changes supported by the pwposed AGSAC. GOH has begun to use this new system to develop coordinated and coheret sWategies and policies for the agricultural sector assisted by the sector agencies. It was used to prepare the AMDP and Law 31-92. 95. The Reform Program. The objective of AGSAC-suported actions in agicultural public adminitron is to improve sector policy planning and coordination by strngtning and making better use of the budget process. Public agricultural instittions would need both to effect economies in administrve and opeting costs, and to justify the continuation and/or start of specific programs and projects on efficiency and economic grounds. Improvements to sector budget managemnt are a crucial precondition to policy and management improvements, and would allow SRN to exercise effectively its lead role in policy coordination ald execution, and strengthen the policy dimension of UPSA in sector manement and budget control. The proposed AGSAC would require POAs and budgets for the sector and for each sector instion, satisfactory to IDA, be approved by the Economic Cabinet prior to their approval by the Ministry of Finance and be presented to IDA by Auust 30 of each precedig year of the imple ion of the Credit, startng in August 1993. These are to include the government's agricultural seaor investment progrm and to reflect and support agricultural policies agreed under this operaion (paas. 102 to 104 and Annex 2) and under SAL II (para. 68 and Annex 4). Implementation  - 29 - of POAs and budgets for the sector as a whole and for each of the sector institutions would be reviewed by the SRN and be presented to IDA at the end of each following quarter to ensure that they did support the agreed policy changes under this credit and SAL II. These requirements are reflected in the Public Adndtratdon Action Plan agreed between the GOH and IDA and attached to the Letter of Agricultural Development Policy (Annex 3). Satisfactory implemention of the Public Administration Action Plan, in particular with respect to implementation of agreed POAs and budgets, would be monitored prior to Second and Third Tranches (paras. 103.(g) and 104.(g)). In addition, the Economic Cabinet and the Treasury have approved satisfactory 1993 POAs and budgets for the sector and for SRN, INA, IHMA, APE, and BANADESA, reflecting and supporting the policies agreed under the proposed operation and under SAL II (para. 102.(g)). 96. Technical Assstance. In conjunction with the proposed credit, GOH has agreed to implement a Policy Support Program (PSP) to provide UPSA and the sector institutions with technical support to strengthen policy planning, management and implementation capabilities (para. 102.(h)). The PSP's main objective is to help define, develop and institutionalize the managerial capacity needed to implement the new sectoral policies. The PSP has three main components: (a) the provision of specialized technical assistance to execute and control POAs and budgets within the context of sector policy priorities; (b) the implementation of the restructuring and provision of insfitutional management techniques needed to carry out the proposed policy reforms; and (c) coordination of the technical support provided by international and bilateral orgnizations active in Honduras' agricultural sector (among others, USAID, CIDA, GTZ, RUTA, and UNDP). Under this program assistance will be provided to UPSA, SRN, INA, APE and BANADESA. GOH has been receiving technical assistance from USA1D, CIDA, RUTA, UNDP and IDB to prepare the regulations to Law 31-92 and the reorganization structure and implementation plan for the sector institutions, particularly INA and COHDEFOR. In addition, since GOH is receiving tehical support from USAIJD to formulate and implement agricultural policies, GOH has requested USAID financial support to finance the proposed PSP satisfactory to IDA (Annex 5); satisfactory PSP iplementation during 1993 and 1994 will be monitored prior to Second and hbird Trancle Releases as part of the Public Administration Action Plan (paras. 103.(g) and 104.(g)). PART m - THE PROPOSED AGRICULTURAL SECTOR ADJUSTMET CREDIT A. Blank Experience and Rationale for Lending for Agriculture 97. B/DDA Experien In LEding for Agriculture. During 1970-90, IDA and the Bank made four credits and three loans, totalling US$113.4 million, to Honduras for six agricultral projects. Many of the lessons learned from them were incorporated in the design of the Fourth Agricultural Credit Project (Loan 2991-HO) of 1988. However, due to Honduras' non-accrual status during 1988-9, the Loan 2991-HO only becne effective in June 1990, during the final phase of SAL II processing, once arrears to the Bank Group were cleared. SAL II supports a number of agricultural policy changes, in particular related to price and trade and rural financial markets. Lessons learned from the implementation of both SALs have also been incorporated in the design of the proposed AGSAC. 98. Raionale for l[DA Ihwolvemnt. Agricultural activities are critical to Honduras' long-term economic growth and IDA and IDB have been working closely with GOH and SRN in designing the AMDP. The Bank and IDA have supported GOH efforts to implement the first phase of this program through SAL II (para. 68 and Annex 4), which was cofinanced by IDB. The proposed reforms of the agriculural progrm are important components of the structural adjustment/stabilization program supported under SAL H, SAC and ESAC and essenti to GOH's medium-term progrm (para. 13). The proposed AGSAC suppons the most important reforms included in the Government's AMDP and Law 31-92, and would help consolidate sector reforms inated under SAL 1I to rblish the country's  - 30 - compaaive advantage in agriculture modemization sector and ensure sustainable medium- and long-term growth. B. Trauche Release Conditions 99. Cofinavclng. The IDB is co-financing -the same policy program as that supported by the proposed AGSAC with a US$50.0 million loan. The IDB loan, to be disbursed in three tranches against fulfillment of the same conditions as the IDA credit, was approved by IDB Board in mid-December 1992. Its effectiveness has been conditioned to the approval of the proposed AGSAC by IDA's Board. 100. Credit Tranchi. IDA support of SDR43.3 million (US$60.0 million equivalent) is proposed to be disbursed over 27 to 30 months as follows: a First Tranche of SDR18. 1 million (US$25.0 million equivalent) would be disbursed upon effectiveness, a Second Tranche of SDRIO.8 million (US$15.0 million equivalent) would be disbursed afier about 9 months upon satisfactory compliance with Second Tranche release conditions, and release of the remaining SDR14.4 milion (US$20.0 million equivalent) is anticipated by the first quarter of 1995 after satisfactory compliance with Third Tranche release conditions. The Closing Date of the Credit will be June 30, 1995. 101. In addition to the monitorable actions specified in paras. 102 to 104, all trance releases would be contingent upon: (a) the mainenance of a sound macoeconomic frmnework consistent with and supportve of the agriculural sector adjustment program for sustained growth; and (b) satisfactory performance in overal agricultural program implementation consistent with the Letter of Agricultural Development Policy and SAL n agricultural policy commments. GOH would also be required to pesent to IDA, for its approval, a satisfactory plan before underaking any resettlement action and carry out such action in accordance with such plan. 102. The following major actions were taken by the Government before presentation of the credit to the Board of Executive DLrectoa: (a) Law 31-92 containing satisfactory modifications to the land tenure and forestry policies was enacted in April 1992 (pan. 69); (b) Regulations to implement the enacted land tenure and forestry chapters of Law 31-92 satisfactory to IDA have been approved by GOH (paras. 76 and 81); (c) GOH has initiated implementation of the agreed Land Tenme Action Plan (pan. 76); (d) Implementation of the agreed Forestry Action Plan has been initiated (pan. 84) (e) Satisfactory progress in the implementation of the restucgt plan of BANADESA (pan. 90); (t) Safactory basic principles to establish and operate rural credit bans and satisfactory regulatons to establish and operate the land credit fund have been approved by GOH (pua. 91); (g) Satisfcory 1993 POAs and budgets for the sector and for SRN, INA, IHMA, APE and BANADESA (pan. 95) have been approved by the Economic Cabinet; and (h) GOH has approved on the PSP and its financing, satisfactry to IDA, to strengthen sector planning, management and implementation capabilities to undertake proposed policy reforms (para. 96).  - 31 - 103. Secod Tlnche Rdease would be conditional upon the following actions: (a) Satisfactory implementation of the Land Tenure Action Plan (para. 76 and Annex 3); (b) Satisfactory implementtion of the agreed Forestry Action Plan (para. 84 and Annex 3); (c) Satisfactory TOR to undertake a financial and operational audit of INA's and AFE's records and accounts (paras. 76 and 84); (d) Evidence that the Central Bank funding to BANADESA has been limited to the August 30, 1991 level, adjusted by inflation, and that there has been no additional treasury funding (para. 90). (e) GOH has completed the study to promote increased participation of financial intermediaries in agricltural credit as agreed with IDA, presented a plan to implement recommended actions, and has initiated implementation of the agreed plan of action to divest BANADESA based on the reommendatons of the evaluation carried out under agreed TOR (pana. 90); (f) GOH has approved satisfactory rules and regulations to establish and operate the rural credit banks, based on the agreed basic principles, and provide evidence that, to the extent the land credit fund and the rural credit banks are operational, are functioning in accordance with agreed schemes, rules and regulations (para. 91); and (g) Satisfactory implementation of the agreed Public Admiistration Action Plan (paras. 95 and 96). 104. Third Tranche Release would be conditional upon the following actions: (a) Satisfactory implmentation of the Land Temnre Action Plan (para. 76 and Annex 3); (b) Satisfactory implementation of the Forestry Action Plan (para. 84 and Annex 3); (c) Satisfactory audit report of INA's and APE's operations based on agreed TOR (paras. 76 and 84); (d) Evidence that the Central Bank funding to BANADESA has been limited to the August 30, 1991 level, adjusted by inflation, and that there has been no additional treasury funding (para. 90). (e) Substantial progress in implementing the agreed recommendations of the study to promote increased participation of financial intmediaries in mrual financial markets and of the agreed plan to divest BANADESA (pan. 90); (f) GOH bas provided evidence that land credit fund and the rural credit banks, to the e.-tent that they are operational, are functioning in accordance with agreed schemes, rules and regulations (para. 91); and (g) Satisfactory implementation of the agreed Public Administration and Expenditure Action Plan (pan. 95 and 96). C. Procurement, Dibursement and AudIting 105. The credit proceeds will be used to finance the foreign exchange cost of general imports (goods and relevant foreign services), excluding goods financed by other muldlateral or bilateral agencies, and other goods specifically prohibited in a negative list defined under the Standard International Trade Classification (SITC) or equivalent classification. Retroacive financing for up to 20 percent of the credit amount is recommended for eligible expenditures incurred beginning fourth months prior to the credit signing date. 106. A Country Procurement Assessment Review (CPAR) carried out by IDA in September 1990 concluded that Honduran legislation which govers public procuremet promote contracting on the basis  - 32 - of competitive bidding is compatible with IDA guidelines. It also determined that private companies generally follow acceptable commercial practices among which the most current is the use of limited competitive bidding procedures among qualified suppliers; importers generally obtain quotations from several suppliers and buy on the basis of quality and price. Based on the CPAR findings it is proposed to apply the following procurement procedures: 107. Imported goods by public and private sector entities valued at US$5.0 million or more would be procured through simplified international competitive bidding (ICB) procedures in accordance with IDA guidelines with the exception of commodities which will be procured through inernational competitive procedures acceptable to the Bank. For petroleum imports being supplied under existing contracts, relevant expenditures would qualify for reimbursement under the credit in an amount not to exceed per unit the reference average FOB price published in the Platt's Oilgram for the US Gulf Coast or the Caribbean, as applicable, on the date of loading and adjusted for the type and quality of crude or product only. Any financing on any such oil imports would be eligible for reimbursement under the credit. A similar criterion would apply to the reimbursement of expenditures for imported commodities under existing contrcts for which the reference unit price would be the average price posted by a recognized commodity exchange; and 108. Imports valued at below US$5.0 million equivalent would be procured in the case of: (i) public sector entities, in accordance with the procedures applicable to such agencies; and (ii) private iniporters, in accordance with established commercial practices of the sector based on price quotations except where direct contracting may be appropriate under para. 3.5 of IDA Procurement Guidelines. 109. Disbursements of each tranche would be made against import documentation received from the Central Bank, which would be responsible for the collection of the relevant documentation and submission of credit withdrawal applications. IDA will follow the simplified documentation procedures for adjustment operations described in the recent Board note on this subject (SecM92-767; June 8, 1992). For those contracts each valued at less than US$5.0 million equivalent, IDA would reimburse the Borrower on the basis of Statements of Expendiu (SOEs) prepared by the Cental Bank. Applications for withdrawals will be consolidated and submitted in amounts not less than US$250,000 equivalent. Expenditures for: (a) goods procured under individual contracts valued at less than US$10,000 equivalent; and (b) crude oil imports in amounts exceeding the equivalent of 25 percent of the credit would not be eligible for financing under the credit. Supporting information related to the SOEs will be retained by the Central Bank for review by IDA and for audit by exenal auditors. In addition to standard auditing covenants, an audit report covering relevant SOEs would be submitted to IDA no later than 90 days after the full disbursement of each tranca. Submission of the audit report for SOEs of the previous tranche release would be a condition of disbursement of each following tranche. D. Benefits, hpact on Envhromnent and Risk 110. Benefits. The proposed AGSAC would benefit Honduras' agricultural sector through: (a) improved resource allocation resulting from the elimination of distortions associated with price and trade policies, credit subsidies, and regulations and legislation related to land use and forestry; (b) improved investment climate by supporting changes in the land and forestry legislation to guarantee security of land tenure and private property rights in forest resources; (c) increased employment as a result of the expected acceleration of agricultural growth and the expansion of more labor intensive activities; (d) laying the basis for a more rational management of forest resources and better protection of the forest by improving the system of land and forest property rights and eliminating legal provisions that promote deforestation; and (e) supporting equal rights for women in the agrarian reform process and credit by eliminating discdminatory provisions in the access to land. As a result of past and proposed adjustment  - 33 - measures in Honduras, the agricultural sector is expected to grow at an average rate of more than 4.0 percent per year during project implementation compared to 3.0 percent experienced during the previous decade. The expected inmpact of the reform program on different agricultural product groups is outlined below: Traditional Export Crops: In spite of the past unfavorable policy conditions, banana and coffee have been Honduras' main export products, accoundng for over 50 percent of its export earnings. Production of these two crops has declined during the last two years due mainly to a strike of banana workers and bad weather. Other traditional export crops are sugar and tobacco. Profitability of these non-traditional export crops has improved as they are now benefiting from a more favorable exchange rate regime. Although future world prices and markets for coffee and bananas are not encouraging, some expansion of area under these two crops is