Wednesday, August 11, 2010

Closing the deal.....

Yesterday the Lobo Sosa government failed to close a deal with the International Monetary Fund for standby funding for the government of Honduras for the next 18 months. This was an important test of the government's political capital as well as its economic capital, and it failed.

So why did the deal fall through at the last minute? The newspaper El Tiempo reported today that the IMF wants to be sure the Lobo government continues sound fiscal policies into the next year by examining its budget proposal in September.

The first negotiations between the IMF and the Lobo Sosa government began in March with a visit where the IMF reviewed the fiscal plans of the government. Among their suggestions, made in a public press release, was that the government needed to contain spending, especially the spending on salaries of public employees. The IMF also recommended that the government strengthen the finances of public institutions such as ENEE and Hondutel, strengthen the government pension plan, and improve the financial situation of the cities.

In response the government passed a set of new taxes, quite unpopular with business, but supposedly designed to have minimal impact on the poor.

It also started a new program financed by government bonds, that gives 10,000 lempiras to poor families. It has had to pay these piecemeal as its cash reserves are quite low and the market for government bonds could not absorb the full cost in a single offering. A new bond offering for $26 million towards this program was being offered by the government today.

Another response, however, weakened the Instituto Nacional de Jubilaciones y Pensiones de los Empleados Publicos del Poder Ejecutivo (INJUPEMP). The Secretary of Finances determined that the fund had over 1000 million lempiras it could invest, and decided to use those funds to retire the debt of the government Electric Company (ENEE) which buys electricity from private power plants that generate electricity using bunker oil. These plants are mostly owned by Honduran businessmen.

Honduras needs the standby agreement to finance budget shortfalls and to fund emergencies. In light of its failure to secure the agreement on this visit of the IMF, the government had to try to put a good face on its failure. All it could seem to find to brag about was there was an agreement that in the next year there would be no new taxes.

The lack of an IMF agreement highlights the failure of the Lobo government to completely unlock international finances. Instead, it has had to issue bonds backed by INJUPEMP funds, and others backed by the money owed to Petrocaribe to finance normal government spending. For now, the international financial community is keeping Honduras broke.

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