Viewing cable 04TEGUCIGALPA543
Title: High Gas Prices: First Test of Honduran IMF Program

04TEGUCIGALPA5432004-03-08 15:33:00 2011-08-30 01:44:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Tegucigalpa
This record is a partial extract of the original cable. The full text of the original cable is not available.
E.O. 12958: N/A 
SUBJECT: High Gas Prices: First Test of Honduran IMF Program 
Ref: A) Tegucigalpa 232 
     B) Tegucigalpa 325 
     C) 03 Tegucigalpa 2385 
¶1. (SBU) Summary.  A third price hike, in as many months, 
has brought gasoline and diesel prices in Honduras up to new 
highs of USD 2.94 and USD 2.02 per gallon, respectively. 
Gas prices are now 19 percent higher than at the end of 2003 
(diesel is up 17.6 percent) and are now clearly the highest 
in Central America.  Taxi, bus, and truck drivers have all 
been clamoring for relief, and the private sector is urging 
the legislature to cap prices.  Power generators are also 
trying to obtain an increase in electricity rates, although 
fuel purchases dedicated to the power sector are exempt from 
the new 12.5 percent import duty that has been the primary 
reason for the phased-in price hikes.  All of this 
represents a serious challenge for the GOH as it strives to 
get off to a good start with the new IMF program and spur 
economic growth.  So far, GOH officials are standing firm. 
End Summary. 
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¶2. (U) On February 29, 2004, fuel prices in Honduras rose 
for the third time this year by more than three lempiras 
(16.7 cents) a gallon (see table below).  As of February 29, 
the price of regular and super gasoline had increased by 19 
percent and diesel fuel by 17.6 percent from December 31 of 
last year.  Regular gas increased by 8.5 lempiras to 52.1 
lempiras per gallon since the beginning of the year. Diesel 
fuel increased from 31.9 lempiras to 37.6 lempiras per 
          12/31/03  1/2/04  2/1/04  2/29/04  Pct Chg 
          --------  ------  ------  -------  ------- 
Super        44.75   44.46   49.98    53.22    18.90 
Regular      43.57   47.15   48.63    52.09    19.04 
Diesel       31.94   34.82   36.38    37.56    17.56 
Kerosene     27.65   31.65   31.36    31.32    13.27 
LPG         159.94  179.25  181.33   172.82     8.05 
¶3. (SBU) The GOH, in regulating the market, sets a maximum 
pump price for oil products, with calculations based on a 
complex formula first established in the early 1990s.  Most 
retailers use this maximum price as the pump price. 
¶4. (SBU) The key reason for the price hikes has been the new 
12.5 percent tariff on fuel products, enacted at the end of 
2003 as part of the GOH's efforts to raise government 
revenues and reach agreement on a three year Poverty 
Reduction and Growth Facility (PRGF).  As noted in ref A, 
the original executive decree included some unilateral 
changes to the formula intended to cushion the impact on the 
consumer by effectively cutting the profit margin allowed to 
the importers.  In the negotiation between the GOH and the 
oil companies that ensued, this change to the formula (and 
the reference price) was put on hold for three months, with 
an agreement that the price increase for consumers would be 
eased in over a two-month period.  At the same time, world 
oil prices have been rising, putting further pressure on 
gasoline prices (to the dismay of Honduran officials who had 
hoped for falling prices to cushion the blow). 
¶5. (U) Fuel prices in Honduras thus remain extremely high 
compared to other countries in the region, with an expected 
negative impact on competitiveness and the cost of living. 
The new customs duty is in addition to the flat excise tax 
on oil products (USD 1.05 per gallon for gasoline).  The 
table below compares prices in Central America in February 
(i.e. before the latest increase). 