taldng place in Honduras as they remain competitive. In the longer run, the effects of the more favorable foreign exchange regimen and a shift of the tax regime from export to income taxes should further improve profitability. In addition, reforms to the LRA supported under this project will facilitate land rental and improve temnre security, and so are expected to increase investment and hence productivity. In the next two years, coffee and bananas are expected to reach the production levels of the late 1980s. Thereafter, productivity increases in coffee and some area and productivity increases in bananas are foreseen. * Non-tadtonal Export Crops: The most successful non-traditional export products are shrimp and lobster, although the area planted with pineapples and melons has doubled in the past decade. Despite recent growth, non-traditional export crops occupy only about 10 percent of cultivated land in Honduras. There is considerable potential in producing high-value crops for export, which will generate foreign exchange and rural employment, and will utilize land more intensively than traditional crops. The subsector is therefore well positioned to benefit from GOH's economic reform program, as devaluation of the currency and elimination of trade barriers protecting domestic m will increase the attractiveness of investment. Key provisions of the LMA which allow land rental and joint ventures are expected to accelerate investment and the expansion of the productive capacity in this important subsector. o lBasic Grais: Honduras' main basic grains-maize and, to a lesser extent, beans, sorghumn, and rice-have already benefitted from on-going policy reforms. Adjustment in the foreign exchange regimen has increased prices and demand for domestically-produced grains and has improved the viability of investments to increase productivity. Price and trade policy changes are expected to bring about a shift in real income from urban consumers to rural producers. In spite of the negative protection of maize over the last decade, maize yields have increased steadily; in the medium term, the productivity of maize (and of other basic grains) will accelerate. In the long- run, there is likely to be a reduction of the area under basic grains, and possibly even of production, due to the greater profitability of other agricultural activities. Resultant possible increases in basic grain imports are expected, however, to be more than compensated for by increases in other agricultural exports. Livestock: Honduras has been an importan. plier of beef within Central America. However, production and exports have fallen since the late 1970s and domestic consumption has been shifting toward chicken meat, production of which expanded rapidly in the 1980s, supported by the low cost of imported inputs. However, price and trade policy changes are now making beef consumption more attractive. In addition, there will be productivity increases in cattle production as other activities compete with pasture for good agricultural land.  - 34 - Forest Product: The proposed policy reforms are expected to raise the price of lumber to international levels; increase revenue from the sector, investnent and productivity; and provide landowners with incenives to reforest and improve the utilization of forest resources. By improving the atlocation efficiency of resource use in commercial timber areas, the value-added of forest products will increase, and over time the productive base will also increase. In areas not suited to commercial production, especially the broadleaf forests, forestry programs will be developed with greater community participation and COHDEFOR's role in improved management of protected areas will be strengthened. 111. Environmental Impadt. The entire sector adjustment credit is designed to create new policies and procedures for the environmentally sustainable management of land and forest resources. Therefore, a separate, free-standing enviromental assessment exercise was not considered appropriate. Instead, an environmental statement on the forestry policy reforms embodied in the LMA is presented as Annex 6. It covers the major environmental and social issues and impact which the project is designed to address. The proposed operation addresses environmental concerns by: (a) correcting the negative environmental effects of current forestry and land reform policies and legislation; (b) promoting reforestation by granting property rights of the forest to forest landowners; (c) encouraging land and forest conservation by giving security of temnre, either through land titles or conditional long-term leases; (d) promoting improved and sustamiable forest management by requiring management plans as a pre-reqiisite to exploitation; and (e) promoting improved management of Protected Forest Areas and biodiversity conservation. All these reforms are expected to have an important positive environmental impact. 112. Risk. There are three major risks associated with the proposed operation. First, the introduction of policy reforms may prove difficult to implement because of public opposition, particularly since the country is in its presidental election year. To minimize this risk, key policy reforms were intrduced prior to Board Presentation. Modifications to the land tenure and forestry laws and regulations have been sanctioned, and the institutions responsible for overseeing the implementtion of the new policy iplementation are being restuctred, both satisfactory. GOH held extensive discussions with farmers' groups and associations and the private sector to seek consensus on the proposed reforms of the LMA and its regulations. In addidon, since the enactment of the Law GOH has been conducting a series of seminars explaining the objectives and implications of the proposed policy changes. Second, GOH has a weak institutional capacity. Policy reforms supported under the AGSAC will substantally reduce the role of the state by eliminating functions related directy to production and marketing. Scarce G0H manpower resources would be better utilized in a regulatory role and as a purveyor of key services. GOH has requested the donor community to readjust their existing technical assistance projects to strengthen its capacity to implement the new agricultural legislation. In addition, GOH is carrying out a PSP (para. 96) to strengthen its policy plannming, management, implementation and donor coordination capabilities. 113. A third possible risk is that initially, the process of returning property rights of the forest to landowners could accelerate harvesting until they trust the new system and COHDEFOR is fully ructred and empowered to monitor and enforce rational harvesting on public and private forest lands, and safeguard protected areas. In addition, and due to the poor land infonmation system and deficiencies in land registration, the process of returning forest rights to forest landowners could induce illegal occupancy of government land and the displacement of settlers from private lands. To minimize such possible impacts, supported by the AGSAC, GOH: (a) is supporting the implementation of an arbitration system to protect farmers' legal and de facto rights; (b) has clearly spelled out in the regulations to the LMA the steps for individuals and communities to take to claim forest rights; (c) will intensify cadastal work and the identification of areas suited for forest development; and (d) is reorganizing the public forest administradon and empower it to monitor and enfrce the new policy (para. 83).  - 35- PART IV- ROAnOMAIN 114. I am safied thut the proposed credit would comply with the Articles of Agreement of the Association, and recommend that the Execuive Directors approve the proposed credit. Lewis T. Preston President Washington, D.C. July 14, 1993  PailA xEut1mc atLa apll u2 amn d Id wmry* 191 Pe Ca4plt GNP US: S MId-1991 Populalio (dn: 5.26 qp I of i GON Domlsdo Product 5,132 10,334 12,540 16,072 18,166 20,464 22,624 24,423 28,351 38,222 Not Indite Taxpe 539 1,078 1,381 2,097 2,139 2,24 2,4 2,762 3,147 4,16 GDPatFact Codt 4,593 9,M6 11,159 13,975 16,027 18,170 20,177 21,661 25,4 54,5 bmpos (GNS) 1/ 2,261 3,121 4,823 5,787 6,195 6,914 7,54 8,3 9,614 12,95 bipoz (GNFS) I/ 1,860 2,944 4,2 4,880 ,918 6,576 7,3 8,077 951 13,24 Resource Balae .401 -177 -598 -907 .2T7 .337 -310 -160 -113 340 Total Eenditures 5,533 10,511 13,138 16,9 18,443 20,01 22,935 24,2 28,466 57,882 Total Consmton: 4,262 84 10,5 13,162 13,827 15,7S2 17,414 18,428 21,0 27,571 Gonameo 650 1,475 1,621 1,70 1,961 2,128 2,421 2,54 3,0 4,204 Privae 3,612 7,219 8,879 11,393 116 13,624 14,993 15,8 18,000 23,167 Gos Donmelc _wsiauaz 1,271 1,817 2,638 3,817 4,416 S,049 5,520 6,S 7,371 10,511 Govrameno 477 561 699 1,58 1,606 1,678 1,878 2, 2 2,867 Pztvate21 794 1,256 1,39 2,759 3,011 3,31I 3,643 4,152 5,103 7,644 Memorandum ftams: GrossDomeStiags 870 1,640 2,040 2,910 4,339 4,711 5,210 5,9 7,258 10,851 Not PFact" tLOo -27S 622 -947 -1,132 1,336 -1,450 -1,17 .1,530 -1,495 -1,534 NoteCunatTransfwa 15 39 116 53 53 d0 67 71 8o lO1 Nional Sap 610 1,057 1,209 1,831 3,056 3,22 3,759 4,537 3 9,418 Opiona deels for RIAMSX. NoetlectT .. .. ... Indirec Team * Subsidies .. .. .. PM Dk Cosen Pre Da Grss Dometic Product 8,141 10,334 10,342 10,6 11.127 11,606 12,106 12,625 13,734 16,253 Impocts (GNPS) 1/ 3,242 3,121 3,041 3,051 3,114 3,241 3,349 3,481 3,751 4,305 Expots (ONPFS) 2,7S4 2.94 2,26 2,7S0 3,218 3,456 3. 3,639 3, 4,782 RuwoueBalance -4 -177 -116 -301 103 196 151 1S7 228 477 Total BpaiE r 8,630 10,511 10,458 10,70 1124 11,410 11.953 12,468 13,506 15,777 Total C _E:awdow. 4,702 8,694 8,511 8,66 8,464 8,818 9,7 9,8 10,2 11,741 Go _emom 1,083 1,475 1,277 1,146 1,11 1,095 1,17S 1,209 1 1,622 PrAte 5AM 7,219 7,23S 7,518 7,313 7,723 8,104 8, 8,9 10,120 Total _ve. Epedtsum 1,92 1,817 1,946 2,305 2,50 2.592 2.674 2,879 3,229 4.055 Govanmeat 721 561 524 645 80 887 936 96 1,24 1,136 Privat 2/ 1,207 1,256 1,422 1,660 1,669 1,70S 1,738 1,914 2,20 2899 Tas of Trod () ECM t 47 0 -261 177 -243 488 425 .272 -364 Goso Domesic om 8.055 10,334 10,81 10,491 10,8 11,252 M.81 1,400 13,462 1589 Dom_sc sl T i.) 1,353 1,640 1569 I87 2421 24 2,537-. 2811 3.184 4.148 Il Goode sad amaiBauvlos 21 bhbolud. hage in JAGA  ~P22f3 4 _doulw. 26.9% 27.1% 274% 2B4% 22.8% 2.7% 23% 22.5% 225% 22.% 1.uiy, f wh: 23.2% 243% 24.1% 24.1% W5% 25.1% 24.8% 24.7% 24.7% 24.7% M _bu .. .. .. .. .. .. .. 4.. . . smlees 49.9% 48.6% 48.A 47.4% 51.7% S2.2% 52.7% 5282 52.8% 52.8% Tota_ 109.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 1to" 100.0% NolZsodeo *amwd pwchd j sonddd o oeat db _dat a Put DIt IW1TM &o_ adtes Grow Doauti Pko4ctm .p. 4.6% 5.2% 2.5% 4.3% 4.3% 43% Agdoubme 2.S% 1A# 3.0% 2.90 4.21 4.4% ,ndo t:y, of obidL 6.2% 5.3% 2.8% 10.6% 3.9% 4.4% sanbg O4.8% 7.S% 2.0% 2.9% 5A% 4A% EioaotGNl8 4.8% 33% 0.0% 17.0%6 4.3% 4.7% .oaaofGtP 4.3% 4.6% 2.1% 3.% 33.S Toidl &padt 3.9% 64S 2.2% 05%S 4.11, 4.0% TOoal 4.1% 6.0% 2.4% -23% 4.0S 3SA _ovamm" 6.0% 8.7% 0.5% 0.4% 3.4% 4%16 Pdvdo 3.8% SAS 2.7% -2.7% 4.1% 3.2% OrmsDomadc k_wd t 3.2% 83% 1.6% 11.1%S 4.8% 5.7S Govum .. 15.7% -1.0% 38.15 2.U% 2.6% iN. .. 5.1% 2.9% 0.5 5.7% 7.1% Cva* fy hmlost 4.3% 4.16 -0.3% 154%b 4.% 44% rogDoauNis_ om. 3.9% 5A% 2.4% 3.7%6 4.3% 4.2% Gro Nad ina omo 3.% 5.39b 2.5% 2S% 4.4% 4J5% oom NaIonl P.d.S 44% 4.9% 2.55 4.3% 44% 4.55 Gro D awv (4q-.) .. 3.7% 2.8% 325% SAS% U8% Gro Nalo"a &wio (4dj. TX) .. 0.9% 2.8% 25.2% 7.3% 8.0% Pepuatio 2.9% 3.% 3SAS 2.9% 2.9% 2% Labor Fom 4% 3.31 3.9% 4.1% 3.9% 3.6% GDPw Caibt 1.7% 1.7% .0.9% 1.4I0 1.4% 1.S% Vbhh"dvMVind0fb&  HONDURAS- NATIONAL ACCOLUlI 1 Pap 3 of 12 PartE: nna Growh R (Am -ot ra. ~alWMh km custt price da Pap3 of 3 GrDomeaDotcPoductm.p. 0.7% 4.3% 0.1% 3.2% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% AJicuuwl 2.1% 10.0% 1.1% 6,3% 2.9% 4.8% 3.8% 3.8% 4.3% 4.3% bIdut .0.8% 6.7% -1.0% 2.7% 10.6% 3.5% 3.5% 3.5% 4.3% 4.3% Servns 2.8% 2.3% -0.9% 0.5% 2.9% 6.5% 5.7% 3.9% 4.3% 439% OwnsDomotlclnoom 1.1% 5.5% -2.S% 4.3% 3.7% 3SA4 5.0% 4.9% 4.2% 4.3% GrossDomestic awtmsat -9.6% -1.5% 6.9% 18.5% 11.1% 1.2% 3.2% 7.6% 5.5% 6.2% Total Conmton 8.4% 5.3% -2.1% 2.1% -2.3% 4.2% 5.2% 3.3% 3.6% 3.2% Popuation 3.3% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9% 2.8% 2.8% Per Capita Gowt Rawe: ros Domustic 1Pdu m.p. -2.6% 1.4% -2.8% 0.3% 1.4% 1.4% IA. IA% 1.5% 1.5% Toud Coalmpn SAS.1% 2.4% -5.0% .0.8% -5.2% 13% 2.3% 0.4% 0.8% 0.4S Ptivao geeeecm-4.S% 2.8% -2.8% 1.2% -5.6% 2.7% 2.0% 0.6% 0.4% 0.2% Part: Pi. Jaie dlee. Q(ationa Accounts DsfltorsD 18-100) Growc Do Ptoda 63.0 100.0 121.3 150.7 163.3 1763 186.9 193.4 206.4 235.2 mopt (GNFS) 69.7 100.0 158.6 189.7 198.9 213.3 226.8 236.6 256.3 300.9 Expost (ONPS) 67.5 100.0 144.4 177.4 183.9 191.4 208.1 222.0 238.8 278.0 Ttd s ER=dkww 64.1 100.0 125.6 154.8 167.3 182.3 191.9 197.2 210.7 240.1 f30_optim 63.6 100.0 123.4 151.9 163A 178.6 187.7 192.2 205.2 233.1 _rmatme 65.9 100.0 13S.5 165.6 180.3 194.8 206.4 213.8 2283 260.S Agricuture 71.9 100.0 126.9 151.5 159.2 .. .. Industty, of which 65.4 100.0 130.0 164.1 180.5 .. .. MMn- * . -.*.... .. ... .. .. M n big .. .. .. .. .. .. . . . Sonico. 59.5 100.0 114.9 139.6 150.7 .. .. Part G: Oh Ec_onilk 1ndiato IApost Emtcit (consa) 13 .0.1 0.9 0.8 2.6 3.4 0.5 - Swig R GrosDomeosdIcavings 5.7 35.8 293 383 .. Grows Naloxa_siav 14.2 30.0 31.6 39.8 ICOR pe.od avrs) 5.3 21.7 13.8 4.9 2.0 33.6 373 Labor Por (%) A 8due .. .. .. .. 63.S% 5% kds .. .. .. .. 14.8% 16.2% S A .. .. .. .. 21.7% 23.3% Tot_ 100.0% 100.0%  NONDU*E^TRNLT Al Pbop 4of 12 A: Vohlue, Vaoe, ma PdM Pop 1 of 2 Volume Idices 1989-100 Merchandise Exprts COFFEE 66.6 100.0 122.3 101.7 127.7 128.7 117.3 119.0 127.5 146.3 BANANA 105.4 100.0 94.0 85.1 106.4 117.2 118.9 120.7 124.3 132.0 SHUIP & LDOSTER 56.1 100.0 104.1 132.0 15S.0 176.2 198.8 216.6 257.4 343.7 PAEAT 308.9 100.0 121.4 140.0 148.1 148.0 153.2 158.5 169.8 194.9 Other Ebpors 146.1 100.0 97.5 85.7 95.7 100.6 105.0 111.3 127.1 168.9 Toad Merch. Export (FOB) 109.0 100.0 102.5 93.9 112.9 120.5 122.0 126.4 137.7 164.2 Curret Prices (USS mmI.) Merhandie Exort COFFEE 204 191 181 146 164 143 142 183 235 386 BANANA 228 352 366 333 382 416 426 440 472 543 SHRIDP& LOBSTER 23 72 73 105 121 134 154 172 207 284 MAEAT 61 20 25 29 32 31 32 34 42 62 Other Expors 334 249 203 195 216 223 243 267 330 515 Total Mach. Exorts (FOB) 850 883 848 8M8 91S 947 997 1,097 1,286 1,791 Volume Idices 1989"100 Merchandise Imports food 76.9 100.0 97.7 109.5 117.7 123.3 126.5 129.0 133.6 143.0 OtWer Consumer Goods 152.4 100.0 137.3 119.1 126.0 132.5 138.2 143.6 155.5 178.1 POL I1 and Other Engy 63.2 100.0 88.4 107.6 112.8 118.1 123.2 128.5 139.8 164.1 Inutrmediae Goods 137.0 100.0 92.2 88.9 89.7 95.1 99.2 103.5 113.0 131.6 Primary Goods .. .. .. .. .. .. .. Manu Goods .. .. .. .. .. .. .. Capld Goodi 18S.2 100.0 95.9 95.0 92.9 94.1 97.0 104.5 II.0 147.7 Total Mahrc. Inports (CIF) 111.1 100.0 96.1 101.8 104.6 109.4 113.5 118.5 128.7 149.6 Curren Pries (US$ m.) Food 155 154 138 151 152 159 169 186 212 276 OdterConsumerGbods 103 89 129 114 126 135 142 151 17S 228 POL and Odier Ergy 171 14S 167 165 168 173 181 193 238 355 Itermediate Goods 348 334 326 321 338 363 383 409 477 632 -dmuy Goods Manufatured Goods .. .. .. .. .. .. .. Capial Goods 262 188 191 193 197 202 211 233 281 400 Tota March. Imports (CIF) 1,039 910 951 944 981 1,031 1,086 1,172 1382 1,892 USSPriceIndices 1989m100 Terms of Trade Merchandie Expots Prics 88.3 100.0 93.6 97.3 91.7 U8.9 92.6 98.2 105.7 123.4 Merchandise Impors Pce 102.8 100.0 108.7 101.8 103.0 103.6 105.2 108.7 118.0 139.0 MerhnudiseTermsofTrade 85.9 100.0 86.1 95.6 89.0 85.9 88.0 90.3 89.6 88.8 Il Cmud and Derivatie  Pap 5 of 12 Pqp2of2 s_ bo C 11 l g:Ii m GFRRVOG ht ~~~~eutlend Imot Vh.Rtes and mports (ha crenti Primas &~M aOMata ric data Actual Pkv de- Actua it. dee 190 12 137 21 190-91 12 1992-97199741 Meomiie xoue() COFFEE 24.0% 17.9% 18.3% 21.6% 3.9% 25.6% 0.0% 3.5% BANANA 26.8% 41.8% 36.7% 303% -1.9% 25.0% 3.2% I.S% SEM P& LOISTER 2.8% 13.2% 16.1% 15.9% 8.1% 17.4% 10.7% 7.5% MIEAT 7.1% 3.% 3.3% 3.4% -.9% 5.8% 2.8% 3.5% Ode Expozta 39.3% 23.6% 25.7% 28.8% -4.7% 11.6% 5.8% 7.4% Totl March. Expor (FOB) 100.0% 100.0% 100.0% 100.0% -1.3% 20.2% 4.1% 4.5% Mero_ha bwods (%) Food 14.9% 15.5% 153% 14.6% 3.3% 7.4% 2.6% 1.7% Ohr Consumler Goods 9.9% 12.9% 12.7% 12.1% -2.2% 5.8% 4.3% 3.4% POL ndOther } 16.5% 17.1% 17.2% 18.8% 5.0% 4.8% 4.4% 4.1% Jaturmedic Goods n..I: 33.% 34.4% 34.5% 33.4% -3.9% 0.9% 4.7% 3.9% Pdmuy Goods ........ Mam&ctuOd Goods ........ CapDS Goods 252% 20.1% 20.3X 21.1% -5.9% -2.2% 4.9% 5.8% Total March. ISmpot CF 100.0% 100.0% 100.0% 100.0% 0.08% 2.7% 4.2% 3.8% Cs Ttnds i No_fcw Smi_ Volum Indices. 1969- 100 Expoul of Noafacto Services . . . . . . . Exports of oafactor Services . . . . . . . Ipt of Nouo Servics .. .. .. .. .. .. ..  