Dmument of

The World Bai

FOR OmCAL US ONLY

Rqut N. P-5923-HO

REPORT AND RECOMENDATION

OF THE

PRESIDENT OF E

INTERNATIONAL DEVELOPMENT ASSOCIATION

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED AGRTCULTURAL SECTOR ADJUSTMENT CREDIT

IN AN AMOUNT EQUIVALENT TO

SDR 43.3 MILLION (US$60.0 MILLION)

TO THE

REPUBLIC OF HONDURAS

JULY 14, 1993

MICROGRAPHICS

Report No: P- 5923 HOType: PR

This document has a restricted distribution and may be nsed by recipients only in the performance oftheir official duties. Its contents may not othenrise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS(as of June 30, 1993)

Currency Unit = LempiraUS$1.0 = L7.00L 1.0 = US$0.18SDR 1.0 = US$1.38612

On June 19, 1992, the Central Bank introduceda freely floating exchange rate regime.

FISCAL YEAR

January 1 to December 31

GLOSSARY OF ACRONYMS

AFE - Public Forestry SectorAMDP - Agricultural Modernization and Development ProgramAMI - Intensive Management ProgramAGSAC - Agricultural Sector Adjustment CreditBANADESA - Agricultural Development BankBANASUPRO - National Basic Products SuppliesBAS - Business Advisory ServiceBCH - Central BankBMI - Mother and Child CouponBMJF - Woman Head-of-Household CouponCACM - Central American Common MarketCEM - Country Economic MemorandumCFF - Compensatory Financing FacilityCG - Consultative GroupCIDA - Canadian International Development AgencyCODA - Committee for Agricultural DevelopmentCOHDEFOR - Honduran Corporation for Forestry DevelopmentCONAMA - National Enviromnental CommissionCPAR - Country Procurement Assessment ReviewCSIR - Country Strategy and 1Iplementation ReviewEAP - Environmental Action PlanEEC - European Economic CommunityENEE - National Power CompanyESAC - Energy Sector Adjustment CreditESAF - Extended Structural Adjustment FacilityESW - Economic and Sector WorkFFI - Formal Financil Intennediaries

101R OIICM& USE ONLY

PHIS - Honduran Soci Invesmen FundFLAS - Foreig vestment Advisory ServiceGATT - General Agree_m on Tariff and TradeGDP - Gross Domestic ProductGNP - Gross Nadonal ProductG00H - Government o HondasGT: - Germa Association for Technical CooperationIlDB - hnter-American Development BankIDF - Is Development FundIFPC - International Finance CorporationHHMA - Hondura Agricultural Market InstuteIMP - Interational Monetary FundINA - National Aga InstiteLMA - Law for the Modernization and Development of the

Agriculral SectorLIA - Agrrian Reform LAwMIGA - Multlateral Inveatm Guarntee AgenyNAFTA - North Amedcan Free Trde AgreementNEAP - National Environmnl Action PlanNGO - Non-Goveramental OrganizationPFMU - Public Forest Management UnitsPFP - Policy Framework PaperPOA - Anual Opeating ProgramPRAP - Family Assistn ProgramPS? - Policy Support ProgramRUTA - Regional Unit for Technical AssistanceSAC - Stuctural Adjustme CreditSAL - Strucral Adjustment LoanSANAA - Public Water Udlity CompanySlTC - Standard International Trade ClassificationSOE - Statement of ExpenduresSRN - Secretriat of Naural ResourcesTOR - Terms of ReferenceUNCTAD - Unied Nations Confer on Trade and DevelopmentUNDP - United Nations Development PrgrmmeUPSA - Agriultural Sector Planing UnitUSMD - United States Ageny for Ieational DevelopmentWID - Women in Developmet

Thb document hs a resucted distribution and may be used by recipients only in the prfornwnceof their officW dutis Its contents may not otherise be diclosed without World Bank authorLi.,~

HONDURAS

AGRICULTURAL SECTOR ADJUSTMENT CREDIT

PART I - COUNTRY POLICIES AND BANK GRO)UP ASSISTANCE STRATEGY ........ 1A. Historical Perpective and Recent Performmce ........................ 1B. The External Environment ..................................... 4C. Country Development Objectives and Policies ......................... 6D. Bank Group Country Assistance Strategy ............................ 14E. Summary Assessment ........................................ 19

PART II - THE AGRICULTURAL SECTOR PROGRAM ........................ 19A. Sector Overview ........................................... 19B. Sectoral Development Program and Recent Reforms ...................... 20C. Land Tenure ............................................. 21D. Forestry ................................................ 23E. Rural Fimmce ..................... ........................ 26F. Government Expenditure and Public Administradon ..................... 28

PART III - THE PROPOSED AGRICULTURAL SECTOR ADJUSTMENT CREDIT ....... 29A. Bank Experience and Rationale for Lending for Agriculture ................ 29B. Tranche Release Conditions .................................... 30C. Procuremet, Disbursement and Auditing ............... I ............. 31D. Benefits, Impa on Environment and Risk ........................... 32

PART iv - RECOMMENDATION ....................................... 35

LIST OF TABLES AND BOXES

Table 1 - Selected Macroeconomic ndicators .................................. 4Table 2 - Honduras Country Portfolio ...................................... 17

Box 1 - Women in Development ......................................... 7Box 2 -Safety Net Operations . ......................................... 8Box 3 - Environmen Strategy ......................................... 12

LIST OF ANNEXES

1. Standard Macroeconomic Data2. Policy Matrix3. Letter of Agricultural Development Policy4. Agricultral Sector Reforms5. Policy Support Program6. Environmental and Economic Impact Assessment c 'the Changes in Forestry Policy

Embodied in Law 31-927. Supplemental Loan Data Sheet8. Action Plan. Implementation Progress

This report was prepaed by Ms. G. C a (Task Manager, LAAG), with conribu n from Ms. C. Kimes andMesrs. D. Cotlear and J. Kuhn (LA2C2), Messrs. A. Peller, H. Hevia, R. Ravettio, G. Sclrooder, D. Blaer and T.Downing (Consudta). Ms. Patricia Gross asised with the wordrocessig of this reporL The Divs Chief isMichael Baxter and the Countrv Denartmet Dirtor is Edliht Sesua.

HONDURASAGI[CULTORAL SECTOI ADJUSTM T CRlDIT

CREDIT AND PROGRAr SUMMR

Borower: Republic of Honduras

Amount: SDR43.3 million (US$60.0 million equivalent)

E 4 1eoft Agac: Ministry of Natural Resources

Baes: Rural pouiaton engaged directy or indirecdy in agriculural and forestryactivities.

Terms: Repayment in 40 years, including a 10 year grace period on standard IDAterms.

Descripio: The proposed credit would support the Government's medium-ermAgricultura Sector Modenation and Development Program which isdesigned to: (a) improve land use by supporting modifications to the AgrarianReform Law (LRA) to seure land propeny rights, sUppoIt the development ofland markets and consolidate the process of the agrarian reform; (b) lay thebasis for a sustinable management of the countrs rich forest resources byimproving forestry property rights and reorienting the role of the publicfoestry sector towards the protection and management of the forest and thepromotion of biodivesity conservadon; and (c) help improve sector planingand coordinaton by strngein and making better use of the budgeingprocess. It will also consoldate reforms in trade, agricultural pricmg policy,gran markeing, and rural finamce implmented during 1990-1992 andsupported by the Second Strucural Adjustmnt Loan (Loan 3257-HO).

The proposed Agriculturl Sector Adjustent Credit (AGSAC) is exected tobenefit Honduras' agicultural sector through: (a) improved resource ailocaionresulting from the elimination of disortions associed with price and tradepolicies, credit subsidies, and regulations and legislation related to land useand forestry; (b) improved inv climate by supporting cages in theland and frestry legislation to guarantee security of land tenure and privateproperty rights in forest resources; (c) inreased employment as a result of theexpected acceleation of agricultural growth and the expansion of more laborintensive activities; (d) laying the basis for a more rational management offorest resources and better protection of the forest !y improving the system ofland and timber property rights and lminatn legal provisions that promotedeforestation; and (e) supportg equal rights for womet i the agrrianreform process and credit by elimiing discriminatory provisions in theacces to land. As a result of past and proposed adjustment actions inHonduras, the agriculual sector is expected to grow at an average rate of

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more than 4.0 pecent per year during project implementation compared to 3.0percent experienced during the previous decade.

ML. There are three major risks associated with the proposed operation. First, theintroduction of policy reforms may prove difficult to implement becase ofpublic opposition, particularly since the country has entered its presidentialelection year. To minimize this risk, the introduction of of key policyreforms were required prior to Board Presentation. (Satisfactorymodifications to the land tenure and forestry laws and regulations have beensanctioned, and te institutions responsible for overseeing the implementationof the new policy implementation are being restructured satisfactorily).Govemment (GOH) held extensive discussions with farmers' groups andazsociations and the private sector to seek consensus on the proposed reformsof the Law for the Modernization and Development of the Agricultural Sector(LMA) and its regulations. In addition, GOH has been conducting a series ofseminars explaining the objectives and implications of the proposed policychanges. Second, GOH has a weak institutional capacity. Policy reformssupported under the AGSAC will substantally reduce the role of the state byehiiinatng functions related directy to production and marketing. ScarceGOH manpower resources would be better utilized in a regulatory role and asa ptrveyor of key services. GOH has requested the donor community toreadjust their existing technical assistance projects to strengthen its capacity toimplement the new agricuiral legislation. In addition, GOH is carrying outa Policy Support Program (PSP) to strengthen its policy planning,management, implementation and donor coordination capabilities. A thirdpossible risk is that initially, the process of returning property rights of theforest to landowners could accelerate harvesting until the new system istrusted and Honduran Corporation for Forestry Development (COHDEFOR)is fully restucured and empowered to monitor and enforce rational harvestingon public and private forest lands, and safeguard protected areas. In addition,and due to the poor land information system and deficiencies in landregisration, the process of reurning forest rights to forest landowners couldinduce illegal occupancy of government land and the displacement of settlersfrom private lands. To minimize such possible impacts, supported by theAGSAC, GOH: (a) is supporting the implementation of an arbitration systemto protect famers' legal and de facto rights; (b) has spelled out in theregulations to the LMA the steps for individuals and communities to take tocaim forest rights; (c) will intensify cadastral work and the identification ofareas suited for forest development; and (d) is reorganizing the public forestadministtion empowering it to monitor and enforce the new policy.

1 X _ : The proceeds of the IDA credit would be disbursed in ftfree tranches:SDR18.1 million (US$25.0 million equivalent) upon effectiveness, SDR10.8million (US$15.0 million) after a satisfactory performance review anticipatedfor June 1994, and the remaining SDR14.4 million (US$20.0 millionequivalent) after a satisfactory performance review anticipated for March

1995. RPoative fincing wi be peottd for eligible expeduInced beginig four months prior to the credt siging date up to anamount equivaet to SDR8.66 mdllion (US$12.0 million equivalent). TheClesing Date will be June 30, 1995.

Schedue dD;sbwse_ : llDA FdYear T T

-SS milion

Anual 40 20Cumulative 40 60

Financing Plan: The loe-American Devdeopmnt Bank is co-financing the same AgriculuralModenization and Delopment Prom to be supported by the proposedAGSAC with a loan of US$50.0 million

A pfrod kReporit: This is a combined Staff Appras u Presiden's Report.

L- 14HNISACARSAYUP

Juy14. 99

PERT AND RECOMMENDATION OF THE EDENTOF THE ATIONAL DEVELOPNT ASSOCIATION

TO THE EXECTIVE DIRECTORS ON APROPOSED AGRICULTURAL SECTOR ADJUSTNT CREDIT

IN AN AMOUNT EQUIVALENT TO US$60.0 MILLIONTO THE REPUBLIC OF HONDURAS

1. I submit the following report and recommendations on a proposed Agricultural Sector AdjustmentCredit (AGSAC) to the Republic of Honduras for the equivalent of SDR43.3 million (US$60.0 millionequivalent) in support of the implementation of an Agricultural Modernization and Development Program(AMDP). This program is described in the Letter of Agricultural Developmert Policy (Annex 3). The creditwould be on standard IDA terms, with 40 years including a grace period of 10 years. The program is beingcofinanced with a US$50 million loan from the Inter-American Development Bank (IDB).

PART I - COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEGY

A. Historical Perspective and Recent Performance

Background

2. Honduras ranks among the least developed countries in the Western Hemisphere. The economy isrelatively small (with an estinated GDP of about US$3 biflion), and highly sensitive to changes in theexternal environment because of its dependence on a few vommodities and on donor assistance. Per capitaGNP (1992) is estimated at U'$580, and poor social indicators reflect this low level of development. Aboutone-third of the population is estimated to live in extreme poverty. Agriculture accounts for almost 25percent of GDP and generates over 80 percent of merchandise exports. Banana and coffee account for over60 percent of export receipts, although the economy has been diversifying rapidly over the past three yearsinto non-traditional export commodities such as fruits, vegetables, and shrimp. Forestry potential is substan-tial, but requires sound policies and careful management to ensure sustainable development. Manufacturingand mining combined also account for about 25 percent of GDP. Manufacturing was traditionally dominatedby agro-industries, but has diversified in recent years to include apparel, electric appliances, leather goods,and other exportables, produced mainly for the US market. Honduras has considerable mineral resourcesand hydrocarbon potentiai, but oil exploration has been limited. The service sector (including public adminis-tration) accounts for about 50 percent of GDP.

Historical Perspective

3. 1980W1989. During the 1980s, Honduras experienced a steady deterioration in the rate of economicgrowth, accompanied by increasing trade and fiscal imbalas. In the 1970s, GDP growth averaged 4.5percent annually, stinulated by high public and private expenditures. While exports grew at an averageannual rate of only 3.7 percent, imports grew rapidly throughout the 1970s, reaching more than 40 percentof GDP by the early 1980s. The combination of strong domestic demand and sluggish exports resulted inthe emergence of balance of payments problems, which were managed in the early 1980s by recourse tobilateral and multilateral credit. However, in the absence of sustained policy reforms, economic performancedeteriorated. During the 1980s, real annual GDP growth declined to an average of 2.5 percent, nationalsavings dropped significantly, and public sector deficits averaged 8 percent of GDP. Between 1980 and 1989,Honduras' total external debt more than doubled, from US$1.5 billiou to US$3.3 billion, of which 70 percentwas owed to official creditors. When exernal sources of finance began to dry up in the late 1980s, theGovernment resorted to external arrears and domestic sources to finance the public sector deficit. Thisintensified pressure on the balance of payments and provoked an increase in inflation. By the end of 1989,annual inflation had reached 20 percent (wholesale price index), the parallel exchange rate was twice the offi-

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cial rate, external arrears amounted to US$620 million, and the country was cut off from intemnational credi-tors.

4. Behind the poor economic performance of the 1980s and the crisis of 1989 lay deep-seated structuralproblems. Honduras' development strategy had been based on import substitution behind high protectivebarriers and had relied on extensive Government intervention via credit subsidies, price controls, and taxincentives. This had resulted in: (a) a large and inefficient public sector; (b) extensive administative controlsover economic activities, discouraging efficient private sector development; (c) an export sector dependenton a few agricultural products; (d) a trade regime that discouraged the growth of ntn-traditional exports; and(e) inefficient financial uatermediation, contributing to low domestic savings. Little attention had been givento investing in human rescurces with the consequence that labor force skills and capacities were largelyunderdeveloped. Successive governents were slow in taking corrective measuies to address these structuralproblems, because Honduras received record inflows of foreign assistance throughout the 1980s, that camou-flaged the seriousness of underlying economic trends. As much of the assistance was linked to the 'ContraWar" being fought along the Honduras-Nicaragua border and structural constraints were not addressed, it didrelatively lilde to contribute to an expansion of the country's productive capacity and economic advancement.It did, however, support an expansion in the size of the military establishment and help increase the latter'salready considerable influence in domestic politics. The Government elected in November 1989 was thereforefaced with the delicate task of introducing long overdue economic reforms while forging a new politicalbalance between civilian and miltay authorities.

5. 1990-1992. The current Government, which took offlce in January 1990, was committed toimplementing a far-reaching economic reform and poverty alleviation program. The basic goals of theadjustment program were to: (a) re-establish macroeconomic stability; (b) reduce the size of the public sectorand strengthen public sector management; (c) improve the incentive framework for private investors throughderegulation, trade liberalization, and financial sector reform; and (d) shift resources into priority socialprograms, and establish a safety-net for the poor during the adjustment period. The Govermment was alsointerested in normalizing its relations with the international financial community as quicldy as possible, withthe objective of resuming needed inflows of capital for investment, restructuring the country's external debt,and having access to technical and financial assistance for its reform program.

6. The first phase of the economic reform progrm was introduced in March 1990 when the Governmentsubstantially reduced maximum import tariffs, eliminated most tariff exemptions and surcharges, devaluedthe lempira by 100 percent, approved major tax increases to enhance revenues, and attempted to rein incurrent expendituras. The impact of these measures, when combined with worker strikes, flooding, and oilprice increases linked to the Gulf crisis, was a contraction in economic output in 1990. The economyregistered only 0.1 percent real growth in 1990, the fiscal deficit reached 8 percent of GDP, the currentaccount deficit grew sharply to 11 percent of GDP, and inflation rose to about 36 percent, fueled by priceadjustments and expansionary fiscal policies. In 1991, the Government deepened and extended its reformcfforts, with major policy changes including: introduction of flexible exchange rate management and furtherreduction of tariff levels and dispersion; elimination of most restrictions on domestic and foreign trade;removal of price controls on agricultual commodities; reforms in pricing of public services and improvedtax collection; liberalization of lending interest rates; eliination of subsidies on all Central Bank rediscountcredit lines; and reclassification of commecial bank portfolios and strengthening of loan loss provisioningrequirements. Restructring programs were introduced for major public enterp.ises which had been signifi-cant contributors to the fiscal deficit. In mid-1992, the Government authorized coimmercial banks and foreignexchange houses to freely buy and sell foreign exchange, moving for all intents and purposes to a floatingforeign exchange regime.

7. The cumulative impact of these reforms began to show positive results during the second half of 1991.In 1991 real GDP grew by an estimated 3.2 percent, the fiscal deficit shrank by more than 4 percentagepoints to about 3.7 percent of GDP, and inflation fell to about 22 percent. The current account deficitremained virtually unchangeJ, however, at 11 percent of GDP. Data for 1992 indicate that economicperformance continued to improve. Inflation only amounted to 6.5 percent, and CDP grew by 4.3 percent.The fiscal deficit, however, deteriorated daring the course of the year to about 4 percent, due to an increasein public investment equivalent to 0.6 percent of GDP. Selected macroeconomic indicators for 1990-92 arepresented in Table 1.

8. The Government complemented its macroeconomic adjustment efforts with a series of detailed sectoralreform programs. Common to the different sector reform initiatives has been the emphasis on scaling backdirect State imervention and creating a favorable environment for private sector development. Acomprehensive energy sector reform program was introduced in late 1991. Its major elements comprisedstrengthening sector planning and policy coordination, aligning electricity tariffs with long-run marginal costs,improving management and operational efficiency of the national power company (ENEE), and graduallyliberalizing the petroleum sub-sector. To create a more favorable environment for private sectordevelopment, Congress approved a new Investment Code in May 1992 that streamlined administrativeprocedures for investors, conferred the same rights and privileges on foreign and domestic investors, and lib-eralized dividend and capital repatriation regulations. The Government has also begun implementing a majorreform progiam in the agricultural sector to complement the trade and pricing measures introduced underthe structural adjusmexnt program. This program, to be supported by the proposed AGSAC, is discussed inPart n.

9. The Government cleared Honduras' accumulated external debt arrears in two stages. The vastmajority of multilateral arrears was paid off in mid-1990, and the bulk of bilateral arrears was handled in thecontext of a Paris Club rescheduling agreement in September 1990. Honduras had been declared IDA-eligiblein August 1990 on the basis of its heavy indebtedness, low income level, and marginal creditworthiness. Inrescheduling arrears and debt service, the Paris Club extended its most generous terms for highly-indebted,lower middle-income countries. Honduras was reclassified as an IDA-only country in September 1991, andin February 1992, the International Monetary Fund (IME) placed it on the list of countries eligible to borrowfrom the Extended Structural Adjustment Facility (ESAP). Following the approval of a 1992-95 ESAFprogram in July 1992, the Paris Club agreed in October 1992 to reschedule debt service falling due duringthe ESAF period, on enbanced-Trinidad terms. As part of that agreement, the Paris Club offered to cancelone-half of Honduras' US$1 billion outstanding debt at the end of the ESAF period, if the Governmentsatisfactorily implements the three year ESAP program. The Government has also worked with commercialbank creditors to retire external commercial debt via debt conversions, and has recently applied to the IDADebt Reduction Facility for assistance in implementng a commercial debt reduction operation.

Recent Performance

10. The significant progress made since 1990 in eliminating major macro- and sector-level distortions pro-vides a good foundation for cond improve in economic performance during 1993 and beyond.GDP growth in 1993 is expected to be reasonably solid at 4.3 percent. However, fiscal performancedeteriorated sharply in the first half of 1993, reflecdng in part pressures arising from elections scheduled inNovember. Public sector expendituMs (both current and capital) rose to unsustainable levels, resulting in afiscal deficit equivalent to 5.9 percent of GDP on an anual basis and reflected in an increased inflation rateof 12 percent. Once this predicament became apparent to them, the Authorities acted swifty to bring thefiscal situation back under control. In close collaboration with the IMF, they developed a set of correctivemeasures which are expected to reduce the deficit to 3.8 percent of GDP for 1993 as a whole. Principalactions include introdhution of a tax on revalued assets, a major reduction in fuel subsidies, selective cutting

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of capital expenditures, and increasing reveme from import duties through a higher customs evaluation factor.(this is, in essence, the exchange rate at which imports are valued for duty collection purposes). Furtiermeur will be taken to reduce the 1994 fiscal deficit to 2 perent of GDP. These will include the virtualelimination of fuel subsidies, a broadening of the sales tax, and the introduction of toll charges on main roads.

