World Bank Document

R E S T R I C T E D

Report No. W.H.4 Public Disclosure Authorized

This document was prepared for internal use in the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein.

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized

THE ECONOMY OF HONDURAS Public Disclosure Authorized

October 28, 1955 Public Disclosure Authorized

Department of Operations Western Hemisphere CURRENCY UNIT - LEMPIRA

U.S. $1 a Lps. 2 Lp. 1 = U.S. $0.50 Lps. 1 million * U.S. $500,000 TABLE CF O1,TEFTS

Page No.

BiSIC DATA

SQr-,ARY AIlTD COYCLUTSIOPS ...... I

GE1 IRAL ......

ECC'S0Oi'IC DEVELOPMENT

The Past ...... 2 Recent Events ...... 4 The Outlook ...... 0 ...... 5 DOiK-ZSTIC FIFANCE

1'ioney and Baniking ...... 6 Public Finance ...... 7

BALANCE OF PAYS ENTS ...... 9

CREDITWORTHIMESS ...... 0...... 12

APFENDICES

(i) PRODUCTION

Bananas ...... a..... 13 General Agriculture ...... 16 Forestry * *.**.*... *., ,. .*. . .. * 17 I-ining and Industry ...... 17 Transportation ...... 18

(ii) STATISTICAL

Table I t%gricultural Production ...... 20 Table II Exports by Main Commodities and Areas ...... 21 Table III Exports and Imports - Value, Volume and Prices ...... 23 Table IV Toney Surply ...... 24 Table V Overall Budget Position ...... 25 Table VI Current Government Revenue .. ,...... 26 Table VII Current Expenditure of the Government ...... 27 Table VIII Government Revenue and Expenditure in Relaticn to Gross National Product ...... 28 Table IX Government Investment *...... , 29 Table X Government Investment and Its Financing ..... 32 Table XI Gross Carital Formation ...... 33 Table XII Balance of Payments ...... 34

o-Go BASIC DATA

Area 112,100 square kms

Population - 1954 (Estimate) 1,6oO,OOo

National Income - 1952 420 million leinpiras (At factor cost) U.S. $210 million 4',135 per head

National Income by Origin - 1952 (%) 100

Agriculture, forestry and fishing 53 Industry (including construction) 12 Trade and Transport 15 Private a-id public services, rent and other items 20

Balance of Payments 'Millions of U. S.$

1953 1954

Exports (f.o.b.) 72.6 57.0 Imports (f.o.b.) u 53,9 - 51.5 Services 19.7 - 8.3

Net Current Account - 1.0 - 2.8

Private Capital 3.7 4.1 Official loans and grants - 0.1 -

Net Capital Account 3.6 4.1 Errors and Omissions - 1,5 o.8

Surplus 1.1 2.1

Principal Exports - 1953 Millions of U, S. %

Bananas 41.1 57 Coffee 12.1 17

Foreign Exchange Reserves (July 1955)

In U. S. $, million 26.4 as % of 1954 import's 5g

Government Finances (1953/54) Millions of Lempiras

Revenue 45.6 Expenditures 52.1

Deficit ( - ) - 6.5 StLI.4J!.Y i:l) COr,RS: ONS

1. The population of Honduzras is not concentrated in one nucleus, as is the case in other Central American countries, but is scattered among a numiber of interior basins and in plains and valleys along the Pacific and Atlantic coasts. Liack of communications has up to this time prevented the country from becoming an economic unit; the western parts have their closest economic relations with El Salvador, and the North Coast w..ith the United States and the Caribbean region.

2. The best lands of Hoinduras are located on the Atlantic coast, and here have developed the foreign-owned banana plantations, the mainstay of Honduran exports. Food crops for domestic consvmrtDion and coffee for exports are raised with primitive m.ethods in the interior in valleys and on mountain slopes.

3. In the past two decades economic progress in Honduras has been slow. Banana procluction has been recovering gradually from the effects of depression and diseases during the thirties. Coffee and timber lave risen as important export products, but this has only in small part made up for the slow recovery in bananas. There has not been any major increase of agricultural and industrial production for the domestic market. On the other hand, Honduras has obtained increasing benefits from the banana industry as production costs and tax payments of the companies have increased. Together with an improvement in the terms of trade, this has helped to raise the rate of growth of real income above that cf production.

4. Public investment has been low in Honduras and for a long time little effort was made by the Government in tlae direction cf economic development. Since 1950, however, a Central Bank and a Development Bank have been created and efficient budget and tax departments set up. Public investment, esrecially in road construction, has increased and efforts have been made to improve agricultural methods and raise the sanitary and educaticnal levels. At present a number of development projects are being prepared under the supervision of a recently established i ational Economic Council, and Govern- ment institutions are being reformed so as better to meet recLuirements of development. Taxes were increased steeply in Anril 1955 in order to ensure a non-inflationary financirng of the development program. Althc ugh Honduras has few experienced businessmen, private ventures in agriculture and industry have increased in recent years.

5. Severe floods on the North Coast, bad weather throughout the country, a major strike on the bannna nlantations and political unrest strongly affected production and exnorts d-uring 1954. However, political stability has been reestablished and the economy is showing good signs of recovery. Banana production is expected to recuperate within one or two years, and exports to reach a level higher than before the floods.

6. Honduras has great unutilized natural resources in land and forests. Pevertheless, the country is li]kely to rind it difficult to achieve rapid economic grow;th. There are not much prospects for an increase in banana production over the longer run, and it .rill robably be difUicult to find s atis- - ii - factory markets for other export products. The small internal market and the dispersion of population will limit possibilities for the development of agricultural and industrial production for domestic use. Substantial investment vill also be required to provide adequate trarsportaticn and powter .

7. Good fiscal and monetary policy and good development planning are, horever, likely to reduce the strains upon the economy and the balance of payments resulting from higher investments. Use of external credits for *rell considered projects would serve the same purpose. Firm prices of bananas and the increasing control of banana diseases will help to ensure economic stability, and so will the ample foreign exchange reserves. These conditions together with the present absence of' foreign debt offer considerable scope for the absorption of long-term external loans. T; ECOCNOiY OF HOITDURAS

1. GE ERAL

1. Honduras is the second largest of the countries of Central America and the third in population. Unlike other Central American ccuntries, population is not, concentrated in one nucleus, but is scattered among a rumriber of interior basins and in plains and valleys along the Pacific and Atlantic coasts. The main population centers are on the plains bordering the Gulf of Fonseca on the Pacific coast, in the central part of the country around the towns of Tegucigalpa and Comayagua, in the mountains and valleys stretch- ing along the Guatemalan border from Ll Salvador towards the north coast, and in the plains and valleys of the northwiestern corner of the country, around the city of San Pedro Sula. .ven within these centers, however, population is relatively widely spread. The northeastern corner of the country, the so-called Nosquitia, is a2lmost comoletely uninhabited and unexplored.

2. Even today and in spite of the great use of the airplane in Hionduras, lack of comrrmnicaticns greatly impedes trade between thee-e areas. The southern and western rarts of the couni-try have long been closely related with the Salvadorearn and to a lesser extent the Guatemalan econormy while the north coast, whose developnment started early in this century, has looked primarily towards the United States and the Caribbean region.

3. Honduras is the onily Central Amer,`car. ccuntry that has its best lands on the Atlantic side, and communications that lead more to that side than to the Pacific. The line of volcanos that borders the Pacific Ocean passes from El Salvador to Nicaragua thrcugh the C-ulf of Fonseca--the southern limit of Honduras--without entering the country. Consequently, Honduras lacks the rich volcanic soils which irake the fortune of its neighbors. On the other hand, Honduras has been endowed with fertile valleys and plains on the north coast which are easily accessible from the central part of the country. Here in modern times the banana plantations, the greatest riches of Honduras, have developed.

4. The central and western regions are made up of hills from three thousand to over eight thousand feet high, and still mostly covered with pine forests. Between them are a number of valleys, some narrow and small, others wide and extensive. These valleys have been the mainstay of Honduran agriculture. Although their soils cannot be comrared in depth and fertility with those of the Pacific plains and volcanic slopes of other Central Ameri- can countries, their yield can be greatly increased with proper agricultural practices, to support not only basic food crops but also cotton and sugar. The hill slopes of tliese parts of the country offer extensive and good orrortunities for coffee cultivation. - 2 -

5. The lIonduran population is predominantly of mixed Indian-white stock with some English sneaking Negro population on the north coast. As in El Salvadcr, the Indian population of Honduras gave up its ancient com- munity culture at an early stage and adapted itself to the Spanish civili- zation. Because of this, Honduras does not have the problem of integration of Indian communities which is so important in Guatemala.

6. Population increase !n recent years has reached the rate of 2.9% annually which is about average for the area. This includes some migration from Wl Salvador comnosed principally of agricultural laborers. R?ural population is 70O of total populaticn, and according to the 1950 census 65% of the population above 10 years of age was illiterate.