HONDURAS - BALANCE oQPAYPJDmeI Pagp 6 of 12 Pap lof 2 A. EorsofGMPS I/ 943 1,023 990 951 1,061 1,105 1,169 1,283 1,509 2,112 1. MN audis (F7B) 850 883 848 808 915 947 997 1,097 1,28 1,791 2. Non-factor Servie 93 139 142 143 146 IS 171 186 223 321 B. ImpoXkof ONfS 1,128 1,041 1,080 1,072 1,110 1,162 1,219 1,308 1,527 2,058 1. Merandia (POB) 954 835 870 83 892 937 987 1,6 1,26 1,720 2. Non-faot Servios 174 206 210 209 218 225 231 243 271 338 C. Rouroo Balance -185 -19 -91 -121 -50 -57 -50 -25 -18 54 D. Net Factor om -154 -234 -239 -220 -239 -244 -244 -243 -237 -244 1. FactorRwep$s 24 11 8 9 9 11 19 21 23 27 2. Faor Pyms 178 245 246 229 249 255 263 264 261 270 a.Totl Interest 120 170 172 157 171 176 183 182 174 171 b. Are .m .. .. .. .. .. .. .. c.Other Fcor PqamM 38 75 - 72 78 79 79 81 87 99 I;.NetCurrenTraasfs a 20 26 10 10 10 11 11 13 16 1. C amtR .. . ... a. Workers rmia .. .. .. .. .. .. .. . . b. Othr cmrr. ..an .. .. .. .. 2. Curre Paymet .. .. .. .. .. .. .. . F. Current Acowunt Blance 1. Befor off. tasfe -331 -233 -304 -331 -280 -290 -283 -2S7 -243 -174 2. Offlclltnaftes 14 53 208 148 144 125 115 70 70 70 3. After off. tansdfer -317 -181 -96 -183 -136 -165 -168 -187 -173 -104 0. LT Capitd Icnfow n.a.i 2/ 263 40 164 94 120 202 185 174 173 104 1. DIect nveasmient 6 51 44 45 44 40 55 55 85 95 2. NtLTBonrowig 258 -11 120 49 76 162 130 119 88 9 a.DlDbumren 3/ 345 176 341 230 311 393 341 314 304 261 b. Reaynmmas 87 187 221 181 235 231 212 1M5 217 253 3. Ohe LT Infows n(a) 0 0 0 0 0 0 0 0 0 0 EL Totd Odw hemte (aen) -25 117 -29 157 39 13 33 43 30 20 l.No ST Capkaln.ei 18 35 -238 4 56 -71 -20 -15 0 0 a. IntdrAtAremra 0 83 -121 -13 -41 -46 0 0 0 0 b. OderNot STCpitap 18 -48 -117 7 -15 -25 -20 -15 0 0 2. Capid }4ovs na. 4/ 5 124 143 s8 100 84 53 58 30 20 3.Eirrs &Omlmsionh -48 -42 67 105 -6 0 0 0 0 0 L Chaes inNet NotsRve 78 24 -39 -69 -23 -50 -50 -30 -30 -20 1.NetCtedl FromlDF 29 -24 19 1 S1 15 3 -30 -8 -5 2. PeAst Chane n.e.i. .. .. . 3. Eacrow Acconn . . 1 Goode nd nmnfloter sevices 21 a.. dnote - neat cbw& ncdd 4I Idoed ad bofrcsn.ps d i a  Pap 2 of 12 P4p2cf2 L. As sbae of GDP (cur.USS): 1. RIou sBalanoc -7 -1 -3 -4 -2 -2 -1 *1 0 1 2. JebatPynuts(LT+W+ST) 5 S 6 5 S S s 5 4 9 3. Cut.Ace.Bal. (SsP.1.) -13 -7 -11 -11 49 4 4 -7 -5 -3 4.LTCaphkldlflow (f.2.+G) 10 1 6 3 4 6 5 4 4 2 S. NtCredgfromlDMP 1 -1 I 0 2 0 0 .1 0 0 K. PeWp Riaaupgo Renm: 1.NotReam (eicd.okl) 150 47 67 138 186 236 286 316 376 456 2. God (end-Yr London P&O) 9 .. .. .. .. .. .. 3. GrOSRe..(WUd. gki) 159 47 67 138 186 236 286 316 376 456 4. Gr.R.Qn monzholpoKe) 1 0 1 1 2 2 2 2 3 2 1- ExcBuge Rte (LCUMU$):r '.Nom. Olt bxc Rao. a. Anoual venq 2.00 2.97 4.58 5.36 5.58 5.95 6.23 6.30 6.30 6.30 b. nof-ywr .. .. .. .. .. .. . 2.Red EffX-Rs( 19W9-O1) a.MUV/PAC eadmat5S6I 0.4% 4.7% 5.7% 2.1% 4.4% 1.3% 1.2% 2.5% 3.4% 3.3% b. Index el ic. mu 7l 78.1 100.0 132.2 117.9 117.8 117.8 117.8 117.8 117.8 117.8 3. X-Ra for NComanverso 2.00 2.97 4.58 5.36 .S S.95 6.23 6.3 6.30 6.30 M .. Jdunadm Ru: GDP (art US$ uillions) 2,566 3,479 2,738 2,999 3,256 3,440 3,631 3,880 4,SO4 6,072 N. Ogon Detall for RUMM 1. Totl Pasoe Pyments: .. .. .. .. .. .. . a. Go1.n.me .. .. .. .. .. . .. . . b. Pvat Seor trs.. .. .. .. .. .. .. c. Po"tandr*P.ia. ... . .. . .. . .. . .. . 2. Of fici C pJ qasn . . . . . . . . . . a a bPdotry fl_8 . .. .. . . . . . .. . b. To b*. b. .. .....a.d.".... 3. Gov. ase LT Ib m . . .. . . . . . .. . b. Resm"mo .. 4. RM ntLT : .. .. .. .. .. .. .. .. .. . a. D _ . . .o. . .. .. .. .. . S5 WdV m _ dk viM Isdext *fmA eiow fie. N^ Gonunw, k^ UM, i USA to _dwdshg _udai. agmued in UAL. doewa WPACrebueWWa BMkUaac AmugdmCMie. 71/An I w , in d. lat inaidit a ea depeoiani ndkeLTmlm.  BONSR - LXEU CArL AND M Ts Pap8 of12 am8 ulfusm at autu it les Np I of 4 s~~~~~~~~~~~~~~~~~~~~~~~~~~~~ WE PUbIC&Publidy am. LT 263.7 156.4 333.1 206.1 311.2 3929 341.3 313.8 304.4 261.4 1. OfMlioW Cr.dlt: 150.7 139.7 298.8 207.2 298.4 38.6 320.0 293.S5 274.4 231.4 a. MuhlatKl 112.7 56.7 178.8 125.6 235.9 302.7 237.4 262.7 197.1 141.1 of whih MDA 17.7 0.0 0.0 48.0 60.0 105.1 83.2 110.5 54.0 31.0 of wich IBD 24.4 1.8 82.2 30.0 3.1 36.4 1.6 0.4 0.0 0.0 b. d 1atw 1I/ 38.0 83.0 120.0 81.6 62.5 85.9 82.6 30.9 77.3 90.3 2. Plvate Cgedll 113.0 16.7 34.3 0.9 12.9 4.4 21.3 20.2 30.0 30.0 a. Rond 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 b. CommulcW Dabn 58.0 2.4 30.0 0.9 3.5 1. 0.5 0.2 0.0 0.0 Supplers + Oder PIvfa 5S.0 14.3 4.3 0.0 9.4 2.9 20.8 20.0 30.0 30.0 NHvatNoaguaratoed 81.3 20.0 8.0 22.0 0.0 0.0 0.0 0.0 0.0 0.0 Togaf1Om LT kSaS 345.0 176.4 341.1 230.1 311.2 392.9 341.3 313.8 304.4 261.4 DdFWPrdbjae 29.1 0.0 28.8 3. 81.0 18.0 18.0 9.0 0.0 0.0 Not SMoe-Tom Capitd .. -4.0 -117.0 7.0 -15.0 -25.0 -20.0 -15.0 0.0 0.0 Totl Dib. (MLT+DM+S1) 2 374.1 128.4 2S2.9 240.1 377.2 385.9 339.3 307.8 304.4 261.4 3. Rqaymea 31 Pubio&sublldy Guar. LT 39.1 179.3 196.0 166.6 222.5 217.9 199.7 185.8 209.7 251.7 1. Ofica Czedhogs: 22.6 135.7 153.9 146.7 185.2 185.4 175.7 169.5 10.6 217.3 a. Mulhitaod 4/ 20.3 85.7 102.7 104.7 124.4 126.2 129.9 126.7 13S.1 137.1 of whc IMA 0.2 1.0 1.2 1.4 1.4 1.4 1.4 1.6 1.8 2.0 Of whicb BD 4.1 42.9 S0.6 43.7 45.7 48.6 51. 51.6 54.7 37.0 b. Blata 114/ 2.3 50.0 51.2 42.0 60.8 59.2 45.8 42.8 42.5 80.3 <oouc .... ....... ....... .... 2. PtIvate Cedito 16.5 43.6 42.1 19.9 37.3 32.5 24.0 16.3 29.1 34.4 a. Bods 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 b. Commeca Daub 13A 10.0 2.7 8.1 10.0 9.0 8.0 8.3 3.5 2.4 c. Suppliers + OdbwPrio 3.1 33.6 39.4 11.8 27.3 23.5 16.0 8.0 25.6 32.0 P dva_Naepmatod 48.3 8.0 25.0 14.0 13.0 13.0 12.0 9.0 7.0 1.0 TOW ffl LT 1om 87.4 187.3 221.0 180.6 235.5 230.9 211.7 194.8 216.7 252.7 P Dardu 0.0 24.4 10.0 2.0 0.0 2.9 15.1 3.5 t80 5.0 Tota &grammta 87.4 211.7 231.0 1826 235. 233.8 226.8 233.3 224.7 257.7 2/ LT 1dmt son W rdme_s Shout Two 311980 repapmesmsAbeds 9 -20u1msa&aedbWL 4/Je_d. neduMq.  sODRS rM CAPfrAL AD T MMAM POg 9 of 12 Pug. 2 of 4 C. NE iDmo_w Publc& Publidy Quw. LT 224.6 -22.9 137.1 41.5 U.7 175.0 141.5 127.9 94.7 9.7 1. OcAl Aedkod: 128.1 4.0 144.9 60.5 113.2 203.2 144.2 124.0 93.8 14.1 a. M _ltila 92.4 -29.0 76.1 20.9 111.5 176. 1075 135.9 59.0 4.0 ofwhihDA 174 -1.0 -1.2 46.6 58.6 103.7 81.8 109.0 522 29.0 ofvwich MD 20.3 -41.1 31.6 -13.7 -42.6 -12.2 -50.0 -51.2 -54.7 -37.0 b. 1latuI 35.7 33.0 68.8 39.6 1.7 26.6 36.8 -11.9 34.8 10.0 2. Pdvat Cuedte 96.5 -26.9 -7.8 -19.0 -245 -28.2 -2.7 3.9 0.9 -4.4 a. eands 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 b. Commwaial Bub 44.6 .7.6 27.3 -7.2 .6.5 -7.5 -7.S 43.1 -3. -2.4 o. SUpPlib + OdatP*Ivm 51.9 -193 -3S.1 -11.8 -17.9 -20.7 4.8 12.0 4.4 -2.0 2Sivas No tEeaWastead 33.0 12.0 -17.0 8.0 -13.0 -13.0 -12.0 -9.0 -7.0 -1.0 Total fxnnLTloass257.6 -10.9 120.1 495 75.7 162.0 129.5 118.9 87.7 8.7 MPFAgreome.ts 29.1 -24.4 18.8 1.0 81.0 15.1 2.9 -29. 48.0 -5.0 D. hnt"u 3/ PubIIAsd&blidy Gaiw. LT 58.5 140.9 146.1 137.9 152.2 156.1 161.2 163.5 1629 162.5 1. Official Caixdtom 31.2 122.8 128.8 127.7 139.2 144.9 152.0 155.5 155.6 157.1 . MuItiltamal 4 24A 85.7 95.7 99.2 97.6 98.8 103.6 104.4 103.1 100.3 of vwhic IDA 0.4 0.6 0.6 0.7 0.9 1.4 2.0 2.8 3.9 5.5 of wbhcb I3RD 12.4 44.4 433 43.9 42.S 42.5 40. 36.S 27.8 14.2 b. Bilatwld 14/4 6.8 37.1 33.1 28.6 41.6 46.2 48.4 S.1 52.4 S6.8 2. Pivaft CaitaOs 27.3 18.1 173 10.2 13.0 11.2 9.2 8.0 7.3 5.4 a. IcOD 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 b. ConummOCl Realm 25.6 4.7 4.0 7.1 53 4.6 3.9 3.2 2.4 1.5 *.8UPPlIetc+0IWh PIdvat. 1.7 13.4 13.3 3.1 7.7 6.6 5.3 4.8 5.0 3.9 P UN _dmomw 24.6 2.8 1.0 4.0 5.0 4.0 3.0 2. 1.0 0.0 TOtd Oa LT loIOQ 83.1 143.7 147.1 141.9 157.2 160.1 164.2 166.0 163.9 165 1Mp8mvlc.dc0u 0.7 3.5 2.5 5.0 6.7 9.4 8.8 7.2 1.2 0.4 No Sbhct-Tao Cq*l 36.4 23.0 22.0 10.0 7.4 6. 10.3 9.1 8.6 S.6 Total Jatreg %LtW+IMF 2/ 120.2 170.2 171.6 156.9 171.4 176.0 183.2 182.3 173.7 1713 21 LT desu luot tw, STdr e_ Bst Toam f11960 sqqmoananabao. 1968.2000 mmanasoal bode. 411.lud..  Pgp 10 of 12 Pap3 of 4 IL 1 ea Dakt (DOD) Publc & Publily G. LT 974.0 2,62.3 3,217.3 2,865.0 3,162.3 3,334.4 3,519.1 3,690.1 3,901.1 4,655.8 1. Offical Cedltuo: 700.5 2,399.8 2,86.7 2,584.4 2,955.3 3,226.7 3,414.1 3,581.2 3,781.5 3,953.6 a. Muldlat 4/ 457.2 1,476.9 1,578.8 1,618.2 1,882.8 2,076.1 2,183.6 2,319.5 2,462.7 2,495A of which IDA 64.0 79.3 76.9 125.8 193.0 296.7 378.5 487.5 609.1 766.5 of Wbih IMD 152.1 527.6 558.0 550.9 652.8 640.6 590.6 539.5 426.5 246.6 b. Bilatea 1/4/ 243.3 922.9 1,287.9 966.2 1,I02.S 1,150.6 1,30.5 1,261.7 1,318.8 1,458.2 2. Pflvat Crsditks 2735 422.5 350.6 280.5 207.1 107.7 105.0 108.9 119.6 102.2 a. Bobd 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 b. ComnmeWIal Bans 193.8 207.9 198.3 15S.7 125.2 49.7 42.2 34.1 27.9 16.6 c. Supplis + Odhr Pnvae 79.7 214.6 152.3 124.8 81.9 58.0 62.8 74.8 91.6 85.6 rvtde Noa ntond 191.1 84.0 66.0 75.0 62.0 49.0 37.0 28.0 13.0 0.0 Totda LQ4mmnn DOD 1,16S.1 2,906.3 3,283.3 2,940.0 3,224.3 3,33.A 3,556.1 3,718.1 3,914.1 4,055.8 IP CredIt 32.8 35.0 32.0 34.0 115.0 130.1 133. 103.S 60.8 40.8 Not Shout-Term Cuplp 272.2 394.0 209.0 203.0 188.0 163. 143.0 28.0 128.0 128.0 Totd DOD (LT+IMPI4'1) 21 1,470.1 3,33.3 3,5243 3,177.0 3,527.3 3,676.5 3,832.1 3,949.6 4,102.9 4,224.6 P. As dae ofIToa DOD (S) PubUcAJ ublily Guzt. LT 66.3% 84.6% 91.3% 90.2% 89.7% 90.7% 91.8% 93WA 95.1% 96.0% 1. Officld Crndbton 47.6% 72.0% 81.3% 81.3% 83.8% 87.8% 89.1% 90.7% 92.2% 93.6% a. multblhal 31.1% 44.3% 44.8% 50.9% 53.4% 56.5% 57.0% 58.7% 60.0% 59.1% of whichDA 4.4% 2.4% 2.2% 4.0% 5.% 8.1% 9.9% 12.3% 14.8% 18.1% ofwhIch 3RDB 10.3% 15.8% 15.8% 17.3% 18.5% 17.4% 15.4% 13.7% 10.4% 5.8% b. Bilated 16.5% 27.7% 36.5% 30.4% A.4% 31.3% 32.1% 31.9% 32.1% 34.5% 2. Privat CedIos 18.6% 12.7% 9.9% 8.8% 5.9% 2.9% 2.7% 2.8% 2.9% 2.4% a. BonD 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% b. Commercha Beaks 13.2% 6.2% 5.6% 4.9% 3.5% 1.4% 1.1% 0.9% 0.7% 0.4% c. SupOies + OE Pivae 54AS 6.4% 4.3% 3.9% 2.30 1.6% 1.6% 1.9% 2.2% 2.0% PYvthNoquarntend 13.0% 2.5% 1.9% 2.4% 1.8% 1.3% 1.0% 0.7% 0.3% 0.0% Tota L*nu4w-a DOD 79.3% 87.1% 93.2% 92.5S 91.4% 92."0 92.8% 94.1% 95A% 96.0% WAFCreodk 2.2% 1.0% 0.9% 1.1% 3.3% 3.5% 3.5% 2.6% 1.5% 1.0% Not Shogt-T Capmtpl 18.5% 11.8% 5.9% 6.4% 5.3% 4.4% 3.7% 3.2% 3.1% 3.0% Total DOD (LT+IMP+S) 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 1/Inlue uslgtlts sou --s 2V LT doatme oSg taem, Sr doots Short Termo Jachd. inusest arsrms 3/ 19i 0 _ reayme a csh basbI. 1988- 20 we on acaua bass. 4/ hadide readoUla.  RLNURS- ZECrA CFrALAD A _1 PsagP4 of 4 0. Pant of Toaal MALT DOD oa ConCsdood Tatma .. .. .. .. .. .. .. WIhb Vrl ablo L Raw .. .. .. .. .. .. .. H. IBD an Rated Ratio lRDDDe*SvmvoBtS 1.7 8.4 9.4 9.1 8.2 8.2 7.8 6.8 5.4 2.4 DBRDDebtScevWoePubloDS 16.9 27.3 27.5 28.8 ?S.5 24.4 25.5 25.2 22.1 12.4 PofeCreditorDS/PublicDS 46.5 62.2 61.6 69.2 61.0 63.4 71.3 79.2 67.2 58.6 8k of 18RD Patodill .. .. .. .. .. .. .. . . . I. DOD-O-Exports Ratios 1/ lonTem D 1/EVou 120.4 281.3 329.2 306.1 3013 303.1 299.3 285.2 255.4 189.7 IMp CrdlExpz 3.4 3A 3.2 3.5 10.7 11.7 11.2 7.9 4.0 1.9 Shog-T-em Db/BVote 28.1 38.1 21.0 21.1 17.6 14.6 12.0 9.8 8.4 6.0 LT+DIF+ST DOD/LVoIts 151.9 322.8 353.4 330.8 329.7 329.3 322.6 302.9 267.7 197.5 L. DOD4o-GDP Ratios Lo-Tem DebW/GDP 45.4 83.5 119.9 98.0 99.0 98A 97.9 95.8 86.9 66.8 MP CtedWGDP 1.3 1.0 1.2 1.1 3. 3.8 3.7 2.7 IA 0.7 Sort-Tom Det/GDP 10.6 11.3 7.6 6.8 5.8 4.7 3.9 3.3 2.8 2.1 LT+IMP+ST DOD/GDP 57.3 95.9 128.7 106.0 1083 106.9 105.5 101.8 91.1 69.6 K Detservick Expou I/V Pubfic &GuatOSdLT 10.1 31.0 34.3 31.7 35.0 33.5 30.4 26.8 24.3 19.4 Pd?rIvNon-guuaneedLT 7.5 1.0 2.6 1.9 1.7 1.5 13 0.9 0.5 0.0 Total La Term Debt Saevic 17.6 32.0 36.9 33.6 36.7 35.0 31.6 27.7 24.8 19.4 MM Rqnurch +Sev. Chgp. 0.1 2.7 13 0.7 0.6 1.1 2.0 3.5 0.6 0.3 baeea only on ST Debt 3.8 2.2 2.2 1.0 0.7 0.6 0.9 0.7 0.6 0.4 Totl (LT+IMP+STJnt.) 21.5 37.0 40.4 35.3 38.0 36.7 345 31.9 26.0 20.1 L Intere Burden R4ato Tot IlanteretDP 2/ 4.7 4.9 63 5.2 5.3 5.1 5.0 4.7 3.9 2.8 Total t/Exports 1/ 12.4 16.S 17.2 16.3 16.0 15.8 15.4 14.0 11.3 8.0 Vl Experts hwhW6 Include nurail. expus ad reOeIPt. firo 20046010f saVoa, hter service. a-d 's..ram r.mlisano ,. 21 Rpm_a anoa b ebcek opt fo 1980.  Palo 12 of 12 Pap Iof I Dinc>Te 261 381 446 643 887 1,146 1,179 1,053 1,219 1,644 ldrct Taxs 11 460 915 1,394 1,38 2,115 2,273 2,423 2,735 3,119 4,128 NoutaxReipR a 2/ 443 310 371 1,024 1,"0 1,141 1,352 1,532 1,785 2,442 Tot Cu mrnot Reva 1,164 1,606 2,211 3,555 4,032 4,560 4,953 5,320 6,1 8,214 Jste. oa }3xta Deb* 74 196 490 651 725 724 724 757 794 841 IaotszanoDomectkDebt 37 162 207 247 2SS 307 317 342 397 535 Total _entm 111 357 697 89 978 131 1,041 10 1,191 1,376 Ode Cwvect Transe 47 71 129 274 343 53 226 19 170 229 Subadidl 0 0 0 0 0 0 0 0 0 0 Cmmmpdoa 3/ 864 1,332 1,474 1,669 1,867 2,128 2.421 2,564 309 4,24 Totd Cumllt Evowitw 1,021 1,70 2,300 2,841 3,188 3,712 3,688 3.859 4,451 5,810 BudSetay S9 142 -154 -89 714 844 848 1,2 1,462 1,672 2,404 Capitl Revee 4/ .. .. .. .. .. . Cpal T ers .. 161 105 113 -43 0 0 0 0 0 Budgetr bNwOA 603 587 825 1,203 1,633 1,678 1,878 2,003 2,268 2,867 Total Capital Exp _ra 603 748 930 1,316 1,590 1,678 1,878 2,003 2,268 2,867 Total Deficit Financing 461 -902 -1,019 *602 -746 430 -612 -541 -S96 43 E.ena Caplt anta 6 62 270 148 0 0 0 0 0 0 1xtmlflorwlag (oet) 289 -2S9 891 836 0 0 0 0 0 0 )afotar ty_ Crodft (u) 122 227 318 318 0 0 0 0 0 0 Odw Dom. Borowing(ade) -22 118 - -69 0 0 0 0 0 0 Odhr 6S 754 -391 -631 0 0 0 0 0 0 Dcbt (at and of t year) Extarn Debt (in _mis ofLCUs) .. .. .. .. .. .. .. .. (ia milions of US$) .. .. .. . Domecic Debt To ty .. .. .. .. .. OdaDoesDebt .. .. .. .. .. .. .. .. .. ,nsyaano .-350 -545 -322 296 232 201 42 55 59 913 vcaira amntinlluaka + "dotPwssedeommods SI Jacldee mm and saaries =4 pods san eniame 4/ca. r nedatfo aloao qedars  Appedix A Page 1 of 1 GDGo ras Rea GD? Growth Jifttiout 7.0% 3S.0% 6.0%. 30.0% 5.0% 4.Off 2.0% / 3 34'0% % 2 0 tt5.0% 2 .0% 1 1.0% 0.0 300 -1.0% 5.0% -2.0% _0.0% PuWlic Sctor Defidt Current Account Defidt 12.0% 14.0% 10.0% 12.0% 04 ~ ~ ~ ~ ~ ~~~~~ ~~101.0% 88.0% 8 8.0% '~6.0% 60 * 4.0% ~60 A ~~~~~~~~~~4.0% 2.0% 2.0% 0.0% . . . , . . * Q0.0% Notes: 1I lbationasmeasum byCPI(yrlyyr) Soure: Snodad Table Annex A  HONDURAS AGRICULTURAL SECTOR ADJUSTMENT CREDIT PolW Matrix POUCYAREA ,MCHE comnIOftAUTY 968WS | OGJECtVES ACTIONS TAKIE PRIOR TO SECOND IRANCHE PRDR TO THIRD TRANE i. GewaCoo Te ne for a To maintin a OOH he adoptd a fle*ly nsg exc tang ate rgim and Is maintann a Smeconaic Maitain sound _acroeconomIre hMkita soud _u e macn frmework con et wthh an"d p of the agc er adjurtm prgm. framewo*k consse with amd mscroeconowie framework naoocooio"framework wMc is suppwtiv of the egrtcrkura consistet with eNW supportiv framebork, supportv of setr adstment prognra for of th agtstaa setr sustaind staine d g dwth Nd adusmnt pogram fo agcutr aeel satifacoy Perfrmance In aihed gowth and gowth ovewi ag0 utal pram satIfacwy perfrman In - p -aen consaten vit overail - proFa the Letter of Aglcdtwl nulmentaftlo contsiste *~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~&Ap- XLr4t _c*w awofArufa Dewbpn Picy ad SAL t the L ter A ula aglaiua Deeomn Ptdley and SAL II - cobmt aent. agrim podY GOM has: (a) reduced tadtf dispsion too 5a20% range; and Ib) elInte quattatied kport an Maitain a8 pliy eoms Maintain Peoy refoms axpont rettos on an arIcultal product. pementd up to AGSAC npbemented up to AGSAC effeetveness an docuntd second MOn rbse and undorti cradiL docmnented under Oti credit. P'lc of aN &ag ul cmmodin their deriva s ed of al awrcutrns hhve been deconotrold arnd ame now determined by maret forcest. AM= 2 Page 1 of 5  | POIJCY ARA TRANCHE CONDIoNAUTY ISULIE8 0 I JECI P s ACTIONS TAKEN PRIOR TO SECOND TRANCHE I PRIOR TO THID TRANOCE v. dX T_M Ararin Rform Lw inprove lbnd use by Pese evdence of satactory Preen evience of (WA) curtse prvte provi a moe of the LnWd satibsfctr ImpeenttIn of property igts aN stbe and sacur TenM Action Plan, In particular the Lnd Ten Aeten Plan htAbd Infdt and legal bs fr land that: in p0tIcides that: u . Appoval of Law Mo. 31-92 and of satifctory egult to modf acrticl atces of the UA to: wnder the lRA: ',_p the go t end secure f ownership th ovr blnds; a) at m 6,000 r land W) at est 35.000 now blandownes wae at effiiency of the b) legalize ln rent arrngme escapt fr aM types of ds oppbV; tite he ben Issued to addton tles have been perMn rsk of lendreform process. c) countueact prvio whih dIst ln use pattens, Igble benefiarIs proided to eEibble es_pogiatiu d) rIs end s_tif WlAd ajdication nd tili proces e.eg.. reducnkg the nimum tim for b) cadasel work is unrWay bereficias; b) land rna was ti elgty frm 40 to 3 yes of colnuous opeation and splfy ing pmocess for In at la 2 departms b) castre wokhs bean Nilb ad a cause frm Of les than 5 ha). previously agreed wM th coplete in t 25% of espopitn; a) elimn the prehialon of tigland to holds of l thn 6 ha; Ink; of the area wIht el fawm unts of es Aoelec_t lend fn Pvd wo_m wIth equa ditf aess to bnd; and ec at lmt 50% of wAs cadastre as of Juni 30. thn S is coud no tilin process and Of esr consstcy between geal sector poies and tho of agrin mrform. pontfolio In h a as of 192; be tited; povid permane Jun 30, 1992 of t n d i al INA potfoo In aras df fm haitdo tddeetosa totl tade _ aLtRA has as ofJam 30, 192 of ks oecupy lon for benefIcide. bee prvatey contrcted to lan tiing wide the IRA more titan 30 yea a collection agneny; has been privately to be ied it lea and d furnds for the seed cap iaI c aced to acoection a) tding dIsrImInated adiItaIeschme do not exceed 25% ageNcy; gains women. br_ I_I f_ of IWA's budet in any dl hfnds for the sed captal ad_judicat a partIclr yea se_m do nt exceed ting end to a) the pn to reduce IAs 25% of WA's budt In wome. lb frce has be aW pny a- sr subStant conpletd; nd e ) Ws labor force does not Land rorm Enau freedom of n te a_grd pln to dive eceed S0 psn; and beIa were, do asoieion to ln WA's asets and aitie a all assets and ac*ti s not facto, hdt rom bnficiaore. not red to th landtl reltd to end titnft productlon prorm Is on trget. p am t been coperives. dbated. INA has deied its nw le to niplean d lend pocv rorms, approved a satsfactr new Present sahtfact TOl to Ptesem satacty audit stuctr, and atd a saifcty restucurin process (eg., eliminated 400 potonm, snd undrtak a financl and rort based on aeed TOM. ated diwesttu fom ctves that do not espond to its new role). opern uit olf IA's records aid accounts. A pennent coordinat conw*tee between INAk CONDEFOR and Cadesto has ben establshed to harmonz required idforman f tie lnd til and rgularization progrm. Fhnnll requiremets for the cadsiral work necessy to support the land tii g program for 1993 have bee budgeted for. Annex 2 Page 2 of 5  N,. F , r i - -| --*t ji jig. fit l jjli Ii' la S E I1iti . 