VZCZCXRO4947
OO RUEHLMC
DE RUEHTG #1484/01 2422119
ZNR UUUUU ZZH
O 302119Z AUG 07
FM AMEMBASSY TEGUCIGALPA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6736
INFO RUEHRC/DEPT OF AGRICULTURE USD WASHDC IMMEDIATE
RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE PRIORITY
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHINGTON DC PRIORITY 0695

UNCLAS SECTION 01 OF 05 TEGUCIGALPA 001484 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
USDA FOR SECRETARY JOHANNS 
STATE FOR WHA, WHA/CEN, WHA/PPC, H, AND EB 
 
E.O. 12958: N/A 
TAGS: BEXP EAGR EAID ECON EFIS ETRD OVIP PGOV PREL
HO 
SUBJECT: HONDURAS SCENESETTER FOR USDA SECRETARY JOHANNS 
 
¶1. (SBU) Summary: As you prepare to visit Tegucigalpa, 
relations between the United States and Honduras are 
generally good.  President Zelaya considers himself a friend 
of the United States, and Honduras generally supports U.S. 
positions on major international issues, including the War on 
Terrorism.  But Zelaya's administration has expressed open 
irritation and defensiveness about the USG's increasing focus 
on corruption in Honduras, which may soon affect Honduras 
continued eligibility for Milennium Challenge Account 
funding.  Your interlocutors may also raise concerns about 
possible safeguards on Honduran socks, a proposed U.S. tax 
increase on domestic and international tobacco products, 
which would affect exports of Honduran cigars, and 
deportations of Hondurans living illegally in the United 
States.  CAFTA entered into force for Honduras in April 2006, 
but Honduras has been slow to implement its CAFTA 
obligations, and exports to the United States were actually 
down slightly in the first year.  Meeting U.S. sanitary and 
phytosanitary requirements for agricultural exports and 
improving the Honduran investment climate are major obstacles 
to reaping the benefits of CAFTA.  An apparently off-the-cuff 
proposal by the Agriculture Minister earlier this year to ban 
genetically modified crops looks to be dead for the time 
being.  A recent visit by Brazilian President Lula has 
sparked interest in developing biofuels in Honduras. 
President Bush discussed biofuels with Zelaya during their 
last meeting in August 2006.  End Summary. 
 
------------------ 
Political Backdrop 
------------------ 
 
¶2. (U) Honduras faces many challenges, including corruption, 
unemployment, high levels of violent crime, a highly skewed 
distribution of income, and a weak judicial system.  With a 
per capita income of approximately USD 1000, Honduras is the 
third poorest country in the Western Hemisphere.  Two-thirds 
of Hondurans live in poverty, and average education levels 
are very low.  Honduras has the highest rate of HIV/AIDS in 
Central America.  The GOH estimates that approximately one 
million Hondurans out of a total population of 7 million live 
in the United States, about 600,000 of whom are undocumented. 
 Immigration issues thus rank high on the bilateral agenda. 
 
¶3. (SBU) Honduras is a transit country for shipments of 
cocaine flowing north from South America, predominantly by 
sea. U.S. and Honduran counternarcotics police and military 
units actively monitor the transshipment of drugs though the 
country via air, land and sea routes. The GOH cooperates with 
the USG in investigating and interdicting narcotics 
trafficking but faces significant obstacles in funding, a 
weak and corrupt judicial system with heavy caseloads, lack 
of coordination, and inadequate leadership. 
 
---------- 
Corruption 
---------- 
 
¶4. (SBU) Honduras is one of the most corrupt countries in the 
Western Hemisphere and was recently ranked 121 out of 163 
countries surveyed by Transparency International.  Only 
Ecuador, Haiti, and  Venezuela scored lower in the Western 
Hemisphere.  U.S. policy and statements against corruption 
have struck a nerve here.  The GOH recently passed two 
important laws that should aid in the fight against 
corruption: the Transparency Law will give public access to 
more of the government,s dealings and allow the public to 
obtain information about ministries and agencies; and the new 
Civil Procedure Code will speed up the judicial process and 
allow for public oral arguments in civil courts, which have 
historically been nontransparent. Nonetheless, Honduras's 
score on the corruption indicators used to determine 
eligibility for Milennium Challenge Account funding have 
recently worsened, putting in jeopardy more than USD 200 
million in MCA funding.  Corruption is particularly rife in 
the state-owned telecommunications and electricity industries. 
 
