IMF Standoff

Honduras was supposed to negotiate another stand-by arrangement with the International Monetary Fund at the end of May.

But the IMF keeps postponing the meeting.  First it was postponed to early June, and now it might happen in late June, more than a month late.

Or it might not happen at all.

A Stand-By Arrangement  (SBA) is the ability to borrow money from the IMF at rates that are slightly cheaper than through a private bank.  It allows the IMF to "quickly respond to a country's external financing needs":

When a country borrows from the IMF, it agrees to adjust its economic policies to overcome the problems that led it to seek funding in the first place. These commitments, including specific conditionality, are described in the member country’s letter of intent (which often includes memorandum of economic and financial policies).

Honduras negotiated its last SBA in October of 2010.  Under a combined Stand-By Arrangement and Stand-By Credit Facility, Honduras arranged to borrow up to $202 million. Its April, 2011 Letter of Intent details the financial targets that had to be met to continue its borrowing privileges.

The IMF and Honduras agreed that the country met those goals during much of 2011.  However, the last quarter of 2011 results fell outside the targets. Specifically, the government deficit increased beyond projections, and the central bank's monetary policy permitted a drawing down of the international reserves beyond the limits set in the agreement.

As of May 31, 2012, Honduras had not drawn on this line of credit. It has continued to pay down the loans taken out by previous administrations, but it again failed to meet the agreed upon targets this spring.

The IMF consequently wants changes in specific monetary policy that led to a higher drawing down of international reserves. But that's currently a sticking point in the negotiations.  Here's the problem:

In June, 2011, Honduras adopted a new exchange mechanism that let to a very slow, gradual devaluation of the Honduran lempira against the US dollar.  It's down about 0.5 lempiras to 19.44 lempiras to the dollar today.  That's about a $0.03 decline.

The new exchange mechanism resulted in a higher than normal demand for dollars, driving the central bank's reserves lower, and contributed to Honduras not meeting the IMF goals.

Any devaluation helps make exports from Honduras cheaper, but increases the price of imports, and Honduras is a net importer of goods.  This widens the trade imbalance.

In its most recent communications with Honduras, the IMF demanded that Honduras accelerate devaluation of the lempira as a condition for signing another SBA.  Lobo Sosa rejected this as disproportionately affecting the poor.  He told the press:

We will not permit an accelerated devaluation of the lempira.  What we are hoping is they will understand us, that they will understand that we cannot do that, and on the other themes we are disposed to do what we can to maintain the fiscal discipline of the government.

The problem is that Honduras promised the IMF in February, 2012, to devalue the lempira by about 5% (or about 0.9 lempiras) during 2012.  The current mechanism is too slow to achieve that goal, and now the Lobo Sosa government is reneging on the promise.

Honduras can't close the annual budget without cutting 2, 500 million lempiras ( $128.6 million dollars), almost exactly the amount of credit in the previous Stand-By Agreement.

More, the next budget contains a 6, 200 million lempira increase, making a total shortfall of 8, 700 million lempiras ($447.5 million dollars).  This money is to be used for the internal elections, transport subsidies, and for an electrical subsidy.

The previous SBA expired on March 31, 2012.

Honduras and the IMF have no date to begin negotiating a new agreement.

Setting the Minimum Wage: Third Rail of Honduran Politics?

When then-president Manuel Zelaya, acting as required by Honduran law, last set a new minimum wage, the 5,500 lempiras a month baseline bottom wage shocked Honduran businessmen, enraged many of them, and reportedly was a contributing factor in the coup in 2009. Many companies refused to pay it with impunity.

Now it's Porfirio Lobo Sosa's turn, and his attempt to avoid this electrified issue has been prolonged.

His government has "hosted" negotiations between business leaders and worker's union leaders, as required by Honduran law, since the spring. These talks are supposed to allow these two sectors to agree on the new minimum wage, avoiding the need for the president to take a unilateral position.

But talks have been at a stalemate since at least May. By law, once they reach such an impasse, it is up to the President to set the new minimum wage. Lobo has been sitting on a decision since before he went to the World Cup in May.