18111 . *411  PO.ICY AREA TRANCHE CONDITIONALITY ISSUES OBJECTIVES ACTIONS TAKEN PRIOR TO SECOND TRANCHE PRIOR TO TMIRD TRANCHE IV. bnatF h Non-tensperent Improve credit GOH has unified all tedicount rates and has priced them at the margnal cost of funds to commrcil nterest aft subsies alocation by banks and libwalied comrercial bank nterest rates. have limited small elmtn interest farmrs access to *ate subsidy end credit. reduZt fiscl drin. Commercial banking In the interir, ceate In the long run, mm co and sector polcV reforms wIl result in increased participation of the COS. To have completed the stody to Satactory progress in system (COS) has been inenftves to GOH has prepared satisfactory terms of reference (TOR) to develop a scheme to promote Iceased develop a sdcme to promot irplementing the agd consrvatIv in Increase Ciro partciation of formal finnci itermedes (FFI) in agricultural credit. Increased prticiption of Fm action plan to pro finning the lendhg to the hagrbutal credit under agreed Incresed patncipaon of FFI agricultural sector. sector. TOR, and have presented a pban In rurl fancbt mkets based to Implement the reed actions, on agreed acdon plan. Instuo and Strengthen the rurat The GOH Is restucuring BANADESA. end has dercded to divest i form the public sector wFie To have Wted the agreed pbn Substan completion of politcal probbms in fiancia system bv developing ltemve sources of rural fwnanl intemedation. GOH has also prepared safactory of action to divest BAADESA agreed plan to difest BANADESA resulted In dbiesti TOR nd timet ble to evaluate atertive waye to divest ANADESA. based on the reommendatin BANADESA. lWe lon losses SANADESA to allow of the evahas- tion caried out Iindering is capablity gtr pariipon Satictory ptoress on te awreed res turing plan of BANADESA. in particuar: under agread TOR Present evece tht Central of servin small of mre effbient Bnk hfundi to iANADESA producers. fnancd a) Cel xank funig has been imied to its August 30. 1991, level adjusted by inflaton and Pesent evene that Central hs been limed to is Auust i mediedes. b) _th has been no addiil govemment transafs during 1992. Bsant fhing to BANADESA has 30, 1991 le, adjsted b been kilIed to hs August 30, ination, end that ther has 1991 lv,. edjsted by Inflation been no addin treasuy ad that tinere has been no fhdig. additiol g8van n traners. iUmited access to credit Impe crOt Law 31-92 created the 'Cos Rurels' as pdvate intutions wih resoure Hm t ust funds Appo of Satisfactory seme. Provide idence that -Cejas In nl reas because access to smnall ua afinlstered by BDAADEA. nues end egulatlons to estblsh Ruralese, to tde eaent that formalfin Ilan benrowers by and operate the Cae RuRss' they re opeaive, ae nstitbns do not makn farmer based on agreed priciples: functonig In accordance with espond to tfam' gros msp_e Provide eidence tha Cejas ageed regulats. neads. for thelr finences. Rae. to the exte t tyhe aeo operative, om functioning in acodnewtvh agreed Limited small farme' achtte sma Law 31-92 creted the cr dit fund whresources from the sales of Govemment lnd, to Povie evidence det the 'land PiW evidenc et the "ac to financelnd M frmer scca to tinance and purcases of t man 10 ha. credit ftund. to theextent t it *iand credfit fud, to the puichas fiandia m.wces is operapive, le functioning in eatent that it is opeati, is to purchase land. GO has approved Satisfactory ndes and regulatlons to establh and opeate the liand credit fund-, accordance with ae futioning In accordence with stipting mh*b doet -e . agred regulation. a) it wbe be ofr of _vab to all qu_Wfd FFia; b) it wi opeate at market _ert mes eM c r ust wlvA be full pon&ty of P1d Annelx 2 Pge 4 of 5  POLICY AREA TRANCE CON1 ROAUTIY ISUES OIJCTnVes ACTIONS TAKEN PRIOR TO SECOND TRANCHE PRIOR TO THIRD TRAIOC V. 1 Ad_ OW _0bM Lac Of secto Strengtn sctto Congress has approved Law 31-92 tht provides the sutsona framework for ovems sectot Satsfcoy implmanctioi Of tsfactoy of Cownatlon in poikc polcy plnng aNd coordination d the eadesip to fomuiet d IplemUen aktura poeiy strategy and dget the agred Pubc Adn tratton the agreed Pubik end pogm plannig. manaent to the Sertat of Natural Resources (SRLM. To that ed UPSA has bean established to prvid Action Pln, In paitcula, wth Administration Acdon PAN In capablides. tal support to the SRN and to the Conso de Deanodo Agrcob (CODA).- respect to: pctar, with rpet tW. GOH has _steblshad an WPSA41F ^Tedla Comni to coodIte budget preparon and a) esetin of th aged a) excton of agreed 1994 execution. 1993 POAs and budgt; POAs and budgets land for any futu"e date mui GON has bIiad stictoy Inpb_mnti of the agrWeed Pl Ad_nisaton Acon Pn In b) prsentaion Of satisfactory oageed betwn GOH nd particr POAs and budt or 1994 IDA); (and tfr ans ohw eftue at satactwy 1993 POA ando bdto for the sector and for SRN, RIA, MlA. AfEand daten ytalareed b) prsntation of BANADESA. refectin ad supporting secto poNcis agreed unde this creit an under SAL n betwe GO nd IDA) f satifctory POAs and have ben approvd by the Eonmic Cabbet and to Mt of F cnd Pc Cedit OmI the sector and tha secW budgts for 1995 land for b) GOH has approv a satiscty Poliy Support Program to trgn rsetor plan and Institutions. These we to any otw futur date _mamt caabtes at ectoat and sctor Instion level to undte agred pofly Icde a d revie Invstnt nwtuaiy ageed betwen reform and pgn In support to GOM end IWA) for the Lack of budget Reoren sectorl ca SON has ensured adequate funding for the agreed Policy _Ppt Program agd ctor policies. end s.or ed t seco magemet dsciln prga ad to have been approved by biution. These ae to rsritadin efficin budgets from the Economic Cabnet; and ncdo a evisd resou"ceocation, hefmcient c) atsfactory kilenntation investment progm in - subsides of tho reed Polcy Support suport of _are etor towards p- Prdctv. policies. nd o hae been -nvstmnt apprved by th Ecmc Cabet and ci satisfctor I,,ieanato of do AnnSx 2 Page 5 of 5  Amnex 3 Page 1 of 31 NON OFFICIAL TRANSLATION FROM ORIGINAL IN SPANlSH HONDURAS AGRICULTURAL SECTOR ADJUSTME CREDIT Letter of Development Policy Honduras, December 8, 1992 Mr. Lewis T. Preston President The World Bank 1818 H Street, N.W. WashWngton, D.C. 20433 Dear Mr. Preston: 1. Over the last three years, the Govermment of Honduras has put in place an important economic program aimed at laying the foundations for the country's fiture development. As part of this program, the Government has carried out a broad structural reform program for the purpose of achieving sustained economic growth based on internationally competitive activities. Mao_eonomic Prora 2. The stabilization program has included the adoption of a flexible exchange rate policy; a reduction in the level and scope of tarifs; the liberalization of prices of all products, including agricultural products; deregulation of interest rates and the elimination of subsidies for Cental Bank redisounts; the intrduction of prudentia regulaions in the private banking system; adjustments in public service tariffs; rationalization of the tax system, and sizable cutbacks in govenment spni to reduce the fiscal deficit. 3. Another main element of the economic and fiscal progrm is a reduction in the number of public enerprises, through the privatization or forclosing of certain enteprises and me nt the efficiency of those public enterprises that, for satiegic reasons, will remain under Government control. 4. As a result of this program, the economy improved significantly in 1991 and even more encouraging results are expected for 1992. Real GDP grew 2.9% in 1991, and the performance of economic activity indicators leads us to expect a growth rate of more than 4% for this year. Inflation fell dramacally from 21.4% in 1991 to less than 6.0% in 1992. The consolidated public sector deficit was reduced in 1991 to 3.5% of GDP.  Annex 3 Page 2 of 31 5. Notwithstanding the introduction of the changes in economic development strategy referred to above, the economy remains fragile and highly vulnerable to external shocks. 6. To strengthen the economy and promote sustained real per capita income growth, the Government has formulated a medium-term program for 1992-1995 that will continue the stabilization effort and consolidate and deepen the structural reforms initiated in 1990, supported by an IMP enhanced structural adjustment facility (ESAF) program. 7. This program places particular emphasis on improving conditions for investment, particularly private investment, streamlining and improving public sector efficiency, rehabilitating the social and economic infrastructure, and expanding programs to reduce poverty. 8. Given the importance of agriculture in the Honduran economy, the reforms to be implemented in this sector, as set out below, are a key element in the Government's medium-term economic program. The program also includes urgent measures to improve management of the country's natural resources. To complement the agricultural sector reforms, the Government will maintain both a restrictive fiscal and monetary policy without financial and monetary restrictions and controls. The Government is also committed to retaining the present flexible exchange rate system. 9. The Government will also seek to enhance the efficiency of the public administration through further tax reform, administrative improvements in the management of customs, reductions in Government current expenditure in real terms and further restructuring of major public enterprises, including the HonduranCorporationforForestry Development (COHDEFOR), the National AgriculturalInstitute (INA), the Honduran Agricultural Marketing Institute (IHMA), and the National Bank for Agricultural Development (BANADESA). 10. The Government expects that implementation of the medium-term program will bring about a GDP growth of approximately 4.5% by 1995; an inflation of about 4% per year, while the current account deficit will be reduced to 6% of GDP. The Government recognizes that to achieve these goals it is imperative to continue the steady reduction of the public sector deficit, to reach 1.5% of GDP by 1995. The Government is convinced that these goals can be achieved if the exchange rate, fiscal, monetary and foreign trade policies outlined above are implemented. Agricultural Sector Reform Progra 11. In order to lay the bases for a modem, competitive agricultural sector, the Government has effected significant policy reforms in the sector and has enacted legislative changes needed to ensure their implementation. 12. The initial sectoral policy reforms focused on liberalization of the agricultural import and export regimes and of the prices of agricultural products; replacing guarantee prices for basic grains with a price band system (variable levies); elimination of interest subsidies on al rediscount lines for the agricultural sector; and reduction of Government intervention in the purchase of agricultural commodities-IHMA's role will be limited to the management of a strategic reserve of basic grains to be used only in cases of national disaster. To this end the Government will maintain maximum stocks of 20,000 tons of maize and 2,000 tons of beans, and will limit sales from the strategic reserve, except when natural disasters occur, purely to stocks rotation carried out under clear rules.  Annex 3 Page 3 of 31 13. At the same time, the Government has initiated the privatzation of IHMA's assets. The Government intends to complete the transfer of these installations to the private sector no later than mid- 1993, and will retain, at most, the storage site located in Tegucigalpa for management of the strategic reserve. The Government has also begun the process of reorganizing BANADESA so as to convert it into a self-sufficient institution specializing in meeting the needs of small rural producers. 14. The macroeconomic and sector-level policy reforms introduced in Honduras have generated an economic enviromnent that is more supportive of agricultural sector development. In 1991 agricultural GDP grew in real terms by 5.4% and it is estimated that this growth will be 5.8% this year. The Government recognizes the need to maintain the thrust of the economic policies introduced as part of the stabilization and structural adjustment program for 1990-1992, and is also aware of the urgent need to intensify its actions at the sectoral level to achieve the objectives proposed in the medium-term economic program. 15. In view of the need to expand sectoral reforms to other key areas, and to institutionalize the above- mentioned reforms, Congress approved Law 31-92, the Agricultual Modernization and Development Law (LMA), in April 1992. This Law includes important amendments in the areas of land tenure, agricultural credit, forestry development, research and extension services, and institutional reform of the agricultural sector. It also contains the measures needed to institutionalize the policy changes in the areas of foreign trade, prices, and marketing of basic grains. The Government has prepared action plans to implement the basic agricultural policy changes referred to above, which are summarized in the attached policy matrix. These plans will be executed over the next three years, the principal areas affected being the following: Land Tenure 16. The Agrarian Reform Act of 1962 (LRA) caused land tenure insecurity, restricted ownership rights and promoted inefficient land use. Under that Act, landowners continually faced the risk of expropriation if they violated any of the many restrictions imposed on the use of their land, including a prohibition on land rental. The titling of farms with less than five hectares was prohibited and collective ownership was forced on individuals. The fact that areas being used for certain crops were protected from the risk of expropriation led to distortions in the selection of crops in accordance with their profitability. 17. Law 31-92 has established a new legal framework to improve the economic environment of the agricultural sector. The new Law guarantees full property rights to all landowners within the lot size limits established by the LRA; it legalizes land rental arrangements and co-investment; it revises and simplifies the land adjudication and titling process; it eliminates the prohibition on titling lands to farmers having de facto rights to state lands who are living on farms smaller than five hectares; and it grants women equal rights of access to land. 18. These amendments will provide more secure land tenure to landholders and will facilitate the expansion of the adjudication and dtling programs for national and community (eiidal) held land. 19. The Government has also approved regulations that include simplified land adjudication, titling, and registration procedures; criteria under which the property limitations establshed in the LMA may be exceeded; the clear distnction between permitted and prohibited methods of indirect operation (share- cropping, partnership, and occupation), and the operation of the "seed capital" system.  Annex 3 Page 4 of 31 20. Likewise, in accordance with the new Law, INA has been reorganized to adapt it to its new role, restricting its activities to administration of state-owned lands and focusing its efforts on adjudication and titling of state-owned lands under the adjudication and tiing policies set out in the LMA. The Governnent has also prepared a Land Tenmue Action Plan, to be implemented over the next two years, to ensure proper execution of its new forestry policy. 21. To enhance the efficiency of the titling and registration system, the Government has clearly defimed Cadastre's, COHDEFOR's, INA's, and Public Registries' responsibilities in these processes and has set up a permanent committee to oversee data harmonization and coordination among these institutions. It is expected that these measures will speed up the process of titling and legalizing families and comunities on forest land as detailed below. 