2. ECCrT O]IC DEVELCM\,jEt1T

The Past

7. 'Jith an income per capita estimated in 1952 at i135, Honduras ranks among the poorer countries of the Western Hemisphere and together with Vicaragua as the poorest of' the Central `merican republics. Income distribution in Honduras is, however, more even than in the neighboring countries, and the workers on the banana plantations are well raid. It is, therefore, not likely that the standard of living of the rural population or of urban workers is aprreciably lower than in El Salvador and Guatemala.

8. In the past two decades Honduran econoric progress has been slow. Banana production reached itF reak in the late nineteen twenties and then declined In spite of a gradual recuneration since the late nineteen thirties, banana rroduction in 1953 was only 255; above the prewar level, and still 20¢ below the 1925/9 average. There has been a considerable development of other ex-nort products, especially coffee, timber and cattle. This, however, has only partly co:,apensated for the slow developsment of the banana industry, and there has been no major expansion of agricultural or industrial production for the domestic market.

9. The calculations made in Honduras of the arowth of real domestic product indicate a very substantial rate of growth (between 4 and 5%? per annum from 1939 to 1953), and thus contradict the general picture presented in the previous paragrapt- There are, howTever, good reasons to believe that these calculations systematically over-estimate the rate of growth. From 1935/39 to 1953 the volume of agricultural, livestock and forestry production increased by an annual average of 2.65;. As these activities acccunt for more than 50'; of total nroduct, a very substantial expansion in other fields would be required to reach an overall increase of between 4 and 5% per annum. Fowever, there are no indications that other activities have on the whole expanded Laster than agriculture, livestock and forestry, which increased their share in national rroduct from 53 to 55% between 1939 and 1953. It therefore seems likely that the overall rate of growth of domestic r,roduct remained below 3; during the period 1939-1953 and exceeded the rate of growth of population only slightly, if at all. There are, furthermore, no indications that the rate of growth wras increasing towards the end of the period.

10. On the other hand, there are indications that both real national product and real income were increasing at a considerably faster rate than real domestic product. This was due to increasing retained benefits from banana production and to improved terms of trade. 1is the banana companies, to fight plant diseases, had to introduce costly irrigation works and spraying systems and bring new lands under cultivation, banana production became more labor intensive. Both for this reason, and because of wage increases, the share of Honduran labor in the value of production tended to increase. The payment of income tax by the companies, starting in 1949/50, also aug- mented the country's benefits from the industry. Moreover, the companies have increasingly utilized domestic sources for the supply of food and materials. All this helped to raise national product at a considerably faster rate than domestic product, especially in the years 1948 - 1953. To this were added the beneficial effects of an improvement in the terms of trade, first when banana prices recovered from the depressed levels of the thirties, and later when coffee prices rose. It is likely that the combined effect of increased benefits from banana production and the improved terms of trade raised the rate of growth of real income to an annual average of close to 4%6 between 1939 and 1953, compared with an increase in real domestic product of less than 3,. This means that real income per capita increased by about 1% per annum.

11. The conclusion that economic growth in Honduras was slow during the period 1939-1953 is further strengthened by considering the general conditions for economic growth during thlis roriod. It is true that the country enjoyed more stable rolitical conditions than at any previous time, and this should have tended to stimulate production. On the other hand, lack of com- raunications and power formed an obstacle to develorment about which little was done. Public investment vas low during most of the period and little effort was nade to foster economic development. Outside the banana industry, private investment was rrincipally directed towards residential construction.

12. HIowever, during the last six years an important change has taken place in the Government's attitude towards economic development. Public investment--especially in road construction--has increased substantially and through this increase and a niumber of fiscal and institutional reforms a basis has been laid for future progress. Outstanding among the reforms were the creation in 1950 of a Central Bank and a Development Bank, the introduction of income taxation, and the establishment of efficient budget and income tax departments. At the same time the Government made efforts to raise educational and sanitary levels and to improve agricultural practices throughout the country. The change in attitude has not been confined to the Government, as there has been a marked increase in private activities in agriculture and forestry, and a few new industries have been established. On the whole, the new policies and activities had not had time to affect economic growth significantly prior to 1954 and there was a growing realiza- tion throughout the country of the need for more active promotion of economic development and social welfare. -4-

Recent Events

1954

13. This drive towards economic development and social reforms had been building up slowly during the admiinistration of President Galvez (1948- 1954). But in 1954 a number of natural and economic setbacks occurred, while the presidential elections of October 1954 were preceded by a vigorous political campaign. In hAay the dock workers in the port of Tela struck against the Tela Railroad Company (the United Fruit Company's subsidiary), and in a matter of days the strilce had spread throughout the properties of the Company. (It also spread to the Standard Fruit Company in La Ceiba, but was settled there almost immediately.) During the more than two morths that the strike lasted there 'ias great social and political ferment, which twas increased by the presidential campaign which had already started. trade unions, formerly non-existerit, sprang up overnight, not only in the arets affected by the strike, but all over the country. The economic effects of the strike were severe, as it paralyzed t-he major part of the ccuntry's princiral export industry. The strike was hardly over when floods hit the plantations of the Tela Railroad Company, a minor one in July and the greatest in histcry in September. The damage to fields, irrigation and spraying systems, railroads, highways and buildings was very considerable. Barana shipments from Puerto Cortds and Tela fell to almost nothing during tae remainder of the year and the number of employed workers declined shgrply. Besides the Company, farmers in the region were also badly hurt. To the economlc effects of the strike and floods were added those of the presidential campaign which, thrcugh its violence and the uncertainty of th- out- come, tended to reduce private investment and initiative. The closing down of the country's biggest mine in iiay 1954 also added significantly to unemployment.

14. The three-cornered presidential election in October proved incon- clusive but, at the same time, it showed unexpected strength for the party furthest to the left, the Liberals, which obtained alnost 50'';.of the votes. The country was therefore confronted with a major political crisis. It was resolved at the beginning of December when the Vice-President of the Galvez administration, don Julio Lozano Diaz, with the surport of all three political parties, assumed all powrers as Supreme Chief of State, revoked the con- stitution, made the newly elected Congress a consultative body and formed a cabinet representing the three political parties. Don Julio Lozano, a staunch conservative, dedicated his government to the promotion of economic development and social reforms. A "Five Year Development Plan" - which had been outlined during the previous weeks - was an;ounced as the economic program of the Government and the early adoption of labor laws was proclaimed.

1955

15. Subsequently, during 19g5, the economic situation has improved and political conditions have stabilized. No reliable data are yet available on the effects of the events of the year 1954 upon national product. Estimates of a decline in real terms of between 10 and 20% are certainly exaggerated, - 5 - and the likelihood is that the decline was not much above 5%, a severe blow in any case. By mid-1955 banana production had recovered substantially from the extremelv low point reached in the last months of 1954 and the first months of 1955, and the Tela Reilroad Company had initiated an investment program which proniised to regain the former production level by 1956 and increase that level in 1957. Private investment in agriculture and construction increased as soon as the overall economic and political situation imptoved. Unemployment diminished, in part as investment increased, and in part as the unemployed returned from the banana regions and the cities to their villages. The growth of trade unions continued without any new clashes. The inflationary development and drain on foreign reserves which had been apparent during the last part of 1954 and the first months of 1955 came to an end in tpril, partly owing to the recuperation of production, and partly to the fiscal and monetary measures adopted by the Government.

16. The economqic and social prograrm of the new Government has neces- sarily progressed slowly, and this has created considerable public disap- pointment after exaggerated hopes of great external loans and rapid progress had been awakened with the announcement of the "Five Year Plan." On the other hand, the Government was able in April 1955 to introduce large tax increases and a new tariff without serious discontent or opposition. These measures helped to eliminate the Goverrnaent deficit and lay a financial basis for future economic development. In spite of considerable friction between the Liberals and the other two parties, political conditions have remained stable and all parties have continued to support the Government.

The Outlook

17. The present outlook is that the country's production and exports will recover fully during the year 1956 and show a continued expansion in 1957. 'lthough the political outlook is much more uncertain, there are reasons to believe that a return to a consitutional system could be made peacefully within the next year or so. A registration of voters is being conducted during the second hali of 1955. It would be followed by the election of a Constituent Assembly and in due time of a new President and Congress.

18. If the prospects for an early economic recovery are good, the outlook for a rapid economic progress in the longer run are not so encouraging. Honduras has arnple agricultural and forestry resources, not only in the underdeveloped northeastern parts of the country, but also in the settled central and western parts. It may also have considerable mineral resources as yet unexplored. However, it is hard to see at the oresent time how these resources could be utilized for an important expansion of exports, and hard to believe that in a small and sparsely populated country rapid economic growth could be based almost exclusively on tile developmnent of agricultural and industrial production for the domestic market.

