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 depres- sion and diseases during the thirties. Coffee and timber lave risen as impor- tant 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 produc- tion 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 develop- ment. 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 indus- try 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 pro- duction 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 pro- duction 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 consider- able 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, popu- lation 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 neigh- bors. 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