D. The 1E tnlEnonme

11. The outcm of Honduras's economic progrm is closely linked to developments in the externalt ,irnmm given the coutry's dwepdence on twfo prkany export oomodities and on large foreign capital

infows fhom private investors and the donor community. The critical variables for the remainder of thi8decade inclue price movemens for banant and coff*e (as tbe account for over 60 percent of exportearnhng), a-ado policies of its mqjor trding parmer, foreign investr decisions, anld tellds in officiam8is e, pardculaly from bilateal sources Overall, edW ftreds in the eatml environmenlt would

appea to placserious cons bt on Honduras' developmet prospects over the mediun term,wtpotenly sevee iVmpat on domestic fincme and Governmen revemlue. Cbmequetly, sounld ecownumc

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management and continued domestic reforms will be even more critical than would be the case in a morefavorable external environment.

12. Bana exports will be affected by the current European Economic Community (EEC) plans to imposeimport quotas on Latim American exporters. Although estimates of the net impact of these measures onHonduran exports vary, the banana industry has canceled substantial investment plans in the pipeline forHonduras, and the Government anticipates dtat the volume of exports will stagnate at its 1992 leve' (whichwas substantially lower than that achieved in 1988). It is also likely that the EEC import restrictions willdepress world prices, leading to the possibility of firther revenue losses. Banana exporters are aggressivelypursuing alternative market outlets in the Far East and in Eastern Europe, but even with these expansionpossibilities, market prospects appear bleak in the medium term.

13. International prices for Honduran coffee were at their lowest average ever in 1991 and 1992. Presentindications suggest that they will remain at this low level for 1993, and that they will recover at a slow pacethereafter. However, any possibility of a significant price increase during the first half of the 1990s is likelyto be dampened by the release of stocks in the coffee importing countries. Real prices are projected tostrengthen in the second half of the 1990s.

14. One of the major factors that will determine the success of Honduras' economic program will be theability to attract private fore investmnt for export-oriented ventures (e.g., agriculture, tourim, m ,apparel) as well as for domestic production and service delivery (e.g., power, telecommunications). Althoughthere has been growing foreign investment in Honduras in recent years, particularly in Free Trade/IndustrialProcessing Zones, there are now concerns that potential new investment might be diverted to Mexico if theNorth Amencan Free Trade AReement (NAFTA) is ratified and implmented. To increase Honduras'atractiveness as an investment site and facilitate internationl trade opportunities, the Government has beenactivc in pursuing membership in the General Agreement on Tariffs and Trade (GATI) (its membershipapplication is under review) and in negoiDang free trade agreements with other Central American countriesin the famework of the Central American Common Market (CACM). While these trade initiatives will help,Honduras' export prospects will remain limited for the foreseeable future.

15. With competing demands for assistance from Eastern Europe and the former Soviet Union, as well asfor supporting the peace process in El Salvador and Nicaragua, official transfers to Honduras are decliningand are expected to continue to fall during the rest of the decade. Debt rescheduling will be an importantcomplementary ttvi iur relieving pressures on the balance of payments and releasing fimds for productiveinvestment. The Paris Club has rescheduled Honduras' official bilateral debt on highly concessional terms,and, as indicated in para. 9, has offered to forgive one-half of its official debt in 1995, subject to successfulcompletion of the ESAF. Multilateal lending, primarily from the Iter-American Development Bank (IDB)and IDA, has been increasing in recent years, but is not expected to be sufficient to compea for the dropin bilateral assistance and to close the external financing gap (see para. 41).

16. Given the fragility of the balance of payment position, a marked deterioration in any one of theseexternal variables could significantly affect the country's ability to invest for the future and to service itssizable external debt. ConseqUenty, HondUras will continUe to depend heavily on the internationalcommunity and on contnued IDA assistance for at least the next 3-5 years. To meet the challenges posedby the difficult exeral enviroment, the Government has been actively promoting trade liberalization andprivate sector investment policies that are resting in export diversification and increased revenues from non-traditional exports. IDA has encouraged this policy orientation, and worked closely with donors through theConsultative Group (CO) to increase concessional aid flows.

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C. Country Development Objectives and Policies

17. Honduras' leaders recognize that they face difficult internal and external challenges as the countryapproaches the twenty-first century. Key among these are Honduras' widespread poverty, low socialindicators, severe indebtedness, institutional weaknesses, and economic dependence on two major exportcommodities. Moreover, although the economy is heavily dominated by agriculture-related activities, thenatural resource base is deteriorating rapidly. Significant progress has been achieved in eliminating majormacroeconomic and sector level distortions, but remaining inefficiencies in the marketplace and in the publicsector are keeping the country from realizing its full potential.

18. The Government is committed to continuing the reform process in order to consolidate achievementsto date and to implementing a medium-term action pln (reflected in the 1992 Policy Framework Paper,PFP), that gives priority to maintaining a sound macroeconomic framework and to addressing criticaldevelopment challenges. The major elements of the Government's medium term program are outlined belowand would: (1) maintain a stable macroeconomic environment, (2) reduce poverty and increase socialdevelopment indicators, (3) increase public sector efficiency, (4) stimulate private sector development andcompetition, (5) improve adequacy of economic and social infrastructure, and (6) protect the environment andpromote sustainable management of the country's natural resources. The complementary actions in theagricultural sector (see Part II), constitute an important component of the program.

19. Elections will be held in November 1993 to elect a new President, Congress, and municipal leaders,and a new Government will take office in January 1994. IDA has initiated contacts with the two major presi-dential candidates, and these discussions have revealed that there is basic agreement on the critical devel-opment challenges facing the country and general support for the medium-term strategy outlined below. Bothpresidential candidates have indicated that the upcoming elections should not delay work on major elementsof the medium-term program (e.g., public sector reform, education sector modernization, environmentalprotection) and have requested that IDA missions maintain contact with their advisors during the pre- andpost-election period in order to facilitate the transition and enhance program continuity over the medium term.

Macroeconomic Policy Framework

20. The current Government is making efforts to prevent the types of expansionary macroeconomic policiesthat often accompany the last year of an outgoing administration. The Government's aim is to hand over tothe new Government a relatively stable macroeconomic environment in order to maintain the recent growthmomentum and enhance prospects for the deepening of the structural reform effort. During its remtime in office, the Government will focus on implehnentation of the corrective measures agreed under theESAF program (see para. 10) in order to prevent a resurgence of inflation and excessive fiscal pressures.in addition to maitaining a flexible exchange rate policy and market detrmined interest rates, theGovernment will continue steps to strengthen prudential supervision of the financial system. Legislation hasbeen submitted to Congress to establish adequate Centrai Bank supervision and regulatory powers overfinancial intermediaries. It is expected that these macroeconomic policies and the reform effort will becontinued during the next administration, as both presidential candidates have expressed support for theadjustment program.

21. As soon as the new Government team is in place, and building on contacts already established, IDAwill exchange views on a broad range of economic issues, using as a framework for discussion a CountryEconomic Memorandum (CEM) that is being prepared in collaboration with Govermnent staff. The mainfocus of the CEM would be how to achieve growth with equity in the Honduran context, based on anassessment of developments in the economy, the progress and impact of the reform program, and remaining

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constrints to growth. Support for macroeconomic management is expected to be provided primarily throughpublic sector reform operations, although structural adjustment lending could be considered after anassessment of the situation with the new Government.

Poverty Reduction and Human Resource Development

22. Honduras face s a series ofsocial problems which are aggravated : 1 by the country's widespread povertyand still unfavorable conditions .. m. ... e.....affecting women (see Box 1). Total ocrr Miattu hw Irafim.fertility is high for Latin America ~ , ~ )~d(about 5 per woman), and maternalmortality rates are also amnong the bRt*hUjIXIM i*f{ CV)highest in the hemisphere (221 per ...eI..100,000 live births). hnfant mortality _ 7 g _ _averages 65 per 1,000 live births, and Emalnutrition affects 45 percent of ~~ .... .

children in the under-five age group. -Rvso ~ According to the most recent data, .. I) e0IWi Io Ot~~~4 h *nAIDS incidence is the highest inCentral America and is spreading by aheterosexual transmission into bothirural and urban areas. Adult literacy pme.ao4 Pband years of schoolin are among the ~Ute 4m~~i 9$* rlowest in Latin America, averaging about three years of primary educa-tion. These national averages mask I i sharp regional disparities, especially inrural areas. Rural-urban migration Aou. 4 into fth capital exceeds 5 percent per to1# K8$Oyear, fueled partly by unsustanable b ou.magricultural practices and environmen- _p ;tal degradation. At the same time that k...these ftreds place an increasing e burden on already strained social.services and infrastructure, they mean U = = _that the current and future labor force r _m ais not weli able to respond to newopportunities as the economymodernizes, due to il health and pooreducation.

23. Poverty reduction and investment in human resources have been a major emphasis of the currentGovernment over the past three years. At the same time that implementation of the structural and sectoraladjustment programs was getting underway, the Government created the Honduran Social Investment Fund(FRIS) and the Family Assistance Program (PRAP) as targeted poverty alaon insuments to cushionthe soial effects of reform measres on the very poor (see Box 2). The FH1S was established in March 1990to implement an emergency employment generation strategy by financing: (a) social infrastructure (such asrebabilitation of health posts, schools, water and sewerage systems); (b) targeted projects in health, nutrition

- 8-

and education; and (c) a limited nmmber ofproductive activities. The HIUS has proved I 0 to be an effective targeting mechanism, for ~19)~Wreaching poor comunities and strengthening grassroots organizations. The PRAF was llk . ....~~e~soacreated in July 1990 to provide nutritional ~~5OS 4~3a assistance to the most vulnerable members of 4 s oia: .8 =society during the adjustent period through a X i i .income transfers in the fonn of food coupons. S m i e .! 1

Operated initially through the primary school ssystem in the very poorest departments, a g i irewl z _tcri.pilot program was introduced in 1991 to test 2 iide.livery of food coupons through the basic ~.health network. The pilot program proved.~*~~)5 effective, and implementation of a second # v__~ phase expansion program for PRAF activities and for strengthening preventive health careservices began in early 1993. IF

24. In parallel with these safety-net operations, the Goverament, under the aus-pices of a bi-partsa Presidentia Commission ~ n r .:~.~ baifor Public Sector Modernization, has been ~ b. 5 ~analyzing in-depth how to reform delivery of ~. education and health services with the goal of .W$c~~adw.'hmncreasing equity and program quality. With-.in the fr-amework of Commission deliber-tions, the Government has defined reformprograms for the education and health sectors that would increase operational efficiency and ~shift resources to priority activities, such asprimary education, basic health, targeted t 3 i | | _nutritional assistance, and reproductive care. 5iOMedium-term goals, which are shared by bothpresidential candidates, are to increase accessto water suply and basic sanitation in rural areas by 50 percent and to reduce adult 111- . ....

teracy (particularly in rural areas) by onethird, repetition rates at all education levelsby at least 15 percent, maternal mortality by almost 30 percent, iniint mortality by 20 percent, and theprevalence of early childhood undernuton by one-tird. Enabling families to manage family size accordingto their preferences and health status, by increased access to contraceptive methods, is also a public healthgoal. Underpinning the social sector reform effort will be a redefinition of institutional relationships betweenline minisries, the municipalities, community groups, and autonomous entities, such as the FHIS. Supportedby the proposed AGSAC (see Part II), the GOH is also introducing reforms to land tenure policy and therural financial system, with the goal of improving the poor's access to land and capital, and increasing thereturns to their labor.

25. IDA is supporting implementation of the Governmen's poverty reduction and human resourcedevelopment strategy through credits to the HIUS (Cr. 2212-HO and Cr. 2401-HO) and for the Nutrition and

-9-

Health Project (Cr. 2452-HO). Future lending will be channelled to support additional reforms and priorityinvestments in the education, water supply and saitation, and health sectors. Project design and targeting,to the extent appropriate, will be guided by the poverty assessment work being carried out in the frameworkof the CEM under preparation (see para. 21). Following completion of the CEM, the Government hasrequested that the findings of the poverty assessment and the poverty profiles be disseminated locally so thatthey can be the subject of a seminar to be attended by representatives of the Government, private sector,academia, and NGOs.

Public Sector Reform and Insttutional

26. The period of heavy administrative controls and State intervention in the economy has left a legacy ofan overized and poorly structured bureaucra, with programs and fimctions that no longer correspondto the economic and social policy framework that the current Government has introduced. Public sectorimplementation capacity is generally weak, and program quality often suffers from inefficient use of availableresources. A particularly delicate issue faces Honduras' civilian authorities with respect to the appropriaterole and size of the military establishment, which expanded significanly during the "Contra War" years. Themilitary has seen its budgetary allocations eroded since 1990, resulting in fierce behind-the-scenes competitionfor scarce public resources. Increasingly, the military is openly entering private sector activities via militarypension fund investments in privatized public enterprises as a means to secure alternative revenue sources.Lack of accountability in the public sector, and the judicial system's inbility to provide redress (whethereconomic or social issues are involved) are subjects of increasing public concern.

27. The Goverment has taken steps during the past three years to begin addressing these issues. In thecontext of sector reform programs, istitutional restucting has focussed on eliminatng unjustified programsand withdrawing from activities that could be better managed by the private sector. For example, in thetransport sector, road mannance is now largely executed by private contaors, and uneconomic railwaylines have been closed and staff laid off. Resuctuing plans for major public enterprises in the electricityand agricultural sectors are under implemation and have included sbtmlining of employment, amongother measures, to increase operational efficiency and focus resources on primary mandates. With respectto public sector accountability, an ad-hoc Presidental Commission was established in March 1993 to examinesecurity police abuses and the functioning of the court system. The estabishment of such a commission wasconsidered an indication of the evolution that has taken place over the past three years in redefining thebalance between civilian and military authorities, and in establishing government accountability. TheCommission's recommendations, presented in April 1993, included abolishing the security police force,seting up a new civil police force, and creating an independent Mnistry of Public Affairs. Congress is nowconsidering the creation of the new Ministry.

28. The Government recognis that a more fundamental restuctuing of the public sector apparatus,management procedures, and persomel policies is required if the State is to become more efficient and defi-cits are to be kept to manageable levels. Therfore, in its remnin time in office, the Govermment plansto develop a comprehensive public sector reform program, to underpin its fiscal reform efforts and enablethe public sector to perform its essential fumctions more efficiedy. The Presidential Commission for PublicSector Modemization, responsible for rg options and specific implementation actions, has focus-sed on decentralization and central government re rig, the judicial system and the police, electoralreform, and the role and size of the military. Of this broad agenda, the reform program would need to con-centate on the following issues during the 1993-95 period: (a) redefining the essential fimctions of the publicsector and restuctuing the institonal apparatus to be consistent with that redefinition; (b) clarifying therespective roles of the central and municipal levels of government, and establishing an effective revenue andexpendiue management system to underpin the new division of labor; (c) implemendng a civil service re-form (including modem personnel management practices and improved wage policy) that would permit decen-

- 10-

tralization of functions and of professional staf; and (d) stngthening the public sector financial system,including investment program prioritization, to ensure that scarce public resources are allocated to priorityprograms. Within this general framework, priority will be given in the short term to implementing ieformsin the education and health sectors. Both presidential candidates have indicated that they support such anapproach and would contnue implementation of public sector reform efforts.

29. IDA is working closely with the Government in the development of its public sector reform program,providing technical advice and expertise whenever possible. As requested by both major presidential candi-dates (and supported by the Government), IDA missions will keep them briefed on program development aspreparation progresses during the pre-election period. IDA lending in support of public sector reform wouldinclude adjustment lending and capacity building operations focussed on the priority themes enumeratedabove. In the immediate term, IDA and the United Nations Conference on Trade and Development(UNCTAD) have jointly prepared a program to strengthen external debt management capacity in Honduras,and program implementation is expected to proceed during 1993-94 (pending mobilization of concessionalfinancing).

Private Sector Development

30. Efficient private sector development and diversification of the export-oriented sectors are key objectivesof the Government's reform progmm. M res taken to date in support of these goals have included movingto a flexible exchange rate regime, liberliing trade policies, negotiating free trade agreements, andliberalizing the financial sector. In addition, the Investment Code and Regulations have been substantiallyrevised and improved with the goal of facilitating investment by both domestic and foreign investors. Keyelements of the Investment Code Legislation, as approved by Congress, include streamlined administrativeprocedures, grantng of the same rights and privileges to foreign and domestic investors, and liberalizeddividend and capital repatriation regulations.

3<1. While these reforms have resulted in increased private sector dynamism, competition in the domesticmarket is still in its early stages as entrepreneurs adjust to an enviromnent characterized by less protectionand public largesse. The transition to greater competition and market efficiency has been slowed by the factthat the private sector is characterzed by considerable concetration of wealth in a few key corporate groupsand families with privileged relationships to private banks. This has created a market structure where entryby newcomers is difficult and collusive price fixing in selected markets is common. Although the dismantlingof quantitative trade restrictions, liberalization of the financial markets, and floating of the exchange rate haslimited the scope for rent-seeking behavior, the regulatory apparatus and associated adinisrativerequiements are still burdensome in many cases, and have in practice reinforced the privileged position ofestablished economic groups and discouraged efficient business practices.

32. To address these remaining constraints to comption and efficiency, the Government is studying exist-ing restrictions to entry in selected sectors (e.g., truckng) with the goal of developing a deregulation policyto stimulate competition. Financial sector legislation recently submitted to Congress would also encouragecompetition in the domestic market by establishing standards for shareholder borrowing from private banks,that would, inter alia, limit prefeential access to finance and diversify non-shareholder access to availablefunding. The Govermnent should also review in the near future its corporate income tax policy to ensure thatit does not discourage potential foreign investors, as well as examine the labor code, existng minimum wagepolicy, and the functioning of the labor market to ddemine the need for reforms to encourage employmentcreation.

33. IDA's primary role in promoting market efficiency/private sector development would be to providepolicy advice based on selected studies. As the IDB has conducted preliminarY analysis in this area with a

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Private Sector Assent, IDA staff and Honduran officials have discussed the desirability of initiating workon a second CEM in mid-FY96 that would focus on consrints to private sector development and market effi-ciency and would identiij additional measures to promote competition and stimulate economic growth. Inaddition, provided that eligibility criteria are met, funds could be made available for a commercial debt reduc-tion operation from the IDA Debt Reduction Facility, based on the Government's recent request (see para.9). Such an operation would contribute, over the longer term, to improved creditworthiness and renewedprivate sector access to medium- and long-term international credit.

Economic and Social

34. Social and economic infrastucture in Honduras is inadequate to meet the current needs of thepopulation and economy, much less future needs. An estimated 60 petcent of the population is inadequatelyhoused, and the lack of potable water and sanitation facilities is acute. Primary schools and first tier healthclinics are in a poor state of repair and inadequately equipped (and staffed) to provide basic services. Seventypercent of energy consumption comes from fuelwood, linked in part to inappropriate pricing andunderdeveloped distribution networks. Telecommunication services cannot keep pace with demand, due tooutmoded equipment and concentration in a few urban centers. Transport infrastucture is generally adequatebut has suffered from poor mantenance and management practices in the past. There is an absence of well-located airports with modern refrigeration facilities that would permit timely transport of fruit and vegetableexports, which are growing rapidly. These infiasucture consaints have a debilitating impact on both socialdevelopment and the economy's ability to modernize and compete in world markets.

35. The Govermnent attaches high priority to rehabilitaing and, where needed, expanding the country'seconomic and social infucture. As part of this effort, emphasis has been placed during the past threeyears on transort infrastuc , water supply and sanitaion systems, primary schools, and basic health cen-ters. This emphasis is expected to condinue under the next Administraion. Attention would also be givento developing power facilities and distribution lines and to upgrading telecommunication services. To attainits infrasucue goals, the Government recogizes that it will be necessary to rely heavily on the privatesector for construction and operation of facilities, and where possible, for investment funds and ownershipof assets. In cases where operation of facilities or provision of services remains in public hands, upgradingof the physical infrastructure would be dependent on putting in place budgetary or fee-based mechansms toensure reliable funding of operton and mateace costs over the long-tem Expansion of socialinfrastruce would be largely limited to rural areas and marginal urban neighborhoods that are currewlyunderserved.

36. IDA is currently supporting inrasucture rehabilitation in the transport and energy sectors, under theMorazan Dam Emergency Project (Cr. 2417-HO) and the recently approved Transport Sector RehabilitationProject (Cr. 2458-HO). In future, IDA support for rasu improvements will be limited to thosecalled for under the Govermnent's poverty reduction and human resource development strategy, with anemphasis on education, water supply and sanitation, and health. In addition, IDA could assist Governmentefforts in settig inrstuct reabilition priorities by conducting an iastuctu assessment.

EnvIonet Protecon and D

37. Honduras' natumal resource base is deterioratng at an increasingly rapid rate as population andeconomic pressures inrease. The country is heavily forestd and predominantly montainous, with narrowcoastl plains and nmrous inland valleys. Honduras' topography dictates that arable land available forcultivation is ihnited. This factor, when combined with a high concentradon of land ownership, past "anti-forestry" policies, and high population growth rates, has resulted in the exqmsion of the agricultural fiontierinto marginal areas as well as in no-selective timber extraction practices. The conseqence of these tends

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has been accelerating defrvstaton and soil erosion, and secondary impacts on climate (rainfall pattems)and water sources. Water conta on (both fresh and coastal) resulting from poor human sanitationpractices, agricultural chemical use, and industrial processes is already affecting health negatively, and if notaddressed, could have significant economic consequences for industry as well (particularly tourism and shrimpfarming). Disposal of solid wastes is not generally managed according to sanitary standards, and the resultingcontamination of water and soil resources is becoming of greater concern as the urbanization processaccelerates. Environmental institutions and policies designed to promote sustainable resource use are recentadditions to the political landscape, and have not yet established an effective track record.