19. In addition to the difficulties for exoanding exports, the topog- rapily of the country and the dispersion of population will make it necessary - 6 -

to make comparatively high investments for the creation of an adecuate system of conmmunications. Because of low nublic investments in the past there are also great unsatisfied needs for investments in most fields. It is a further obstacle to economic development tht.t the country has only a limited number of experienced and enterprising bisinessmen.

3. MINESTIC FIN.-nlCE

Money and Bankinz

20. The monetary system of Honduras wras completely changed in 1950 when a Central Bank was established and U.S. silver coins withdrawn from circulation. The change was carried out srnoothly and did not impair the solidity of the lempira, which remained at its prewar rate of 2 le,.-.?ras to l doll:-r, 7.ithout e-ctl.n;-e co nt;-ols.

21. There are in Honduras three commercial banks: the Banco Ptl4ntida, controlled by the same interests as the Standard Fruit Company; the Banco de Honduras, locally controlled; and the Banco de Occidente, a small local bank in the West. There is also a Government D"velopment Bank (Banco racional de Fomaento), founded in 1950, and a few but not unimportant savings and mortgage banks, one of which is a branch of a Salvadorean corporation.

22. The years 1950-53 were years of moderate rmlonetary expansion. The money supply, whlile increasing, was largely keeping in line with exchange inflow and with the general upswing in hcusiness. The difficulties of the year 1954 had, however, their repercussions upon the monetary situation. ht the end of i.arch 1955, national income and foreign exchange reserves had diminished,Iwhereas money supply stood at its highest. Factors of expansion were two-fold. In the first place the Central Bank began buying government bonds, issued during the preceding years to help finance road and telephone projects, the greatest part of which had remained with the Treasury. During 1954, government bonds held by the Central Bank increased from Lps. 0.9 to 7.0 million; during the first quarter of 1955 the Bank again took Lps. 1 million of treasury notes. In the second place, there was a considerable expansion of credit by the cormercial bariks in the beginning of 1955. At the end of i'arch 1955, credits of the banking system (excluding the Central Bank) stood Lps. 7 million higher than a year before. This increase served primarily to finance imports in anticipation of the increase in tariffs and to satisfy a pent-up demand for office and home construction and business inventories released after the stabilization of the political situation.

23. The monetary expansion together with bad crops reacted strongly upon prices. T'Jhereas the cost of living had been increasing relatively moderately fromi 1948 to 1953 (at an average of 5%0 per year), a sharp increase began towards the end of 1954. A further increase was occasioned by the tariff and tax increases of April 1955 and by the food shortage which became severe at this time. By Anpust 1955 the cost of living index stood 20% higher than a year before. a 7 -

24. Bank reserve requirements were raised in March 1955 from 255' to 35%o of sight deposits. A part of the requirements can be covered by govern- merit bonds, and the aim of the increase was specifically described as that of channeling more funds towards the government sector. At the same time the Central Bznk raised rediscount rates for import, export and other commer- ciel loans to 5-6%, which implied that the barnls could only make such redis- counts at a loss. The immediate result of -these monetary measures was a severe tightening of credit which caused some alarm among businessmen. This crisis was short-lived, however, and from liay to July the Banks have been granting new loans at a normal rate (similar to that of the same period of 1954). In any case, commercial credit exransion was checked - probably as much by the end of speculative imports after the new tariff went into effect as by the monetary measures adopted. At the same time an improvement of the fiscal situation permitted the Government to reduce its debt with the Central Bank back to its former level.

25. As a result of the checking of credit expansion and the imnroved fiscal situation, the monetary expansion has come to an end. In July 1955 money supply of internal origin wras less than one half of wihat it had been in March and only slightly higher than it had been a year earlier. Owing to the fall in internctional reserves, total money suprly iras lower than it had been in July 1954.

Public Finance

26. For a long time the Honduran Government budget was small, much smaller than the banana comranies' r-rofits - not to speak of their total turnover. This is no longer trae. The goverrnment budget has increased from 6-7% of gross national product in 1946-50 to 8-9% in recent years; in the fiscal year 1954/55 this relation rose to 10t, and - as presented - the 1955/56 budget ccmes to about 13% of gross national procluct. This indicates the important change wrhich is taking place in government policy.

27. Import taxes have until recertly accounted for almost one half of government revenues, and excise taxes (mostly on beer and tobacco) together with surpluses of fiscal monopolies (rrincipally liquor) for almost one third. Export taxes, mainly on coffee, are unimportant. Ho-wrever, important as import taxes are in the fiscal system, they are levied on not more than one half of total imports. The other half enters free of charge, either under the concessions of the ba-nana companies, or under treaties with the U.S. and El Salvador, or as government imports. In addition there are reduced tariff rates on some goods coming from the U3.S.

28. The fiscal system has thus relied heavily upon indirect taxes, but this has been changing substantially wxith the increasing importance of the income tax. Introduced in 1949, in recent years the income tax has accounted for almost 20% of government revenue. The tax is progressive and had, until April 1955, a maximum yield of 15%.. It anrnlies to individuals as well as businesses, but because of high tax exemptions on personal income, - 8 -

very few individuals were raying the tax. I-evertheless, the machinery for its administration had been set up, and this was imrortant when it was decided to extend the tax.

29. The fiscal years 1950-51 and 1951-52 left an aprreciable surplus that helped to build government deposits in the Central Bank. *>hen deficits did appear from 1952-53 onwiards, they were covered first by running down these cash balances and second by selling bonds, principally to the Central Bank. The events of 1954 increased the Government's expenditures and reduced its income, and between September 1954 and karch 1955 the Government ran a deficit of almost Lps. 6 million.

30. Early in 1955, the Goverrment decided to raise the level of public revenue greatly in order to eliminate the existing inflationary deficit and make it possible to finance more development projects. The government deficit was to be limited to the utilization of external loans for development purposes. The measures adopted went into effect in April and included: an increase in income tax rates, bringing the maximum rate up from 15 to 301; a lowering of personal income tax exemDtions, making many more individuals liable to tax; an increase of taxes on cigarettes, beer and liquor; an increase in rany import taxes, made simultaneously with a simplification of the tariff and the adoption of a new nomenclature which is to be the same for all the Central American countries.

31. After these measures had been adopted, government revenue was estimated in the new budget for 1955/56 at Lps. 57 million (including the net profits of government monopolies and enterprises). This compares with an original estimate of government revenue in 1955/56, excluding the new taxes, of Lps. 41 million, and actual revenue in 1953/54 of Lps. 46 million. lhen the 1955/56 budget was prepared, the revenue estimate wras on the whole considered to be conserv-ative. Hcwever, after the new taxes went into effect, demand shifted strongly from liquor to beer, probably reducing revenue from consumers' taxes by Tps. 2 million from *rhat had been estimated.

32. In spite of the Government's determinaticn to avoid inflationary deficits, the new budget presented an overall deficit of Lps. 10 million. In part this deficit was intended to be financed from external borrowing and wrould, therefore, not be inflationary. In part, however, it resulted from high estimates of public investment, which the Government did not expect to be able to realize in full during the fiscal year, but was not willing to reduce explicitly.

33. The Five Year Plan, presented as the eccncmic program of the new Government, had created high hopes of a better future in a country going through a profound economic and political crisis. At the beginning of February 1955 a F\ational Economic Council was established and - witlh the advice of a resident IBRD 1;ission - gradually began the slow process of having projects technically prepared and institutions established and reformed so as to be able to implement development programs. By the time the 1955/56 budget was finally ready, the Government realized that the during investment scheduled in the Five Year Plan could not Le carried out the year. On the other hand, technical preparations were not sufficiently and advanced to permit realistic estimates in place of the original ones, there was a natural reluctance to create an abrupt pufflic disillusionment after the high hopes previously evoked. The investment part of the version of budget was, therefore, largely left unchaanged from the original compared the Five Year Plan. At Lps. 26 million this projected investment 18 million withl Lps. 14 million soent in the fiscal year 1954/55 and Lps. in 1953/54.

34. In spite of the apparent deficit in the budget the Government 1955/56. It stood on its intention to aroid an inflationary deficit in was realized that t-he econotmic situation was uncertain, that no realistic the estimates for investment expenditures could be made, ead that these expected increase in revenue might not materialize in full. Under them- conditions the National Economic Council and the Government prepared selves to follow closely the econo.mic and financial situation and adopt in budget during the fiscal year ary changes in government policy and the required to avoid inflation. in the 35. In recent years, the main gover.wnent Investmrents have been Southern Road from Tegucigalpa to the Lnter-kmerican Highway (where most of for the work was done by a U.S. contractor), in a ntew telephone system Tegucigalpa, in public buildings, in water supply systems and in transfers to the Government Development Bank. The investient plans now being prepared yet taken a under the supervision of the National Economic Council have not of elec- definite shape, blut they are primarily directed towards the supply and tric power to the North Coast srnd Tegucigalpa (the Rio Lindo Project) Western tlhe improvements of road coira.unications in the populated Central, to and Northwestern parts of th-e country. The construction of rural roads road new agricultural areas 4is also receiving attention, and a complete is maintenance progran is being prepared. At the sane time the Council pilanning a ste;ping up of expenditures for agricultural ex.tension services, campaigns for construction of water supply systems, for hiealth centers, for these plans against malaria and yellow fever and for education. A part of will probably be realized in the fiscal year 1955/56.