----- 
Crime 
----- 
 
¶5. (U) Personal security is a serious concern for all 
Hondurans and foreigners residing in Honduras.  Violent 
crime, particularly homicides and various gang-related 
crimes, is extremely high.  According to official Honduran 
figures, the country has a murder rate of 23.1 per 100,000 
 
TEGUCIGALP 00001484  002 OF 005 
 
 
inhabitants (compared to the average murder-rate worldwide of 
8.8). The police estimate that over half the murders can be 
attributed to youth gangs that claim over 36,000 members in 
Honduras. Public support for forceful government actions 
remains strong.  Although the Zelaya administration can claim 
some credit for a small reduction in the number of violent 
deaths in Honduras, the country remains one of the most 
dangerous places in the Western Hemisphere. 
 
---------------- 
President Zelaya 
---------------- 
 
¶6. (SBU) After more than a year and a half in office, the 
record of accomplishments of President Manuel (Mel) Zelaya, 
with whom you will meet September 6, is mixed.  Zelaya was 
elected on a platform of "Citizen Power" and the plan of 
achieving a smaller central government with more power at the 
local level.  But his first year in office has seen a 
consolidation of power in his hands and those of several 
close advisors.  He claims to favor government transparency, 
and signed into law in 2006 a transparency bill to promote 
public access to information.  But corruption in Honduras 
remains rampant. While Zelaya considers himself a friend of 
the USG, his personality, administration, and populist 
policies -- as reflected by his proposal to effectively 
nationalize the distribution of petroleum products -- have 
made working with him a challenge. 
 
¶7. (SBU) Zelaya sees the integration of Central America as 
the only viable means Honduras has to meet the challenge of 
globalization.  In addition to ratifying CAFTA and increasing 
cooperation with neighboring countries, Zelaya intends to 
develop and strengthen relationships with other countries in 
the Western Hemisphere, as well as in Asia and Europe. 
Honduras, together with its Central American partners, is 
currently negotiating a free trade agreement with the 
European Union.  As a consequence, Honduras, a major banana 
producer, has opted not to join the United States and other 
Western Hemisphere countries in a World Trade Organization 
dispute with the EU over the EU's banana import policies. 
 
¶8. (SBU) Over the past month, Zelaya has become embroiled in 
a power play with the President of the Honduran Congress, 
Roberto Micheletti, who like Zelaya is from the Liberal 
Party.  The dispute centers on competing proposals to reform 
the Honduran telecommunications market and to regulate the 
rates on incoming international calls charged by the state 
telecom company Hondutel.  Hondutel has become a major source 
of graft and corruption in Honduras.  Reforming the telecom 
sector is a CAFTA requirement, but corruption and power 
politics are standing in the way. 
 
----------------- 
Economic Overview 
----------------- 
 
¶9. (U) After lagging for most of the 1980s and '90s, the 
Honduran economy has shown steady growth of 4-5 percent over 
the last five years, thanks in large part to roughly USD 3 
billion in external debt forgiveness and huge inflows of 
remittances from Hondurans residing -- legally and illegally 
-- in the United States, which amount to about one-fifth of 
GDP.  Inflation has remained moderate at around 6 percent, 
and the exchange rate has been stable.  However, creeping 
budgetary pressures in the form of subsidies for fuel and 
electricity and public sector salary demands, in particular 
from teachers, are causing concern about fiscal 
sustainability over the medium term.  The GOH has committed 
to applying the resources it has acquired through debt relief 
to poverty alleviation, but execution has been well below 
expectations. 
 
¶10. (U) In April 2006, the International Monetary Fund (IMF) 
was unable to certify GOH compliance with its Poverty 
Reduction and Growth Facility (PRGF), based largely on 
concerns about new fiscal policies that loosened fiscal 
discipline and significantly augmented public sector wages. 
The PRGF agreement stalled and eventually expired in February 
¶2007.  At present Honduras has no formal agreement in place 
with the IMF. 
 
¶11. (U) The United States is Honduras' largest trading 
partner, with two-way trade in goods of USD 7 billion in 
2006, and the largest source of foreign direct investment. 
One of the major magnets for foreign investment is the 
 
TEGUCIGALP 00001484  003 OF 005 
 
 
apparel assembly (maquila) sector, which grew dramatically in 
the 1990s and now employs more than 130,000 people. However, 
weak policies and physical and juridical insecurity deter 
many potential investors.  FDI in the maquila sector actually 
dropped 10 percent in 2006, despite CAFTA. 
 
----------------------- 
The Importance of CAFTA 
----------------------- 
 
¶12. (U) On March 3, 2005, the Honduran Congress approved 
CAFTA by an overwhelming margin.  The agreement entered into 
force for Honduras on April 1, 2006.  In the 12 months 
following entry into force, Honduran exports to the United 
States actually fell slightly compared with the 12 months 
before the agreement went into effect -- to USD 3.71 billion 
from USD 3.76 billion.  Although 12 months is too short a 
time on which to judge, many analysts here see this 
lackluster performance in the first year as evidence that 
Honduras needs to undertake serious microeconomic reforms and 
improve its investment climate before it will be able to take 
advantage of the opportunities offered by CAFTA. 
 