22. During 1993-95 the Government will accelerate cadastal work in the departments not yet surveyed so as to complete the peaceful tiding of state-owned lands occWied by settlers and the regularization of families and communities on state forest lands within i maximum of four to five years. During 1993 INA will concentrate its titling efforts on deprtment in which cadastral work has already been completed. Cadastral work in other parts of the country will also begin in 1993 and in 1994-95 INA will focus on departments in which this work has been initiated from 1993 onwards. 23. The Government acknowledges that one of the most important aspects of ensuring efficient execution of the Land Tenure Action Plan is that of ensuring sufficient resources for the subsector. For this purpose the Government will allocate the necessary fnds to implement the Plan, using a system of quarterly budget advances and payments. It wiUl also be necessary to ensure that INA uses the funds allocated to it efficiently and consequently the Govermment will require operating and financial audits of INA activities. Forestry Sector 24. The forestry sector has been affected by a set of outdated laws and policies that have promoted the depletion of Honduras's significant forest resources and led to reduction of forestry activities on private lands. The serious undervaluation of forest resources, due to the low standing-tree values, have led to waste and inefficiency in forest management. The public setor's concention on logging, sawing, and marketing activities has acted as a deterrent to the private sector investm needed for sustained woodland developmnent and has prejudiced the state's ability to fulfill its duties to protect resources and the environment. 25. The forestry policy reforms contained in Law 31-92 are designed to promote the rational and sustainable use of Honduras's forestry resources; the Govenment's new policy measures thus include: (a) eliminating the Government's direct participation the acties related to production and markeing of forest products; (b) reonenting the Government's role towards management and protection of public forests, regulation and oversight of private forest, fire protection, and forest exension and research; (c) requiring formulation of management plans as a pre-requisite for forest utilization both in public lans as well as private; (d) retning and guaraneeing ownehip rights to forest landolders with reet to forest resources, subject to submission of management plans; (e) exempting forest lands from futre expropriation; and (f) allowing private sector entry into the production, insiion, and marketing of forest products.  Annex S Page 5 of 31 26. To achieve the LMA's objectives, the Government has approved regulations needed to enforce its forestry-related provisions. These regulations include, among others, rules for regularizing the position of forest land settlers, resolving disputes and resetling and compensating communities that must be relocated as a result of the application of the new forestry policy. In addition, to ensure satisfactory implementation of the new forestry policy, the Government has prepared a Forestry Action Plan to be implemented over the next two years. 27. This plan places particular emphasis on reorganizing COHDEFOR to adapt it to its new responsibilities, namely, the identification of areas with forestry potential; application of public bidding process for sales of wood resources owned by the state; the establishment of public forest management units and preparation of management plans; regularization of the legal and other rights of settlers in _de facto occupation of stat-owned forest lands; establishment and evaluation of the System of Protected Areas and preparation of management plans to improve their protection, and implemenation of a system for monitoring the social and ecological impact of implementation of the changes in forestry policy contained in the LMA. 28. In general, communities and settlers in state forests will be regularized either by giving medium and long-term leases or tides or by being incorporated into forest activities via the management plans to be prepared as a prerequisite for the usufruct of forestry resources, whether public or private. The Government's policy is to minimize involuntary resettlement as a consequence of the application of the ne-w forestry policy. 29. As soon as the need for resettlement in any forest area is detennined, the Government will prepare a resettlement and development plan for the communities to be relocated. This plan will among othef things specify the institutions responsible for the various activities, identify the displaceme and resettlement zones, set out the compensation and development packages for the communities to be resettled, and stipulate the ways in which active community participation will be sought in the planning and execution of the resettlement plan. 30. Regularizaion of the forest land settlers and the return of the rights of forest ownership to owners of forest lands will be carried out in close cooperation with COHDEFOR, INA and the Directorate General of the Cadastre. The Government recognizes that, to minimze the length of the transition period, it is of the greatest importance that the process for returning these rights be effected quickly and in an orderly fashion. However, care will be taken to recognize the legal and associated rights stemming from def occupation by communities now located in forest areas. 31. The Government acknowledges that there are risks in implementing this process in view of the deficiencies in the systems of property registraton and the limited coverage of the cadastre. To minimize these risks, the Government will emphasize impletion of a dispute setlement mechanism with meaningful representation of local counities and will speed up cadastral work, ideification of areas with forestry potential, and reorganization and strengthening of COHDEFOR. With the assistance of the German development agency GTZ the Government intends to conclude the identf ication of forestry during the first half of 1993. 32. The Government also recognizes that it needs to ensure efficient allocation of state"Woned forest resources. Accordingly, the Governnt will begin the process of public bidding for the sale of public forest. Whenever public bidding cannot be carried out, development of the forest will be pursued under  Annex 3 Page 6 of 31 contracts with cotmnunities of farmers or individual small farmers settled on the forest lands. In any event, the management plans-which will be the basis for the bidding-will ensure adequate recognition of the rights of the conmmunities located on forest lands. 33. The Government acknowledges that one of the most important aspects of ensuring efficient execution of the Forestry Action Plan is that of ensuring sufficient resources for the subsector. For this purpose the Government will allocate the necessary funds to implement the Forestry Action Plan independently of such resources as the sector may generate for the state, using a systemn of quarterly budgetary advances. Likewise, it will be necessary to ensure that COHDEFOR makes efficient use of Treasury funds allocated to it, and consequently the Government will require annual operating and financial audits of COHDEFOR activities. Rural Finance Sector 34. Several factors have traditionally distorted the iural finance sector, leading to inefficient allocation of resources, high fiscal costs, and severe limits on provision of financial services, especially for small- and mediun-scale producers. 35. These distortions have included, among other things: (a) broad, non-transparent interest rate subsidies; (b) deficient administration of BANADESA, mainly due to poor credit practices that lacked proper technical standards, reflected in high losses over time; (c) deficiencies in the collateral system (guarantees and mortgages) and in the legal-regulatory system, which make it difficult to foreclose on loans in a timely and efficient manner; and (d) a weak legal framework for land tenure. 36. In accordance with its overall financial sector strategy, the Government of Honduras has made significant efforts in the last three years aimed at eliminating these distortions, including: (a) elimination of interest rate subsidies through unification of all rediscount rates at a level equal to the marginal cost of funds for commercial banks and (b) formulation and implem. tion of a plan to reorganize BANADESA, including: cleaning up of its portfolio and capital restructure; lowering the level of real indebtedness permitted with the Cental Bank; adjustment of its lending and borrowing operations to market rates; privatization of nonfinancial activities; and cost reduction, including a substantial cutback in personnel. 37. The Government recognizes that further significant changes in the financial system are stll required to ensure provision of financial services in the mral sector, particularly for small- and medium-scale producers. With this in mind, the Government has formulated a series of actions that are specifically intended to achieve that objective, which are to be carried out during the period 1992-1995. Specifically, the Government will take action in the foliowing areas: BANADESA: During the first half of 1993, altematives will be analyzed to determine the nature and timetable of the process to be followed to transfer this institution to the private sector. The privatization process will be initiated during the second half of 1993. To improve its financial position, the institution is being reorganized, centering the efforts on cleaning up its portfolio. limiting its operational growth, avoiding additional asset degradation and, in particular, on preparing the institution for privatization. To this end, the Government intends to maintain the volume of Central Bank rediscounting at its August 30, 1991 level, adjusted for inflation, and not to transfer any Treasury funds to BANADESA. The Government also believes that after  Annex 3 Page 7 of 31 implementation of Decree 77/92 no addidonal loan condonation for BANADESA beneficiaries will be needed. Land Credit Fund: A financial fund will be established during 1993 to be made available to financial intermediaries for the purpose of providing market-rate financing for small-scale producers to purchase rral lands. This fund will have the purpose of broadening access to land and developing an orderly and stable land market, as well as providing a permanent private system of land financing. The Government funds made available to set up this fund will be limited to those established in Article 69 of the LMA. Private Rural Credit Banks: A system of private rural credit banks (Caias de Credito Rural will be established in 1993 to supply streamlined and timely financial services in the rural sector, especially to the smallest producers, in the various sectors of economic activity. The basic principles to be incorporated in the rules governing the operation of these banks will require them to be financially self-sufficient institutions, professionally administered under prudent standards and practices, and appropriately supervised. The system will take shape as parties interested in forming these banks come forward making cash capital contributions. The Government resources to set up these banks will be limited to those established in Article 43 and 44 of the LMA. 38. The Government is aware that the rural finance sector is only one part of the national financial system, and that commercial banks and other formal financial intermediaries will be called upon to provide the majority of the financial services that the sector requires. 39. The sector's greater competitiveness and the increased clarity in land tenue should lead to more active participation by those intermediaries as agricultural policy changes are implemented. Nonetheless, the Govermment is concerned that there may be an excessive delay in the bankdng system's reaction to the new conditions in the agricultural sector. For this reason, early in 1993 the Govermment will launch a study to identify methods of promoting greater participation by the commercial banking system in the rural sector, particularly in the financing of small-scale producers. The recommendations of the study will be implemented during 1993. 40. A review of the legal-regulatory system will also be started, including an analysis of the system of guarantees and mortgages as collateral for loans, with regard to their role in efficiently facilitating compliance with loan contracts. The Government expects to complete both studies during the first half of 1993; actions based on those studies will be implemented in the second half of the year. Administration of the Public Agricultural Sector 41. The organization, functions, and regulations of the public agricultural sector are in need of a broad-based and immediate reform, both to adapt to the new policy framework and to correct their inherent administrative and managerial deficiencies. For this purpose, the Government is undertaking a series of measures intended to: (i) improve coordination, budgeting, and control systems at the sectoral level; (ii) improve the allocation and use of sectoral funds; and (iii) strengthen organizational and management capabilities. 42. In this regard, and as stipulated in the LMA, the sector has established a Committee for Agricultural Development (CODA), which has the technical support of a Sector Planning Unit (UPSA) and an  Anmex 3 Page 8 of 31 UPSA/Finance Ministry Technical Committee. Under the direction of the Minister of Naural Resources, the CODA will work to ensure that national and international fnds are used to support the new sectoral policies. 43. The Government, through the UPSA, has formulated and tested new planning and budgeting procedures for the sector, including preparation of an integrated sectoral Annual Operational Program and a consolidated sectoral budget. Through the Technical Committee, the Ministry of Finance will cooperate with the CODA to ensure that expenditures executed during 1993 follow the agreed Annual Operating Programs (POAs) and sectoral budget plans, so as to support implementation of the sectoral policies referred to above and spelled out in the various 1993-1994 Action Plans. 44. With regard to strengthening organizational and managerial capabilities, since mid-1992 the Government has implementing a Technical Cooperation Program finaced by the Inter-American Development Bank, to enhance the UPSA's capability in the areas of policy analysis, planning and budgeting, administration and coordination of multilateral and bilateral financial aid. The Government has also received substandal technical assistance support from US/AID to support the formulation and monitoring of agricultural policy, which has strengthened UPSA's skills in these areas. 45. The Technical Cooperation Program includes also resources to support the reorganization of COHDEFOR and create the necessary technical and administrative capabilities to fulfill effectively its new priority functions of protecting forests and the environment, and monitoring the social and environmentl impact of the new forestry policy. In the case of INA and COHDEFOR the Government plans to use private contractors for the purpose of supplementing the available capability to carry out such tasks as the management of protected areas and technical assistance (COHDEFOR) or cadastral and land titling functions (INA). Conlusion We wish to reiterate that the Government of Honduras is fully committed to implementing the stabilization and economic development program described above and is also resolved to execute the Agricultural Sector Development Program contained in Decree Law 31/92. We are convinced that this is the most effective and efficient way to increase the growth of the agricultur sector, improve management of natural resources and, therefore, the well-being of the Honuran people, especially those in the rural sector. Taking into account our significant progress in changing agricultural sector policy  Annex 3 Page 9 of 31 and the medium-term program described above, the Government requests your favorable consideration in support of the Agricultral Sector Developmet Program. Sincerely, /s/ Ricardo Maduro President Central Bank of Honduras and Coordinator of Economic Cabinet Is/ Benjamin Vilianueva Tabora 18s Mario Nuflo Gamero Seretary of State Secreutay of State Department of Finance and Deprnent of Natual Resources Public Credit  Anmex 3 Page 10 of 31 HE3ONDURh$ AGRICULSE CTOR MODERNIZATION AN1D DEVELOENTM ]PROGRA LAND TENURE PLAN OF ACTION I. Objectives The objectives of the Govenmnent of Honduras' land tenure reforms are as follows: (a) to bring about more efficient land use through development of a stable, secure tenure system in which the State seeks to ensure property rights, whether public or private, thereby achieving greater investment and thus greater emiployment in the sector; and (b) to improve the efficiency of the adjudication and titling process, with due regard for the preferences of beneficiaries, and to speed up this process with a view to completing it at medium term, estimated at three to four years. This latter goal will be achieved through the approval and subsequent implementation of the regulations to the Agricultural Modernization Law 31-92 and the restructuring of INA, which will focus its activities in providing permanent titling of land to complete this program as quickly as possible. H. Targets Listed below are the minimum actions which the Government undertakes to carry out in the Land Tenure area in order to achieve the objectives indicated above. Actions Prior to Release of the Second lranche of the Credit 1. Present evidence of satisfactory implementation of the new land tenure policy, in particular, that: (a) at least 5,000 new land titles have been issued to eligible beneficiaries; (b) cadastral work is under way in at least two departments previously agreed with the Bank; (c) at least 50% of INA's portfolio in arrears as of June 30, 1992, arising from its land titling program under the LRA, has been privately contracted to a specialized collection agency; (d) funds for the seed capital scheme budgeted within the SRN do not exceed 25% of INA's total budget in any particular )ear; (e) the plan to reduce INA's labor force has been substantially completed; and (f) the agreed plan to divest INA's assets and activities not related to the land titling program is on target. 