4. BA'LLANCE OF PAYMENTS its 36. Prior to l955 Honduras had not experienced serious strains dn low, balance of payments. Public and private investm,-,ent had been relatively over a prolonged period exceeded domestic savings and long-term and never did capital imports. Even the sharp fiscal deficits of the years 1952-1954 of not adversely affect the balance of payments because of the high level private savings. - 10 -

37. The economic difficulties of the year 1954 did, however, put a considerable strain on the balance of payments. In April 1955 the foreign reserves of Monduras were ;7 million lower tlhan they had been a year earlier, although still at the satisfactory level of i 24 million. From then on reserves started to increase and at the end of July they exceeded 126 million, and were less than qp4 rillion lower than in July 1954. This favorable outcome in face of a fall in exports of 25% from their 1953 level was due in part to the strong fiscal and monetary measures adonted by the Government, and in part to the high capital imports made by the United Fruit Company for the rehabilitation of its plantations.

38. In normal years, the Honduran balance of payments presents a favorable trade balance which is turned into a substantial overall deficit on total goods and services by the remittances of investment income by the banana companies. However, miuch of this investraent income flo,w7s back in the form of new investments, thus eliminating the deficit on goods and services, and creating an overall balance of payments surplus in every year from 1948 to 1954. 'When exports fell in 1954 and 1955 income remittances fell sharply, while invest- rment increased in 1955. This greatly reduced the impact of the fall in exports upon the Honduran economy and the balance of payments.

39. Although bananas have over time been losing their preponderant weight in Honduran exports, they still accounted for 61%p of total exports in 1950-1953. Coffee gained the second place in exports from silver in 1949, and accounted for 14%1- of total exports in 1950-53. Silver and gold together came to 7% and the remaining 18% was divided between a variety of goods, the most important of which were timber, cattle and tobacco. Rice, corn and cotton are normally exported, but in very small quantities.

4o. Thle direction of exports depends principally on the goods exported. The bananas, coffee and metals go to the U.S. and Canada, and to a small but increasi:ng degree to Europe. other exports are mnainly directed to IIonduras' neighbors in Central 'uaerica and the Caribbean. El Salvador is the imost important trade partner in this region, taking most of the cattle exports, some of the timber, all the tobacco, corn and cotton and a number of other minor agricultural and industrial articles. The timber goes principally to Cuba and Venezuela, some of the cattle goes also to the Caribbean area, and the rice is sold to British Honduras. In 1954, 81% of total exports went to the U.S. and Canada, 7% to Europe, 7% to Central i'America and 5% to the Caribbean (including the Guyanas, Venezuela and Colombia).

41. During the next two or three years IIonduran exports are likely to recover from their recent decline and reach a somewhat higher level than during tlhe past five years. It is difficult at present, however, to envis- age the possibilities for any substantial further increase. Banana prices are expected to remain firm, but it is not very likely that production will continue to increase after 1957. Gold and silver exports have declined sharply, and are not likely to recover, Although Honduras has great physical - 11 v

possibilities to expand coffee production and is a low-cost producer, it is not likely that more than a modest expansion will take place under present prospects for coffee prices.

42. It may be that in the long run the most important possibility for increase in exports is in food products, timber and some industrial products to the neighboring countries. However, these exports account at present for only a small part of Honduran exports, and cannot be expected to increase rapidly. It is true that El Salvador, Guatemala and some of the Caribbean countries have been importing cattle and other food products and that Honduras has much unutilized lands which could be used to increase production of these goods. However, not only Honduras but most other countries in the area (including the importing countries themselves) have good possibilities to increese their food production. As a matter of fact, all these countries are promoting this production, and these efforts are bound to increase if the expanLion of their tradit.ional exports (such as coffee, sugar and cotton) is thwarted. As far as timber is conce.ned, there should be no market difficulties. At present exploitation practices, however, production cannlot be increased without serious damage to the forests. Recently, Honduras has been able to export some manufactared goods, especially shirts, tc El Salvador. These exports are not Blrge, but they could be expected to increase over time if free trade arrangenents between the two countries can be maintained.

4.3. The efforts whrich are being made for increased econom.ic Lntegra- tion of Central America are espec.ally significant in view of the liffi- culties in increasing their traditional exports which not only THonduras but the other countries as well are likely to encounter. Eliminat.on of tariffs between the countries together witn improved transportaticn would create a much larger market and promote a sound division of labor For Honduras it could mean larger possibilities for exports of cattle aend food products and for develonmnent of some industries. The obstacles a'e formid- able, howl-Cer, and the progress made so far modest. Bi3fore a cormon cus- tcms area can be established several steps are necessary. The first - which has already largely been accomrlished - is to adopt identical tariff nomenclatures in all the countries. The second - which is in a preliminary stage of discussion - is to equalize the tariffs. To give an idea of the difficulties liholy to be encountered, -it is sufficient to recollect that the l'ng-stariding bilateral free trade agreement between El Oalvador and Honduras recently practically broke down because of Salvadorean dissatis- facticn ovo- imports of shirts from Honduras. The establishment cf industries with the support of the governments and serving the wlhole area has also been considered. The first project of this type, which was approved in principle at the conferernce of the Tvinisters of Economy in San Salvador in 2iay 1955, is a pulp and paper mill to be established in Honduras; however, its technical and financial aspects have yet to be studied.

44. The difficulties in increasing export production over the longer run are not the only factors likely to expose the Honduran balance of payments to greater strains in the future. Greater retained benefits from - 12 -

banana production and improved terims of trade have in the past helped to increase national income and strengthen the balance of payments. Higher wage and tax payments of the banana companies will continue the trend of increasing benefits from the banana industry, once production has recovered. On the other hand, continued improvement of the terms of trade cannot be expected. Yoreover, government policy has changed towards a more active promotion of public welfare and economic development. Consequently, government expenditures for recurrent services as well as for investment are likely to increase, and to tend to rise at a faster rate than national income. This jill create high claims for expenditures, while at the sane time inelastic exports and deterioration of the terms of trade may limit the resources from which these claims can be met.

45. Under these conditions a proper conduct of monetary and fiscal policy acquires prime importance, and in that field Honduras has developed institutions end obtained experiences which promise well for the future. It has a modern and efficient Central Bank, a good tax system, an outstanding tax and budget administratiori, and a National Econoinic Council in charge of development planning and overall coordination of economic policies. It has, moreover, a strong tradition of financial orthodoxy and its Government has demonstrated -ts ability to take strong imeasures to avoid inflation.

5. CR3DIrhiGRT1INESS

46. Honduras has no external debt. The final payment required by the 1925 debt agreements on the four sterling loans of 1867, 1666 and 1870 was made in January 1953. Bonds estimated at 100-150,000 pounds sterling at the agreed settlement value were never presented for payment and are no longer listed either in the London Stock Exchange Year Book or in the annual reports of the British Council of Foreign Bondholders. During the last fifteen years Honduras has obtained some small loans from the Export- Import Bank and the United Fruit Company for road and railroad construction. These loans had been fully repaid by the middle of 1955, and no suppliers' or other short or medium term debts are outstanding at the present time.

-47. The prospects are that during the next two years Honduras will recover completely from the severe difficulties of the year 1954 and that its production and exports will reach hligher levels than before. For the future, the stable price of bananas and the success achieved in curbing banana diseases will help to give the country economic stability. Ample foreign reserves serve as added protection. In spite of the great unutilized resources of Honduras, the country will probably find it difficult to achieve rapid economic growth, partly because of obstacles in developing exports, partly because of the substantial investment required to provide adequate transportation and power, and partly because of the lack of business experience within the country. However, good fiscal and monetary policy and good development planning are likely to reduce the strains upon tile economy and the balance of payments which an active promotion of economic development and social welfare under adverse conditions otherwise might have created. Use of external credits for well considered projects would serve the same ourpose. These conditions together with the present absence of foreign debt offer considerable scope for the absorption of long-term loans. APPEDICES

(i) PRODUCT ION

(ii) STATISTICAL - 13 -

(i) PRODUCTION

Benanas

1. The banana lands are on the North Coast. A,lthough it is the most fertile part of the country, the Coast - mainly because of malaria - was not really settled and developed until the beginning of the twentieth century, when banana cultivation started. Eventually the banana industry was concentrated under two foreign-owned companies, the IJnited Fruit Company, of Boston -- which ooerates in Honduras under the name of Tela Railroad Comapany -- and tne Standard Fruit and Ste3nship Company, of New Orleans. The North is Honduras' most progressive region. Population of the two deoartrments of Cortes and tlantida increased froin 1930 to 1950 by llo/, as cormpared with a national average of 62%. A3lthough other activities followed in the wake of banana cultivation, notably around San Pedro Sula, second city of the country and an active comt!ercial center, the banana companies' operetions are still thie mainstay of the North Coast's econorrmy.