38. Public awareness is growing in Honduras of the importance of protecting the country's valuable timber,soil, water, and coastal resources and of improving natural resource management in general. Supported bythe AGSAC (see Part U), the Government has begun a major reform of its forestry management and landtenure policies, and implementation of these policies will be critical to sustainable development over themedium- and long-term. More broadly, Congress approved in June 1993 basic environmental legislation thatclarifies institutional responsibilities and policies as they apply to natural resource management and environ-mental protection. Under the new law, the National Environmental Commission (CONAMA) will beupgraded to ministerial rank to -ensure that it has sufficient administrative authority for effective action. Anational Environmental Action Plan MAP) has been completed by the Government that establishes institu-tional, policy and investment priorities and provides the basis for Honduras' medium-term environmentalstrategy (see Box 3). The Govemment is noworganizing a three month consultation processwith NGOs, academic circles, the private sector,and local muiiaiisand community gopspin order to better identify and establishconsensus on national priorities. Commets and -

suggestions received during this process will beused to prepare the fuml revised version of theEAP. The Govenament intends to periodically .wuupdate the EAP and to use it to guide futureinvestment decisions in the area ofenviromental protection. =

39. IDA has provided extmnsive support overthe past few years for the development of the .

natural resource management miniatives to be OS j Uu .iisupported by the AGSAC. More recently, theBank approved an 18-month IIDF gran lastOctober 199 that is providing assistanc toCONAMA for developing a prioritized work ___

program a Undtrann plan, defining the scopeand requirements of a national EnvironimentalImpact Assessment sys5tem aW1 drafig tregulatons called for under the new environ-.mental law. The grant also supported the ~

prearaionof the EAP, through poiso of .

techncal expert. In future, IDA would. t t lo rtconsolidate progress in both these areas bysupporting furthe institutionalstethng.r drelated to broad eniomna oiyandstrategy and to natural rmsurce mangement. ~

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Medium-term Prospects

40. Implementation of the medim-term strategy oudined above would consolidate recent improvementsin economic performance and contribute to the long-term sustainability of economic and social developmentefforts. The Government's development strategy, which is expected to be continued by the next Administra-tion, would lead to increased agricultural productivity, expanded private investment, continued diversificationof the agricultural and manufacturig sectors, and growth in job formation. Over the medium-term, thesetrends would result in an economy characterized by a better public/private sector mix, a dynamic exportsector, reduced dependence on exceptional foreign financing, and gradual declines in poverty levels.Investments in education and health services would produce, over time, a healthier, more literate workforce,and sustainable use of the natural resource base would make possible continued economic and socialdevelopment. In quantitative terms, implementation of the Government's program is expected to result inreal GDP growth of around 4.3 percent a year, stabilization of inflation, and a reduction in the currentaccount deficit from 11 percent in 1991 to about 6 percent of GDP by 1995, with further reductions bringingit to about 3 percent by the year 2000. Central to the achievement of these targets will be a reduction of theoverall public sector deficit, and an increase in domestic savings and investment rates. Macroeconomic indi-cators for 1990-1992 and projected estimates for 1993-2001 based on the RMSM model are presented inAnnex 1.

41. Extea Fhianng Rque t. Continued implementation of the Government's stabilization andstructural reform program will require large inflows of grants, concessional assistance, and debt relief,amounting to US$290-310 million per year between 1993 and 1995. On the basis of likely disbursementsfrom major multilateral and bilateral donors, there would be annual financing gaps ranging from US$15 toUS$55 million between 1993 and 1995. It is expected that these gaps would be covered by debt reliefresulting from Paris Club and non-Paris Club reschedulings and further commercial debt reduction.

42. Creditwortdoess. Honduras is severely indebted, with a heavy concentrtion of official and preferredcreditor debt. It is currendy classified as an IDA-only country and is not eligible for Bank lending. Totalexteral debt, amounting to US$3.2 billion at the end of 1991, represened 105 percent of GDP and 330percent of export earnings. By the end of 1991, total debt service to export earnings had increased to about35.4 percent, of which 16 percent was for interest payments. Honduras' long term debt (about 93 percentof the total stock) is almost all public or publicly guarnteed (98 percent), ad of that, roughly 90 percentwas owed to official creditors. Preferred creditor debt amounted lo almost two-thirds of official debt in 1991,and accounted for about 70 percent of 1991 long term debt service. The lBRD/IDA share in Honduras' stockof medium and long term debt in 1991 was 20 percent, representng about 40 percent of preferred creditordebt. Debt service on outstanding IBRD/IDA obligations in 1991 represted about 9 percent of exporteaniings, and about 45 percent of preferred creditor debt service. Honduras is not expected to becomecreditworthy for Bank lending during the foreseeable future. Similarly, access to foreign financing oncommercial terms is not expected to become a possibility over the medium term.

43. Risks. The economic prospects described above are ainable, provided that the external environmentdoes not deteriorate substntally from current conditions and that there is continmity in the implementationof economic and development policies. Risks that could jeopardize program success are related to the fragil-ity of the economy and its vulnerability to enemal shocks, in particular, to further price declines of its majorexports and/or additional restrictions to market access by its major trading parters. Continuity in economicmanagement over the medium term could also be at risk, due to presidential elections in November 1993 andthe subsequent change in goverment in Janury 1994. While both major party candidates state publicly thatthey do not question the need to continue with the adjustment program, they have also emphasized that theymay wish to take firther measures to soften Its impact on the poor by stengbthi and expanding social pro-grms. If this desirable emphasis were to spill over into populist policies with significant fiscal implications,

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the progress achieved in recent years could be seriously eroded. In such circumstnces, it is mhtikey thatthe international financial community would be willing to provide exceptional financial support for Hondurasor that foreign investors would consider the country to be an attractive investment site. Under such condi-tions, it is likely that Hondurs would return to intermittent periods of non-payment of extnal debt serviceand accumulaon of arreaus to multinational and bilateral creditors.

44. To minimize these risks, the Government is pursuing export promotion policies and encouraging privatesector investment with the goal of strengthening the external accounts and smlating economic growth. IDAis encouraging the Govermnent to contimne these policies over the medium term, and, in addition, will beworking closely with the Goverment and the donor commu!nity in the context of the CG to develop a strongproject and program pipeline for external funding. Based on discussions with the two major presidential can-didates, it is our expectation that the programs and policies oudined above will be continued during the nextAdministraion.

D. Bank Group Country Assstane Strate

Assdstace Sraty

45. The Bank Group's future assistance program is designed to assist the Goverment in overcoming thecountry's critical development constraints. Given IDA resource limitations, the proposed approach is to behighly selective and to focus on areas where the Bank and IDA can play a catalytic role. In keeping with thisphilosophy, the proposed IDA assistance strategy would roncentrate on helping the Govenmen in its effortsto achieve three major objectives of its medi-term program - reduce poverty, modernize the economy andthe publie sector (thereby creatng a busmess enviroment conducive to private sector development), andsustinably manage the country's natural resources. Implementation of such a strategy would be accomplishedby means of: (a) economic and sector analyses, focussing on key structural, sectoral, and institutional issues;(b) design and implementation of a lending portfolio comprising policy-based, sector rehabilitation, andinvestment operations; (c) assistance for building institutional capacity in the public sector; and (d) aidcoordination, to assist in mobilizing adequate fimding for economic and social programs, on highly conces-sional terms. IPC has a potental role to play in facilitating the transition to greater private sector provisionof services previously reserved to the public sector (such as electricity, telecommunications, and ports/airportsmanagement). IDA would continue to work closely with the IDB and the IMF on sensitive reform programsto minimize conflicting policy advice and to increase aid mobilization for reform operations.

Leading Levels and Compoddon

46. Past Operations. During the 1980s, Bank/IDA lending to Honduas was sporadic and disperwd acrosssectors. Twelve IEBRD and 2 IDA lending operations, for a total of US$399.3 million equivalent, wereapproved between 1980 and 1989, supporting investment needs in the power, educaion, transport, municipaldevelopment, water supply, industry, and agriculture sectors. When the economic situation deteriorated inthe late 1980s, the Bank provided finani support for the implementation of an ecomic adjustment programthrough a first strucurl adjustment loan (SAL), but this assistance, as well as ongoing project siUpOort, wassuspended for an 18-month period between December 1988 and June 1990, when the country accumulatedarrears on its Bank and IDA debt. Lending was resumed in September 1990, initially on IBRD teWns andsubsequenly on IDA terms. New lending commtments during FY91-93 have totalled US$292 million equiv-alent, and have focussed on three major areas: structural and sectoral adjustm, representig about 55percent of total volume (SAL II, a supplemental Structurl Adjustment Credit (SAC), and Energy SectorAdjusmw Credit (ESAC)); poverty alleviaton and human resource development, representig about 20percent of the total (IS I, FHIS II, and Nutrition and Health); and infratructurerabiLitation projects,

- 15 -

for about 25 percent of the total (Morazan Dam Emergency, Transport Sector Rehabilitation). In addition,IDA Reflows amounting to US$64 million equivalent have been approved in FY92-93.

47. Future operadons. The core program proposed for Honduras between FY94-97 could include up toeight lending operations, complemented by studies and technical advice on the priority areas of emphasisidentified above. While the current FY94-96 country IDA allocation is SDR84 million (US$120 million equi-valent), successful execution of the Government's economic and social program would establish a strong casefor higher levels of support from the donor community. Over the medium term, it is expected that about 30percent of the total credit volume would support human resource development/poverty reduction operations,about 50 percent would support public sector reform and economic policy reform, and about 20 percentwould support environmental protectionand natural resource management activities. Providing that eiigibilitycriteria are met, Honduras would also be able to participate in IDA-only programs such as IDA Reflows andthe IDA Debt Reduction Facility. IDA Reflows could potentially add SDR 15-20 million per year to the basiclending program allocation. Under the assistance strategy, net transfers from the Bank Group to Honduraswould be positive in the early years, turning itegative in the outer years. In view of Honduras' severeindebtedness and low per capita income, continued lending on IDA terms is expected over the next 4-5 years.Proposed assistance in each of the priority areas is summarized below.

48. Over the next four years, povert reducton and hIuan resource developmet will be central to theIDA lending and ESW program. The overall thrust of IDA's poverty reduction and human resourcedevelopment efforts would be to increase access to social services for the entire population, with a particularemphasis on improving operational efficiency, program quality, and institutional arrangements in theeducation, water, and health sectors. Priority will be given to expanding program delivery in underservedrural areas and addressing the needs of poor women and girls. Actions supported under the proposedAGSAC, through the LMA, wfll help reduce poverty in rural areas by amending certain provisions of theagrarian reform law (increasing smallhoklers' and women's ability to obtain title to land) and reforming ruralfinancial policies and institutions. Technical advice on social sector reforms and poverty reducton effortswould be provided by RUTA Social (see para. 51). We are working with the Goverment in the preparationof water and educaton sector projects, and expect to work closely with the lDB on these operations.

49. Increasing public sector efliEicy and ondating ro in economic modernization will bepriority themes for the IDA assistance strategy. IDA would aid the Government increase public sectorefficiency through a combination of adjustment lending and capacity-building projects focussed on publicsector management reform and on municipal development and decentralizadon issues. Proposed lendingoperations would help improve public sector management in the areas of personnel adminisi, financialmanagement, and investment programmig, stgen municipal management and operational capacity, andintroduce structural reforms in the public sector. EDB is expected to work closely with IDA in thedevelopment of the public sector adjustent operation and to provide co-financing. The need for a follow-upstructural adjustment operation will be evaluated further into the next administration's term of office, whenprogress in implementing the different strucual and sectoral reform programs could be assessed and policymeasures could be refined and reoriented, as required. Technical advice on constraints to private sectordevelopment and options for stimulatig competition would be provided through the preparation of a CEM(see para. 33). The proposed AGSAC would provide support for resructuin critical agriculture sectornstitutions and for reforming financial management and investment programming in the sector.

50. Support for emiromnental protetion and M e resource management will become increas-ingly important in the IDA program. The program supported by the proposed AGSAC would be consolidatedin a few years through a follow-up operation that would focus on strengthening the sector institutionsresponsible for natural resource magement (such as forestry, agricultual research and extension, and landtitling and registration). To orient speiffic activities of the proposed follow-up project, we plan to carry out

- 16-

a Land Markets Study as part of the ESW program to update knowledge of land market dynamics in ruralareas following the recent policy reforms. Building upon the capacity-building activities supported by theIDF grant and on the framework provided by the recety completed BAP, we plan to develop with theGovenmnent a proposed follow-on Enviroment Institutions project that would assist in strengtheningCONAMA as it takes on its new functions, in developing a domestic strategic environmental planning capa-city (through the monitoring and periodic updating of the EAP), and in supporting priority investment ortraining activities identified in the EAP.

51. Capacity Building. In addition to specific institutional development components included in proposedlending operations and the proposed public sector management reform program, IDA is using a variety ofinstruments to strengthen operational and management capacity in the public sector. The IDF grant approvedfor CONAMA is one such example (see para. 39), and the IDA/UNCTAD debt management strengthenngprogram is another such (see para. 29). In the social sectors, a technical secretariat under the President hasbeen established with support from a Japanese Technical Assistance Grant, to conduct policy analysis,program monitoring, and sector coordination. The Bank-exu Regional Unit for Technical Assistancein the Social Sectors (RUTA), which has been recently established, is based in Honduras and will providetechnical support for institution building efforts.

52. Portfolio en-t. The lending p-rafolio comprises 12 operations tat have been either approvedor are under implementation. A grant und.zr the IDF has also been approved. The portfolio is highly di-verse, and includes sector investment projects, adjustment operations, and safety net programs. The oldestproject in the portfolio was approved in 1984 and the most recent one in 1993. The 12 projects have a totalloan and credit value of US$392 million, of which US$211.6 million have been disbursed and US$184.3 mil-lion remain undisbursed as of May 31, 1993. Two receny approved lending operations are not yet effective.One of the most distinctive aspects of the Hondziras portfolio is that within the next 18-24 monfts, 10 of the12 projects currently under implementation are expected to be completed. This means that by the end of

1994, the portfolio will have shrunk by about 85 percent in terms of number of operations and by about 50percent in terms of undisbursed balances. Consequently, 1993-94 will be a critical period for developing alending pipeline for implementation during the second half of the 1990s.

53. Project hnplemeion has been generally satsfactory over the recent past. Significant progress hasbeen made in introducing structural and sector reforms agreed under the Second Structural Adjustment Loan(SAL II) and Energy Sector Adjusutent Credit (ESAC) programs, as well as under the proposed AGSAC.Execution of the safety net programs by the PHS and PRAP have been notable for the effectiveness of tar-geting mechanisms used to reach poor communities and families at risk of malnutrition. Implementation ofon-going investment projects has continued to be satifactory, and four new lending operations were approvedin the last year. No projects are crrenly rated as "3" or "4", and the average portfolio rating for the entirecountry program is 1.6. This represes a noticeable improvement compared to the country portfolio ratingconducted during the FY92 ARIS exercise (from 1.75). Sunmy data on the lending portfolio with Hon-duras are presented in Table 2.

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Table 2. Hondurs Couty PortfolioProjects Approved or under Implemeon

PROJECT LN/CR APPROVAL LW/CR DISBURSED UNDISBURSED CANCELED OVERALLNAME NBR DATE ANOUNT (5/31/93) (5/31/93) RATING

Water Supply/Drainage 2421-Ho 5-22-84 19.6 11.4 8.1 2Industrial Credit III 2703-NO 5-29-86 37.4 31.9 3.2 2.3 2Rural Primary Education 2804-NO 5-05-87 4.4 1.7 2.7 2Agricultural Credit IV 2991-HO 9-15-88 25.0 23.5 1.5 2SAL II 3257-HO 9-13-90 90.0 65.0 25.0 2FRIS I 2212-HO 2-28-91 20.0 18.6 1.1 1FHIS II 2401-HO 6-25-92 10.2 4.4 6.0 1ESAC 2306-HO 10-31-91 50.6 37.4 16.2 2IDA Reflows 2306-2 12-23-92 32.8 16.9 14.8 1Morazan Dam 241.'-HO 8-04-92 12.0 0.8 11.8 1Nutrition/Health * 2452-HO 1-05-93 25.0 0.0 25.3 NRTransport Sector Rehab. * 2458-HO 2-16-93 65.0 0.0 66.6 NREnviron. Institutions 2872-IDF 10-23-92 0.2 0.0 0.2 1

* Not yet effectiveNR Not Rated

Loan/Credit amounts are given in US Dotlars. Inconsistencies between the Credit Amount and Disbursed/Undisburseddata are due to fluctuations in the SDR/USD rates since credit approval.

54. While implementation has been satisfactory overall, delays have been experienced in carryin outagreed activities for both investment projects and adjustment operations. These delays are reflected inlower disbursement levels than planned and in negative trasfers between the World Bank and Hondurasthat could have been avoided. Of particular concern are delays in completing Honduran procedures forcredit signing and ratification, as this means that funds approved by the Bank and at the disposal of theGovernment cannot be accessed. At present a combined total of US$90 million, for two operations, iscaught in such a limbo. Delays have also been encountered at times with respect to the submission ofaudit reports by independent auditors for project accounts.

55. These delays appear to be largely due to weak management capacity in the public sector and tobudgetary constraints affectmng counterpart fund allocations for investment projects. With respect tomanagement capacity, two trends appear to be at work: insufficient numbers of high-level professionals(particularly for the adjustment program) and frequent staff turnover in project management units (evenat the directorial level). For the adjustment program (SAL U, ESAC, AGSAC), limited staff .apacityhas negatively affected the Government's ability to coordinate among institutions, monitor implementa-tion, and keep to agreed timetables for tranche release, with serious consequences for the balance of pay-ments. Staff turnover at the investment project level has resulted in a loss of institutional efficiency, asnew staff must be trained and brought up to speed. More i indamently, it has interfered with institutionbuilding within the public sector, as kmowledgeable individuals have left positions of responsibility.Cumbersome administrative procedures in the central government agencies also have contributed toobserved delays.

56. IDA is addressing these weaknesses through intensive supervision at the project level, and perio-dic Comutry Stratea and -mplmntion Revew (CSIR) meetings at the country level. The firstCSIR took place in September 1991, and a follow-up meeftng took place in June 1993. These meetingshave provided a useful forum for reviewing both cros-cauing portfolio issues as well as project-specific

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questions. As a result of the latest CSIR consultations, the Government has taken several steps toinstitutionalize portfolio management procedur with a view to more timely monitoring and taking ofcorrective actions where necessary. Future CSIR meetings are expected to take place roughly every 12-18 months. In addition to the CSIR mecbanism, in-country disbursement, procurement, and auditseminars are held periodically to ensure underst of Bank/DA procedures at the executng agencylevel. The most recent disbursement seminar took place in March 1993, and the most recent procurementseminar, in May 1993. Addressing the underlying causes of staff turnover and insufficient high-levelprofessionals will require a much longer time horizon by means of concerted actions to reform civil ser-vice administration and public sector management practices. Similarly, introduction of an integratedfinancial management system for the consolidated public sector and strengthening of investmentprogrammng performance would help correct some of the weaknesses observed in the allocation ofbu(dgetary resources to investment projects and priority programs. These structural issues of personneladministration and financial management in the public sector would be addressed by proposed operationsoriented to public sector reform (see para. 49).

57. lFC/MGA. Since 1964 IFC has made four loan and equity investments in Honduras totallingUS$11 million in pulp and paper, leather tanning, textiles, and shrimp fanning. IFC's strategy inHonduras will focus on assisting private sector investors with: (a) plant expansions or refurbishments forselected industrial activities; and (b) export-oriented businesses, including those in export-processingzones. In addition, IFC is considering a possible credit line to a commercial bank and assistance forprivate sector infastructr projects. At the request of the Govemment, the Foreign Investment AdvisoryService (PIAS) reviewed the Honduran legal and regulatory framework for private investment in mid-1991 and made recommendations to the authorties for improving the country's investment code whichwere incorporated in the Investment Code legislation approved by Congress in May 1992. Hondurasbecame a member of Multilateral Investment Guarantee Agency (MIGA) on June 30, 1992. MIGA hasreceived three preliminary applications to support investment projects in Honduras.

58. Aid Coordnaton. Because of Honduras' external finaucing needs (see para. 41), aid coordina-tion will continue to play a crucial role in the success of the program. The principal mechanism will bethe Consultative Group, in conjunction with informal donor meetings organized around specific sectorthemes. At the most recent CO meeting in Washington in March 1992, discussions focussed on theGovernment's implementation of the adjustment program and poverty alleviation efforts. The next CGmeeting is tentatively scheduled for mid-1994 in order to give the new govermment time to define andpresent its program to the donor community. In addition to the CG, informl donor nmetg have beenheld in Honduras during the preparation and appraisal of the proposed AGSAC, mainly to disuss forestrysector reforms. These meetings have contributed to achieving a consensus on the program's policyorientation and to identifying measures to mage the transition and avert potential negative socialimpacts. Such informal meetings will continue to be used for the agricultural program as well as forother program initiatives, as appropriate. Potetia topics for futre informal donor meetings includediscussions of the EAP and the conclusions of the poverty analysis to be conducted as part of the CEM.

59. C_ofidng. Co-financing with other muldlateral ins"tions and bilateral donors, particularlyon concessional terms, has become a central feature of IDA support to Honduras. The US$292 millionequivalent in new BanklWA assistance since lending resumed in FY91 have been largely exceeded byofficial co-financing moung to US$440 million. IDB has been one of the major co-financiers ofBan/IDA supported operations, and is the major multilateral donor in Honduras. In the past three years,the IDB has lent a total of US$467.0 million (US$268.0 million on market terms, US$198.0 million onsoft terms, and US$1.0 million in tecdmical cooperation grants). The planned IIDB lendn program for1993-95, projected at US$385 million, fowsses primarily on water and sanitation, road rehabilitation andsocial sector investment. In addition to co-financint on cash terms, the donor community is working

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closely with IDA and the authorities to provide needed technical assistance upstream for projectpreparation as well as for project implementation support. As with the proposed AGSAC, IDA plans towork closely with co-financiers in futr operations through joint project preparation and supervision.

