Honduras facing fiscal readjustment

Without improvement on the horizon, broad fiscal readjustment is just a matter of time for Honduras.

The country faces major crises as unemployment keeps rising, a reactivation plan is lacking, and vaccines remain scarce. Additionally, a US court case could link President Juan Orlando Hernández to drug trafficking. And general elections, slated for November, will also increase uncertainty.

On Monday, labor minister Olvin Villalobos (pictured) said 2020 unemployment was 10.9%, almost double the 5.7% registered in 2019. Villalobos said the figure was still better than expected.

Fiscal reform could become inevitable but higher taxes are unlikely. 

“In the conditions of the economy, it is very difficult to increase taxes. You can reduce exemptions, increase fiscal control, reduce superfluous expenses and renegotiate debt or another type of relief mechanism,” former finance minister Hugo Noe Pino told BNamericas.

Tax collection last year was 25bn lempiras (US$1.04bn), compared to 109bn lempiras expected. Besides the pandemic, hurricanes Eta and Iota hit the economy, causing damage of 46bn lempiras, according to a report from the UN Economic Commission for Latin America and the Caribbean (Eclac).

This has led to a 6% budget deficit last year, which is projected to be 5% in 2021. In 3Q20, external debt was US$14bn, 56.4% of GDP. 

“The excessive spending that the government is doing increased the budget immensely. They have duplicated functions for some issues of state, for example human rights and energy,” Ismael Zepeda, an economist at NGO Foro Social de Deuda Externa y Desarrollo de Honduras (Fosdeh) told BNamericas.

With more than 220,000 public employees, state wages account for almost 45% of GDP, Zepeda said.

The economist suggested the government offer fiscal adjustment, including taxation, rate reforms, and lower education and health spending in the negotiations for an IMF loan in November.

Minimum wage negotiations, projected to end during the week, represent another complication. If the new wage is too high for the IMF, it could shut down some credit lines and even demand harsher measures, Pino said. But if the wage is too low, the government will lose support and fuel emigration.

The private sector is likely to oppose tax reforms, however, even though limiting public spending is consensus.

The former president of NGO Cohep, Luis Larach, told BNamericas, “we have the highest taxes in Central America. The solution is to streamline/slim down the government and stop stealing. Every day we have less investment and jobs. More migration. We need to be more competitive and raising taxes does the opposite effect.”

Photo credit: Honduras government