2. In tlhe past 25 years, banana production and trade has become increasingly difficult. First there were ma-keting difficulties during the great depression, then the spreading of diseases, the Sigatoka, and miost notably the Panama disease. The sorayinc of Bordeaux mix.ture can take care of the first, buit in spite of extensive researclh carried out by the United Fruit, no adequate control has yet been discovered of the Panana disease w-hich, once it lhas taken hold of a field, spreads gradually, bringing marketable production down- to zero. The only defenses are the flooding of the contaminated fields for a period of six to eight months - which will kill the fungus, but is not efficient on sandy, light soils - or the switching to more resistant, but also cheaper species of banana. The first method has been ultilized by the Tela Rail-oad Co., and the second by the Standard Fruit Co.

3. Tne result of tbie diseases nas been in the first place the almost complete disappearpnce of independent producers, w'ho depended on thle corpanies for marketing. For the coilpanies theMselves, a rmarked decline in profits has taken place. 'he corapanies have reacted to this by a considerable reduction in acrea,e and by concentration of their activities on the best lands at their disposal. From 1931, an all-time high, to 1947, the record of postwar years, the acreage planted in banana declined by 51% to 25,o00 hectares (which represent only a s.nall part of the companies' concessions), and production by 40%. The United Fruit abandoned its plantations in Cuyamel, along thle Guatemalan border, during the early thirties, its entire Eastern Division in the lower .Aguan Vclley at the start of the war, and also the Lean Valley. i1 its banana production is now conducted in the extremnc ly fertile Sula plain. The plantations, very compact, are divided into farms o. around 800 acres, each with its pumping station and a double network of pipes (i irrigation and spraying), serviced by an elaborate railroad network leading to - 14 - the two ports of' Puerto Cortes and Tela. The company, which possesses three major towns, where everytinig, including houses, streets, hosoitals, playgrounds and shopping facilities belongs to the company, constitutes a massive, elaborate and ef'ficient, although cumbersome organization. The Standard Fruit Company, whose production in recent years normally has been only one half of that of the Tela R.R., hnas its h1eadquarters in La Ceiba, but most ot' its plaitations scattered far away in the middle f.;guan Valley. It is organized along somewhat similar lines as the Tela R.R. Co., altnough in a much less complex and conspicuous way.

4. The year 1954 was a most critical one for the Tela R.R. Co.; first because of a two-month strike, unique in the company's history, and then because of the great floods in tihe Sula Valley in Seotember - not to speak of the usual, but somewJhat more threatening Panama disease situation. Production for 1954, and similarly for 1955, is estimated at no more than one half of wlhat it was in l)53. IMinimum daily wages after the strike are Lps. 4.06 (L.3.30 for the Standard F'ruit), which is rmiuch above general agricultural and most industrial wages in T-Ionduras. In Decermber 1954 - at the seasonal low-point - the two companies' total employment was 16,000 and 8,500 respectivelv, which is altogether some 10,000 lower then a year earlier. Towards thIe end of 1954 and in the beginning of 1555 labor laws were being preoared snd adopted for the first time in the country's history and the trade unions which had sprung up during the strike were achieving more reguilar forms of existence. In -4pril 1955, after the comoenies had made an offer to this effect, their income tax was raised from 15,; to 30%0 (which makes it equal to the rate in Costa Rica and Guatemala).

5. 'Is soon as the political and labor situation had stabilized the Tela R.R. Co. embarked upon a large rehabilitation program designed to overcome the effects of the floods and check th-e Panama disease. This program envisages an investment of 410 .lillion anuually in the three yeFrs 1955-57, a. much higher level of investment than in previous years. Once the proL=rai is completed, production will reach - or slightly exceed - the level of the early nineteen fifties. The Standard Fruit Company is also in a process of expansion, and expects in 1956 to reach a level of production one third hiQ;ier than in 1954. Barring new natural catastrophies or a serious deterioration in the political or labor situation - wlhich might affect the comipaniest intentions - the outlook is, therefore, that banana production 'oy 1957-56 wiill have reached a level somewhat hi-her than in receint years.

6. On the other hand, neither of the two companies has at the present time plans for further expansion. At the production level envisaged for 1957-53 both cormpaniies would be using all the suitable lands in their present areas of operation, and then present transportation and port facilities w-ould be w;,orking at near capacity. (This may, however, be somewhat less true of the Tela R.R. Co. then of the Standard Fruit Co.). In order to increase production further, the cormpanies would therefore have to extend cultivation to new areas and expand their transportation - 15 -

and loading facilities. On the 1N'orth Coast there are much lands available for banana cultivation, although they are of inferior quality to those oresently cultivated. There are also convenient conditions for extension of Dort and transportation faciMEi-s. •iJeverthalossj the companies are not likely to embark upon major new expansion programs in Honduras. One reason is the severe threat of the Panama disease. '.nother is that t'he Standard Fruit Co. has all its investments in banana production in Honduras, and the United Fruit Co. has larger investments in iIonduras than in any of the other countries where it operates. The present policy of the two companies appears therefore to be to limit their operations in Honduras to the full utilization of the suitable lands and general facilities in their present areas of operations and seek fur ther expansion opportunities elsewhere.

7. For a long time the fruit companies could be considered as constitutiiag isolated islands of activity within Honduras, with only a lirited impact upon the economiy of the counLry. This would be less and less true today. Thiis is thne result or improving communica,ions; of the diversification of the conmanies' agricultural and industrial activities and of thl-e increrse of their scles and purchases within ILonduras; of the constant reduction of their retained profits outside Honduras; of thle expansion of activities other than their own o1 tIhe 11North Coast; of the irmprovement of both government finances and nrivate banking; of the growing strength of labor. .'~t the samie time as the coililDanies' operations are diminislhing (relatively speaking) it can be said that their contribution to the countr-r is increasing. This is exemoplified by t`e trend of national income to rise at a .more rapid rate than domestic production. 8. Relations have to adjust to this changing situa3tion. On the Hondvuran side, there is wt4ide recognition and acceptance of the fact that the companies are there to stal, t'hat only they can run and manage the i;^;tricate machinery in existence. On tle companies' side, along with their primary desire to protect the value of their investment, there is recognition of' their interest in the prosperity of tne North Coast and of the country as a whole. This is not to say that there are no problems ?ending. Labor problems will continue to loom large in spite of the promising beginnings which have been made in organizing unions and establish- ing labor laws, and in spite of the enlightened attitude towards organized labor which the companies on the whole have adopted. It bodes well for future labor relations, hoiiever, that in July 1955 th,e Tela R. R. Co. signed a three year contract with its workers. Another problem exists in the field of transportation, where the comoanies, through their ships, thne ports and the railroads which they ownm or operate for the Government's account enjoy a virtual monopoly in their respective area. Although they strictly abide by the terms of their contracts, which make of them common carriers, there is a general consensus Emong Honduran opinion that the railroads and ports are not the help they should be for general development. - 16 -

General agriculture

9. The transformation of the still primitive type of agriculture conducted in most parts of' Honduras is of necessity a slow process. Although actual results are yet sriiall, the efforts made in recent years are promising. To this have contributed the various agencies of the Ministry of Agriculture and STICA, (an efficient joint U.S.-Honduran organization) which provide extension services, tools, seeds, selected breeds, fight diseases and sink wells. Through its agricultural credits, its construction of granaries and intervention on the grain market, its coffee and rice mills, the Banco Nacional de Fomento (the government development bank) has also played an important role. !ll this activity which did not exist prior to 1950 is increasing each year, and although it could be oetter coordinated and some errors may have been conmitted tihere is no doubt about its beneficial effects.

10. Best progress has been miade in export products, such as colfee, cattle and cotton. Coffee is now I'ondurast second export, and there has been e pronounced upswing in production in recent years, which will continue at least for some time as high orices called forth extensive new plantings. Although on the whole thie coffee lands of Honduris are not as good as the volcanic soils of its neighbors, there appear to be large physical possibilities for expansion. For instance, a survey by the Banco de Fomeinto revealed that in thle department of Santa Barbara, which produces one-quarter of all -Ionduran coffee, there existed 40,000 manzzaias of suitable coffee lands, of which only 25,000 were planted and 20,000 actually in production.