60. Cooperaton with the NIM. The Bank, IDA and the IMP have worked closely to ensure thatproposed stabilization measures and medium-term structural reforms are consistent and appropriatelysequenced. An IMP stand-by arrangement for SDR 30.5 million, approved in July 1990, was completedsa.isfactorily in February 1992 and aU planned purchases were made under the program. In February1992, the IMP approved additional assistance to Honduras amounting to SDR 44 million under theCompensatory Financing Facility (CFF) for export shordalls experienced in 1990/91. Followingagreenent on a PFP and detailed first-year program in early June, an ESAP for Honduras of SDR 40million was approved in July 1992. Agreement has been reached between the Government and the IMPon a satisfactory macroeconomic framework for 1993-94, including specific performance targets for 1993.The authorities and the IMP expect to begin discussions on the progrm for the second year of the ESAFand to update the PFP in October 1993. The results of these disssions would be reviewed andconfirmed with the new administron early in 1994.

E. Summary Asment

61. The Honduran authorities have begun a long overdue process of economic and structural reform.Results of the progrm to date are encouraging, and medium-term prospects for sustainable growth areimproving. Nevertheless, the country's economic and financial situation remains fraile, as the economyis still highly vulnerable to exenal shocks. In addition, continuity in domestic policy may prove dificultto maintain as the country goes through presidential elections in late 1993 and a newly elected governmenttakes office in early 1994. IlDA's program of assistance, including the proposed AGSAC, plays a keyrole in supportig the Government's efforts to deepen the structural reform process and in ensuring thatinadequate or untimely levels of extnal finance are not a contrbuig factor to policy backsliding.

62. IDA's planned assistance program depends on the continued willingness and ability of the Govern-ment to pursue sound macroeconomic management policies and to define and implement a major reformprogram that wiUl begin lo tackle the structnl problems in the Honduran public sector. Criteria to judgeprogress would include: maintenane of a supportive macroeconomic framework, including flexiblemangement of the exchange rate an tight control over public finas; contiation of price liberali-zation and trade policy reforms; hiproved public enterprise performance, including generation ofoperational surpluses; implementation of agreed reforms in the energy and agriculural sectors; andgradual restucurng of social sector progrms in the direction of increased equity and operationalefficiency. Gven the importance of macroeconomic policies to the success of any sectoral reformprogram, the proposed AGSAC inchld assurances on satisfactory macroeconomic wanagement and oncontinued adherence to relevant elements of the SAL n program (para. 70).

PART ll - TEE AGRICULTURAL SECTOR PROGRAM

A. Sector Ovaeviw

63. Agricultural activities are critical to the economy and to Honduras' long-term growth.Agriculture employs more than one-half of the labor force, accounts for 25 percent of GDP, andgenerates about 80 percent of export eanings. Over 1980-89, real agricultual GDP grew at an averageof 2.9 percent per year. In 1990 it grew only by 1.1 percent mainly due to a strike by banana industryworkers and flooding. However, during 1991 agricultual ouput grew at 5.4 percent and a similar rateis expected during 1992.

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64. The development of the agricultural sector during the 1980s was constrained by distortions inreladve prices, natural resource misuse, institutional weakness, and inadequate investment. During the1980s, agriculture was subject to considerable Govermnent intervention. Overvaluation of the lempira,supported by a growing battery of trade controls, discriminated against all exports, in particular those ofan agricultural nature. Industa sector-oriented protection policies negatively affected agricultural termsof trade. The suport price system for basic agricuttural products implemented through the HonduranAgricultural Marketing Institute (IHMA), a grain trading agency which had the monopoly of all grainimports, was ineffective in protecting producer prices. Consumer price subsidies, implemented throughthe Government's retail outlet, the National Basic Products Supplies (BANASUPRO), did not protectpoor consumers' real income. Credit subsidies through the Agricultural Development Bank(BANADESA) were intended to counteract lower prices for farm products, especially basic grains. Insum, these Government interventions misallocated resources, were costly and inhibited private investment.

65. Until recently, the legislation concering land and forest resources, land tenure policy and forestmanagement inhibited and distorted private investment in agriculture and forestry. The Agrarian ReformLaw (LRA) caused tenure insecurity as it allowed land to be easily expropriaXd. Titles provided toagrarian reform beneficiaries were provisional, thereby inhibiting land transactions in the form of sale,rental or mortsgae. The LRA imposed restrictions on owners' land use decisions. The forestrylegislation and the LRA actually encouraged farmers to cut forest and replace it with pasture-even onfragile lands, hills, and areas already degraded-to regain control over their property. Vested with theownership of all forest, COHDEFOR participated actively in wood processing and had the lumber exportmonopoly.

66. Public investment and expenditure in agriculture is low. It decreased sharply as a proportion ofagricultural GDP over the 1980s, from 23 percent in 1980 to about 4 percent in 1991. During the 1980s,GOH expendit in the sector were primarily for: (a) generalized food subsidies; (b) credit and inputsubsidies; (c) an extensive system of Government enterprises in production, marketing, and storage ofagricultural products; and (d) a large bureaucracy. Despite this unfavorable policy environment,agriculture had been undergoing a slow process of adjustment and resource reallocation which hasaccelerated as a result of recent policy changes. There has been rapid growth of nontraditional exports,especally pineWple, cantaloupe and seafood. Production of conmodities for the domestic market, suchas palm oil, plnin, poultry, and cabbage, has also expanded rapidly, while corn yields have increasedfrom 1 ton/ha in the mid 1970s to 1.75 ton/ha in 1991.

B. Sectoral Development Po and Recent Reorms

67. Sedoral Devdopent Program. Supported by SAL IL, GOH embarked on a major programof economic reform early in 1990. As part of this program, GOH, assisted by the Bank/IDA, the IDB,and other donors, started to formulate a comprehensive agricultural sector development program toestablish the basis for a modern, competitive agricultural sector. The program aims to establish incenivesto: (a) foster sustainable, private sector-led growth; (b) improve natural resources mamagement; (c)expand export earnings; and (d) generate employment. The new sectoral strategy is outlined in theSecretariat of Natural Resources' (SRN) document entitled Agricultural Modernization and DevelopmentProgram (AMDP, dated August 1991), which was approved by Congress in April 1992 (see para. 69).It includes refonns in the: (a) trade regime; (b) agricultural price policy and marketing regulations; (c)mral financial sector; (d) policies and legislation affecting private property rights over timber and landresources; (e) role of the state, specifically a move towards a regulatory role and purveyor of keyservices, in particular to small producers; and (t) public sector framework for formulating andimplementing agricultural policy straty and budgeing.

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68. Recent Sectoral Reforms. GOH started to implement the first stage of the AMDP in early 1990,supported by SAL H. Substanti reforms in agricultural price and trade policy have already beenintroduced, such as the: liberalization of all agricultural import and export regimes; reduction andharmonization of trade tariffs; liberalization of all agriculh -ral producer and consumer prices-guaranteeprices for basic grains have been replaced with a price band (i.e., a variable levy); reduced Governmentintervention in agricultural commodity purchases and food distribution-IHMA's role has been limitedto the management of a "strategic reserve" of basic grains (for natural disasters), while BANASUPROis selling food at market prices; and the elimination of interest subsidies on all agricultural loans.Progress has also been made in restructuring the rural financial sector, in particular with regards toBANADESA (see Annex 4). These reforms, together with the improvement in the overallmacroeconomic enviromnent, have strengthened agricultural terms of trade and made investing in thesector more attractive.

69. However, to further stinmlate private investment and ensure sustainable medium-term growth,these gains need to be complemened with reforms in: (a) land and forestry property rights andmanagement, and utilization of land and forest resources; and (b) agricultural public sector management.Policy changes in these areas could not be implemented under the then prevailing land tenure and forestrylegal framework. Therefore, early in 1990 and as part of the preparation of the AMDP (para. 67) andof the proposed AGSAC, the Government embarked on the preparation of a comprehensive biUl entitled"Modernization and Development of the Agricultural Sector." This bill also included legal changes toinstitutionalize the reforms on price, trade, grain marketing and rural finance that were beingimplemented under SAL II since 1990. The bill was submitted to Congress in December 1991 aftersubstantial consultation (lasting more than 6 months) with the population expected to be affected most andwith IDA, as part of the preparation of the proposed AGSAC; it was enacted by Congress as Law 31-92(Agricultural Modernization Law, LMA) in April 1992.

70. The proposed AGSAC will support implementation of the policies and structural reformsembodied in the LMA with respect to land tenure; forest rights, management and utiliaon; andagricultural public sector management. It will also consolidate reforms in trade, agricultural price policy,grain marketing, and rural finance begun under SAL II. These reforms, together with the overallmacroeconomic strategy of GOH consistent with and supportive of the agricultural adjustment programfor sustained growth-including efforts to reduce the fiscal deficit, flexibly manage the exchange rate andliberalization of interest rates, and improve the management of public enterprises-are included in theGovernment's Letter of Agricultural Development Policy, dated December 8, 1992 (Annex 3). The letteralso includes action plans to implement the agreed reforms in the areas of land tenure, forestry, ruralfinance, and Government ewpenditure and Public fiance. In general, imple tn of the agreed plansare satisfactory. The Policy Matrix of key actions under the AGSAC is presented in Annex 2.

C. Land Tenure

71. The LRA was enaced in 1962 to distribute land to the landless, and to provide them with servicesnecessary to improve living conditions. To implement the agrarian reform process and coordinate policiesand services with other public agencies, the National Agrarian Instiute (INA) was created. While in itsnearly 30 years of opeaton INA has distributed 400,000 ha of land (15 percent of Honduras' farmedarea) to about 70,000 beneficiaries, it has been duplicating services rendered by other agencies andneglecting its most important role-the distribution of land to the landless. In addition, the agrarianreform process has been at a high cost; public expendiur for the program tbrough 1988 (the latest yearfor which data are available) are estimated at about US$2,200/ha, equivalent to the investment requiredto irrigate one hectare.

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72. The LRA actually caused tamre insecurity and imposed restrictions on owners' land usedecisions, thereby discouraging Inestment and efficient land use. Tenure insecurity derived frompotential expropriation by INA and invasion by peasnts. Although INA had not been active inexpropriating land in recent yeas, the risk of expropriation remained and represented a disincentive toinvestment. (Landowners, including land reform beneficiaries, were subject to continuous "evaluation"by INA officials, and their property could be exproprited if they did not engage in "direct" and"efficient" land eiploitation.) The climate of insecurity was exacerbted by the legal impediments totitling farms of less than 5 ha (a way to discourage minlfundio). INA estima that at present thenumber of farms of less than 5 ha exceeds the number reported in the 1974 Census, the latest availableland distribution data: LRA did not contain the proliferation of small landholders but deprived them oftheir de facto possession rights and hence of incentives to settle and invest in better managementpractices, both of which are necessary, though not sufficient conditions, for increased productivity.

73. Legal and administrative rules of the agrarian reform process hampered landowners' exercisingproperty rights, itroduced distortions in land use efficiency, and obstructed the development of a landmarket. Legal safeguards against expropriation of land under perennial crops or livestock have shiftedland use away from anmual crops. The definiton of "efficient" exploitation to mean that at least 90percent of farm area should be under cultivation or pasture, encouraged the clearance of forest areas onprivate lands, with the predictable negative impact on soil and water resources. Because private landrental arrangements were prohibited until recenty, land markets are underdeveloped and land useefficiency low. Small farmers' access to credit continues to be limited becse rural land cannot bepledged as collateral due to the provisional nature of the titles given by INA or the lack of land ttling.Furthermore, land has been distributed under the land reform program almost exclusively as "collective"property to producers' associations or cooperatives. Thus, land reform beneficiaries have been defacto,although not de jure, limited to organize as production cooperatives or commnal farms. LRA alsoestablished the rules and regulations for the selection of land reform beneficiaries. Before the new law,a number of these rules and regulations made land adjudication and ttling very cumbersome, anddiscriminated against women (who were not allowed to hold title unless they were single mothers withdependent children).

74. Land market development is also affected due to the incomplete coverage of the cadastral, andhence of the titling, system. In addition, coordination between INA, the Depament of Cadastre(Cadastro), and COHDEFOR is inadequate, and the Public Registrar is not up to date. The rural cadastrehas been completed only in 7 of 18 Departments. Tiding programs have been supported by externaldonors but with limited success due to the process embodi'4 in the LRA and the lack of inter-agencycoordination within GOH.

75. The Refon Progam. The objective of the land tenure reform program to be supported underAGSAC is to improve land use and consolidate the process of land reform. To that end, Law 31-92modifies the LRA to: (a) guarantee and secure flu land ownership rights; (b) legahe land rentalarrangements, except for some types of share-cropping; (c) counteract provisions of LRA which distortedland use patterns; (d) revise and simplify the adjudication and titg process (e.g., by reducing theminim time for title eligibility from 40 to 3 years of contnuo operation); (e) eliminate theprohibition of titling to holders of less than 5 ha; (f) provide women with equal rights of access to land;and (g) ensure consistency between general sectoral policies and those of agrarian reform. These changeswill provide a more secure land tenure basis and expand and accelerate adjudication and titling programsfor individual and community (ejidl land.

76. GOH has recenly approved a set of satisfactory regultions to implement the reforms to the LRAunder Law 31-92 after extensive disussions with farmer groups and IDA (para. 102.(b)). The

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regulations ensure that all types of land rental other than a narrowly defined form of share-cropping willbe allowed. GOH has also approved a satisfactory restuchatng of INA to have it focus primarily on landtitlng; this includes the divesting of assets and activities not related to land titling, reducing its labor forceto 800, and contracting-out some services. A Land Tenure Action Plan agreed between GOH and IDAand attached to the Letter of Agricultural Development Policy (para. 70 and Annex 3), is intended interalla, to accelerate: (a) land adjudication and titling; (b) cadastre work; (c) the recovery of INA's duesfrom its land adjudication and titling program; (d) the divestiture of INA's assets and activities not relatedto land adjudication and titling program; (e) the restructuring of INA, in particular with respect to thereduction of its labor force; and to ensure (f) that funds for the 'seed capital" scheme budgeted under theSRN will not exceed 25 percent of INA's budget in any particuar season. During the first year, INA'sactivities will be centered on the Departments where cadastre work bas been completed. Priority will goto providing titles to women and smallholders previously deprived of such a right (holders of less than5 ha), and on converting provisional titles into pmanent ones, in so doing allowing beneficiaries todecide whether to be titled individually or as a group. In forest lands, INA will closely coordinate itsactivities with Cadastro and COHDEFOR (para. 83). A pemanent coordinatng committee has beenestablished between INA, COHDEFOR and Cadastro to define responsibilities and harmonize requiredinformation for the titig and regularization program. In addition, INA has started implementing theagreed action plan (paa. 102.(c)) (in particular with respect to its rtucring), and GOH has budgetedthe financial requrements for the 1993 cadastral work required in support of the land titling program.Satisfactory implementation of the Land Temnre Action Plan would be conditions of Second and ThirdTrance rass (paras. 103.(a) and 104.(a)). Presentation of satsfactory terms of reference for afnancial and operational audit of INA would be a condition of Second Tramlhe release (para. 103.(c)),while presentaton of a satisfactory audit report would be a condition for Third Trache release (para.104.(c)).

D. Forestry

77. Honduras bas significant forest development potential. However, output is limited due todistortions of incentives resulting from government interventions, absence of private property rights overthe forest, and poor forest management practices. Undl March 1992 (when the LMA was approved),forestry laws and regulations discouraged imvestment, efficient resource use, commercial exploitation, andconservation and development of the natnral forest. Two-thirds of Honduras is classified as suitable onlyfor forest pover but the actual forest area is only 45 peet of totl land area and severe degradationin some regions attests to widespread misuseY The annal rate of deforestation is estimated at 1.1percent (about 80,000 ha), mainly of broadleaf forest. The forestry indutry is also in a state of decline.Lumber production in 1990 was 600,000 to 700,000 cubic meters, or about 30 percent below 1978-79production; the export value of prmary forest products has decreased by more than 40 percent in thesame period. Revenues and marketed volumes have declined faster than the harvestig of logs. Thesector's regulatory frmeork has resulted in the producdon of low-value products, and considerableinefficiency in resource use: currenty, neither the objectives of susianable commercial foresty norconservation of enviromnentally fragile areas are beig met.

78. The principal factors causing degradation of fort lands are the settemat of generally landlessfamilies in forested land and extensive livestock ranching. The LRA and forestry laws and policies

11 There is no accuae hfmaton on forest coverage. Esdcas Foresales 1989^ by CORDEFOR and PAOIUNDPand miion calcula estmate tat die present f a is 7.6 million ha, of whicb 2.4 mion ha is broadleaf noest and2.9 miion ha is conifrows an 2.3 mSion ha (many broaf frest) is dortesXd. Slight over half of the people livingin forest area occupy communal (o) land, and less thn 10 percn le on private lands. Most of the population ondeforestd areas are on ejdo or non-ejdo public lands.

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prevailing until April 1992 established a perverse set of incentives which encouraged cutting the forestand replacing it with crops or pasture to avoid possible expropriation of land and lumber resources. Thelaw that created COHDEFOR gave it legal rights and full control over all timber resources, even thoseon private lands. Commercial logging was also inefficient due to COHDEFOR's: (a) stumpage fee whichresulted in "high-grading"; (b) practice of granting shott-term (less than one year) extraction permits,which failed to establish an incentive to increase yields through improved forest management; and (c)weak monitoring and enforcement of sustinable forest management. COHDEFOR's legal monopoly oftimber exports, direct intervention in pricing and production, and controls over the production andmarketing of wood products, reflected and encouraged the short-rn, extractive nature of the Honduranforest resource utilization, and inhibited the development of a sustainable private sector forestry industry.Excessive protection of the domestic sawmill industry through the 49 percent limitation on foreign capitalparticipation in forestry-related venture discouraged improvements in forestry management practices.

79. In recent years, and with substantal support from the donor community, COHDEFOR has madeefforts to address some of these problems. First, a new stumpage valuation system, based on standing-tree value, is being implemented. Second, it has started to re-direct its policies and activities away fromforest exploitation towards resource management, stopping all its production activities and closing itssawmills. Third, it is divesting all assets related to production and processing of lumber; the fiveremaining enterprises have been offered for sale, and the divestiture process is expected to be completedby end-1993. Fourth, an intensive management program (AMIs) has been introduced on a pilot basisunder the support of the Canadian International Development Agency (CIDA). In this, owners or settlersare incorporated into a management system that minimizes tree harvesting and has the potential ofyielding results in terns of prevention and detection of forest destruction, as well as aireely benefitingthe rural poor.

80. The Reform Progam. The objective of the forestry policy reforms to be supported by theAGSAC is to lay the basis for a sustinable management of the country's rich forest resources withincreased participation of the private sector. To that end, Law 31-92 introduced modifications to theforestry laws to: (a) elminate any activity or function of the forestry public sector (AEE, i.e.,COHDEFOR) related to the production, marketing and trade of forest products; (b) reorient the APE'srole towards management and protection of public forests, regulation of private forests, fire pretection,and forest extension and research; (c) require management plans as a pre-requisite for all forestutilization; (d) return and guarantee ownership of tmber resources to landowners; (e) exenpt all forestlands from future expropriation under the LRA; and (f) allow private sector entry into forest production,industrialization and marketing.

81. GOH has recently approved satisfactory reguations to implement the enacted forestry changesunder Law 31-92 (para. 102.(b)), that include: (a) the role and responsibilities of APE; (b) that publicstumpage sales and other revenues generated by the public forest lands would be part of the Treasury'sincome; (c) standards for the mangemet plans to be submitted to AFE as prerequisite to utilize anyforest resources; (d) procedures to demonstrate the right of use of forest resources by forest land owners;(e) transitional dispositions to identify public forest areas; (f) rules to establish dispute settlementmechanisms in forest areas; (g) policies and procedures to regularize communities in national forestsand/or to compensae farmers in cases of involuntary resettlement; and (h) regulations to establish andmanage Protected Forest Areas and to promote biodiversity conservation. The regulations stipulate alsothat the resources to implement the APE's anmual work program would have to be sanctioned by theMinistry of Finance and would be independent of the revenues generated by the public forest lands.

82. A simple workable scheme for the development of forest managemen plans to safeguard publicinterest and the eaviroment on one hand, while providing incentives to the owners to husband the

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resource on the other, is critical. The rules, regulations and standards of the management plans havebeen developed by GOH with technical assistance from the donor conmmunity under close consultationwith IDA. These regulations minimize requiements for the numerous, small landowners who are notlocated in environmentally critical areas, while concentrating attention and effort on the fewer largerowners and environmentally critical areas (e.g., nucleus of protected areas). GOH's policy, as stated inthe Letter of Agricultural Development Policy (Annex 3), is that in the majority of the public forest area,settlers would need to be regularized (e.g., through conditional long-term leases) and incorporated intomanagement systems which minimize or avoid harvesting. In critical areas, owners and/or settlers mayhave to be bought out or moved in land swaps. In general, however, GOH policy is to mininizeinvoluntary resettlement, and it will only be exercised in cases of urgent need and only as a measure oflast resortY The extent of the population that might be resettled will only become apparent as individualmanagement plans are prepared and approved. Resettlement rules and regulations, consistent withOperational Directive 4.30 on Involuntary Resettlement, are part of the regulations to the LMA (para.81). In particular, the latter states: (a) the cases in which resettlement will be considered; (b) theirstitutions responsible for resettlement; (c) that a resettlement plan must be prepared as soon as the needfor resettlement is identified; (d) that any resettlement action must include an appropriate comnpensationpackage as part of the plan; and (e) that comnmnity participation must be an important element inresettlement activities. GOH has agreed to present to IDA for its approval, a plan for any proposedresettlement before any resettlement action is initiated (para. 101) and carry out such actions inaccordance with such plan. Implementation of such plans would be monitored pror to Second andThird Tranche releases as part of the Forestry Action Plan (para. 84).

