We’re from Tegucigalpa And We’re Here to Help
New Year Brings Bad News from the Capital on Multiple Fronts

January 24th, 2013
by Robert Armstrong

The Bay Islands received two belated lumps of coal in their Christmas stocking from Tegucigalpa in January.

First, after Roatan’s West End community came together and did all that was asked of them to bring the national Tourist Police back to West End, including paying off their electric bill, the order authorizing the police to move back into their newly refurbished station house apparently got lost on somebody’s desk in the capital. Apparently the chief of the National Police for the Bay Islands, himself an envoy from Tegucigalpa, cannot deploy the units under his command without Tegucigalpa’s approval. This is bureaucratic centralism at its most ridiculous. And a “tourist police” that will not go where tourists are getting mugged, even when the municipality and local businesses cover the overhead, isn’t worthy of the name.

The second insult came later in the month, when the Central Government, to address its cash flow problems, suspended all tax exemptions – including the ZOLITUR scheme that applies to businesses on the Bay Islands – for 60 days. Note that Congress did not repeal the laws that enshrined and guaranteed these tax benefits, in some cases in perpetuity. It simply decided not to honor those guarantees for two months.

Bay Islanders may recall that when then President Zelaya signed the ZOLITUR legislation into law five years ago, he proclaimed that nobody here would ever pay taxes again.

One can argue the merits of ZOLITUR, or any of the many other tax exemptions in Honduras, or the concept of tax exemptions in general. But people who invested on the Bay Islands over the past five years did so expecting ZOLITUR benefits to be the rules of the road. They expected that because that was what the Honduran Government promised them. It was the law.

Needless to say, all governments sometimes make imprudent promises they cannot fulfill. Tax codes must be periodically revised to assure that they are fair, that they keep up with changes in the economy and that they provide sufficient revenue to pay for essential public services and investments. But where is the evidence that ZOLITUR was draining funds from the Central Government? Furthermore, where is the evidence that Honduras faces a financial crisis justifying such a sledge-hammer approach?

Honduras has economic problems to be sure, as Alfonso Ebanks makes abundantly clear this month and last . Honduras is poor. But a quick review of the latest data from the Honduran Central Bank indicates that, unless those books are seriously cooked, a financial crisis this is not.

First of all, the Honduran economy is growing. The latest Central Bank reports indicate gross domestic product (GDP) is expanding about 4 percent a year. That is not fast enough to provide good jobs for a young and expanding workforce or put a dent in the country’s chronic poverty. But in today’s global context, many countries would envy that growth rate, including the US. In countries that are in crisis, output is usually declining, not rising.

Secondly, consumer prices last year increased a little more than 5 percent. That may be faster than the International Monetary Fund would prefer, but it is hardly hyperinflation.

Honduras imports more than it exports. But the resulting trade deficit is almost fully offset by remittances from Hondurans living in the US. Thus hard currency reserves of the Central Bank, while down somewhat from a year ago, are still sufficient to pay for three months of imports – not a comfortable cushion, but adequate. Foreign debt remains well below 40 percent of GDP. The lempira is declining against the dollar, but it is doing so in a gradual and orderly fashion, and its depreciation makes Honduran exports more competitive.

The Honduran Central Government does not raise enough revenue to cover its expenditures. Its budget deficit equals about 6 percent of GDP, at the outer limit of what technocrats generally consider manageable. But the US deficit is 7 percent of GDP, and those of some other major economies are even higher. Of course, it is easier for the US Government to borrow or print money to cover the difference, and US interest rates remain at historic lows, which makes borrowing cheap. In contrast, Honduran interest rates are rising, which indicates banks are reluctant to acquire more government bonds. But public internal debt, while rising, remains well below that of the US and other major economies as a share of GDP, and yet the US has not driven off its “fiscal cliff.” Politicians wisely avoided that manufactured armageddon.

Why then is the Central Government unable to pay its employees or remit revenue to municipalities as required by law? Why does it find itself in such desperate straits that it must renege on commitments to investors? Unfortunately, the answer appears to be simple mismanagement.

A Honduran public interest group recently issued a report concluding that at the core of Honduras’s fiscal difficulties is the same problem that afflicts the country in so many other areas – impunity. Government agencies spend funds for purposes not authorized by the National Congress, with no consequences. Obviously, if they spend money for unauthorized purposes, that money is not available to pay for what was authorized, like paying teachers, doctors and nurses, soldiers and policemen.

Are Bay Islanders who have played by the rules to relinquish the tax incentives they were promised in perpetuity solely because senior bureaucrats in Tegucigalpa have not?

As we reported here in November, ZOLITUR was originally intended as much more than a preferential tax scheme. It was to be a framework under which the Bay Islands would be given autonomy to regulate their own affairs as they saw fit. The islands were also to retain the revenue generated by local tourism for their own security, well being and environmental protection. In practice, only the tax aspects of ZOLITUR have been implemented, and imperfectly. If those tax incentives are now to be repealed as well, what is left of ZOLITUR? What is left of Tegucigalpa’s commitment to the Bay Islands?

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