2. Present satisfactory terms of reference for undertaing a financial and operational audit of INA's records and accounts.  Anmex 3 Page 11 of 31 Prior to Release of the Third Tranche 1. Present evidence of satisfactory implementation of the new land tenure policy, in particular, that: (a) at least 35,000 new additional land titles have been provided to eligible t meficiaries; (b) cadastral work has been completed in at least 25% of the area without cadastre as of June 30, 1992; (c) all INA's portfolio in arrears as of June 30, 1992, arising from its land titling program under the LRA, has been privately contracted to a specialized collection agency; (d) funds for the seed capital scheme budgeted within the SRN do not exceed 25% of INA's total budget in any particular year; (e) INA's work force does not exceed 800 persons; and (f) all INA's assets and activities not related to the land titling program have been divested. 2. Present satisfactory audit report based on agreed TIOR. HI. Strategy for achieving the objectves Listed below are the complementary actions that will facilitate attainment of the targets indicated earlier. These actions may be revised by mutual agreement between the Govermnent and the IDA. .1. To be completed by December 30, 1992: (a) Identification of the teams of private contractors who will be invited to submit proposals for the delivery of the services to be contracted out by INA, and decision on how they will be informed of the decisions. (b) Identification of NGOs and PDOs that might be interested in cooperating in any permanent titling requested by members of cooperatives or other associations of farmers. (c) Establishment of the timetable of activities for the Commission that will be responsible for coordinating the cadastral survey to be undertaken in the country by domestic or foreign contractors, to start prioritizing and coordinating the work to be carried out as soon as possible. The Commission will be made up of staff from INA, COHDEFOR, and the Departnent of Cadastre and the Interior. In the case of INA, semi-annual targets will be set for the information required beginning on January 1, 1993, to permit the land titling program to be completed within 28 to 36 months. (d) Detailed estimate, in terms of number and costs, of what is involved in resolving and paying-off for land that was subject to expropriation. Tentative timetable for the work to be carried out over an 18-month period. (e) Start evaluating INA's information management capacity for carrying out the plan of action.  Annex3 Page 12 of 31 (f) Identification of the procedure to be followed by INA in soliciting proposals for its account payable, whether for tiding land or others. In addition, idenify a detailed accounting of delinquent and current balances on those account. (g) Identification of a procedure to expedite the transactions involved in the replacement of provisional titles and occupancy guarantees by permanet titles. 2. To be complet by January 30, 1993: (a) Inplementation of INA's organizational chart, structure and manual of functions based on a maximum staff of 800 persons. (b) Preparation and approval of the terms of reference for teams of private contractors who will be performing selected fumctions that can be contracted out by INA. (c) Tentative or final ements with NGOs and PDOs that wish to cooperate in the task of issuing permanent land titles to cooperatives or other associations of farmers who so request. (d) Agreement of the two departments on which cadastral work will be undertaken on a priority basis. (e) Preparation and approval of the criteria for establishing the roster of contractors to be invited to submit proposals to participate in the competitive bidding for the cadastal survey to be conducted first in the two departments agreed, and subsequety, in the eight remaining departments. Opening of this roster in the Department of Cadastre and invitation to register. (f) Titling and delivery of at least 300 pmanent land titles. (g) Estblishmentof, and definitive dmetable for, the procedure to be used in resolving cases involving expropriations. (h) Establishment of relevant procedures and implementation of improvemnts to INA"s information management capacity. (i) Preparation and approval of the terms of reference for inviting bids on the collection of INA's claims. (j) Start-up the smlined system for reguarizing dtles. 3. To be completed by June 30, 1993: (a) Opening of roster of contractors; invitation to bid, and award to private contractors of selected functions that can be conacted out by INA. (b) Signing of contracts with the NGOs and PDOs selected, and start-up of their activities.  An= 3 Page 13 of 31 (c) The Depamen of Cadastre to have requested bids and have awarded the contrat(s) for carying out the castral work, to have started the work and to have delivered the il reports to INA. (d) Titling and delivery of at least 13,000 peannt lmnd tites. (e) Initiaton of the final setdement process for at least 100 files involving expropon. (t) Start-up of INA's enhanced computer system at both the central and the regional level. (g) Invitation to bid, contract award, and start of collections of INA's claims. (h) Finalization of sales of INA"s nonessentl assets. 4. To be completed by D15tS, 1993 (a) INA fimctions that can be contrcted out to be fully operated by private conftrors. (b) Completion of at least 20% of the work contacted out to NGOs and PDOs. (c) Delivery by the D qarmet of Cadastre to INA of the cadastrl data conacted for this period (data from two previously agreed departmen). (d) Tiling and delivery of at lest 23,000 additonal pemunent land titles. (e) Final settlement of 100 fles involving previous eopriations, and iniation of the same process for at least another 200 cases.  Annex 3 Page 14 of 31 HONlDUA AGRCUR SECTOR MODERATION AMl DEELPEN PROGRA FORESTRY PLAN OF ACTION I. OBJECTIVES The objective of the Honduran Government's reforms in the forestry sector is to achieve sustined economic growth within the framework of a sound environmental policy that safeguards biodiversity. This objective will be achieved through the approval and subsequent implementation of the regulations to the Agricultural Modernization Law 31-92 and the restructuring of COHDEFOR. The activities identified in the plan of action will serve to establish the guidelines for implementing the program of reforms in the forestry sector. The key areas of the plan of action are as follows: 1. Forest Propty Rights: To restore forest user rights to those who can prove land tenure and ownership. Private owners of forest lands will be required to draw up management plans to guide and monitor the use of private forests. 2. ent of Public Forests: Public forest land will be subject to management plans that promote sustained forestry activities, while at the same time: (i) safeguarding the user rights of the communties and settlers established in affected areas; and (ii) protecting areas of critical importance.in terms of their amenity value, such as land, water, conservation, and biodiversity. The process of selling timber and other goods and services derived from public forest lands will be steered toward a transparent, competidve and efficient market that reflects world price levels for similar goods and services. 3. Environmntal Prot n: To protect and manage a representative sample of all the ecosystems that exist in the country, by consolidating the Honduran Protected Areas System so as to protect fragile ecosystems or areas that merit protection by reason of their biodiversity or other environ- mental considerations. To improve the monitoring of forests and to step up punitive efforts to discourage activities that result in enviormental degradation. 4. Reform of the Stae Foresty Ad itration (AFE): The emphasis of the public forestry adinisration should be shifted from a commercial forestry corporation (COHDEFOR) toward development of a forestry agency (APE). The new APE will be responsible for: (i) administering public forest lands from the standpoint of harvesing, environmental protection, and conservation of nture and of protected wildlife reserves; (ii) regulating, monitoring, and ensuring compliance with forestry legislation on all forest lands; (iii) supporting private forest-sector marketing functlons (owners of private forest lands, forestry industry, municipalities and ejidos, and society at large); and (iv) providing forestry extension services, particularly to groups of small forestry operators. In addition, the organizational unit responsible with enforcing the law should have sufficient autonomy to ensure that the laws are applied on both private and public forest lands.  Annex 3 Page 15 of 31 II. TARGETS The following are the minimum actions which the Government undertakes to carry out in the forestry subsector. Actions prior to release of the second tranche of the credit Present evidence of satisfactory implementation of the new forestry policy, in particular: (a) satisfactory implementation of the agreed plan to restnctre APE; (b) all potential forest lands in Honduras have been identified on the basis of the agreed criteria; (c) forest resources from public lands eligible and suitable for commercial forestry use are allocated on a competitive and efficient basis under procedures acceptable to IDA; (d) at least 10 public forest management units (PFMUs) have been established, and usufruct rights of communities on at least 50% of the PFMUs have been formalized, or resettlement plans, if needed, are being executed; (e) management plans for at least 5 PFMUs are being executed; (f) an evaluation, under agreed terms of reference, of the relevance and relative morace of protected areas, both existing and proposed by APE, has been completed; and (g) satisfactory implementation of the agreed program to monitor the social and enr impact of the forestry reform program. 2. Present satisfactory terms of reference to undertake a fincial and operational audit of APE's records and accounts. Actions prior to release of the third tranche of the credit I1. Present evidence of satisfactory implemention of the new forestry policy, in particular: (a) implementation of the plan to restructre APE is subsntly completed; (b) all PFMUs have been identified; (c) all PFMUs in cadastral areas have been regularized, mna tplans are in execution, and usufruct rights of at least 50% of the commuities have been formized; (d) at least 70% of all PPMUs have management plans in execudon, and plams to reglarize usufruct rights of communities have been prepared; (e) management plans for at least 15 protected areas are being established; (f) satisfactory execution of resettlement plans, if any; and  Ann 3 Page 16 of 31 (g) satisfactory implementation of the agreed program to monitor the social and evioe impact of the forestry reform program. 2. Present a satisfactory audit report on AFE's operations based on the agreed terms of reference. Mll. STRATEGY 1. Listed below are the complementary actions that will facilitate attainmem of the targets indicated earlier. These actions may be revised by mtual agreement between the Goverment and IDA. Implemeation of the reforms embodied in the Agricultural Modenization Law will require major technical, administrative and budgetary changes in the state forestry sector over the next 24 mouths. During this period, COHDEFOR will consolidate its conversion to a forestry service and discontinue its production and marketing activities. Under the Modeization LAw, the new forestry service will emphasize the management and protection of state lands and the monitoring of private forestry activities. 2. To be complted by Janry 30,1993 (a) approval of the Regulations on forestry aspects of the Modenization Law (Decree 31-92 of April 6, 1992), which will cover at least the following aspects: (i) the role and responsibilities of AFE; (ii) that public stumpage proceeds and other public sector revemes geneated by APE should bepart of the Treasury's income; (iii) standards for the management plans to be submitted to APE as prerquisite to utilize private and publicly owned forest resources; (iv) procedures to demonstrate the right of use of forest resources to forest land owners; (v) transitional dispositions to idendfy public forest areas; (vi) rules for the establishment of dipute settlement mechm in forest areas; (vii) policies and procedur to regulaize commurties in national forests and/or to compensate farmers in cases of involuntary resettlement; and (viii) regulations to establish and manage Protected Forest Areas and to promote biodiversity conservation. (b) approval of the Work Plan for identifying potential for forety land, using a methodology to be agreed among APE, INA and the National Cadastre. Tle plan should also include actions to identify those areas primarily suited to comm ial havestng of timber (or other forest products). (c) initiation of timber sales and other private goods and services from publicly owned forest lands, using a transparet, competitive and efficient biddig ssm The system must:  Anue 3 Page 17 of 31 (i) set a base price below which forest products may not be sold; and (ii) assure participation by the greatest possible mber of buyers in a corpetitive manner. (d) present a Plan of Action for implementing the restructuing of APE that covers at least the following aspects: (i) management of publicly owned forest lands (National Forests and Protected Areas) for production, enviromental protection and nature conservation; (ii) supporting functions concerned with marketing by private forest-sector groups (owners of private forest lands, foresty idustry, municipalities and ejidos, and society at large); (iii) sufficient autonomy and administrative capacity to regulate, monitor, and ensure compliance with forestry legislation on both private and public forest lands, and imposition of sanctions in the event of noncompliance with the pertinent law; (iv) establishment of a Price Informatlon Systm to provide data on domestic and world prices for relevant forest products in different parts of the country; (v) establishment of a monitoring system to identify the impact of forest sector reforms on the environment, the economic and social sectors, and the mesures to prevent, mitigate, correct and compensate for possible negative impacts, ensuring that the latter are dealt with in a timely and appropriate manner; (vi) a new personnel management system, and measures to promote decelntrization that reflect operational needs in field locations remote from the capital; (vii) identification of fiuctions, such as extension, fire control, reforesttion, and management of publicly owned lands, that can be contracted out to the private sector; and (viii) establishment of the autonomy of ESNACIFOR. (e) preparation of terms of reference for evaluat the relevance and relative importance of existng Protected Areas and those proposed by APE. (f) presetaion of a satisfactory draft of the Forest Maagement Regulationsl (IManagement Plans) to be issued by APE. 3. To be completed by Febry 28, 1993 (a) preparation of APE's new mamnal of functions and procedures. 11 TheSe should be snple and reus-orented, and d&efr uts and rqummem should be dda_d by size of pperty (rangln rom minimmles and conte for vey sm holdings, to di plans for lae propedes where nsud mmhaet is feasible).  Annex 3 Page 18 of 31 (b) presentation of acceptable drafts of the following specific regulations to be issued by APE: (i) Regulations on Forest Protection; and (ii) Regulations on the Public Forest Management System. (c) approval and entry into effect of the Forest Management Regulations (Management Plans). (d) contract awarded for the evaluation of Protected Areas on the basis of agreed terms of reference. (e) contract awarded for the technical assistance to monitor the social and environmental inpact of the refonms. 