83. The regularization of forest land settlers and the return of LMA ownership of the forest tolandowners will have to be done carefuilly in cooperation with the INA and Cadastro (para. 76) becauseof the precarious status of the land transaction recording system and the limited coverage of the cadastre(para. 74). To mitigate possible risks associated with the above, GOH has issued clear rles for: (a)reinrning forest resources to landowners; (b) the establishment of an efficient arbitration system; and (c)the imposition of a strict control by APE of the validity of the titles to claim forestry property rights andof possible fuure edcroachments in state land. Rules to implement such measures are spelled out in theregulations to the LMA that were recently approved by GOH (para. 84), and the execution of such policywould be monitored before Second and Third Tranche releases as part of the Forestry Action Plan(paras. 84, 103.(b) and 104.(b)). Also, to accelerate the regularization and titling process, it is imperativeto expedite the development of a land capability system to identify the forest areas (included degradedforest) most suited for forestry (i.e., "potential forest areas"), and to accelerate cadastral work in forestedareas with higher population concentraIons. According to Law 31-92, potenti forest areas are notsubject to expropriation or adjudication and hence state forests cannot be privatized. Gt)H will beassistd by the German Association for Technical Cooperation (GTZ) in identifying potential forest areas,a task expected to be completed during 1993.

84. A satisfactory Forestry Action Plan agreed between GOH and IDA is attached to the Letter ofAgricultural Development Policy (pam. 70 and Annex 3) and includes, inter alfa, actions for the: (a)restructuring of AFE; (b) identification of potential forest areas; (c) auctioning of forest resources frompublic lands eligible and suitable for commercial forestry; (d) establishment of public forest managementunits (PFMUs); (e) formalization of usufiu rights of communities or implementaton of resettlementplans, if any; (f) preparation of management plans; (g) establishment of a Protected Forest Area system;and (h) implementation of a program to monitor the social and environmental impact of the forestry

2/ The LMA does not change the legal stus of protecd areas and tre does not ree GOH to resettle ocupantof protected areas. However, GOH could decide to exerche ias acrr righs to preserve legally- established protected areas,in which case it might consider defraying the cost at resettemenit

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reform program (Annex 6). GOH has initiated implementation of the agreed plan (para. 102.(d)), inparticular: (a) satisfactory restrucring of APE has been approved by GOH; (b) stumpage in all publiclands has been increased to parity level with private lands; (c) an auctioning system of timber sales hasbeen initiated; and (d) funds to implement the agreed social-enviromental monitoring system have beenensured. Satisfactory implementation of the agreed Forestry Action Plan will be monitored prior toSecond and Tdb Tranche releases (paras. 103.(b) and 104.(b) and Annex 3). In addition, presentationof satisfactory terms of reference to undertake a financial and operational audit of COHDEFOR wouldbe a condition of Second Tranebe release (para. 103.(c)), while presentation of a satisfactory audit reportwould be a condition for a Third Tranche release (para. 104.(c)). An economic and environmentalstatement of the possible impact of the forestty policy reforms contained in Law 31-92 and to besupported by the proposed operation is in Annex 6. This sXtaement was prepared by IDA based oninformation provided by COHDEFOR and has been discussed with GOH officials and the donorconmunity.

E. Rural Fiance

85. GOH, with substntial support from international agencies, tried to compensate farmers for theadverse terms of trade for agriculture (para. 64) by giving subsidized credit through: (a) a large numberof Central Bank (BCH) credit lines for agricultre; (b) a first-tier state-owned bank, BANADESA, whichcatered mainly to rural borrowers at highly concessionary terms; and (c) INA, a nonfinancial institutionthat provided financial resources to agrarian reform beneficiaries. By the end of the 1980s, totalagricultural interest subsidies from the banking system (including BANADESA's own operations but notits trust funds) alone were equivalent to about two percent of agricultural sector value-added.

86. Commercial banks provide credit primarily to medium- and large-scale commercial farmers, usingBCH rediscounts. Citing lack of collateral, they often turn down small rural producers. Low-incomenrr producers' difficulties in obtaining formal finance have been due to: (a) their inability to mortgageland since they lack title to it; (b) high costs of monitoring borrowers in distant locations; (c) economiesof scale in commercial bank operations which penalize small accounts; and (d) deficiencies in thecollateral system which force lenders to require extremely high collaterals. Ceilings on interest rates andother service charges did not allow formal intermediaries to cover transaction costs or higher risks.Informal markets are generally more flexible but have higher costs and do not intermediate effectivelyamong rural areas.

87. BANADESA, the main source of formal credit for small farmers, was created in 1982 as thesuccessor to an agricultural bank that went bankrupt. Since its inception, BANADESA has facedsolvency and liquidity problems due mainly to insufficient capital and loan losses. Political interferencein credit allocation and approval frequently resulted in loans of dubious quality. The more than 30 trustfunds managed by BANADESA, each requiring its own management and with varying, ambigous creditregulations, contribute to BANADESA's excessive int tion costs of about 10 percentage points.Moreover, BANADESA was given a nunber of tasks unrelated to its primary mission.

88. As nart of the Fourth Agriculural Credit Project (Ln. 2991-HO, approved in September 1988),GOH agreed to take the first steps towards rationalizing the rural financial sector. The main objectiveof the agreed rationalization program was to stgthen the incentives for the financial sector to allocateresources more efficiently in rural areas. This policy commitment was complemented and deepened underSAL It. Fulfillment of financial sector policy conditionality under these two operations has beensatisfactory. In particular, commercial bank lending rates have been liberalized and rediscount ratesubsidies eliminated (Annex 4). In addition, in 1993, and funded under Ln. 2991-HO, GOH will initiate

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a study to idewt major deficiencies in the collateral system and to propose short- and medium-termcouses of action to overcome such constraints. The study is epected to be completed duing 1993.

89. Under SAL 11, the Bank and GOH agreed on a restrcturing plan for BANADESA. Inaccordance with that plan, BANADESA has: (a) laid off 45 percen of its personnel; (b) increased tomarket levels lending rates on a portion of its portfolio; (c) stow lending to public sector instiutionsand providing loans in excess of US$50,000 equivalent to a single borrower; and (d) started to divestfrom its non-fcial activities. However, during 1991-early 1992 (GOH failed to improve overall loanrecovery (mainly due to the announcement of a debt forgiveness program In mid-1991). Since mid 1992,the Goveent has generally complied with the financial comnitments (para. 90).

90. The Reform Progrm. Liberalization of interest rates (pan. 88) and improvements in theagriculunral terms of trade and land teue property rights (paras. 68 and 75) will substantially improvefarmers' access to formal fiancial credit in the medium- and long-run. Therefore, the objective of themral financial sector reform program to be supported by the AGSAC is to help improve the efficiency

of rural financial intermediation and to increas access of small farmers to credit facilities as reflectedin the Rural Financia Sector Action Plan attached to the Agreement's Letter of Agricultural DevelopmentPolicy (para. 69). GOH has shown its commtment towards this objective by satisfactory implementationof BANADESA's restuct plan agreed under SAL II since April 1992, in particular with respect tomaintaining the August 30, 1991 Central Bank rediscount level, adjustd by inflation, and providing noadditional Tray fimding to the insituon throughout 1992 (par. 102.(e)). The Government hascommitted itself to mahinn such financing limit and not to provide any additional debt forgiveness toagricWultal credit beneficiaries (Letter of Agricultual Developmn Policy; Annex 3). These financingcommments will be closely monitored prior to Second and Third Trandw releass (pa. 103.(d) and104.(d)). In addiion, GOH has agreed to divest BANADESA to facilitate gre r participation and todevelop more efficient finmcial intermeaes in rural fiacig and has prepared satisfactory terms ofreference (TORs) to evaluate diveste alteraves. Initiation of concrete agreed actions to divestBANAD13SA (e.g. havng completed the sales of a portion of BANADESA's portfolio or of somebranches, or having completed the preparation of tender documents to sale the institution as a whole)based on the study carried out under agreed TOR would be a condition of Second Tranche whilesubstntial progress on the divesdtur process would be a condition of Third Tranhe release (para.103.(e) and 104.(e)). In the short run, there is a need to ident and develop ways to increase theparticipation of formal financial insttutions in rural financing. Therefore, GOH has also prepared andapproved satsfactory TORs for a study to ident a scheme to promot the increased participation offor fal financial imedi in agricultural credit. Satisfactory implementation of the agreed actionplan to promote increased participation of fancal itmediaries based on eons of thestudy, would be monitored prior to Second and Tlird Tranche releases (aras. 103.(e) and 104.(e)).

91. To better attend fte needs of small fiamers, Law 31-92 has established the legal basis for two newtypes of entities in the rural financial system: rural credit banks (Cajas Rurales) and a land credit fund.The main objective of GOH in the creation of rural crit banks is to improve credit access to small uralborrowers by making fiam groups responsible for their own finances. The main objective of the landcredit fund is to facilitate small farmers' access to financial resources to purchase land. IDA has agreedwith the SRN and the BCH regadi the nature and function of these new entities and the need toestablish suh h a network of rral credit bans with adequate fan supervision and managerial skills.Similarly, it has been agreed to limit treasy esources for the land credit fund to those stipulated in theLMA, that is, to the recoveries fom the lani adjudication and titing under such law. The basicprinciples under which such schmes would operae are spelled out in the Rural Credit Action Plan agreedbetween tg GOH 0and IDA and attaced to the Letter of Agricultural Developmet Policy (pan. 70 andAnn 3). In summary it was agreed tatthe land credit fund scheme wod: (a) be a line of credit open

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to all qualified financial intermediaries; (b) lending will be at market interest rates; and (c) financialintermediaries will be filly responsible for credit risks. The rural credit banks will be: (a) privatefinancial institutions tightly controlled by a competent regulatoy entity; and (b) financially self-sufficient.GOH has recenty approved the regulations to operate the Land Credit Fund (para 80.102.(f)) while thedeta on how the rural credit bns will operate are beig developed by GO with assistnce from theUnited States Agency for International Development (USAID). Prior to Second Tnhe Release (pam.103.(1), GOH would approve satisfactory schemes, rules and regulations to implement the rural creditbanks, based on the principles laid out in the Rural Credit Action Plan; implementation of these twoschemes according to agreed rules and regulations would be monitored prior to Second and ThirdTrenche releases (paras. 103.(t) and 104.(D).

F. Government Ependiture and Public Administration

92. The organization, functions, and regulatory systems of the agricultural public sector needimmediate and broad-based reform, both to adapt it to the proposed new policy environment and tocorrect the following administaive and managerial deficiencies and major sector management problems.

93. A complex system of decenlized, functionally overlapping government institutions andpaastals involved in all aspects of the production-distribution chain was developed to enforce price andtrade controls, and other regulations. Most were inefficient and operated with minimum or no costrecovezy, so contributing to significant fiscal deficits. In addition, due to GOH's weak budgeting system,sectoral agencies are not well informed about planning parameters or financial restictions for thebudgeting process; the system does litfle more than track the movement of money in a rudimenty way.Expendt classifications are obsolete and the absence of common standards prevents uniformity inbudgeting classification. Under these conditions, budgeting control becomes difficult, if not impossible,as it does not allow monitoring of achievement of the objectives stated in the Annual Operating Programs(POAs), or of the cost efficiency of activities.

94. Law 31-2 provides the institutional framework for overall sector coordination, and allocatesresponsibility to formulate and implement the agricultural policy, strategy and budgeting to the SRN.Under this system, the Agricultural Sector Planning Unit (UPSA) within SRN provides technical supportto the Committee for Agricultural Development (CODA). This new instittional framework provides thebasis for managing stmctur administrative reforms and implementing the overall policy changessupported by the pwposed AGSAC. GOH has begun to use this new system to develop coordinated andcoheret sWategies and policies for the agricultural sector assisted by the sector agencies. It was used toprepare the AMDP and Law 31-92.

95. The Reform Program. The objective of AGSAC-suported actions in agicultural publicadminitron is to improve sector policy planning and coordination by strngtning and making betteruse of the budget process. Public agricultural instittions would need both to effect economies inadministrve and opeting costs, and to justify the continuation and/or start of specific programs andprojects on efficiency and economic grounds. Improvements to sector budget managemnt are a crucialprecondition to policy and management improvements, and would allow SRN to exercise effectively itslead role in policy coordination ald execution, and strengthen the policy dimension of UPSA in sectormanement and budget control. The proposed AGSAC would require POAs and budgets for the sectorand for each sector instion, satisfactory to IDA, be approved by the Economic Cabinet prior to theirapproval by the Ministry of Finance and be presented to IDA by Auust 30 of each precedig year ofthe imple ion of the Credit, startng in August 1993. These are to include the government'sagricultural seaor investment progrm and to reflect and support agricultural policies agreed under thisoperaion (paas. 102 to 104 and Annex 2) and under SAL II (para. 68 and Annex 4). Implementation

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of POAs and budgets for the sector as a whole and for each of the sector institutions would be reviewedby the SRN and be presented to IDA at the end of each following quarter to ensure that they did supportthe agreed policy changes under this credit and SAL II. These requirements are reflected in the PublicAdndtratdon Action Plan agreed between the GOH and IDA and attached to the Letter of AgriculturalDevelopment Policy (Annex 3). Satisfactory implemention of the Public Administration Action Plan,in particular with respect to implementation of agreed POAs and budgets, would be monitored prior toSecond and Third Tranches (paras. 103.(g) and 104.(g)). In addition, the Economic Cabinet and theTreasury have approved satisfactory 1993 POAs and budgets for the sector and for SRN, INA, IHMA,APE, and BANADESA, reflecting and supporting the policies agreed under the proposed operation andunder SAL II (para. 102.(g)).

96. Technical Assstance. In conjunction with the proposed credit, GOH has agreed to implementa Policy Support Program (PSP) to provide UPSA and the sector institutions with technical support tostrengthen policy planning, management and implementation capabilities (para. 102.(h)). The PSP's mainobjective is to help define, develop and institutionalize the managerial capacity needed to implement thenew sectoral policies. The PSP has three main components: (a) the provision of specialized technicalassistance to execute and control POAs and budgets within the context of sector policy priorities; (b) theimplementation of the restructuring and provision of insfitutional management techniques needed to carryout the proposed policy reforms; and (c) coordination of the technical support provided by internationaland bilateral orgnizations active in Honduras' agricultural sector (among others, USAID, CIDA, GTZ,RUTA, and UNDP). Under this program assistance will be provided to UPSA, SRN, INA, APE andBANADESA. GOH has been receiving technical assistance from USA1D, CIDA, RUTA, UNDP andIDB to prepare the regulations to Law 31-92 and the reorganization structure and implementation planfor the sector institutions, particularly INA and COHDEFOR. In addition, since GOH is receivingtehical support from USAIJD to formulate and implement agricultural policies, GOH has requestedUSAID financial support to finance the proposed PSP satisfactory to IDA (Annex 5); satisfactory PSPiplementation during 1993 and 1994 will be monitored prior to Second and hbird Trancle Releasesas part of the Public Administration Action Plan (paras. 103.(g) and 104.(g)).

PART m - THE PROPOSED AGRICULTURAL SECTOR ADJUSTMET CREDIT

A. Blank Experience and Rationale for Lending for Agriculture

97. B/DDA Experien In LEding for Agriculture. During 1970-90, IDA and the Bank madefour credits and three loans, totalling US$113.4 million, to Honduras for six agricultral projects. Manyof the lessons learned from them were incorporated in the design of the Fourth Agricultural Credit Project(Loan 2991-HO) of 1988. However, due to Honduras' non-accrual status during 1988-9, the Loan2991-HO only becne effective in June 1990, during the final phase of SAL II processing, once arrearsto the Bank Group were cleared. SAL II supports a number of agricultural policy changes, in particularrelated to price and trade and rural financial markets. Lessons learned from the implementation of bothSALs have also been incorporated in the design of the proposed AGSAC.

98. Raionale for l[DA Ihwolvemnt. Agricultural activities are critical to Honduras' long-termeconomic growth and IDA and IDB have been working closely with GOH and SRN in designing theAMDP. The Bank and IDA have supported GOH efforts to implement the first phase of this programthrough SAL II (para. 68 and Annex 4), which was cofinanced by IDB. The proposed reforms of theagriculural progrm are important components of the structural adjustment/stabilization programsupported under SAL H, SAC and ESAC and essenti to GOH's medium-term progrm (para. 13). Theproposed AGSAC suppons the most important reforms included in the Government's AMDP and Law31-92, and would help consolidate sector reforms inated under SAL 1I to rblish the country's

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compaaive advantage in agriculture modemization sector and ensure sustainable medium- and long-termgrowth.

B. Trauche Release Conditions

99. Cofinavclng. The IDB is co-financing -the same policy program as that supported by theproposed AGSAC with a US$50.0 million loan. The IDB loan, to be disbursed in three tranches againstfulfillment of the same conditions as the IDA credit, was approved by IDB Board in mid-December 1992.Its effectiveness has been conditioned to the approval of the proposed AGSAC by IDA's Board.

100. Credit Tranchi. IDA support of SDR43.3 million (US$60.0 million equivalent) is proposedto be disbursed over 27 to 30 months as follows: a First Tranche of SDR18. 1 million (US$25.0 millionequivalent) would be disbursed upon effectiveness, a Second Tranche of SDRIO.8 million (US$15.0million equivalent) would be disbursed afier about 9 months upon satisfactory compliance with SecondTranche release conditions, and release of the remaining SDR14.4 milion (US$20.0 million equivalent)is anticipated by the first quarter of 1995 after satisfactory compliance with Third Tranche releaseconditions. The Closing Date of the Credit will be June 30, 1995.

101. In addition to the monitorable actions specified in paras. 102 to 104, all trance releases wouldbe contingent upon: (a) the mainenance of a sound macoeconomic frmnework consistent with andsupportve of the agriculural sector adjustment program for sustained growth; and (b) satisfactoryperformance in overal agricultural program implementation consistent with the Letter of AgriculturalDevelopment Policy and SAL n agricultural policy commments. GOH would also be required topesent to IDA, for its approval, a satisfactory plan before underaking any resettlement action and carryout such action in accordance with such plan.

102. The following major actions were taken by the Government before presentation of the credit tothe Board of Executive DLrectoa:

(a) Law 31-92 containing satisfactory modifications to the land tenure and forestry policieswas enacted in April 1992 (pan. 69);

(b) Regulations to implement the enacted land tenure and forestry chapters of Law 31-92satisfactory to IDA have been approved by GOH (paras. 76 and 81);

(c) GOH has initiated implementation of the agreed Land Tenme Action Plan (pan. 76);(d) Implementation of the agreed Forestry Action Plan has been initiated (pan. 84)(e) Satisfactory progress in the implementation of the restucgt plan of BANADESA

(pan. 90);(t) Safactory basic principles to establish and operate rural credit bans and satisfactory

regulatons to establish and operate the land credit fund have been approved by GOH(pua. 91);

(g) Satisfcory 1993 POAs and budgets for the sector and for SRN, INA, IHMA, APE andBANADESA (pan. 95) have been approved by the Economic Cabinet; and

(h) GOH has approved on the PSP and its financing, satisfactry to IDA, to strengthen sectorplanning, management and implementation capabilities to undertake proposed policyreforms (para. 96).

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103. Secod Tlnche Rdease would be conditional upon the following actions:

(a) Satisfactory implementation of the Land Tenure Action Plan (para. 76 and Annex 3);(b) Satisfactory implementtion of the agreed Forestry Action Plan (para. 84 and Annex 3);(c) Satisfactory TOR to undertake a financial and operational audit of INA's and AFE's

records and accounts (paras. 76 and 84);(d) Evidence that the Central Bank funding to BANADESA has been limited

to the August 30, 1991 level, adjusted by inflation, and that there hasbeen no additional treasury funding (para. 90).

(e) GOH has completed the study to promote increased participation of financialintermediaries in agricltural credit as agreed with IDA, presented a plan to implementrecommended actions, and has initiated implementation of the agreed plan of action todivest BANADESA based on the reommendatons of the evaluation carried out underagreed TOR (pana. 90);

(f) GOH has approved satisfactory rules and regulations to establish and operate the ruralcredit banks, based on the agreed basic principles, and provide evidence that, to theextent the land credit fund and the rural credit banks are operational, are functioning inaccordance with agreed schemes, rules and regulations (para. 91); and

(g) Satisfactory implementation of the agreed Public Admiistration Action Plan (paras. 95and 96).

104. Third Tranche Release would be conditional upon the following actions:

(a) Satisfactory implmentation of the Land Temnre Action Plan (para. 76 and Annex 3);(b) Satisfactory implementation of the Forestry Action Plan (para. 84 and Annex 3);(c) Satisfactory audit report of INA's and APE's operations based on agreed TOR (paras.

76 and 84);(d) Evidence that the Central Bank funding to BANADESA has been limited

to the August 30, 1991 level, adjusted by inflation, and that there hasbeen no additional treasury funding (para. 90).

(e) Substantial progress in implementing the agreed recommendations of the study to promoteincreased participation of financial intmediaries in mrual financial markets and of theagreed plan to divest BANADESA (pan. 90);

(f) GOH bas provided evidence that land credit fund and the rural credit banks, to the e.-tentthat they are operational, are functioning in accordance with agreed schemes, rules andregulations (para. 91); and

(g) Satisfactory implementation of the agreed Public Administration and Expenditure ActionPlan (pan. 95 and 96).

C. Procurement, Dibursement and AudIting

105. The credit proceeds will be used to finance the foreign exchange cost of general imports (goodsand relevant foreign services), excluding goods financed by other muldlateral or bilateral agencies, andother goods specifically prohibited in a negative list defined under the Standard International TradeClassification (SITC) or equivalent classification. Retroacive financing for up to 20 percent of the creditamount is recommended for eligible expenditures incurred beginning fourth months prior to the creditsigning date.

106. A Country Procurement Assessment Review (CPAR) carried out by IDA in September 1990concluded that Honduran legislation which govers public procuremet promote contracting on the basis

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of competitive bidding is compatible with IDA guidelines. It also determined that private companiesgenerally follow acceptable commercial practices among which the most current is the use of limitedcompetitive bidding procedures among qualified suppliers; importers generally obtain quotations fromseveral suppliers and buy on the basis of quality and price. Based on the CPAR findings it is proposedto apply the following procurement procedures:

107. Imported goods by public and private sector entities valued at US$5.0 million or more would beprocured through simplified international competitive bidding (ICB) procedures in accordance with IDAguidelines with the exception of commodities which will be procured through inernational competitiveprocedures acceptable to the Bank. For petroleum imports being supplied under existing contracts,relevant expenditures would qualify for reimbursement under the credit in an amount not to exceed perunit the reference average FOB price published in the Platt's Oilgram for the US Gulf Coast or theCaribbean, as applicable, on the date of loading and adjusted for the type and quality of crude or productonly. Any financing on any such oil imports would be eligible for reimbursement under the credit. Asimilar criterion would apply to the reimbursement of expenditures for imported commodities underexisting contrcts for which the reference unit price would be the average price posted by a recognizedcommodity exchange; and

108. Imports valued at below US$5.0 million equivalent would be procured in the case of: (i) publicsector entities, in accordance with the procedures applicable to such agencies; and (ii) private iniporters,in accordance with established commercial practices of the sector based on price quotations except wheredirect contracting may be appropriate under para. 3.5 of IDA Procurement Guidelines.