The Lobo Sosa government has promised to declare a new minimum wage several times this summer, most recently, on August 30.

Instead, it convened yet another fruitless meeting between business representatives and union leaders. Lobo Sosa's Labor Minister, Felicito Avila, first declared Lobo would freeze the minimum wage where it is now, and as recently as yesterday argued that the government would insist that, rather than changing the minimum wage, businesses pay a one-time bonus of 3000 lempiras to workers this year.

Lobo himself is in a catch 22 situation. He says his government doesn't have the funds to pay a wage increase to government workers that would be triggered by raising the minimum wage.

As the government, it could, in theory, issue bonds to cover the increase. But in reality the Lobo Sosa administration cannot take such a step, because it would interfere with his negotiations with international financial agencies.

In order to convince the International Monetary Fund that Honduras qualifies for a standby line of credit, Lobo Sosa must prove to them that he has contained government costs in the 2011 government budget, especially salaries. The IMF returns to Honduras next week to review Lobo's 2011 budget proposals. Obviously, adding a large increase to the budget, specifically for salaries, would undercut meeting that target.

So, for now, not having set the minimum wage is probably better for the Lobo Sosa administration, although it has reinforced the atmosphere of labor unrest that exists.

Because Lobo has not set the minimum wage, labor unions have called a "civic strike" day for next Tuesday, September 7. Some unions, such as STENEE, the state electrical workers union, have said this is a preview to a national strike, should there be no progress on a minimum wage.

Wonder if a general strike will help or hurt the task of impressing the IMF?

"It Should Be Automatic"

Mario Canahuati, Honduras's Foreign Minister, says Honduras's readmission to the OAS should be automatic when the OAS next convenes in Peru on June. He currently is in the US to meet with Miguel Insulza to lobby for Honduras's reinsertion in the OAS. In a La Tribuna article, he's quoted as saying "the seventh point of the Tegucigalpa-San Jose Accord says Honduras should be reintegrated into the different forums, and nothing remains but for the OAS to fulfill its promise under the document." In Canahuati's vision, it's automatic because they've fulfilled the letter, if not the intention, of the clauses of the Tegucigalpa-San Jose Accord, so they should be allowed back in to play with other countries.

The OAS has a slightly different view. Albert R. Ramdin, the Assistant Secretary General of the OAS, said that the OAS “continues to seek solutions”, and “supports the efforts started by the governments of Central America to create the necessary conditions for the readmission of Honduras to the Organization”.

The OAS determined last July, under Article 21 of the Democratic Charter, that there had been an "unconstitutional interruption of the democratic order of a member state", and that diplomatic initiatives to correct the situation had failed. More than two-thirds of the member countries voted to suspend Honduras. Although suspended, Article 21 still required that Honduras uphold all its OAS obligations, including human rights obligations.

Under Article 22, restoration may be proposed, once the situation is resolved, by the Secretary General of the OAS (Miguel Insulza) or any member state, and will require that two-thirds of the member countries vote in favor of restoration.

You see the problem. While the United States, and several Central American countries are working for Honduras's readmission as a member in good standing in the OAS, there are other countries that have expressed concerns. These countries, including most of South America and Mexico, remain uncertain about whether Honduras should be readmitted at this time.

Honduras hasn't exactly complied with its human rights obligations as required under Article 21. It was added to the OAS Human Rights organization's "black list" in April. It also is not clear that even if the will was there to uphold human rights on the part of the government, that the judicial system has the required independence. Human rights violations aren't grounds for suspension, but they certainly will be taken into account in discussing reincorporation. While the US would like to say the situation is resolved and that Porfirio Lobo Sosa was democratically elected, as Hillary Clinton said in Costa Rica last month, there are other governments that have a different view.

Why is all of this important? What's at stake is the unlocking of aid from the World Bank and International Monetary Fund. Both have stated in the past that Honduras being reincorporated into the OAS would be required before funding could actually be restored. That funding, along with money from the BCIE and BID is critical to staving off a complete collapse of the Honduran economy.

The OAS discussions in June in Lima, Peru should be interesting.