4. To be completed by March 31, 1993 (a) identification of all public forest management units (PPMUs) in all departments where cadastral data are available, marking the start of the Land Tenure Regularization Program for such forest lands. (b) initiation of the process of regularizing comunities and individual families in PFMUs in areas where cadastral data is available, and preparation of resettlement and development plans, as appropriate. (c) preparation of an Action Pau to consolidate the Protected Forest Areas System, including the regularization of tenure of the lands involved. (d) preparation of drafts of the following specific regulatons to be issued by APE: (i) Regulations for the Proted Forest Areas System; and (ii) Regulations for the Management of Municipal and Ejida Forest Lands; (e) present a Proposal for the Creaion of a Foret Bond System to finance technical assistance from private consultants to small forest land owners. The proposal should indicate the legal and fmncial reuiments for implementing the program;' and (f) present a mechanism for setding disputes over private forest lands that cannot be resolved by the procedure agreed between COHDEFOR and INA; if necessary, regulations should also be presented. 5. To be completed by October 30, 1993 (a) promulgation and entry into effect of: 2/ The system of bonds will be an alternative to directemployment of dle foresay service by AFE, as a means Of providing technical assistance. It will allow for die disbursement of budget fun4s to eligible pardcipans to pay fbr privately offered technical assisce services.  Annex 3 Page 19 of 31 (i) Regulations on Forest Protection; (ii) Regulations for the Public Forest Management System; (iii) Regulations for the Protected Forest Areas System; and (iv) Regulations for the Management of Municipal and Ejida Forest Lands; (b) to be implementing the social and environmental impact monitoring system and to have concluded the flights under this monitoring system; (c) to provide evidence that measures have been taken to transfer fully and to guarantee ownership and use of timber resources to the owners of forest lands; (d) satisfactory implementation of AFE's restructuring Plan and, in particular, to be operating under the new organizational structure and in accordance with the new manuals of functions and procedures; (e) to complete the identification of all potential forest lands and officially adopt the resulting operating level map; (f) to be conducing sales of timber from publicly owned forest lands using a transparent, competitive and efficient bidding system; (g) to have identified and regularized at least 250,000 hectares of public forest lands, established at least 10 public forest management units (PFMU), regularized the presence of communities and individual families in at least 50% of such PFMUs, and be executing any resettlement plans that may have been found necessary. (h) to have prepared management plans and be executing them in at least five public forest management units; (i) to have completed the evaluation of all protected areas in the system in accordance with agreed terms of reference; (j) to have prepared management plans for 10 protected areas, including programs to regular- ize land tenure for public registration and to regularize communities and individual families in the PFMUs, as well as resettlement plans wher needed; (k) to demonstrate that it is implementng the Forest Bond System; and (1) to demonstrate that it is executing the environmental and social impact monitoring system. 6. To be completed by October 30, 1994 (a) to have identified all public forest management units; (b) to have regularized the presence of communides and individual families in all public forest management units in areas which have been surveyed;  Anmes 3 Page 20 of 31 (c) to have management plans under execution for at least 70% of the total number of public forest managemen units; (d) to have created, re-created or eliminated all the proteted areas needed to make the Protected Forest Area System representative; (e) to have prepared management plans for at least half the number of protected areas and started to implement at least half of these managemern plans; (f) to have regularzed the presence of comnities and individual families in 30% of the total area of the Protected Forest Areas System; (g) to be executing any resettlement plans identfied as necessary and justifiable; (h) to have substantiatly completed the transition to the new AE in accordance with the agreed plan; and (i) to demonstrate that it is execting the enviromnental and social impact monitoring system.  Anmex 3 Page 21 of 31 HONDURAS AGRICUL SECTOR MODERNIZATION AND DEVELOPMENT PROGRAM RUTRAL FINANCIAL SECTOR PLAN OF ACTION 1. OBJECTIVES The main objectives of the Honduran Government's reforms in the rural financial sector are: (a) to assure the provision of adequate financial services in the rural sector, especially for small and medium-scale producers; (b) to imnprove the allocation of credit resources; (c) to reduce state involvement in rural sector fnancing; (d) to lower the fiscal costs associated with subsidized interest rates and losses by BANADESA; (e) to increase commercial bank participation in rural sector financing; and (f) to give small producers access to credit facilities for the purchase of land. To achieve these objectives, five areas of action have been defined: 1. BANADESA: The objective with respect to BANADESA is to see its function of providing banking services in the rural sector - particularly to small and medium-scale farmers - performed by a financially self-sufficient, efficient and viable financial entity. To this end, it has been decided to divest it from the public ;ector by selling it to the private sector, either wholly or by selling its assets separately. While a suitable assessment of the agency is being obtained and the initial steps toward privatization are being taken, the aim is to have BANADESA continue to operate under a restructuring program designed to focus efforts on restructuring its capital and cleaning up its portfolio (in accordance with Decree-Laws 31-92 and 71-92), to avoid expansion, and to prevent further deterioration of its assets. 2. LAND CREDIT FUND: The objective of creating this fund is to enable small-scale producers to buy rural land on market terms, with the aim of expanding access to the land, developing an orderly and stable land market, and fostering the emergence of a permanent private system of land financing. 3. PRIVATE RURAL CREDIT BANKS: The aim of creating private rural credit banks (Cajas Rurales) is to provide quick and timely financial services in the rural sector, for all the economic activities carried out by the smallest producers. To this end, the Cajas Rurales must be solvent and financially self- sufficient, operated on efficient business principles, including adequate provisioning rules, and supervised by a competent ageac. 4. INCENTIVES TO THE FORMAL FINANCIAL SECTOR TO EXPAND m INVOLVEMENT IN AGRICULTURAL CREDIT: The objective in this area is to foster greater participation by the commercial banking system and other formal financial intermediaries in the provision of financial services in the rural sector, especially to small-scale producers. S. IMPROVEMENTS TO GUARANTEE SYSTEMS AND LEGAL/REGULATORY FRAMEWORK TO EFFECT CREDIT CONTRACTS: The objective in this area is to remove deficiencies in the system of guarantees (collateral, mortgages, etc.) and in the legal/regulatory system that hamper the effectiveness of credit contracts, particularly in the rural sector.  Annex 3 Page 22 of 31 D[. TARGETS Listed below are the minimum actions which the Government undertakes to carry out in order to achieve the objectives outlined for the rural financial system. Actions prior to release of the second trauche of the credit 1. To have completed the study to develop a scheme to promote increased participation of formal financial intermediaries in agricultural credit, under agreed terms of reference, and have presented a plan to implement the agreed actions. 2. To have initiated the agreed Plan of Action to divest BANADESA, based on the recommendations of the evaluation carried out under the agreed terms of reference. 3. Present evidence that Cental Bank funding to BANADESA has been limited to its August 30, 1991 level, adjusted for inflation, and that there has been no additional Treasmuy funding. 4. Provide evidence that the "land credit fund " to the extent that it is operative, is functioning in accordance with the agreed regulations. 5. To have approved the legal bases for operating the "Cajas Rurales' and established, as a minimum that: (a) they will be financial institutions supervised by a competent regulatory entity; and (b) they will be fnancially self-sufficient. 6. Provide evidence that "Cajas Rurales' to the extent that they are operative, are fimctioning in accordance with the agreed rules and regulations. Actions prior to release of the third tanche of the credit I. Satisfactory progress in implementng the agreed Plan of Action to promote increased participation by formal financial intermediaries in the rural financial markets. 2. Substantial progress in implementing the agreed plan of action to privatize or liquidate BANADESA. 3. Present evidence that Central Bank funding to BANADESA has been limited to its August 30, 1991 level, adjusted for inflation, and that there has been no additional Treasury funding. 4. Provide evidence that the "land credit fund," to the extent that it is operative, is functioning in accordance with the agreed regulations. 5. Provide evidence that "Cajas Rurales", to the extent that they are operative, are functioning in accordance with the agreed rules and regulations. EL. STRATEGY Listed below are the complementary actions that will facilitate ataim of the targets indicated earlier. These actions may be revised by mutua agreement between the Government and IDA.  Annex 3 Page 23 of 31 1. BANADESA The divestiture of BANADESA, combined with its critical financial and administrative situation, calls for major efforts to clean up its portfolio and reorganize its capital position to avert further deterioration and prepare the entity for sale, in whole or in part, to the private sector. Pending actual divestiture, BANADESA will implement in full the provisions for cleaning up its portfolio set forth in the Agricultural Modernization (Law 31-92 and Portfolio Reorganization (Decree 71-92); cut its administrative expenses; transact its business at market rates of interest; restrict its indebtedness to the Central Bank (net of any debt taken over by the central government), so as not to exceed, at any point in time, the August 30, 1991 level, with adjustments for inflation on January 1 each year; and not receive any budget allocation either to support its operations or as a capital transfer. Because of the transitional process envisaged for BANADESA, mobilization of funds from the public will be handled with caution. At the same time, as an essential step prior to divestiture, BANADESA will be fully evaluated and a specific strategy will be defined for its full or partial sale to the private sector. 2. LAND CREDIT FUND To achieve the objectives sought in a reasonable time ftame and avoid inefficiencies and unwanted transfers of wealth, the following basic criteria will be adopted in defining and implementing the land credit fimd: (a) no new state-owned institution will be created either as a real estate or finance instituton; (b) it will be a line of credit available to any eligible established financial intermediaries that wish to participate; (c) Government financing of the fund will come solely from resources earmarked in Article 69 of Decree-Law 31-92; (d) credit risks will be borne by the fianmc-ial intenmediaries, ot by the fimd; (e) financing will be at market interest rates; (f) participation by financial intermediaries will be conditional primanly on their solvency and compliance with relevant provisioning regulations; (g) the mechanism will be sufficiently open to enable the private sector to cofinance land purchases from the outset. It wil' also function as the prime mover behind a basically private system of financing that is open both to beneficiaries and to non-beneficiaries of Agrarian Reform; (h) the land eligible to be purchased using fimd resources will be both public and private land suitable for fanning; (i) qualification of beneficiaries will be by an automatic, objective and expeditious process; and a,) responsibility for supervising compliance with the rules will rest with the Superntendency of Banks.  Annex 3 Page 24 of 31 3. PRIVATE RURAL CREDIT BANKS To attain the desired objectives, it will be necessary to use great care in designing the class of financial entities to be known as private rural credit banks, and to determine what their regulatory, operational and supervisory rules should be in order to reasonably assure their sustained viability over time. The system will be built up out of private entities that are sufficiently strong and financially self-sufficient, regulated and supervised by a competent agency. It will thus take shape as specific parties interested in forming banks come forward with cash capital contributions, and its creation should not be artificially forced. To this end, the following basic principles vYi,' be followed: (a) account will be taken of the financial services that small-scale rural producers need. Accordingly, a satisfactory diagnosis will be made of why those needs have not been met and the prospects that the new land ownership conditions will stimulate interest on the part of traditional financial intermediaries; (b) a clear understanding will be needed of how to resolve problems arising from the high degree of homogeneity of the groups associated witi any particular bank: (a) bunching of credit risks (same products, in the same region, at the same time); and (ii) deficits and surpluses occurring at the same time for the entire group; (c) the approach to resolving possible conflicts of interest in the roles of lender and borrower will be clarified (those responsible for lending policies are also the beneficiaries of the credit); (d) clear ground rules will be provided regarding the form of legal corporation they should adopt, agreed property concentration, policies and methods of capitalization, and distribution of profits; (e) there will be specific requirements that prospective interested entities must meet to qualify as a bank, including capital, legal, economic and fmancial, and human resource aspects, and, above all, submission of a viable proposal. In particular, the only transfers from the Government to be taken into account are those indicated in Decree 31-92 (up to 70 percent of the returns on the Goverment trusts managed by BANADESA); (f) a satisfactory regulatory framework wili be defined that will assure its administration in line with prudential rules generally accepted for financial intermediaries. This framework will include as a minimum the following aspects: (i) minimum capital, and maintenance of its value in real terns (adjustment for inflation); (ii) capital adequacy (debt ratio); (iii) diversification of assets (by borrower and by "equal-risk" economic activity); (iv) mandatory accounting policies; (v) mandatory external audit and related re(rArements; (vi) minimim rquments for intemal control systems;  Annex 3 Page 25 of 31 (vii) activities permitted and prohibited (should be limited to the mobilization and placement of funds); (viii) asset risk control and provisioning policies; (ix) regulation of financial caps, such as terms and interest rates; (x) policy on disclosure of information to associates and the public at large; (xi) specific restrictions on lending to directors, senior executives and, in general, to any individuals or grou.ns having lending authority; (g) an efficient supervisory agency will be established (or an existing one will be used), with sufficient powers, including: (i) the requirement that prior authorization be obtained to form a bank, and the power to intervene and liquidate a bank with substandard management or problems of financial instability; (ii) access to all books, files, documents, etc.; (iii) power to request general or special information both from the bank and from any of its directors, executives, or employees; (iv) authority to issue accounting, asset and liability valuation, and regulatory guidelines in general; (v) power to demand the creation of provisions for dubious debts and the write-off of unrecoverable assets; (vi) authority to require capital increases, either through capitalization of profits or in the form of additional special contributions; (vii) power to impose sanctions, including monetry fines; (viii) in general, all powers conferred on it by law with respect to entities under its supervision under the Honduras' Suprintdency of Banks. 4. INCENTIVES TO THE FORMAL FINANCIAL SECTOR TO EXPAND ITS INVOLVEMENT IN AGRICULTURAL CREDIT To achieve the objective in question, it is planned to conduct a study to define specific incentive schemes for fornal financial intermediaries. Based on the results of this study, a Plan of Action will be drawn up, and agreed with IDA, to implement any measures considered desirable in order to promote more rapid penetration by formal financial iteredia into the rural financial services market.  