109. Disbursements of each tranche would be made against import documentation received from theCentral Bank, which would be responsible for the collection of the relevant documentation and submissionof credit withdrawal applications. IDA will follow the simplified documentation procedures foradjustment operations described in the recent Board note on this subject (SecM92-767; June 8, 1992).For those contracts each valued at less than US$5.0 million equivalent, IDA would reimburse theBorrower on the basis of Statements of Expendiu (SOEs) prepared by the Cental Bank. Applicationsfor withdrawals will be consolidated and submitted in amounts not less than US$250,000 equivalent.Expenditures for: (a) goods procured under individual contracts valued at less than US$10,000 equivalent;and (b) crude oil imports in amounts exceeding the equivalent of 25 percent of the credit would not beeligible for financing under the credit. Supporting information related to the SOEs will be retained bythe Central Bank for review by IDA and for audit by exenal auditors. In addition to standard auditingcovenants, an audit report covering relevant SOEs would be submitted to IDA no later than 90 days afterthe full disbursement of each tranca. Submission of the audit report for SOEs of the previous trancherelease would be a condition of disbursement of each following tranche.

D. Benefits, hpact on Envhromnent and Risk

110. Benefits. The proposed AGSAC would benefit Honduras' agricultural sector through: (a)improved resource allocation resulting from the elimination of distortions associated with price and tradepolicies, credit subsidies, and regulations and legislation related to land use and forestry; (b) improvedinvestment climate by supporting changes in the land and forestry legislation to guarantee security of landtenure and private property rights in forest resources; (c) increased employment as a result of theexpected acceleration of agricultural growth and the expansion of more labor intensive activities; (d)laying the basis for a more rational management of forest resources and better protection of the forest byimproving the system of land and forest property rights and eliminating legal provisions that promotedeforestation; and (e) supporting equal rights for women in the agrarian reform process and credit byeliminating discdminatory provisions in the access to land. As a result of past and proposed adjustment

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measures in Honduras, the agricultural sector is expected to grow at an average rate of more than 4.0percent per year during project implementation compared to 3.0 percent experienced during the previousdecade. The expected inmpact of the reform program on different agricultural product groups is outlinedbelow:

Traditional Export Crops: In spite of the past unfavorable policy conditions, banana and coffeehave been Honduras' main export products, accoundng for over 50 percent of its export earnings.Production of these two crops has declined during the last two years due mainly to a strike ofbanana workers and bad weather. Other traditional export crops are sugar and tobacco.Profitability of these non-traditional export crops has improved as they are now benefiting froma more favorable exchange rate regime. Although future world prices and markets for coffee andbananas are not encouraging, some expansion of area under these two crops is taldng place inHonduras as they remain competitive. In the longer run, the effects of the more favorableforeign exchange regimen and a shift of the tax regime from export to income taxes shouldfurther improve profitability. In addition, reforms to the LRA supported under this project willfacilitate land rental and improve temnre security, and so are expected to increase investment andhence productivity. In the next two years, coffee and bananas are expected to reach theproduction levels of the late 1980s. Thereafter, productivity increases in coffee and some areaand productivity increases in bananas are foreseen.

* Non-tadtonal Export Crops: The most successful non-traditional export products are shrimpand lobster, although the area planted with pineapples and melons has doubled in the pastdecade. Despite recent growth, non-traditional export crops occupy only about 10 percent ofcultivated land in Honduras. There is considerable potential in producing high-value crops forexport, which will generate foreign exchange and rural employment, and will utilize land moreintensively than traditional crops. The subsector is therefore well positioned to benefit fromGOH's economic reform program, as devaluation of the currency and elimination of tradebarriers protecting domestic m will increase the attractiveness of investment. Keyprovisions of the LMA which allow land rental and joint ventures are expected to accelerateinvestment and the expansion of the productive capacity in this important subsector.

o lBasic Grais: Honduras' main basic grains-maize and, to a lesser extent, beans, sorghumn, andrice-have already benefitted from on-going policy reforms. Adjustment in the foreign exchangeregimen has increased prices and demand for domestically-produced grains and has improved theviability of investments to increase productivity. Price and trade policy changes are expected tobring about a shift in real income from urban consumers to rural producers. In spite of thenegative protection of maize over the last decade, maize yields have increased steadily; in themedium term, the productivity of maize (and of other basic grains) will accelerate. In the long-run, there is likely to be a reduction of the area under basic grains, and possibly even ofproduction, due to the greater profitability of other agricultural activities. Resultant possibleincreases in basic grain imports are expected, however, to be more than compensated for byincreases in other agricultural exports.

Livestock: Honduras has been an importan. plier of beef within Central America. However,production and exports have fallen since the late 1970s and domestic consumption has beenshifting toward chicken meat, production of which expanded rapidly in the 1980s, supported bythe low cost of imported inputs. However, price and trade policy changes are now making beefconsumption more attractive. In addition, there will be productivity increases in cattle productionas other activities compete with pasture for good agricultural land.

- 34 -

Forest Product: The proposed policy reforms are expected to raise the price of lumber tointernational levels; increase revenue from the sector, investnent and productivity; and providelandowners with incenives to reforest and improve the utilization of forest resources. Byimproving the atlocation efficiency of resource use in commercial timber areas, the value-addedof forest products will increase, and over time the productive base will also increase. In areasnot suited to commercial production, especially the broadleaf forests, forestry programs will bedeveloped with greater community participation and COHDEFOR's role in improved managementof protected areas will be strengthened.

111. Environmental Impadt. The entire sector adjustment credit is designed to create new policiesand procedures for the environmentally sustainable management of land and forest resources. Therefore,a separate, free-standing enviromental assessment exercise was not considered appropriate. Instead, anenvironmental statement on the forestry policy reforms embodied in the LMA is presented as Annex 6.It covers the major environmental and social issues and impact which the project is designed to address.The proposed operation addresses environmental concerns by: (a) correcting the negative environmentaleffects of current forestry and land reform policies and legislation; (b) promoting reforestation by grantingproperty rights of the forest to forest landowners; (c) encouraging land and forest conservation by givingsecurity of temnre, either through land titles or conditional long-term leases; (d) promoting improved andsustamiable forest management by requiring management plans as a pre-reqiisite to exploitation; and (e)promoting improved management of Protected Forest Areas and biodiversity conservation. All thesereforms are expected to have an important positive environmental impact.

112. Risk. There are three major risks associated with the proposed operation. First, the introductionof policy reforms may prove difficult to implement because of public opposition, particularly since thecountry is in its presidental election year. To minimize this risk, key policy reforms were intrducedprior to Board Presentation. Modifications to the land tenure and forestry laws and regulations have beensanctioned, and the institutions responsible for overseeing the implementtion of the new policyiplementation are being restuctred, both satisfactory. GOH held extensive discussions with farmers'groups and associations and the private sector to seek consensus on the proposed reforms of the LMAand its regulations. In addidon, since the enactment of the Law GOH has been conducting a series ofseminars explaining the objectives and implications of the proposed policy changes. Second, GOH hasa weak institutional capacity. Policy reforms supported under the AGSAC will substantally reduce therole of the state by eliminating functions related directy to production and marketing. Scarce G0Hmanpower resources would be better utilized in a regulatory role and as a purveyor of key services.GOH has requested the donor community to readjust their existing technical assistance projects tostrengthen its capacity to implement the new agricultural legislation. In addition, GOH is carrying outa PSP (para. 96) to strengthen its policy plannming, management, implementation and donor coordinationcapabilities.

113. A third possible risk is that initially, the process of returning property rights of the forest tolandowners could accelerate harvesting until they trust the new system and COHDEFOR is fullyructred and empowered to monitor and enforce rational harvesting on public and private forest lands,and safeguard protected areas. In addition, and due to the poor land infonmation system and deficienciesin land registration, the process of returning forest rights to forest landowners could induce illegaloccupancy of government land and the displacement of settlers from private lands. To minimize suchpossible impacts, supported by the AGSAC, GOH: (a) is supporting the implementation of an arbitrationsystem to protect farmers' legal and de facto rights; (b) has clearly spelled out in the regulations to theLMA the steps for individuals and communities to take to claim forest rights; (c) will intensify cadastalwork and the identification of areas suited for forest development; and (d) is reorganizing the public forestadministradon and empower it to monitor and enfrce the new policy (para. 83).

- 35-

PART IV- ROAnOMAIN

114. I am safied thut the proposed credit would comply with the Articles of Agreement of theAssociation, and recommend that the Execuive Directors approve the proposed credit.

Lewis T. PrestonPresident

Washington, D.C.July 14, 1993

PailA xEut1mc atLa apll u2

amn d Id wmry*191 Pe Ca4plt GNP US: SMId-1991 Populalio (dn: 5.26 qp I of i

GON Domlsdo Product 5,132 10,334 12,540 16,072 18,166 20,464 22,624 24,423 28,351 38,222Not Indite Taxpe 539 1,078 1,381 2,097 2,139 2,24 2,4 2,762 3,147 4,16GDPatFact Codt 4,593 9,M6 11,159 13,975 16,027 18,170 20,177 21,661 25,4 54,5

bmpos (GNS) 1/ 2,261 3,121 4,823 5,787 6,195 6,914 7,54 8,3 9,614 12,95bipoz (GNFS) I/ 1,860 2,944 4,2 4,880 ,918 6,576 7,3 8,077 951 13,24Resource Balae .401 -177 -598 -907 .2T7 .337 -310 -160 -113 340

Total Eenditures 5,533 10,511 13,138 16,9 18,443 20,01 22,935 24,2 28,466 57,882

Total Consmton: 4,262 84 10,5 13,162 13,827 15,7S2 17,414 18,428 21,0 27,571Gonameo 650 1,475 1,621 1,70 1,961 2,128 2,421 2,54 3,0 4,204Privae 3,612 7,219 8,879 11,393 116 13,624 14,993 15,8 18,000 23,167

Gos Donmelc _wsiauaz 1,271 1,817 2,638 3,817 4,416 S,049 5,520 6,S 7,371 10,511Govrameno 477 561 699 1,58 1,606 1,678 1,878 2, 2 2,867Pztvate21 794 1,256 1,39 2,759 3,011 3,31I 3,643 4,152 5,103 7,644

Memorandum ftams:GrossDomeStiags 870 1,640 2,040 2,910 4,339 4,711 5,210 5,9 7,258 10,851Not PFact" tLOo -27S 622 -947 -1,132 1,336 -1,450 -1,17 .1,530 -1,495 -1,534NoteCunatTransfwa 15 39 116 53 53 d0 67 71 8o lO1

Nional Sap 610 1,057 1,209 1,831 3,056 3,22 3,759 4,537 3 9,418

Opiona deels for RIAMSX.NoetlectT .. .. ...Indirec Team *

Subsidies .. .. ..

PM Dk Cosen Pre Da

Grss Dometic Product 8,141 10,334 10,342 10,6 11.127 11,606 12,106 12,625 13,734 16,253

Impocts (GNPS) 1/ 3,242 3,121 3,041 3,051 3,114 3,241 3,349 3,481 3,751 4,305Expots (ONPFS) 2,7S4 2.94 2,26 2,7S0 3,218 3,456 3. 3,639 3, 4,782RuwoueBalance -4 -177 -116 -301 103 196 151 1S7 228 477

Total BpaiE r 8,630 10,511 10,458 10,70 1124 11,410 11.953 12,468 13,506 15,777

Total C _E:awdow. 4,702 8,694 8,511 8,66 8,464 8,818 9,7 9,8 10,2 11,741Go _emom 1,083 1,475 1,277 1,146 1,11 1,095 1,17S 1,209 1 1,622PrAte 5AM 7,219 7,23S 7,518 7,313 7,723 8,104 8, 8,9 10,120

Total _ve. Epedtsum 1,92 1,817 1,946 2,305 2,50 2.592 2.674 2,879 3,229 4.055Govanmeat 721 561 524 645 80 887 936 96 1,24 1,136Privat 2/ 1,207 1,256 1,422 1,660 1,669 1,70S 1,738 1,914 2,20 2899

Tas of Trod () ECM t 47 0 -261 177 -243 488 425 .272 -364Goso Domesic om 8.055 10,334 10,81 10,491 10,8 11,252 M.81 1,400 13,462 1589Dom_sc sl T i.) 1,353 1,640 1569 I87 2421 24 2,537-. 2811 3.184 4.148

Il Goode sad amaiBauvlos21 bhbolud. hage in JAGA

~P22f3

4 _doulw. 26.9% 27.1% 274% 2B4% 22.8% 2.7% 23% 22.5% 225% 22.%1.uiy, f wh: 23.2% 243% 24.1% 24.1% W5% 25.1% 24.8% 24.7% 24.7% 24.7%

M _bu .. .. .. .. .. .. .. 4.. . .

smlees 49.9% 48.6% 48.A 47.4% 51.7% S2.2% 52.7% 5282 52.8% 52.8%Tota_ 109.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 1to" 100.0%

NolZsodeo *amwd pwchd j sonddd o oeat db _dat a

Put DIt IW1TM &o_ adtes

Grow Doauti Pko4ctm .p. 4.6% 5.2% 2.5% 4.3% 4.3% 43%Agdoubme 2.S% 1A# 3.0% 2.90 4.21 4.4%,ndo t:y, of obidL 6.2% 5.3% 2.8% 10.6% 3.9% 4.4%

sanbg O4.8% 7.S% 2.0% 2.9% 5A% 4A%

EioaotGNl8 4.8% 33% 0.0% 17.0%6 4.3% 4.7%.oaaofGtP 4.3% 4.6% 2.1% 3.% 33.S

Toidl &padt 3.9% 64S 2.2% 05%S 4.11, 4.0%

TOoal 4.1% 6.0% 2.4% -23% 4.0S 3SA_ovamm" 6.0% 8.7% 0.5% 0.4% 3.4% 4%16

Pdvdo 3.8% SAS 2.7% -2.7% 4.1% 3.2%

OrmsDomadc k_wd t 3.2% 83% 1.6% 11.1%S 4.8% 5.7SGovum .. 15.7% -1.0% 38.15 2.U% 2.6%

iN. .. 5.1% 2.9% 0.5 5.7% 7.1%

Cva* fy hmlost 4.3% 4.16 -0.3% 154%b 4.% 44%rogDoauNis_ om. 3.9% 5A% 2.4% 3.7%6 4.3% 4.2%

Gro Nad ina omo 3.% 5.39b 2.5% 2S% 4.4% 4J5%oom NaIonl P.d.S 44% 4.9% 2.55 4.3% 44% 4.55

Gro D awv (4q-.) .. 3.7% 2.8% 325% SAS% U8%Gro Nalo"a &wio (4dj. TX) .. 0.9% 2.8% 25.2% 7.3% 8.0%

Pepuatio 2.9% 3.% 3SAS 2.9% 2.9% 2%Labor Fom 4% 3.31 3.9% 4.1% 3.9% 3.6%

GDPw Caibt 1.7% 1.7% .0.9% 1.4I0 1.4% 1.S%

Vbhh"dvMVind0fb&

HONDURAS- NATIONAL ACCOLUlI 1Pap 3 of 12

PartE: nna Growh R(Am -ot ra. ~alWMh km custt price da

Pap3 of 3

GrDomeaDotcPoductm.p. 0.7% 4.3% 0.1% 3.2% 4.3% 4.3% 4.3% 4.3% 4.3% 4.3%AJicuuwl 2.1% 10.0% 1.1% 6,3% 2.9% 4.8% 3.8% 3.8% 4.3% 4.3%bIdut .0.8% 6.7% -1.0% 2.7% 10.6% 3.5% 3.5% 3.5% 4.3% 4.3%Servns 2.8% 2.3% -0.9% 0.5% 2.9% 6.5% 5.7% 3.9% 4.3% 439%OwnsDomotlclnoom 1.1% 5.5% -2.S% 4.3% 3.7% 3SA4 5.0% 4.9% 4.2% 4.3%

GrossDomestic awtmsat -9.6% -1.5% 6.9% 18.5% 11.1% 1.2% 3.2% 7.6% 5.5% 6.2%Total Conmton 8.4% 5.3% -2.1% 2.1% -2.3% 4.2% 5.2% 3.3% 3.6% 3.2%

Popuation 3.3% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9% 2.9% 2.8% 2.8%

Per Capita Gowt Rawe:ros Domustic 1Pdu m.p. -2.6% 1.4% -2.8% 0.3% 1.4% 1.4% IA. IA% 1.5% 1.5%

Toud Coalmpn SAS.1% 2.4% -5.0% .0.8% -5.2% 13% 2.3% 0.4% 0.8% 0.4SPtivao geeeecm-4.S% 2.8% -2.8% 1.2% -5.6% 2.7% 2.0% 0.6% 0.4% 0.2%

Part: Pi. Jaie dlee.Q(ationa Accounts DsfltorsD 18-100)

Growc Do Ptoda 63.0 100.0 121.3 150.7 163.3 1763 186.9 193.4 206.4 235.2mopt (GNFS) 69.7 100.0 158.6 189.7 198.9 213.3 226.8 236.6 256.3 300.9

Expost (ONPS) 67.5 100.0 144.4 177.4 183.9 191.4 208.1 222.0 238.8 278.0

Ttd s ER=dkww 64.1 100.0 125.6 154.8 167.3 182.3 191.9 197.2 210.7 240.1f30_optim 63.6 100.0 123.4 151.9 163A 178.6 187.7 192.2 205.2 233.1

_rmatme 65.9 100.0 13S.5 165.6 180.3 194.8 206.4 213.8 2283 260.S

Agricuture 71.9 100.0 126.9 151.5 159.2 .. ..

Industty, of which 65.4 100.0 130.0 164.1 180.5 .. ..

MMn- * . -. *.... .. ... .. ..

M n big .. .. .. .. .. .. . . .

Sonico. 59.5 100.0 114.9 139.6 150.7 .. ..

Part G: Oh Ec_onilk 1ndiato

IApost Emtcit (consa) 13 .0.1 0.9 0.8 2.6 3.4 0.5

- Swig RGrosDomeosdIcavings 5.7 35.8 293 383 ..Grows Naloxa_siav 14.2 30.0 31.6 39.8

ICOR pe.od avrs) 5.3 21.7 13.8 4.9 2.0 33.6 373

Labor Por (%)A 8due .. .. .. .. 63.S% 5%kds .. .. .. .. 14.8% 16.2%S A .. .. .. .. 21.7% 23.3%Tot_ 100.0% 100.0%

NONDU*E^TRNLT AlPbop 4of 12

A: Vohlue, Vaoe, ma PdM

Pop 1 of 2

Volume Idices 1989-100Merchandise ExprtsCOFFEE 66.6 100.0 122.3 101.7 127.7 128.7 117.3 119.0 127.5 146.3BANANA 105.4 100.0 94.0 85.1 106.4 117.2 118.9 120.7 124.3 132.0SHUIP & LDOSTER 56.1 100.0 104.1 132.0 15S.0 176.2 198.8 216.6 257.4 343.7PAEAT 308.9 100.0 121.4 140.0 148.1 148.0 153.2 158.5 169.8 194.9Other Ebpors 146.1 100.0 97.5 85.7 95.7 100.6 105.0 111.3 127.1 168.9Toad Merch. Export (FOB) 109.0 100.0 102.5 93.9 112.9 120.5 122.0 126.4 137.7 164.2

Curret Prices (USS mmI.)Merhandie ExortCOFFEE 204 191 181 146 164 143 142 183 235 386BANANA 228 352 366 333 382 416 426 440 472 543SHRIDP& LOBSTER 23 72 73 105 121 134 154 172 207 284MAEAT 61 20 25 29 32 31 32 34 42 62Other Expors 334 249 203 195 216 223 243 267 330 515Total Mach. Exorts (FOB) 850 883 848 8M8 91S 947 997 1,097 1,286 1,791

Volume Idices 1989"100Merchandise Importsfood 76.9 100.0 97.7 109.5 117.7 123.3 126.5 129.0 133.6 143.0OtWer Consumer Goods 152.4 100.0 137.3 119.1 126.0 132.5 138.2 143.6 155.5 178.1POL I1 and Other Engy 63.2 100.0 88.4 107.6 112.8 118.1 123.2 128.5 139.8 164.1Inutrmediae Goods 137.0 100.0 92.2 88.9 89.7 95.1 99.2 103.5 113.0 131.6Primary Goods .. .. .. .. .. .. ..Manu Goods .. .. .. .. .. .. ..

Capld Goodi 18S.2 100.0 95.9 95.0 92.9 94.1 97.0 104.5 II.0 147.7Total Mahrc. Inports (CIF) 111.1 100.0 96.1 101.8 104.6 109.4 113.5 118.5 128.7 149.6

Curren Pries (US$ m.)

Food 155 154 138 151 152 159 169 186 212 276OdterConsumerGbods 103 89 129 114 126 135 142 151 17S 228POL and Odier Ergy 171 14S 167 165 168 173 181 193 238 355Itermediate Goods 348 334 326 321 338 363 383 409 477 632

-dmuy GoodsManufatured Goods .. .. .. .. .. .. ..