¶13. (SBU) Zelaya's team worked hard to bring CAFTA into 
force, but has done little since then to take advantage of 
the opportunities offered by the agreement.  Key reforms in 
energy, telecommunications, and other sectors remain stalled, 
and policies favoring price controls and state intervention 
have weakened the investment climate.  The agreement is 
considered to be absolutely vital to the survival of the 
textile and apparel sector in Honduras now that worldwide 
quotas have been eliminated.  The agreement's agricultural 
chapter liberalizes agricultural trade gradually while 
protecting Honduran farmers from sudden disruptions caused by 
subsidized imports. 
 
¶14. (SBU) The recent announcement by the U.S. Committee on 
Implementation of Textile Agreements (CITA) that it was 
initiating proceedings to determine whether to impose 
safeguards in response to a recent surge in imports of socks 
from Honduras has caused a press stir here and may come up in 
your conversations with Honduran officials.  Business groups 
claim imposition of a safeguard would cost Honduras thousands 
of jobs and cause investment in the textile and apparel 
sectors to dry up.  CITA will be collecting public comments 
on the issue until September 20, after which it will have 60 
days to decide whether a safeguard is warranted.  Under 
CAFTA, Honduras has the right to demand consultations and to 
receive compensation in the form of trade concessions on 
other apparel products.  But at this point the GOH is 
challenging the basis for the safeguard and complaining to us 
privately that imposing one would be interpreted in Honduras 
as a betrayal of CAFTA. 
 
-------------------- 
Honduran Agriculture 
-------------------- 
 
¶15. (U) Agriculture accounts for about 12 percent of Honduran 
GDP and employs about 35 percent of the workforce.  For much 
of the 20th century, bananas accounted for the vast majority 
of exports and the bulk of government revenue.  But they now 
amount to just 13 percent of exports.  Although there has 
been some diversification of agricultural production in 
recent years into more lucrative cash crops (melons, 
cultivated shrimp, palm oil, oriental vegetables), there 
remains a large population of subsistence farmers with few 
economic opportunities other than illegal immigration to the 
U.S.  This is exacerbated by a shift in agricultural policy 
under the Zelaya Administration to one of subsidizing 
non-competitive basic grains production. 
 
¶16. (SBU) Earlier this year, apparently without coordination 
within the GOH, Agriculuture Minister Hernandez announced his 
intention to ban genetically modified seeds from Honduras. 
This provoked a popular backlash, which forced Hernandez to 
withdraw the proposal.  But Hernandez is reportedly a true 
believer in the evils of GMO crops. 
 
¶17. (U) More recently, Honduran trade and agriculture 
interests have sounded an alarm over a proposal in the U.S. 
Congress to raise the tax on tobacco products -- including 
Honduran "puro" cigars -- to finance an expansion of 
children's health insurance.  The bill is currently in 
conference.  The Senate version would set the tax on cigars 
at USD 3; the House version at USD 1.  The President opposes 
 
TEGUCIGALP 00001484  004 OF 005 
 
 
both versions in their current form.  An earlier Senate 
version would have raised the tax to USD 10, and Honduran 
press are erroneously reporting that as the current proposal. 
 
------------------------ 
U.S. Assistance Programs 
------------------------ 
 
¶18. (U) In June 2005 Honduras signed a 5-year, USD 215 
million Millennium Challenge Compact.  It was one of the 
first countries to sign such a compact. The Compact aims to 
reduce poverty and promote growth by increasing the 
productivity and business skills of farmers who operate small 
and medium-sized farms and by reducing transportation costs 
between production centers and national, regional and global 
markets. The goal of the Compact is to increase Honduras' 
annual income by an estimated USD 69 million by 2010. 
Hundreds of small/medium farmers have begun receiving 
intensive technical assistance in the production and 
commercialization of high-value agricultural crops.  An 
international project manager is reviewing final designs for 
upgrades to the country's main highway and working with 
MCA-Honduras to evaluate proposed improvements to secondary 
and tertiary roads.  Construction is expected to begin in 
late 2007-early 2008.  However, Honduras's recent worsening 
score on MCC's corruption indicators may result in an imposed 
remediation plan for Honduras to continue receiving 
Millennium Challenge Account funding. 
 