11. The cultivation of coffee in Ilonduras is orinitive, especially haen compared wjith thaat of neigaboring Il 5alvador. The coffee plantations are small and scattered. IH1ost of tlhem are out of the reach of roads. Prices paid to the growiers seem to be low -- perhaps one-quarter or one-fifth lower titan in El Salvador even though export taxes in that country are higher. This induces some movemnent of Honduran coffee through Salvador -- a process Honduran authorities would like to prevent. One of the pecularities of the coffee trade in Honduras is that the merchants, who botlh buy and finance production, deal with large growers only, these in turn making sub-contracts; generally at lower prices, with the small producers of their 'Localities. Fromn available estimates of production costs, it appears that prices of 40h500 per pound would still be suite profit- able. However, the present uncertainties of future coffee prices may well put an end to new plantings.

12. The increase in livestock, although not as spectacular as that in coffee growing, is nonetheless important. Exports of cattle and meat represenit between one-fourtlh and one-fifth of estimated yearly production, and have not increased rmuch in recent years. There are extensive possibilities of expanding production by the utilization of new lands in the departments of Olancho and Cortos and by employing better practices, especially of feeding, in the old cattle areas. - 17 -

13. While the production of tobacco, a basic casih crop in the small farms of the west, and cotton, a someo.hat newi venture, has increased appreciably, the production of basic food crops -- principally corn and beans-- has not followed the general progress of recent years. Because of bad weather, crops were especially poor in 1954 and during 1955 there has been serious food shortage which had to be relieved by imports. Over the longer run, however, there are good prospects for the increased pro- duiction of food crops, both by bringing new lands under cultivation and by usinc better methods on the lands already cultivated. The use of improved seed is especially promising.

Forestry

14. Forests are one of the greatest natural resources of Honduras. However, only a small part of their -,iealth is presently utilized and this in a wasteful and destructive -manner. Noreover, forest fires threaten the regeneration of forests in wide areas. The rmost valuable of the Honduran lorests are the pine forests in tile mountainous p.trts of the country. covering about two million hecteres of la-ds practically unsuited for agricultural use. Closest to population centers the forests have been destroyed and in recent decades lumber companies -largely working under concessions in national forests- have left belind them a wake of destruction. It is only very recently that some weak attempts have been made to have the concessionaires abide by their concessions and pay their stipulated taxes. Nevertheless there are still great areas of pine forests practically untouched, especially around the Lalke of Yojoa aid in the departments of Yoro and Olancho. These and other forests are, however, constantly threatened by tthe forest fires Alhich rav:age the country during the dry season and originate mostly from. tine clearing of old fields or of ne.. lands by burning. In the tropical north-eastern part of the country thlere are large areas coveered with broad- leaved forests of considerable potential vadue, although mahogany and other more valuable species are largely exhausted.

15. There is great need for better forestry law!s in Honouras, and a new laiw h--s been under pleoaration for some tLnie. .^bove all, howeverx, there is need of better law enforcement, strict sulpervision of the concessionaires and en efficient fire control. Once exploitation and fires are controlled existing forest resources would perait timber production r:many times greater thlanrt'he present one. If, on the oth-Aer handd, present conditions continue most of tlie remaining forest resources will be destroyed in a relatively short time.

Minin- and Industry

16. Mining,, For long stationary, is notw declinin. The production of silver, first in imnportance, has reirained moroe or les3 the sane in the past twenty or tihirty y ers, wihile that of gold increased only slightly. The most imoortant mine in thie country, tihe San Juancito iaine of the New York and Honduras Rosario i-ining Co., closed down in May 1954, after exhausting its ore reserves (treatment of t-ihe last reserves erplains the increase of production in 1953-51). ralthough this company has expanded its operations at another site, its overiall production has declined sharply. - 18 -

Some smaller mines have also slhut down. Nevertheless, no final pronouncemuent on t1ie :rilining future of the country is oossible; not only could new deposits be discovered -- no cormprehlensive survey has ever been made-- but changes in prices or costs could put numerous snall mines back in production.

17. I;ith the exce-tion of a plywood factory in Puerto Castilla, all the industries of the country are to be found in Tegucigalpa (textiles, beer), San Pedro Sula, the second city of the country and perhaps its most active industrial center (cigarettes, beer, appzxel, _ugar mill, saivimills) and in La Ceiba, the headquarters of tho Standard Fruit Co. (vegetable oil ond soap). Consideration has been given, with tihe help of UbN experts, to the construction of a cement mill near San Pedro and to a pulp and paper mill near the Yojoa Lake. lowever, no investors are yet knowin for either of these rather large projects. .11 these industries use mainly local raw mat-rials, with the exception of apparel which uses higher-quality imDorted cloth. In the past fe-w years industry as a whlole has continued expanding, although not very rapidly, and the production of some branchles, such as soap and textiles, has remnained stationary.

Transportation

18. The N4orth Coast is served by wTell-ecquioped railroads, the National Railroad (managed by the Tela R.R. Co.) and the Tela Railroad itself, both of 42 inches gauge, and thae Standard Fruit R.R. of 36 inches gauge. These, however, are primarily designed for servicing the banana plantations. There are no railroads in other parts of the country and roads are deficient everywhiere.

19. The total road network of Honduras is about 2,500 kilometers. In early 1955 there were no paved roads in the country, exceDt for some 30 kilometers recently compleLed on the southern road. Thle Inter-American Highway, still unpaved, crosses only a small part of the country between El Salvador and Nlicaragua.

20. The backbone of the road network of Honlduras is the so-called Inter_oceanic Road. This is composed of a southern branch, from the Pacific to Tegucigalpa, which is now rebuilt, and has absorbed the bulk of road funds in recent years, and a northerri brmnch, fromi Tegucigalpa to Puerto Cortes, wnich needs reconstruction. ZLually important potentially is the UTestern Road thatt would run froma the border of E1 Salvador and link with the Inter-Gce2nic -toad in San ?edro Sula7, giving anl access on the Atlantic to El Salvador a4nd to HIonairas' populous western provinces. At present a section is still miissinE and the rest is in poor condition. In addition to this basic network t iee are branches going from Teguci- galpa to the east and northeast, the latter forming the beginning of a penetration road to the undeveloped northeastern part of the country. inother branch goes froDi Comayagua towards the west, eventually to link- up with the ;,estern Road. Outside of tihe Inter-Americen Highaway, the country has no road or rail cornnection iwith any of its three neiglhbors, although in some cases only a few nmiles are needed to provide a linlc, - 19 -

21. The only ports where ships can dock are the three company ports, Puerto Cortes, Tela and La Ceiba. Puerto Castilla is an excellent natural harbor, furuther to the east. It is a former United Fruit port now owned by the Government. it present, 11owever, facilities are in disrepair and there are no road connections. On the Pacific side, the only Honduran port is ftmapala, on the El Tigre Island, but the use of this port entails three trangshippicnts before goods reach the mainland, To some extent, Hondurai trade makes use of the Sa1vadorean port of Cutuco, on the other side of the Gulf of Fbnseca -- which, as a property of the International Railroads of Central ?.rmerica, is another part of the United Fruit system. - 20 -

(ii) STATISTICAL

TABIE I

'.GRICULTUAL PRODUCTION

Unit 1925-29 1935-39 1945-49 .1950. 1951 1952 1953 195

Corn 1000 metric tons 135 156 190 210 223 182 194 174

Beans ".14 18 19 21 22 18 19 21

Rice " 4 6 11 11 12 11 12 11

Bananas (for 2p.) " 555 384 408 505 522 4865 185 323

Bananas and plarntains" 218 258 308 353 355 366 383 324 (internal consur.ption)

Oranges 21 27 36 41 43 44 46 46

Sugar Cane " 5o 37 51 55 57 62 60 61

Coffee 100 m. tons 51 61 104 139 140 151 183 166

Tobacco tt 11 20 35 38 38 39 42 43

Cotton - 2 6 10 14 15 18 19

Timber 1000 M3 198 ;223 376 469 504 554 (544)

Cattle 1000 Head 590 770 1000 ...1100 '130 1157 (1185)(121

General Index (99) 100 130 143 148 142 150 137

Source: Ministerio de -. ricultura, Seccion de Estudios de Econo,nia .Jgricola (M. Tosco and R. Cabanas). Index - Computed by Mission on the basis of above data and data submitted by the Departanento de Estudios Economicos of the Banco Central. The products included cover L3p of the gross value of agricultural production in 1953. TABLE II

Exports by Main Conmmodities and Areas Millions of Dollars

1925-29 1935-39 19145-49 1950 1951 1952 1953 1954 (prov.)