Capial Goods 262 188 191 193 197 202 211 233 281 400Tota March. Imports (CIF) 1,039 910 951 944 981 1,031 1,086 1,172 1382 1,892

USSPriceIndices 1989m100Terms of TradeMerchandie Expots Prics 88.3 100.0 93.6 97.3 91.7 U8.9 92.6 98.2 105.7 123.4Merchandise Impors Pce 102.8 100.0 108.7 101.8 103.0 103.6 105.2 108.7 118.0 139.0MerhnudiseTermsofTrade 85.9 100.0 86.1 95.6 89.0 85.9 88.0 90.3 89.6 88.8

Il Cmud and Derivatie

Pap 5 of 12

Pqp2of2

s_ bo C 11 l g:Ii m GFRRVOG ht

~~~~eutlend Imot Vh.Rtesand mports (ha crenti Primas &~M aOMata ric dataActual Pkv de- Actua it. dee

190 12 137 21 190-91 12 1992-97199741Meomiie xoue()COFFEE 24.0% 17.9% 18.3% 21.6% 3.9% 25.6% 0.0% 3.5%BANANA 26.8% 41.8% 36.7% 303% -1.9% 25.0% 3.2% I.S%SEM P& LOISTER 2.8% 13.2% 16.1% 15.9% 8.1% 17.4% 10.7% 7.5%MIEAT 7.1% 3.% 3.3% 3.4% -.9% 5.8% 2.8% 3.5%Ode Expozta 39.3% 23.6% 25.7% 28.8% -4.7% 11.6% 5.8% 7.4%Totl March. Expor (FOB) 100.0% 100.0% 100.0% 100.0% -1.3% 20.2% 4.1% 4.5%

Mero_ha bwods (%)Food 14.9% 15.5% 153% 14.6% 3.3% 7.4% 2.6% 1.7%Ohr Consumler Goods 9.9% 12.9% 12.7% 12.1% -2.2% 5.8% 4.3% 3.4%POL ndOther } 16.5% 17.1% 17.2% 18.8% 5.0% 4.8% 4.4% 4.1%Jaturmedic Goods n..I: 33.% 34.4% 34.5% 33.4% -3.9% 0.9% 4.7% 3.9%Pdmuy Goods ........

Mam&ctuOd Goods ........

CapDS Goods 252% 20.1% 20.3X 21.1% -5.9% -2.2% 4.9% 5.8%Total March. ISmpot CF 100.0% 100.0% 100.0% 100.0% 0.08% 2.7% 4.2% 3.8%

Cs Ttnds i No_fcw Smi_

Volum Indices. 1969- 100

Expoul of Noafacto Services . . . . . . .

Exports of oafactor Services . . . . . . .

Ipt of Nouo Servics .. .. .. .. .. .. ..

HONDURAS - BALANCE oQPAYPJDmeIPagp 6 of 12

Pap lof 2

A. EorsofGMPS I/ 943 1,023 990 951 1,061 1,105 1,169 1,283 1,509 2,1121. MN audis (F7B) 850 883 848 808 915 947 997 1,097 1,28 1,7912. Non-factor Servie 93 139 142 143 146 IS 171 186 223 321

B. ImpoXkof ONfS 1,128 1,041 1,080 1,072 1,110 1,162 1,219 1,308 1,527 2,0581. Merandia (POB) 954 835 870 83 892 937 987 1,6 1,26 1,7202. Non-faot Servios 174 206 210 209 218 225 231 243 271 338

C. Rouroo Balance -185 -19 -91 -121 -50 -57 -50 -25 -18 54

D. Net Factor om -154 -234 -239 -220 -239 -244 -244 -243 -237 -2441. FactorRwep$s 24 11 8 9 9 11 19 21 23 272. Faor Pyms 178 245 246 229 249 255 263 264 261 270a.Totl Interest 120 170 172 157 171 176 183 182 174 171b. Are .m .. .. .. .. .. .. ..c.Other Fcor PqamM 38 75 - 72 78 79 79 81 87 99

I;.NetCurrenTraasfs a 20 26 10 10 10 11 11 13 161. C amtR .. . ...a. Workers rmia .. .. .. .. .. .. .. . .

b. Othr cmrr. ..an .. .. .. ..2. Curre Paymet .. .. .. .. .. .. .. .

F. Current Acowunt Blance1. Befor off. tasfe -331 -233 -304 -331 -280 -290 -283 -2S7 -243 -1742. Offlclltnaftes 14 53 208 148 144 125 115 70 70 703. After off. tansdfer -317 -181 -96 -183 -136 -165 -168 -187 -173 -104

0. LT Capitd Icnfow n.a.i 2/ 263 40 164 94 120 202 185 174 173 1041. DIect nveasmient 6 51 44 45 44 40 55 55 85 952. NtLTBonrowig 258 -11 120 49 76 162 130 119 88 9a.DlDbumren 3/ 345 176 341 230 311 393 341 314 304 261b. Reaynmmas 87 187 221 181 235 231 212 1M5 217 253

3. Ohe LT Infows n(a) 0 0 0 0 0 0 0 0 0 0

EL Totd Odw hemte (aen) -25 117 -29 157 39 13 33 43 30 20l.No ST Capkaln.ei 18 35 -238 4 56 -71 -20 -15 0 0a. IntdrAtAremra 0 83 -121 -13 -41 -46 0 0 0 0b. OderNot STCpitap 18 -48 -117 7 -15 -25 -20 -15 0 0

2. Capid }4ovs na. 4/ 5 124 143 s8 100 84 53 58 30 203.Eirrs &Omlmsionh -48 -42 67 105 -6 0 0 0 0 0

L Chaes inNet NotsRve 78 24 -39 -69 -23 -50 -50 -30 -30 -201.NetCtedl FromlDF 29 -24 19 1 S1 15 3 -30 -8 -52. PeAst Chane n.e.i. .. .. .3. Eacrow Acconn . .

1 Goode nd nmnfloter sevices21 a.. dnote - neat cbw& ncdd

4I Idoed ad bofrcsn.ps d i a

Pap 2 of 12

P4p2cf2

L. As sbae of GDP (cur.USS):

1. RIou sBalanoc -7 -1 -3 -4 -2 -2 -1 *1 0 12. JebatPynuts(LT+W+ST) 5 S 6 5 S S s 5 4 93. Cut.Ace.Bal. (SsP.1.) -13 -7 -11 -11 49 4 4 -7 -5 -34.LTCaphkldlflow (f.2.+G) 10 1 6 3 4 6 5 4 4 2S. NtCredgfromlDMP 1 -1 I 0 2 0 0 .1 0 0

K. PeWp Riaaupgo Renm:

1.NotReam (eicd.okl) 150 47 67 138 186 236 286 316 376 4562. God (end-Yr London P&O) 9 .. .. .. .. .. ..3. GrOSRe..(WUd. gki) 159 47 67 138 186 236 286 316 376 4564. Gr.R.Qn monzholpoKe) 1 0 1 1 2 2 2 2 3 2

1- ExcBuge Rte (LCUMU$):r

'.Nom. Olt bxc Rao.a. Anoual venq 2.00 2.97 4.58 5.36 5.58 5.95 6.23 6.30 6.30 6.30b. nof-ywr .. .. .. .. .. .. .

2.Red EffX-Rs( 19W9-O1)a.MUV/PAC eadmat5S6I 0.4% 4.7% 5.7% 2.1% 4.4% 1.3% 1.2% 2.5% 3.4% 3.3%b. Index el ic. mu 7l 78.1 100.0 132.2 117.9 117.8 117.8 117.8 117.8 117.8 117.8

3. X-Ra for NComanverso 2.00 2.97 4.58 5.36 .S S.95 6.23 6.3 6.30 6.30

M .. Jdunadm Ru:

GDP (art US$ uillions) 2,566 3,479 2,738 2,999 3,256 3,440 3,631 3,880 4,SO4 6,072

N. Ogon Detall for RUMM

1. Totl Pasoe Pyments: .. .. .. .. .. .. .a. Go1.n.me .. .. .. .. .. . .. . .b. Pvat Seor trs.. .. .. .. .. .. ..c. Po"tandr*P.ia. ... . .. . .. . .. . .. .

2. Of fici C pJ qasn . . . . . . . . . .a a bPdotry fl_8 . .. .. . . . . . .. .b. To b*. b. .. .....a.d."....

3. Gov. ase LT Ib m . . .. . . . . . .. .

b. Resm"mo ..

4. RM ntLT : .. .. .. .. .. .. .. .. .. .a. D _ . . .o. . .. .. .. .. .

S5 WdV m _ dk viM Isdext *fmA eiow fie. N^ Gonunw, k^ UM, i USA to _dwdshg _udai.agmued in UAL. doewa

WPACrebueWWa BMkUaac AmugdmCMie.71/An I w , in d. lat inaidit a ea depeoiani ndkeLTmlm.

BONSR - LXEU CArL AND M TsPap8 of12

am8 ulfusm at autu it les

Np I of 4

s~~~~~~~~~~~~~~~~~~~~~~~~~~~~ WE

PUbIC&Publidy am. LT 263.7 156.4 333.1 206.1 311.2 3929 341.3 313.8 304.4 261.4

1. OfMlioW Cr.dlt: 150.7 139.7 298.8 207.2 298.4 38.6 320.0 293.S5 274.4 231.4a. MuhlatKl 112.7 56.7 178.8 125.6 235.9 302.7 237.4 262.7 197.1 141.1

of whih MDA 17.7 0.0 0.0 48.0 60.0 105.1 83.2 110.5 54.0 31.0of wich IBD 24.4 1.8 82.2 30.0 3.1 36.4 1.6 0.4 0.0 0.0

b. d 1atw 1I/ 38.0 83.0 120.0 81.6 62.5 85.9 82.6 30.9 77.3 90.3

2. Plvate Cgedll 113.0 16.7 34.3 0.9 12.9 4.4 21.3 20.2 30.0 30.0a. Rond 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0b. CommulcW Dabn 58.0 2.4 30.0 0.9 3.5 1. 0.5 0.2 0.0 0.0

Supplers + Oder PIvfa 5S.0 14.3 4.3 0.0 9.4 2.9 20.8 20.0 30.0 30.0

NHvatNoaguaratoed 81.3 20.0 8.0 22.0 0.0 0.0 0.0 0.0 0.0 0.0Togaf1Om LT kSaS 345.0 176.4 341.1 230.1 311.2 392.9 341.3 313.8 304.4 261.4

DdFWPrdbjae 29.1 0.0 28.8 3. 81.0 18.0 18.0 9.0 0.0 0.0Not SMoe-Tom Capitd .. -4.0 -117.0 7.0 -15.0 -25.0 -20.0 -15.0 0.0 0.0Totl Dib. (MLT+DM+S1) 2 374.1 128.4 2S2.9 240.1 377.2 385.9 339.3 307.8 304.4 261.4

3. Rqaymea 31

Pubio&sublldy Guar. LT 39.1 179.3 196.0 166.6 222.5 217.9 199.7 185.8 209.7 251.7

1. Ofica Czedhogs: 22.6 135.7 153.9 146.7 185.2 185.4 175.7 169.5 10.6 217.3a. Mulhitaod 4/ 20.3 85.7 102.7 104.7 124.4 126.2 129.9 126.7 13S.1 137.1

of whc IMA 0.2 1.0 1.2 1.4 1.4 1.4 1.4 1.6 1.8 2.0Of whicb BD 4.1 42.9 S0.6 43.7 45.7 48.6 51. 51.6 54.7 37.0

b. Blata 114/ 2.3 50.0 51.2 42.0 60.8 59.2 45.8 42.8 42.5 80.3<oouc .... ....... ....... ....

2. PtIvate Cedito 16.5 43.6 42.1 19.9 37.3 32.5 24.0 16.3 29.1 34.4a. Bods 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0b. Commeca Daub 13A 10.0 2.7 8.1 10.0 9.0 8.0 8.3 3.5 2.4c. Suppliers + OdbwPrio 3.1 33.6 39.4 11.8 27.3 23.5 16.0 8.0 25.6 32.0

P dva_Naepmatod 48.3 8.0 25.0 14.0 13.0 13.0 12.0 9.0 7.0 1.0TOW ffl LT 1om 87.4 187.3 221.0 180.6 235.5 230.9 211.7 194.8 216.7 252.7

P Dardu 0.0 24.4 10.0 2.0 0.0 2.9 15.1 3.5 t80 5.0Tota &grammta 87.4 211.7 231.0 1826 235. 233.8 226.8 233.3 224.7 257.7

2/ LT 1dmt son W rdme_s Shout Two311980 repapmesmsAbeds 9 -20u1msa&aedbWL4/Je_d. neduMq.

sODRS rM CAPfrAL AD T MMAM POg 9 of 12

Pug. 2 of 4

C. NE iDmo_w

Publc& Publidy Quw. LT 224.6 -22.9 137.1 41.5 U.7 175.0 141.5 127.9 94.7 9.7

1. OcAl Aedkod: 128.1 4.0 144.9 60.5 113.2 203.2 144.2 124.0 93.8 14.1a. M _ltila 92.4 -29.0 76.1 20.9 111.5 176. 1075 135.9 59.0 4.0

ofwhihDA 174 -1.0 -1.2 46.6 58.6 103.7 81.8 109.0 522 29.0ofvwich MD 20.3 -41.1 31.6 -13.7 -42.6 -12.2 -50.0 -51.2 -54.7 -37.0

b. 1latuI 35.7 33.0 68.8 39.6 1.7 26.6 36.8 -11.9 34.8 10.0

2. Pdvat Cuedte 96.5 -26.9 -7.8 -19.0 -245 -28.2 -2.7 3.9 0.9 -4.4a. eands 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0b. Commwaial Bub 44.6 .7.6 27.3 -7.2 .6.5 -7.5 -7.S 43.1 -3. -2.4o. SUpPlib + OdatP*Ivm 51.9 -193 -3S.1 -11.8 -17.9 -20.7 4.8 12.0 4.4 -2.0

2Sivas No tEeaWastead 33.0 12.0 -17.0 8.0 -13.0 -13.0 -12.0 -9.0 -7.0 -1.0Total fxnnLTloass257.6 -10.9 120.1 495 75.7 162.0 129.5 118.9 87.7 8.7

MPFAgreome.ts 29.1 -24.4 18.8 1.0 81.0 15.1 2.9 -29. 48.0 -5.0

D. hnt"u 3/

PubIIAsd&blidy Gaiw. LT 58.5 140.9 146.1 137.9 152.2 156.1 161.2 163.5 1629 162.5

1. Official Caixdtom 31.2 122.8 128.8 127.7 139.2 144.9 152.0 155.5 155.6 157.1. MuItiltamal 4 24A 85.7 95.7 99.2 97.6 98.8 103.6 104.4 103.1 100.3of vwhic IDA 0.4 0.6 0.6 0.7 0.9 1.4 2.0 2.8 3.9 5.5of wbhcb I3RD 12.4 44.4 433 43.9 42.S 42.5 40. 36.S 27.8 14.2

b. Bilatwld 14/4 6.8 37.1 33.1 28.6 41.6 46.2 48.4 S.1 52.4 S6.8

2. Pivaft CaitaOs 27.3 18.1 173 10.2 13.0 11.2 9.2 8.0 7.3 5.4a. IcOD 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0b. ConummOCl Realm 25.6 4.7 4.0 7.1 53 4.6 3.9 3.2 2.4 1.5*.8UPPlIetc+0IWh PIdvat. 1.7 13.4 13.3 3.1 7.7 6.6 5.3 4.8 5.0 3.9

P UN _dmomw 24.6 2.8 1.0 4.0 5.0 4.0 3.0 2. 1.0 0.0TOtd Oa LT loIOQ 83.1 143.7 147.1 141.9 157.2 160.1 164.2 166.0 163.9 165

1Mp8mvlc.dc0u 0.7 3.5 2.5 5.0 6.7 9.4 8.8 7.2 1.2 0.4No Sbhct-Tao Cq*l 36.4 23.0 22.0 10.0 7.4 6. 10.3 9.1 8.6 S.6Total Jatreg %LtW+IMF 2/ 120.2 170.2 171.6 156.9 171.4 176.0 183.2 182.3 173.7 1713

21 LT desu luot tw, STdr e_ Bst Toamf11960 sqqmoananabao. 1968.2000 mmanasoal bode.

411.lud..

Pgp 10 of 12

Pap3 of 4

IL 1 ea Dakt (DOD)

Publc & Publily G. LT 974.0 2,62.3 3,217.3 2,865.0 3,162.3 3,334.4 3,519.1 3,690.1 3,901.1 4,655.8

1. Offical Cedltuo: 700.5 2,399.8 2,86.7 2,584.4 2,955.3 3,226.7 3,414.1 3,581.2 3,781.5 3,953.6a. Muldlat 4/ 457.2 1,476.9 1,578.8 1,618.2 1,882.8 2,076.1 2,183.6 2,319.5 2,462.7 2,495A

of which IDA 64.0 79.3 76.9 125.8 193.0 296.7 378.5 487.5 609.1 766.5of Wbih IMD 152.1 527.6 558.0 550.9 652.8 640.6 590.6 539.5 426.5 246.6

b. Bilatea 1/4/ 243.3 922.9 1,287.9 966.2 1,I02.S 1,150.6 1,30.5 1,261.7 1,318.8 1,458.2

2. Pflvat Crsditks 2735 422.5 350.6 280.5 207.1 107.7 105.0 108.9 119.6 102.2a. Bobd 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0b. ComnmeWIal Bans 193.8 207.9 198.3 15S.7 125.2 49.7 42.2 34.1 27.9 16.6c. Supplis + Odhr Pnvae 79.7 214.6 152.3 124.8 81.9 58.0 62.8 74.8 91.6 85.6

rvtde Noa ntond 191.1 84.0 66.0 75.0 62.0 49.0 37.0 28.0 13.0 0.0Totda LQ4mmnn DOD 1,16S.1 2,906.3 3,283.3 2,940.0 3,224.3 3,33.A 3,556.1 3,718.1 3,914.1 4,055.8

IP CredIt 32.8 35.0 32.0 34.0 115.0 130.1 133. 103.S 60.8 40.8Not Shout-Term Cuplp 272.2 394.0 209.0 203.0 188.0 163. 143.0 28.0 128.0 128.0Totd DOD (LT+IMPI4'1) 21 1,470.1 3,33.3 3,5243 3,177.0 3,527.3 3,676.5 3,832.1 3,949.6 4,102.9 4,224.6

P. As dae ofIToa DOD (S)

PubUcAJ ublily Guzt. LT 66.3% 84.6% 91.3% 90.2% 89.7% 90.7% 91.8% 93WA 95.1% 96.0%

1. Officld Crndbton 47.6% 72.0% 81.3% 81.3% 83.8% 87.8% 89.1% 90.7% 92.2% 93.6%a. multblhal 31.1% 44.3% 44.8% 50.9% 53.4% 56.5% 57.0% 58.7% 60.0% 59.1%

of whichDA 4.4% 2.4% 2.2% 4.0% 5.% 8.1% 9.9% 12.3% 14.8% 18.1%ofwhIch 3RDB 10.3% 15.8% 15.8% 17.3% 18.5% 17.4% 15.4% 13.7% 10.4% 5.8%

b. Bilated 16.5% 27.7% 36.5% 30.4% A.4% 31.3% 32.1% 31.9% 32.1% 34.5%

2. Privat CedIos 18.6% 12.7% 9.9% 8.8% 5.9% 2.9% 2.7% 2.8% 2.9% 2.4%a. BonD 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%b. Commercha Beaks 13.2% 6.2% 5.6% 4.9% 3.5% 1.4% 1.1% 0.9% 0.7% 0.4%c. SupOies + OE Pivae 54AS 6.4% 4.3% 3.9% 2.30 1.6% 1.6% 1.9% 2.2% 2.0%

PYvthNoquarntend 13.0% 2.5% 1.9% 2.4% 1.8% 1.3% 1.0% 0.7% 0.3% 0.0%Tota L*nu4w-a DOD 79.3% 87.1% 93.2% 92.5S 91.4% 92."0 92.8% 94.1% 95A% 96.0%

WAFCreodk 2.2% 1.0% 0.9% 1.1% 3.3% 3.5% 3.5% 2.6% 1.5% 1.0%Not Shogt-T Capmtpl 18.5% 11.8% 5.9% 6.4% 5.3% 4.4% 3.7% 3.2% 3.1% 3.0%Total DOD (LT+IMP+S) 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

1/Inlue uslgtlts sou --s

2V LT doatme oSg taem, Sr doots Short Termo Jachd. inusest arsrms3/ 19i 0 _ reayme a csh basbI. 1988- 20 we on acaua bass.4/ hadide readoUla.

RLNURS- ZECrA CFrALAD A _1

PsagP4 of 4

0. Pant of Toaal MALT DOD

oa ConCsdood Tatma .. .. .. .. .. .. ..WIhb Vrl ablo L Raw .. .. .. .. .. .. ..

H. IBD an Rated Ratio

lRDDDe*SvmvoBtS 1.7 8.4 9.4 9.1 8.2 8.2 7.8 6.8 5.4 2.4DBRDDebtScevWoePubloDS 16.9 27.3 27.5 28.8 ?S.5 24.4 25.5 25.2 22.1 12.4PofeCreditorDS/PublicDS 46.5 62.2 61.6 69.2 61.0 63.4 71.3 79.2 67.2 58.68k of 18RD Patodill .. .. .. .. .. .. .. . . .

I. DOD-O-Exports Ratios 1/

lonTem D 1/EVou 120.4 281.3 329.2 306.1 3013 303.1 299.3 285.2 255.4 189.7IMp CrdlExpz 3.4 3A 3.2 3.5 10.7 11.7 11.2 7.9 4.0 1.9

Shog-T-em Db/BVote 28.1 38.1 21.0 21.1 17.6 14.6 12.0 9.8 8.4 6.0LT+DIF+ST DOD/LVoIts 151.9 322.8 353.4 330.8 329.7 329.3 322.6 302.9 267.7 197.5

L. DOD4o-GDP Ratios

Lo-Tem DebW/GDP 45.4 83.5 119.9 98.0 99.0 98A 97.9 95.8 86.9 66.8MP CtedWGDP 1.3 1.0 1.2 1.1 3. 3.8 3.7 2.7 IA 0.7Sort-Tom Det/GDP 10.6 11.3 7.6 6.8 5.8 4.7 3.9 3.3 2.8 2.1LT+IMP+ST DOD/GDP 57.3 95.9 128.7 106.0 1083 106.9 105.5 101.8 91.1 69.6

K Detservick Expou I/VPubfic &GuatOSdLT 10.1 31.0 34.3 31.7 35.0 33.5 30.4 26.8 24.3 19.4Pd?rIvNon-guuaneedLT 7.5 1.0 2.6 1.9 1.7 1.5 13 0.9 0.5 0.0Total La Term Debt Saevic 17.6 32.0 36.9 33.6 36.7 35.0 31.6 27.7 24.8 19.4MM Rqnurch +Sev. Chgp. 0.1 2.7 13 0.7 0.6 1.1 2.0 3.5 0.6 0.3baeea only on ST Debt 3.8 2.2 2.2 1.0 0.7 0.6 0.9 0.7 0.6 0.4

Totl (LT+IMP+STJnt.) 21.5 37.0 40.4 35.3 38.0 36.7 345 31.9 26.0 20.1

L Intere Burden R4ato

Tot IlanteretDP 2/ 4.7 4.9 63 5.2 5.3 5.1 5.0 4.7 3.9 2.8Total t/Exports 1/ 12.4 16.S 17.2 16.3 16.0 15.8 15.4 14.0 11.3 8.0

Vl Experts hwhW6 Include nurail. expus ad reOeIPt. firo 20046010f saVoa, hter service. a-d 's..ram r.mlisano ,.21 Rpm_a anoa b ebcek opt fo 1980.

Palo 12 of 12

Pap Iof I

Dinc>Te 261 381 446 643 887 1,146 1,179 1,053 1,219 1,644ldrct Taxs 11 460 915 1,394 1,38 2,115 2,273 2,423 2,735 3,119 4,128NoutaxReipR a 2/ 443 310 371 1,024 1,"0 1,141 1,352 1,532 1,785 2,442Tot Cu mrnot Reva 1,164 1,606 2,211 3,555 4,032 4,560 4,953 5,320 6,1 8,214

Jste. oa }3xta Deb* 74 196 490 651 725 724 724 757 794 841IaotszanoDomectkDebt 37 162 207 247 2SS 307 317 342 397 535Total _entm 111 357 697 89 978 131 1,041 10 1,191 1,376Ode Cwvect Transe 47 71 129 274 343 53 226 19 170 229Subadidl 0 0 0 0 0 0 0 0 0 0Cmmmpdoa 3/ 864 1,332 1,474 1,669 1,867 2,128 2.421 2,564 309 4,24Totd Cumllt Evowitw 1,021 1,70 2,300 2,841 3,188 3,712 3,688 3.859 4,451 5,810

BudSetay S9 142 -154 -89 714 844 848 1,2 1,462 1,672 2,404

Capitl Revee 4/ .. .. .. .. .. .

Cpal T ers .. 161 105 113 -43 0 0 0 0 0Budgetr bNwOA 603 587 825 1,203 1,633 1,678 1,878 2,003 2,268 2,867Total Capital Exp _ra 603 748 930 1,316 1,590 1,678 1,878 2,003 2,268 2,867

Total Deficit Financing 461 -902 -1,019 *602 -746 430 -612 -541 -S96 43E.ena Caplt anta 6 62 270 148 0 0 0 0 0 01xtmlflorwlag (oet) 289 -2S9 891 836 0 0 0 0 0 0)afotar ty_ Crodft (u) 122 227 318 318 0 0 0 0 0 0Odw Dom. Borowing(ade) -22 118 - -69 0 0 0 0 0 0Odhr 6S 754 -391 -631 0 0 0 0 0 0

Dcbt (at and of t year)Extarn Debt(in _mis ofLCUs) .. .. .. .. .. .. .. ..

(ia milions of US$) .. .. .. .Domecic DebtTo ty .. .. .. .. ..OdaDoesDebt .. .. .. .. .. .. .. .. ..

,nsyaano .-350 -545 -322 296 232 201 42 55 59 913

vcaira amntinlluaka + "dotPwssedeommods

SI Jacldee mm and saaries =4 pods san eniame4/ca. r nedatfo aloao qedars

Appedix APage 1 of 1

GDGo rasRea GD? Growth Jifttiou t

7.0% 3S.0%6.0%. 30.0%5.0%4.Off 2.0% /3 34'0% % 2 0 tt5.0%2 .0% 1 1.0%0.0 300

-1.0% 5.0%-2.0% _0.0%

PuWlic Sctor Defidt Current Account Defidt

12.0% 14.0%

10.0% 12.0%04 ~ ~ ~ ~ ~ ~~~~~ ~~101.0%

88.0% 8 8.0%'~6.0% 60

* 4.0% ~60A ~~~~~~~~~~4.0%

2.0% 2.0%

0.0% . . . , . . * Q0.0%

Notes: 1I lbationasmeasum byCPI(yrlyyr)Soure: Snodad Table Annex A

HONDURAS

AGRICULTURAL SECTOR ADJUSTMENT CREDIT

PolW Matrix

POUCYAREA ,MCHE comnIOftAUTY

968WS | OGJECtVES ACTIONS TAKIE PRIOR TO SECOND IRANCHE PRDR TO THIRD TRANE

i. GewaCoo

Te ne for a To maintin a OOH he adoptd a fle*ly nsg exc tang ate rgim and Is maintann a Smeconaic Maitain sound _acroeconomIre hMkita soud_u e macn frmework con et wthh an"d p of the agc er adjurtm prgm. framewo*k consse with amd mscroeconowie frameworknaoocooio"framework wMc is suppwtiv of the egrtcrkura consistet with eNW supportivframebork, supportv of setr adstment prognra for of th agtstaa setrsustaind staine d g dwth Nd adusmnt pogram foagcutr aeel satifacoy Perfrmance In aihed gowth andgowth ovewi ag0 utal pram satIfacwy perfrman In- p -aen consaten vit overail - proFathe Letter of Aglcdtwl nulmentaftlo contsiste*~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~&Ap- XLr4t _c*w awofArufaDewbpn Picy ad SAL t the L ter A ulaaglaiua Deeomn Ptdley and SAL II