¶19. (U) USAID operates a USD 38.8 million program closely 
aligned with the goals of the MCC.  Projects seek to increase 
the responsiveness and accountability of public institutions 
and create better models for governance, justice reforms, 
transparency and participation.  There is also a concerted 
focus on trade policy and support to Honduras in complying 
with the requirements of CAFTA.  USAID strives to bridge 
agricultural production in rural areas with relatively higher 
value processing and marketing enterprises in urban centers. 
An integrated natural resource management program emphasizes 
sustainable land and water-use, biodiversity, and reduced 
disaster vulnerability.  The health program aims to improve 
reproductive health, family planning, child survival, 
prevention of HIV/AIDS, and household food security.  USAID 
is also working to improve the Honduran education system, 
including through a Centers for Excellence in Teacher 
Training Presidential Initiative and by assisting GOH efforts 
to develop quality education standards, testing, and 
evaluation. 
 
------------------------------------ 
Relations With Neighboring Countries 
------------------------------------ 
 
¶20. (U) The economic relationship between Honduras and El 
Salvador is growing despite the territorial disputes. The two 
countries are working together to construct a controversial 
hydroelectric dam that will provide power to both countries, 
and with the help of funds from MCC, they are constructing a 
modern road that will allow El Salvador to send its goods to 
the Honduran ports on the Caribbean. 
 
¶21. (SBU) The election of Daniel Ortega in Nicaragua was not 
cause for alarm but only caution on the part of the GOH. 
Ortega,s claims that he has changed from the 1980s and that 
he will fully support CAFTA and free trade in the area were 
well-received by the GOH. However, second thoughts are 
arising as Ortega welcomes aid from Cuba, Venezuela, and 
Iran.  The GOH is neither embracing nor shunning the Ortega 
administration, but Zelaya was the only Central American 
president to personally participate in the recent anniversary 
of the Sandinista revolution. 
 
¶22. (SBU) Honduras restored relations with Cuba in 2002 after 
a 40-year break but only recently actively engaged the Cuban 
government. The Honduran Foreign Minister visited Cuba in 
October 2006 to sign agreements of friendship and to commence 
negotiations regarding a maritime boundary. The Cuban Foreign 
Minister returned the favor and visited Honduras in early 
March when he promised more medical and education assistance. 
 The first Honduran Ambassador to Cuba in over forty years 
was named in June 2007.  Cuba sent doctors to help Honduras 
recover from the devastation of Hurricane Mitch in 1998. 
Since then, Cuba has maintained a brigade of 300 doctors who 
provide medical assistance to the poor. Cuba also donates 
medical supplies and offers scholarships for Honduran medical 
students. 
 
TEGUCIGALP 00001484  005 OF 005 
 
 
 
---------------------------- 
Political/Military Relations 
---------------------------- 
 
¶23. (SBU) The GOH committed itself to deploying some troops 
to Haiti in support of the UN peacekeeping operations there, 
possibly via the Conference on Central American Armed Forces 
(CFAC), but has yet to do so.  Honduras generally supports 
the United States at the UN, including on such issues as 
human rights, human cloning, Cuba and the Middle East. 
Honduras has taken the lead in a number of regional 
initiatives to enhance cooperative security against emerging 
transnational threats.  Honduras hosted and participated in a 
joint disaster relief training operation with U.S. military 
forces last year and a series of joint US/Honduran exercises 
(Horizons 06). During New Horizons, the two militaries worked 
together to construct clinics and schools to serve the 
Honduran poor. 
 
¶24. (U) Approximately 575 U.S. service men and women, 12 
civilian DOD employees, and 62 Locally Employed Staff 
(Hondurans) are currently stationed at Honduras, Soto Cano 
Air Base under the command of the Combatant Commander, U.S. 
Southern Command, as Joint Task Force Bravo (JTF-B).  JTF-B 
has responsibility for interagency operations and supporting 
contingency operations such as disaster relief, humanitarian 
assistance, search and rescue operations, joint and combined 
training exercises, and counternarcotics operations in the 
assigned geographical area.  In 1954, the USG and GOH signed 
a Bilateral Military Assistance Agreement that set forth 
their intention to work closely together to foster peace and 
security in the Western Hemisphere. 
 
------------------- 
Embassy Tegucigalpa 
------------------- 
 
¶25. (U) Embassy Tegucigalpa is a medium-sized post, employing 
approximately 119 U.S. citizens and 320 Locally Employed 
Staff (mostly Hondurans) among 14 USG agencies.  The Peace 
Corps program, with approximately 192 volunteers, is one of 
the world's largest.  The Mission maintains a Consular Agent 
in Honduras' second largest city and industrial center, San 
Pedro Sula. 
 
FORD