                Price Per Gallon, February 2004 
                          (in dollars) 
          Honduras  Salvador  C.R.   Nicar.  Guatemala 
          --------  ------  ------  -------  --------- 
Super        2.80    2.09     2.37    2.47     2.13 
Regular      2.72    2.00     2.26    2.35     2.08 
Diesel       2.04    1.70     1.67    2.01     1.52 
Kerosene     1.76     --      1.68    1.94     1.67 
LPG         10.81    3.67    10.08    7.15     7.54 
Source: El Heraldo, March 2, 2004 
¶6. (SBU) Some Honduran officials believe that there is room 
to force down the prices charged by oil importers at the 
border.  Some statistics appear to show that pre-tax prices 
of oil products are much higher for Honduras than 
neighboring countries.  Much of the discussion between the 
government and the oil companies in the next couple of 
months will focus on this issue. 
Public Outcry at Latest Hikes 
¶7. (U) With the latest gas hike, taxi and bus drivers 
successfully fought for an increase in the tariffs they are 
permitted to charge the public.  On March 2, the GOH 
authorized city bus rates to rise from 2.0 to 2.5 lempiras 
and for the price of a taxi collective ride to rise from 7.5 
lempiras to 8.5 lempiras.  Regulated intercity bus fares 
rose by 15 percent as well.  Truck drivers agreed to cease a 
strike and road block near Puerto Cortes on March 4, when 
the government arranged tri-partite negotiations with the 
private sector and Congress.  These talks are set to start 
on March 8. 
¶8. (U) The power sector, working through sympathetic 
legislators, also appears to be trying to obtain an increase 
in rates they can charge for electricity generation by 
pushing for increases in regulated electricity tariffs.  The 
general manager of the state-owned electricity company, 
ENEE, has discounted the proposal as unnecessary at this 
time, as fuel purchases used in the power sector are exempt 
from fuel taxes.  Members of the private sector also began a 
campaign to urge the National Congress to set price controls 
on fuel prices to stop the prices from rising further. 
Note: The IMF agreement requires the GOH to refrain from any 
further price control measures.  End Note. 
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Formation of a Commission to Study the Regulatory Regime 
--------------------------------------------- ----------- 
¶9. (SBU) On March 2, prior to leaving for a Central American 
Presidents summit in Spain, President Maduro announced the 
establishment of a commission to study possible ways to 
reduce fuel prices, including a full review of the formula 
used to set the maximum pump prices.  The Commission will be 
headed by Juan Ferrera, head of the National Convergence 
Forum, a state entity that attempts to fold the input of 
civil society into GOH policymaking.  Ferrera is a former 
Finance Minister and former head of the association of oil 
product distributors.  Presidential Advisor, Ramon Medina 
Luna (a former Minister of Economy), will serve on the 
Commission and act as the key interlocutor with the GOH on 
data requests and recommendations.  President Maduro also 
asked former Minister of Industry and Trade, Juliette 
Handal, to participate in the Commission.  Handal has been a 
key proponent of the change in the reference price used as a 
proxy for cost in the regulated gas price formula; she has 
raised serious concern about Medina Luna's participation in 
the Commission, since she believes that he is largely 
responsible for the government's policy on fuel prices. 
¶10. (SBU) Ferrera told EconCouns in a March 2 meeting that 
the Commission plans to complete its work within 60 days. 
He noted an understanding of the need to maintain budget 
revenues and to avoid price controls.  In recent days, 
several GOH officials, including Vice Minister of Finance, 
William Chong Wong, and Ferrera, have indicated privately 
and publicly the government's resolve to stand fast on the 
oil tax.  Oil company reps have told us that they will urge 
the government to look for ways to cut tax evasion by 
informal oil importers and retailers. 
¶11. (SBU) All of this represents the first test of the new 
IMF program, approved by the IMF Board on February 18.  The 
GOH knew that the gas tax would be politically 
controversial, but had hoped that a phase-in of the hikes 
would give some breathing space and might be accompanied by 
a decline in world oil prices.  Instead, world prices have 
risen significantly in response to changes in OPEC policy 
and developments in other parts of the world, making the 
decisions in Honduras particularly difficult to defend to a 
weary public.  IMF officials will be watching carefully to 
ensure that the government continues to meet its fiscal 
targets and does not violate its commitment to refrain from 
further price controls.  End Comment.