Total Exportas of bichb 32.9 21.9 47.8 60.6 69.6 66.8 72.6 57.9

Bananas 28.8 18.0 34.6 41.0 43.6 40.2 41.1 30.5 % of total (86) (82) (72) (68) (63) (60) (57) (53)

Coffee 0.5 0.2 2.1 547 9.0 9.4 12.1 14.2 % Of total (2) (1) (4) (9) (13) (14) (17) (25)

Silver 1.3 1.7 2.2 2e7 247 2.7 4.9 Gold 02 08 0.5 1.1 1.3 1.2 147 Oold & Silver, % (5) (u) (6) (6) (6) (6) (9) Timber 0.1 0.1 1.6 2.5 3.4 3.7 3.6

Cattle 0.1 0.1 1.0 1.3 1.6 1.5 1.7

Countries^r areas (in % 100 100 100 100 100 100 100 100 of total)l U.S.A. 84 82 75 75 75 76 79 77 Canada 2 U1 10 8 9 8 4 Europe 13 12 1 1 1 3 2 7 Central Am rica 1 2 U 12 13 7 7 7 Caril5beff - - 2 2 2 5 4 5 Other - 4 - - 1 - - Source; Banco Central de Honduras, except for export by areas 1952-53 for which the source is the "Comercio Exterior de la Republica de Honduras 1953". Because of the difference in sources the figures for exports by areas for 1952-54, on one hand, and for previous years on the other, are not entirely camparble. T A B L E II (contld)

1/ Includes revaluation of banana exports and non-monetary gold.

1 For 1925/29-1951 fiscal years (July 1 - June 30); for 1952-54 calendar years.

Y Including the Guyanas, Venezuela and Colombia..

Iv cV T A B L E III

EXPORTS AND IMPORTS - Value, Volume and Prices

1937 1948 1949 1950 1951 1952 1953 1954 (prov.) Exports ($ millions)* 18.7 56.7 56.9 60.6 69.6 66.8 72.1 57.9 Export prices (1937 - 100) 100 200.9 226cO 244W4 257.3 273.4 (276) (287) Export volume (1937 a 100) 100 151 137 133 145 131 (141) (108) Imports ($ millions) u.6 32.9 37.8 34.7 47.6 57.6 53.9 51.5

Import prices (1937 X 100) 100 183.2 173.0 182.4 205.5 196.6 (196.6) (195) Import volume (1937 - 100) 100 155 187 163 199 252 (235) (227) Terms of trade (1937 = 100) 100.0 122.7 127.0 131.0 124.2 138.1 (134) (146)

* Including non-monetary gold

Source: Value: Banco Central de Honduras Prices and terms of trade: 1937-1952: Banco Central de Honduras; 1953-54: estimated by IBRD Mission. Volume: Calculated on the basis of value and price data. - 24 -

TABLE IV

MONEY SUP?LY

INDICES OF MO1OiEY SIJ?PLY N iTIO11AL PRODUCT AND COST OF LXVI1 G (1949= 100)

Gross National Cost of Year or month lloney Suqplply Product Living

1950 101 '109 106 1951 116 125 117 1952 13h 128 114l 1953 150 143 120 1954 172 136 (Prel.) 130 July 1954 184 128 July 1955 172 150

Source: Barnco Central de Honduras

S The annual figures are averages between 1naoney supply at the beginning and the end of the year. T AB LE V

OVEIRLL BUDGET POSITION J

Fiscal years ending June 30

(MUllions of Lempiras) 1949-50 1950-51 1951-52 1952-53 1953-54 1954-552/ 1955-56. Prel. Budget Current Income 20.0 35.5 40.2 43.6 45.4 Other 027 0.8 0.7 0.3 0.2 Total Revenue 28.7 36.3 40.9 43.9 45.6 47.6 57.0 Current Expenditure?/ 18.1. 20.5 24.4 26.8 33.6 42.6 Investment 6.7 U.? 15.1 19.0 18.5 - Total Expenditure 24.8 32.2 39.5 45.8 52.1 53,2 68.9

Overall Surplus or Deficit L 3.9 f 4.1 1.4 1.9 - 6.5 - 5.6 _ 1.8

Sources Compiled by IBRD Mission from Balances de Liquidaciones Presupuestarias del Gobierno Central 1924-25/1951-52, Liquidaciones del Presapuesto del Gobierno Central 1952/53 and 1953/54, Presupuesto General for 1954/55 and 1955/56 and preliminary results of the fiscal year 1954/55 according to the Banco Central de Honduras. 1/ Government enterprises appear only for their surpluses or deficits. The figures for investment from 1949-50 to 1952-53 are somewhat superior to the figures given in Table X. The reason for this is, that the Balances de Liquidaciones Presupuestarias del Gobierno Central 1924-25/1951-52 which was used as source for this ta le, does not present a breakdown of investment; to obtain a breakdown other sources had to be used (cf. Table X) and it was not possible to arrive at a complete reconciliation between the sources. , These figures represent preliminary results of the fiscal year 1954/55 and therefore do not check with the figures for 1954/55 in the following tables, which are based on the budget and supplementary authorizations. T_A B L E VI

Current Government Revenue 1949-50 1950-51 1951-52 1952-53 1953-54 1954-55 1955-56 Budget Budget

(Millions of Lempiras)

Import Taxes 14,2 16.6 20.5 21.3 21.5 20.6 20.4 Export Taxes 0.8 1.0 1.2 1.4 1,2 1.7 1.7 Incoie Taxes - individuals 0.3 0.5 0.7 0.3 0.9 0.8 5.3 (Incl. other personal taxes)

Income tax - Business 3.4 6.7 6.9 7.4 8.7 7.0 10.4 Excise and other consumption taxes 4.1 4.4 4.7 5.4 5.7 5.7 8.0

Fiscal monopolies 5.0 5.4 5.5 7.0 6.1 7.8 10.1 Income from property 0.3 0.2 0.3 0.4 0.4 0.4 0.4 Surplus or deficit of Government -0.3 0.3 -0.2 -0.1 -0.1 - 0.3 enterprises

Other 0.3 0.3 0.4 o.5 1.1 0.5 0.5 Total Revenue 28.0 35.5 40.2 43.7 45.6 44.6 57.0 (Percentages) Income Tases. 13 20 19 18 21 18 27 Import and export taxes 53 50 54 52 50 50 39 Other indirect taxes 33 28 26 28 26 30 32 Other revenue 1 2 1 2 3 2 2 Total 100 100 100 100 100 100 100 Source: Same as Table V. - 27 -

TABLE VII

CURRENT EXPENDITURE CF THE GOVERI\T4ENT (thousands of Lempir as ) 1953-54 1954-55 1955-56 Budget (2) Budget

Council of State 715 892 819 DepErtment of Interior 3,274 4,254 3,312 Department of Justice 1,156 1,176 1,187 Department of Foreign !ffairs 1,835 2,445 2,691 Department of Defense 5,331 5,298 6,193 Department of Public Education 4,992 5,104 5,334 Department of Economy and Finance 3,827 4,342 5,708 Department of Public Works 4,118 4,802 5,161 Deoartment of Health and lW'elfare 3,835 4,454 5,316 Department of Labor -- 310 1,138 Department of Agriculture 2,116 2,774 2,993 Pensions 749 842 912 Justice 672 766 876 Supplementory Appropriations for -- 341 -- various Ministries Other current expenditures -- 1,545 (1) -- Current deficit of goverinment 991 1,254 1,008 establishnents 33,611 40,599 42,648

Source: Compiled by IBRD Mission from Liauidacion del Presuouesto del Gobierno Central 1953/54, Presupuesto General for 1954/55 and 1955/56 and supplementary authorizations for 1954/55.

(1) Cancellation of Internal Debt 1,059,000 Lempiras Flood Emergency Fund 466,ooo

1,545,000

(2) including supplc-hentary appropriations up to the end of December 1954. - 28 -

TABLE VIII

GOVERIZENT REVENUE .lND EXPEYDITURE IN RELATION TO GROSS NATIONAL PRODUCT 1953-5h 1954-55 1955-56 Budget Budget

EXPENDITUTRE (thousands of Lempiras)

Current Expenditure 33,611 4o,599 42,648 Investment 18,483 13,635 26 226 T O T A L 5094 54,237

IN PER CENT:

Current E*penditure 64.5 74.8 62.0 Investment 35.5 25.2 38.0 T O T L 100.0 100.0 100.0

EXPENDITULE IN RELDTIOIN TO THE GROSS NATIoNAL PRODUCT (%) 9.8 10.5 13.0

Current Expenditure 6.3 7.9 8.0 Investment 3.5 2.6 5.0

REVENUE IN REL,.TI07 TO GROSS N.TIONAL PRODUCT (T) 8.6 8.7 10.7

GROSS Ni-.TIOri.A'L PRODUCT AT WRKST PRICES (Estimate) (I.illion of Lempiras) 530 (1) 515 (2) 530 (2)

SOURCE: Same as Table VII

(1) At current prices (2) At 1954 prices T A B L E IX

GOVER14MENT INVFSTMENT

(Thousands of Lempiras)