Annex 3 Page 26 of 31 5. IMPROVEMENTS TO GUARANTEE SYSTEMS AND LEGAL/REGULATORY FRAMEWORK TO EFFECT CREDIT CONTRACTS To achieve the objective in question, it is planned to conduct a study to identify (a) the problems arising from the system of credit guarantees (collateral and mortgages) and (b) the effectiveness of the legal/ regulatory system. This study should produce concrete proposals aimed at improving the system so as to facilitate credit, particularly toward the rural sector. It is also planned to implement the proposals put forward in the study. Listed below are the complementary actions that will facilitate attainment of the targets and objectives indi- cated earlier. These actions may be revised by mutual agreement between the Govermment and the Bank. By January 30, 1993 (a) approval of the regulations for the land credit fund, containing the basic principles set out above; and (b) dernonstrate that Central Bank funding to BANADESA has been maintained at its August 30, 1991 level, adjusted for inflation, and that there has been no additional Treasury funding. By March 30, 1993 (a) to have tendered and initiated the evaluation of BANADESA with a view to its divestiture; (b) show significant progress in implementing Decrees 31-92 and 71-92 on cleaning up of the portfolio, and present concrete evidence of having initiated actions to collect from delinquent borrowers who are not beneficiaries of the portfolio rehabilitation program and from those falling into arrears; (c) completion of an internal study on the profitability of BANADESA's offices, and of a plan and specific strategy for closing those that are not viable; (d) present concrete evidence that it has begun to privadze the operation of BANADESA's sales of inputs and started direct negotiations or prepared the final terms of reference for tender; (e) to have invited bids for the study on improving the guarantee system; (f) to have put up for bid the study on incentives to the financial sector; and (g) to have initiated the study on improving the guarantee system. By August 30, 1993 (a) to have completed the evaluation of BANADESA in accordance with the agreed terms of reference, and agreed on the strategy for implementing the plan to divest BANADESA; (b) present concrete evidence of continued efforts to collect from BANADESA's deliquent borrowers; (c) to have completed the privadzation of BANADESA's input 00eratioos; (d) show significant concrete progress in closing BANADESA's unprofitable offices; and  Annex 3 Page 27 of 31 (e) to have completed the study on imprving the guarantee system, and prepared a plan of action for carrying out the recommendations of the study. By November 30, 1993 (a) to have started the process of divesting BANADESA in accordance with the time frame contained in the agreed Plan of Action; (b) demonstrate that Central Bank fnding to BANADESA has been mintined at its August 30, 1991 level, adjusted for inflation, and that there has been no additional Treasury funding. (c) show concrete progress in closing an additional number of BANADESA's unprofitable offices; and (d) to have completed the study on incentives to the financial sector, and prepared a plan of action for carrying out the recommendations of the study. By July 30, 1994 (a) to have made substantive progress in implementing the agreed Plan of Action for the divestiture of BANADESA; (b) to be implementing specific agreed actions to stimulate participation in the rural financial sector; and (c) to be implementing specific agreed actions to improve the guarantee system.  Anex 3 Page 28 of 31 HONDURAS AGRICULTURAL SECTOR MODERNIZATION AND DEVELOPMENT PROGRAM PUBLIC ADMINISTRATION AND EXPENDITURE PLAN OF ACTION I. Objectives The main objectives of the Government's reforms in the area of public administration are to redefine the role of the state in the sector and to improve sector planning and coordination by making more effective use of the budgeting system to support specific priorities of the new sector policy. To this end, action will focus on the following areas: 1. strengthening the sector's planning, coordination and resource allocation capacity in accordance with the new policy; 2. ensuring that the policies, programs and organizational structures of institutions within the sector are responsive to and supportive of the new sector policy; and 3. improving the managerial and budgetary capacity of these institutions with a view to speeding up the implementation of new programs and investments. H. Targets Listed below are the actions which the Government undertakes to carry out in the area of public administration and government expenditure in order to achieve the objectives indicated above. Actions Prior to Release of the Second Tranche Present evidence that the policy on Institutional Strengthening and Government Expenditure is being satisfactorily implemented, in particular: I . that the Annual Operating Plans (POAs) and budgets for 1993 (and for any other year previously agreed between GOH and IDA) have been executed in support of the new agricultural policy. 2. that the POAs and budgets (current expenditure and investments) for 1994 for the sector as a whole, and for sector institutions (SRN, INA, IHMA, AFE, and BANADESA) reflect and support the sector policies agreed under this credit and under SAL II. These are to have been approved by the Economic Cabinet and presented to IDA before being submitted for approval to the Secretariat of Finance and Public Credit. 3. satisfactory implementation of the previously agreed Policy Support (PSP) Program to strngthn the capacity of the sector's public institutions. Actions Prior to Release of the Second Tranche Present evidence that the policy on Institutional Strengthening and Government Expenditr is being satisfactorily implemented, in particular:  Annex 3 Page 29 of 31 1. that the POAs and budgets for 1994 (and for any other year previously agreed between GOH and IDA) are being executed in support of the new agricultural policy; 2. that the annual operadng plans and budgets (current expenditure and investments) for 1995 for the sector as a whole, and for the sector insdtutions (SRN, INA, IHMA, APE, and BANADESA) do reflect and support the sector policies agreed under this credit and under SAL H. These are to have been approved by the Economic Cabinet and presented to IDA before being submited for approval to the Secretariat of Finance and Public Credit. 3. satisfactory implementation of the previously agreed PSP to strengthen the capacity of the sector's public institutions. M. Overad strtg for achieving the objectives Listed below are actions which will facilitate attainment of the objectives and targets indicated earlier. These actions may be revised by mual agreement between the Government and IDA. The objectives will be achieved through integrated and complementary actions in the following areas: 1. In the course of 1993, the sector's managerial capacity will be str hened by accelerating and consolidating CODA/UPSA's current programs and improving the sectoral systems Oel program planning and management and sectoral budgeting. 2. In the first few months of 1993, a technical assistance package will be launched to define and institutionalize the new organizational structures of the insdtutions and the new systems and procedures that require strengthening in order to improve the managerial capability of the different sector institutions. 3. In mid-1993, preparation of the 1994 POAs and budgets will begin, with a view to defining and initiating the new programs of services and investments in support of the new agricultural policy. Actions to be completed by December 31, 1992 1. complete the process of revising and adjusdng the institutioal POAs and budgets for 1993 so as to assure adequate funding to implement the action plans in the areas of land tenure, forestry, and the rural financial sector. These should be approved by the Economic Cabinet and the Secretariat of Finance and Public Credit; 2. propose definitive funding for the technical cooperation program to strengthen the capacity of the public institutions in the sector (to plan, coordinate, admunister and implement the policy reforms agreed under this operation and under SAL 11), and begin the process of selecting consultants; and 3. prepare an integrated summary of the technical cooperation projects in the agricultural sector under execution or to be initiated in other sector institutions, with fumding from other donors. Actions to be completed by March 31, 1993 1. to have completed the evaluation of the 1992 budget and of the POAs and budgets for the sector as a whole and for each of the insdtitons that comprise the agricultural sector; and 2. the PSP for institutional strengthening and budgetary improvemens is opeating satisfactorily.  Annex 3 Page 30 of 31 'Acton to be completd by Jue 30, 1993 1. to have complete the evaluation of the budget for the frs quarter of 1993 and of the POAs and budget for the sector as a whole and for each of the insdtutions that comprise the agricultural seaor; and 2. presentaton of the instruction sheet for preparing the POAs and budgets for 1994; 3. the PSP for institutional strengthening and budgetary improvements is opeaing satisfactorily. Acdon to be complaed by July 30, 1993 1. presentation to CODA, for review and evaluation, of the 1994 POAs and bxudgets for the sector as a whole and for each of the institutions that comprise the sector, in support of the new sector policy. These should include a schedule of investnents. Actions to be completed by August 30, 193 1. presentaton of the 1994 POAs and budgets for the sector as a whole and for each sector institution to the Economic Cabinet and IMA, prior to their submission to the Secretariat of Finance and Public Credit. Agtions to be completed by September 30, 1993 I1. to have completed the evaluation of the budget for the second quarter of 1993 and of the POAs and budgets for the sector as a whole and for each of the institutions that comprise the agricltural sector; and 2. the PSP for institutional strengthening and budgetaty improvemens is operating satisfactorily. Actios to be compleded by March 31, 1994 1. to have completed the evaluation of the 1993 budget and of the POAs and budgets for the sector as a whole and for each of the institutions that comprise the agricultura sector; and 2. the PSP for institutionat strengthening and budgetary improvements is operaing satisfactoily. Actions to be comletd by June 30, 1994 1. to have completed the evaluation of the budget for the fist quarter of 1994 and of the POAs and budget for the sector as a whole and for each of the insdtutions that comprise the agricultural sector; and 2. presentation of the instruction sheet for preparing the POAs and budgets for 1995; 3. the PSP for insdtutional stregthening and budgetary improvements is Opting satisfactorily. Actdons to be completed by July 30, 1994 1. presention to CODA, for review and evaluation of the 1995 POAiand budgets for the sector as a whole and for each of the institutions that comprise the sector, in support of the new sector policy. These should include a schedue of investments.  Ame= 3 Page 31 of 31 Ac0on to be cmpleted by Augut 30, 1994 1. preseaion of the 1995 POAs and budgets for the sector as a whole and for eah sector insuion to the Economic Cabinet and IDA, prior to their submission to the Secreiat of PFine and Public Credit. Actions to be completed by September 30, 1994 1. to have completed the evaluation of the budget for the second quarter of 1994 and of the POAs and budgets for the sector as a whole and for each of the institutions that comprise the agricultural sector; and 2. the Policy Support Program for institutional strengthening and budgetary improvent is operating satisfactorily. LlVHllAGSACLWAwUPP.uCY.1zr  Annex 4 Page 1 of 3 HONDURAS AGRICULTURAL SECTOR ADJUSTMEN CREDIT Implementation of Agricutural Sector Reorms 1. The current administration headed by President Callejas that took office in January 1990, embarked on a bold program of economic reform based on fiudamental redefinition of the role of the state. Within over three yeas of implementing its adjustment program, the Government has accomplished major changes in macroeconomic and agricultural policies as outlined below. Reforms have been implemented in foreign exchange management, fiscal and monetary policies, and tariff structure and administatve trade controls. Agricultual policy reforms implemented during the last two years as part of the overall adjustment program, and supported by SAL n, included reforms in agricultural trade policy, agricultural price policy, marketing of basic grains, food subsidies and rural financial sector. Trade Poicy: (a) The temporary export tax for non-traditional exports was eliminated in October 1990 and that for traditional exports was reduced to 25 percent of its original level. (b) Tariff dispersion was reduced from its previous range of 0-90 percent to a 4-35 percent range as of January 1991; and to a 5-20 percent range early in 1992. (c) The 10 percent surcharge on agricultural products and byproducts was eliminated in November 1991 among Cental Americavn countries and are expected to be eliminaed worldwide before the end of the year. (d) Since May 1991, the private sector is allowed to fully participate in basic grain imports, eliminating the import monopoly of IHMA. (e) Ihport permits and other restrictions imposed by the Ministry of Economy (WE) 'An a number of agricultural products were gradually eliminated during 1990 and early 1991. Import permits for basic grains (corn, beans, rice and soybeans) previously required by the Government's IHMA were abolished in May 1991. In addition, in September 1991, IHMA ceased issung statistical registration forms for imports- transferring this fimction to the Central Bank's External Financing Regulatory Department. (f) Quantitative Export Restrictions imposed by the ME on a number of agricultural products have been gradually eliminated during the last two years. Export permits are required only for low-quality coffee.  Annex 4 Page 2 of 3 Nice PoHcy: (a) Guaranteed producer prices for basic grains set by IHMA were eliminated in February 1991. A price band system for corn, through the establishment of a variable levy, was introduced in February 1992. Currently, Honduran domestic grain prices are a reflection of international prices and are substantally higher, in real terms, than those prevailing prior to 1990. (b) All price controls for the major agricultural products have been eliminated. The Goverrnent eliminated price controls imposed by the ME on all agricultural products and their derivatives except for low-quality coffee. This commodity is subject to complex trade negotiations among Central American countries. The Goverment is addressing price liberalization for this commodity in the context of a Central American initiative on agricultural trade and price policy harmonization. Coffee prices are expected to be liberalized during 1993. In October 1991, the domestic price of ground coffee was increased and a 50 percent price band was intoduced. This band allowed coffee prices to rise closer to free trade levels. Basc Grain Marketng and Food Subsidies: (a) In May 1991, IRMA took steps to withdraw from two of its most important and traditional activities: monopolizing imports and trading grain. During the third and fourth quarters of 1991, all grain imports have been carried out by feed compounders, industrial users and other small grain traders. (b) The Government has redefined the role of IHMA, and restructured it by partially divesting IHMA's storage facilities, infrastructure and other assets related to inmports and marketing activities. To that end, IHMA is in the process of seUling all its storage facilities except the one in Tegucigalpa. The latter will be used to operate a strategic food reserve equivalent to about one-and-a-half weeks (or about three percent) of the anmal consumpdion of com and beans. At least four grain storage facilities is expected to be auctioned before the end of May 1993, while the remainder will be negotiated directly before June 30, 1993. (c) IHMA's role has been redefined -rom direct marketing of basic grains to administering the price band systtbn, the strategic reserve, and to providing satistical information of grain trade. The regulations to operate the storage reserve were approved by GOH authorities by end of May 1993. (d) Untargeted food consumption subsidies have been substantially curtailed since the initiation of the macroeconomic adjustment program. A pilot targeted food stamp program has been successfully implemented and expanded under the second PHIS. (e) The Government is retring BANASUPRO. The latter is buying and selling goods at market prices and is privatizing a number of its outlets. During 1991 and 1992, BANASUPRO did not receive any trasfers from the Central Government and has only received loans which are being serviced. Instead, the BANASUPRO basic food subsidy program has been replaced by a smaller, tageted food assistance program developed through the Honduran Socal I