1949-50 1950-51 1951-52 1952-53 1953-54 1954-55 19555-56 2/ Budget Budget Interior 128 1,198 811 1,321 447 570 575 Construction of Public Buildings 128 1,198 811 1,321 447 470 475 Paving of streets in San Pedro Sula - - - - - 100 100

Health and Assistance 340 364 350 213 2 100 1,120 General Hospital (extension & equipment) 99 305 Construction of a building of health 95 Studies and building of a National Hospital 154 5°° Other hospitals and health centers 22D

Public Education 630 361 1298 595 456 196 13° Construction and extension of schools 225 Construction of primary schools 450 Education equipment 55 Economy and Finances 72 82 169 262 617 710 650 Moles, custom and light houses 72 82 169 262 617 410 250 Alcohol factories - - - - 300 400 ,Roaday 1,430 2,040 5,166 7,365 10,160 5,621800

z5tudies - - - 253 Ifjteroceanic road 209 641 3,327 5,733 4,725 Ot?her new roads 986 1,182 1,727 1,632 2,895 Bridges 235 217 112 - 492 Equipment and vehicles _ - - 1,795 -2-

1949-50 1950-51 1951-52 1952-53 1953-54 1954-55 1955-56 Budget Budget

Other Public Works 74 503 1,002 1,438 2,016 1,806 6,632 Bridges (public works) - - - - 381 232 - Airports - 6 53 490 740 275 710 Aviation equipment - - _ 49 - 50 Rio Lindo Project - _- - - 4,0006/ Other electrical plants studies - - - 84 200 200 Waterworks 62 243 571 1,046 345 699 1,020 Popular housing ------250 Paving of streets in Tegucigalpa 12 254 378 392 417 400 200 Aerial map ------200 Agriculture - 123 291 386 75° 66 4,000 °

Drainage - irrigation - 39 258 233 350 2,400 Coffee development program - - - - - Agricultural machinery program ------350 Defense of vegetation - - - - - 100 Forest techniques and studies - - 75 Penetration roads - - - - - 75 Equipment for sinking wells - - - - - Colonization 140 - - - - 28 35 200 Mineral resources survey ------100 Fish program ------45 Artificial insemination _ - - - - - 200 Various buildings and equipment - 123 252 128 489 275 255 Government er.terprise3 110 189 896 1,355 418 ,204 310

WIater and Light Company 98 175 301 288 309 204 280 Electrical communications 12 14 595 1,067 109 30 -3-

1949-50 1950-.51 1951-52 1952-53 1953-54 1954-55 1955-56 Budget Budget Transfers to the Banco Nacional de Fomento 915 3,206 1,349 1,700 2,571 2,194 2,250

Rehabilitation of the North Coast - - - 1,000 Purchase of furniture, equipment & vehicles - - - - 795 569 959 Other 1,842 1,548 16/11 - Total 5,541 9 1,984 14363 5 Source: Compiled by IBRD Mission from Informe de la Secretaria de Hacienda, Credito Publico y Comercio 1952/53, Liquidacion del Presupuesto del Gobierno Central 1953/54, Presupuesto General for 1954/55 and 1955/56 and supplementary 1954/55. authorizations for

Roads - Excludes maintenance expenditure (thousands of lempiras) 49-50, 114; 50-51, 260; 51-52, 301; 52-53, 165; 53-54, 2,127; 54-55 (budget) 2 , 837j 55-56 (budget) 3,168. Includes supplementary appropriation up to Feb. 24, 1955.

/ Includes Lps. 2 million to be covered by an externaL loan and not included in the budget. i Unassigned amount to be appropriated by the Chief of State for various investment purposes. - 32 -

T.ABLE X

GOVERINMT INVESTIE1T KD ITS FINRNmING

(Thousands of Lempiras)

1953-54 1954-55 1955-56 Budget Budget

CURRENT SURPLUS

Current Revenue 45,554 44L603 56,962 Current Expenditures 33,611 40,5909 42,648

Surplus on current account 11,943 4,004 14,314

INM]STh1ENT

In-restment of Government departments 15,277 11 237 23,611 Investment of Government enterprises 635 204 365 Transfers to Development Bank 2,571 2,194 2,250 T 0 T ^. L 18,483 13,635 26,226

FINA IITG

Current Surplus 11,943 4,004 14,314 Lxoected &x-ternal Borrowing for Rio Lindo Project -- -- 2,000 DNet BorrowTing and cs4anges in cash balances 6,540 9,631 9,912

T 0 T A L 18,483 13,635 26,226

SOURCE: Same as Table VIII

1) A part of this deficit is expected to be financed by external loans for road construction and agricultural rmiachinery. - 33 -

T.ABLE XI

GROSS CAPITA. FORMA;TION

Million of Lerpiras

1948 1949 1950 1951 1952 1953

Fornation of fixed assets - private enterprises (Domestic) 25.3 23.6 29.3 34.4) 65 2 (Foreign) 21.1 15.7 20.2 20.2) 6 Formation of Goverrnent & PubDlic Enterprises 5.9 8.0 12.6 18.6 18.8 Increase in inventories 7.2 3.8 7.7 16.2 15.4 13.2

Total 47.1 56.1 54.9 76.4 86.7 97.2

Total excluding inventories 39.9 52.3 47.2 62.2 73.3 84.o

Financing:

Domestic savings (individuals & household) 21.5 21.8 33.0 26.6

Undistributed profits 1.6 1.4 2.8 3.6

Government savings 6.1 13.2 15.2 14.1

Depreciation 20.0 19.3 24.0 26.3

Net imports of goods and services 6.9 -0.7 3.4 18.2 56.1 54.9 7d.4 c37.7

Gross capital formation in % of gross domestic product (at rnarket prices) 12.3 13.5 12.1 15.3 17.3 17.0

Excluding inventories 10.4 12.6 10.4 12.2 14.3 14.7

Source: 1949-1952: Tosco, Estadisticas del Producto e Ingreso Nacional 1925;52 1953: Bainco Central de 7Ionduras. T A B L E XII

BALANCE OF PAYMENTS

(millions of lempiras)

1947 1948 1949 1950 1951 1952 1953 1954

A. Current account Exports 101.6 112.5 114.7 120.4 138.0 130.3 143.2 114.1 Imports 67.8 65.8 75.7 69.4 94.2 116.4 109.3 103.1 Trade Balance 33.3 46.7 39.0 51.0 43.o 13.9 33.9 11.0

Transportation and insurance - 8.0 - 7.4 - 8.7 - 8.2 - 8.5 - 8.9 - 10.7 - 8.6 Direct investment income -44.8- -45.1 -36.8 -41.4 -37.8 -27.1 -27.2 - 8.4 Other interest - - - 0.3 0.3 0.7 1.0 Other services - 1.1 - 0.8 - o.6 - 1.0 - 0.9 - 0.5 - 0.4 - 0.7

Net goods and services -20.1 - 6.6 - 7.1 0.4 - 3.1 -22.3 - 3.7 - 5.7

B. Private capital movements

Donations - 1.8 - 1.9 - 1.6 - 1.8 --- 1.8 - 1.3 - 1.4 - 1.8 Long Teim 18.8 9.2 10.4 0.3 24.2 23.8 11.5 8.6 Short Term 0.3 - 0.8 - 1.5 5.0 4.3 2.7 0.7 1.4 Total 17.3 6.5 7.3 3.5 26.7 25.2 10.8 8.2

C. Official capital movements

Grants 0.2 0.2 0.1 0.2 0.3 0.3 0.3 0.4 Amortization - 1.0 - 0.9 - 1.5 - 1.4 - 0.4 - 0.3 - 0.5 - 0.4 New official loans 0.2 0.1 1.0 - 0.5 0.4 - - Subscriptions to IMF and IBRD - - - 0.2 - - - 1.0 - Total - 0.6 - 0.6 - o.6 -1.2 0.4 - 0.6 - 0.2 -

D. Net errors and omissions 0.6 1.6 1.1 3.4 - 6.1 - 1.7 - 4.7 1.7 T A B L E XII (conttd)

1947 1948 1949 1950 1951 1952 1953 1954

E. Surplus (f) or deficit (-) - 2.9 0.9 0.7 6.1 17.9 0.6 2.2 4.2

F. Official compensatory movements

Commercial bank short term assets 1.7 - 3.0 2.0 4.5 0.6 1.5 - 0.2 - 1.4 Central bank short term assets - 0.9 0.2 - 3.3 - 13.0 - 15.4 - 2.2 - 2.7 0.4 Central bank securities 2.0 1.9 0.6 2.4 - 3.1 0.1 0.7 - 3.2 Monetary gold ------

Total 2.8 -0.9 -0.7 - 6.1 - 17.9 - 0.6 -2.2 -4.2

Source: 1947-1952: IMF, Balance of Payments Yearbook 1953-1954: Banco Central de Honduras