- cobmt aent. agrim podY

GOM has: (a) reduced tadtf dispsion too 5a20% range; and Ib) elInte quattatied kport an Maitain a8 pliy eoms Maintain Peoy refomsaxpont rettos on an arIcultal product. pementd up to AGSAC npbemented up to AGSACeffeetveness an docuntd second MOn rbse andundorti cradiL docmnented under Oti credit.

P'lc of aN &ag ul cmmodin their deriva s ed of al awrcutrns hhve beendeconotrold arnd ame now determined by maret forcest.

AM= 2Page 1 of 5

| POIJCY ARA TRANCHE CONDIoNAUTY

ISULIE8 0 I JECI P s ACTIONS TAKEN PRIOR TO SECOND TRANCHE I PRIOR TO THID TRANOCE

v. dX T_M

Ararin Rform Lw inprove lbnd use by Pese evdence of satactory Preen evience of(WA) curtse prvte provi a moe of the LnWd satibsfctr ImpeenttIn ofproperty igts aN stbe and sacur TenM Action Plan, In particular the Lnd Ten Aeten PlanhtAbd Infdt and legal bs fr land that: in p0tIcides that:u . Appoval of Law Mo. 31-92 and of satifctory egult to modf acrticl atces of the UA to:

wnder the lRA: ',_p the go t end secure f ownership th ovr blnds; a) at m 6,000 r land W) at est 35.000 nowblandownes wae at effiiency of the b) legalize ln rent arrngme escapt fr aM types of ds oppbV; tite he ben Issued to addton tles have beenperMn rsk of lendreform process. c) countueact prvio whih dIst ln use pattens, Igble benefiarIs proided to eEibblees_pogiatiu d) rIs end s_tif WlAd ajdication nd tili proces e.eg.. reducnkg the nimum tim for b) cadasel work is unrWay bereficias;b) land rna was ti elgty frm 40 to 3 yes of colnuous opeation and splfy ing pmocess for In at la 2 departms b) castre wokhs beanNilb ad a cause frm Of les than 5 ha). previously agreed wM th coplete in t 25%of espopitn; a) elimn the prehialon of tigland to holds of l thn 6 ha; Ink; of the area wIhtel fawm unts of es Aoelec_t lend fn Pvd wo_m wIth equa ditf aess to bnd; and ec at lmt 50% of wAs cadastre as of Juni 30.thn S is coud no tilin process and Of esr consstcy between geal sector poies and tho of agrin mrform. pontfolio In h a as of 192;be tited; povid permane Jun 30, 1992 of t n d i al INA potfoo In arasdf fm haitdo tddeetosa totl tade _ aLtRA has as ofJam 30, 192 of ksoecupy lon for benefIcide. bee prvatey contrcted to lan tiing wide the IRAmore titan 30 yea a collection agneny; has been privatelyto be ied it lea and d furnds for the seed cap iaI c aced to acoectiona) tding dIsrImInated adiItaIeschme do not exceed 25% ageNcy;gains women. br_ I_I f_ of IWA's budet in any dl hfnds for the sed captal

ad_judicat a partIclr yea se_m do nt exceedting end to a) the pn to reduce IAs 25% of WA's budt Inwome. lb frce has be aW pny a- sr

subStant conpletd; nd e ) Ws labor force does notLand rorm Enau freedom of n te a_grd pln to dive eceed S0 psn; andbeIa were, do asoieion to ln WA's asets and aitie a all assets and ac*ti s notfacto, hdt rom bnficiaore. not red to th landtl reltd to end titnftproductlon prorm Is on trget. p am t beencoperives. dbated.

INA has deied its nw le to niplean d lend pocv rorms, approved a satsfactr new Present sahtfact TOl to Ptesem satacty auditstuctr, and atd a saifcty restucurin process (eg., eliminated 400 potonm, snd undrtak a financl and rort based on aeed TOM.

ated diwesttu fom ctves that do not espond to its new role). opern uit olf IA'srecords aid accounts.

A pennent coordinat conw*tee between INAk CONDEFOR and Cadesto has ben establshed toharmonz required idforman f tie lnd til and rgularization progrm.

Fhnnll requiremets for the cadsiral work necessy to support the land tii g program for 1993have bee budgeted for.

Annex 2Page 2 of 5

N,.

F , r i - -| -- *t

ji jig. fit l jjli Ii' la S

E I1iti . 18111 . *411

PO.ICY AREA TRANCHE CONDITIONALITY

ISSUES OBJECTIVES ACTIONS TAKEN PRIOR TO SECOND TRANCHE PRIOR TO TMIRD TRANCHE

IV. bnatF h

Non-tensperent Improve credit GOH has unified all tedicount rates and has priced them at the margnal cost of funds to commrcilnterest aft subsies alocation by banks and libwalied comrercial bank nterest rates.have limited small elmtn interestfarmrs access to *ate subsidy endcredit. reduZt fiscl drin.

Commercial banking In the interir, ceate In the long run, mm co and sector polcV reforms wIl result in increased participation of the COS. To have completed the stody to Satactory progress insystem (COS) has been inenftves to GOH has prepared satisfactory terms of reference (TOR) to develop a scheme to promote Iceased develop a sdcme to promot irplementing the agdconsrvatIv in Increase Ciro partciation of formal finnci itermedes (FFI) in agricultural credit. Increased prticiption of Fm action plan to profinning the lendhg to the hagrbutal credit under agreed Incresed patncipaon of FFIagricultural sector. sector. TOR, and have presented a pban In rurl fancbt mkets basedto Implement the reed actions, on agreed acdon plan.

Instuo and Strengthen the rurat The GOH Is restucuring BANADESA. end has dercded to divest i form the public sector wFie To have Wted the agreed pbn Substan completion ofpolitcal probbms in fiancia system bv developing ltemve sources of rural fwnanl intemedation. GOH has also prepared safactory of action to divest BAADESA agreed plan to difestBANADESA resulted In dbiesti TOR nd timet ble to evaluate atertive waye to divest ANADESA. based on the reommendatin BANADESA.lWe lon losses SANADESA to allow of the evahas- tion caried outIindering is capablity gtr pariipon Satictory ptoress on te awreed res turing plan of BANADESA. in particuar: under agread TOR Present evece tht Centralof servin small of mre effbient Bnk hfundi to iANADESAproducers. fnancd a) Cel xank funig has been imied to its August 30. 1991, level adjusted by inflaton and Pesent evene that Central hs been limed to is Auusti mediedes. b) _th has been no addiil govemment transafs during 1992. Bsant fhing to BANADESA has 30, 1991 le, adjsted b

been kilIed to hs August 30, ination, end that ther has1991 lv,. edjsted by Inflation been no addin treasuyad that tinere has been no fhdig.additiol g8van n traners.

iUmited access to credit Impe crOt Law 31-92 created the 'Cos Rurels' as pdvate intutions wih resoure Hm t ust funds Appo of Satisfactory seme. Provide idence that -CejasIn nl reas because access to smnall ua afinlstered by BDAADEA. nues end egulatlons to estblsh Ruralese, to tde eaent thatformalfin Ilan benrowers by and operate the Cae RuRss' they re opeaive, aenstitbns do not makn farmer based on agreed priciples: functonig In accordance withespond to tfam' gros msp_e Provide eidence tha Cejas ageed regulats.neads. for thelr finences. Rae. to the exte t tyheaeo operative, om functioning in

acodnewtvh agreed

Limited small farme' achtte sma Law 31-92 creted the cr dit fund whresources from the sales of Govemment lnd, to Povie evidence det the 'land PiW evidenc et the"ac to financelnd M frmer scca to tinance and purcases of t man 10 ha. credit ftund. to theextent t it *iand credfit fud, to thepuichas fiandia m.wces is operapive, le functioning in eatent that it is opeati, isto purchase land. GO has approved Satisfactory ndes and regulatlons to establh and opeate the liand credit fund-, accordance with ae futioning In accordence withstipting mh*b doet -e . agred regulation.a) it wbe be ofr of _vab to all qu_Wfd FFia;b) it wi opeate at market _ert mes eMc r ust wlvA be full pon&ty of P1d

Annelx 2Pge 4 of 5

POLICY AREA TRANCE CON1 ROAUTIY

ISUES OIJCTnVes ACTIONS TAKEN PRIOR TO SECOND TRANCHE PRIOR TO THIRD TRAIOC

V. 1 Ad_ OW _0bM

Lac Of secto Strengtn sctto Congress has approved Law 31-92 tht provides the sutsona framework for ovems sectot Satsfcoy implmanctioi Of tsfactoy ofCownatlon in poikc polcy plnng aNd coordination d the eadesip to fomuiet d IplemUen aktura poeiy strategy and dget the agred Pubc Adn tratton the agreed Pubikend pogm plannig. manaent to the Sertat of Natural Resources (SRLM. To that ed UPSA has bean established to prvid Action Pln, In paitcula, wth Administration Acdon PAN Incapablides. tal support to the SRN and to the Conso de Deanodo Agrcob (CODA).- respect to: pctar, with rpet tW.GOH has _steblshad an WPSA41F ̂ Tedla Comni to coodIte budget preparon and a) esetin of th aged a) excton of agreed 1994execution.

1993 POAs and budgt; POAs and budgets land forany futu"e date muiGON has bIiad stictoy Inpb_mnti of the agrWeed Pl Ad_nisaton Acon Pn In b) prsentaion Of satisfactory oageed betwn GOH ndparticr

POAs and budt or 1994 IDA);(and tfr ans ohw eftueat satactwy 1993 POA ando bdto for the sector and for SRN, RIA, MlA. AfEand daten ytalareed b) prsntation ofBANADESA. refectin ad supporting secto poNcis agreed unde this creit an under SAL n betwe GO nd IDA) f satifctory POAs andhave ben approvd by the Eonmic Cabbet and to Mt of F cnd Pc Cedit OmI the sector and tha secW budgts for 1995 land forb) GOH has approv a satiscty Poliy Support Program to trgn rsetor plan and Institutions. These we to any otw futur date_mamt caabtes at ectoat and sctor Instion level to undte agred pofly Icde a d revie Invstnt nwtuaiy ageed betwenreform and pgn In support to GOM end IWA) for theLack of budget Reoren sectorl ca SON has ensured adequate funding for the agreed Policy _Ppt Program agd ctor policies. end s.or ed t secomagemet dsciln prga ad to have been approved by biution. These ae torsritadin efficin budgets from the Economic Cabnet; and ncdo a evisdresou"ceocation, hefmcient

c) atsfactory kilenntation investment progm in- subsides of tho reed Polcy Support suport of _are etortowards p- Prdctv. policies. nd o hae been-nvstmnt

apprved by th EcmcCabet and

ci satisfctorI,,ieanato of do

AnnSx 2Page 5 of 5

Amnex 3Page 1 of 31

NON OFFICIAL TRANSLATION FROM ORIGINAL IN SPANlSH

HONDURAS

AGRICULTURAL SECTOR ADJUSTME CREDIT

Letter of Development Policy

Honduras, December 8, 1992

Mr. Lewis T. PrestonPresidentThe World Bank1818 H Street, N.W.WashWngton, D.C. 20433

Dear Mr. Preston:

1. Over the last three years, the Govermment of Honduras has put in place an important economicprogram aimed at laying the foundations for the country's fiture development. As part of this program,the Government has carried out a broad structural reform program for the purpose of achieving sustainedeconomic growth based on internationally competitive activities.

Mao_eonomic Prora

2. The stabilization program has included the adoption of a flexible exchange rate policy; a reductionin the level and scope of tarifs; the liberalization of prices of all products, including agricultural products;deregulation of interest rates and the elimination of subsidies for Cental Bank redisounts; the intrductionof prudentia regulaions in the private banking system; adjustments in public service tariffs; rationalizationof the tax system, and sizable cutbacks in govenment spni to reduce the fiscal deficit.

3. Another main element of the economic and fiscal progrm is a reduction in the number of publicenerprises, through the privatization or forclosing of certain enteprises and me nt the efficiencyof those public enterprises that, for satiegic reasons, will remain under Government control.

4. As a result of this program, the economy improved significantly in 1991 and even moreencouraging results are expected for 1992. Real GDP grew 2.9% in 1991, and the performance ofeconomic activity indicators leads us to expect a growth rate of more than 4% for this year. Inflationfell dramacally from 21.4% in 1991 to less than 6.0% in 1992. The consolidated public sector deficitwas reduced in 1991 to 3.5% of GDP.

Annex 3Page 2 of 31

5. Notwithstanding the introduction of the changes in economic development strategy referred to above,the economy remains fragile and highly vulnerable to external shocks.

6. To strengthen the economy and promote sustained real per capita income growth, the Governmenthas formulated a medium-term program for 1992-1995 that will continue the stabilization effort andconsolidate and deepen the structural reforms initiated in 1990, supported by an IMP enhanced structuraladjustment facility (ESAF) program.

7. This program places particular emphasis on improving conditions for investment, particularlyprivate investment, streamlining and improving public sector efficiency, rehabilitating the social andeconomic infrastructure, and expanding programs to reduce poverty.

8. Given the importance of agriculture in the Honduran economy, the reforms to be implemented inthis sector, as set out below, are a key element in the Government's medium-term economic program.The program also includes urgent measures to improve management of the country's natural resources.To complement the agricultural sector reforms, the Government will maintain both a restrictive fiscal andmonetary policy without financial and monetary restrictions and controls. The Government is alsocommitted to retaining the present flexible exchange rate system.

9. The Government will also seek to enhance the efficiency of the public administration throughfurther tax reform, administrative improvements in the management of customs, reductions in Governmentcurrent expenditure in real terms and further restructuring of major public enterprises, including theHonduranCorporationforForestry Development (COHDEFOR), the National AgriculturalInstitute (INA),the Honduran Agricultural Marketing Institute (IHMA), and the National Bank for AgriculturalDevelopment (BANADESA).

10. The Government expects that implementation of the medium-term program will bring about a GDPgrowth of approximately 4.5% by 1995; an inflation of about 4% per year, while the current accountdeficit will be reduced to 6% of GDP. The Government recognizes that to achieve these goals it isimperative to continue the steady reduction of the public sector deficit, to reach 1.5% of GDP by 1995.The Government is convinced that these goals can be achieved if the exchange rate, fiscal, monetary andforeign trade policies outlined above are implemented.

Agricultural Sector Reform Progra

11. In order to lay the bases for a modem, competitive agricultural sector, the Government haseffected significant policy reforms in the sector and has enacted legislative changes needed to ensure theirimplementation.

12. The initial sectoral policy reforms focused on liberalization of the agricultural import and exportregimes and of the prices of agricultural products; replacing guarantee prices for basic grains with a priceband system (variable levies); elimination of interest subsidies on al rediscount lines for the agriculturalsector; and reduction of Government intervention in the purchase of agricultural commodities-IHMA'srole will be limited to the management of a strategic reserve of basic grains to be used only in cases ofnational disaster. To this end the Government will maintain maximum stocks of 20,000 tons of maizeand 2,000 tons of beans, and will limit sales from the strategic reserve, except when natural disastersoccur, purely to stocks rotation carried out under clear rules.

Annex 3Page 3 of 31

13. At the same time, the Government has initiated the privatzation of IHMA's assets. TheGovernment intends to complete the transfer of these installations to the private sector no later than mid-1993, and will retain, at most, the storage site located in Tegucigalpa for management of the strategicreserve. The Government has also begun the process of reorganizing BANADESA so as to convert itinto a self-sufficient institution specializing in meeting the needs of small rural producers.

14. The macroeconomic and sector-level policy reforms introduced in Honduras have generated aneconomic enviromnent that is more supportive of agricultural sector development. In 1991 agriculturalGDP grew in real terms by 5.4% and it is estimated that this growth will be 5.8% this year. TheGovernment recognizes the need to maintain the thrust of the economic policies introduced as part of thestabilization and structural adjustment program for 1990-1992, and is also aware of the urgent need tointensify its actions at the sectoral level to achieve the objectives proposed in the medium-term economicprogram.

15. In view of the need to expand sectoral reforms to other key areas, and to institutionalize the above-mentioned reforms, Congress approved Law 31-92, the Agricultual Modernization and Development Law(LMA), in April 1992. This Law includes important amendments in the areas of land tenure, agriculturalcredit, forestry development, research and extension services, and institutional reform of the agriculturalsector. It also contains the measures needed to institutionalize the policy changes in the areas of foreigntrade, prices, and marketing of basic grains. The Government has prepared action plans to implementthe basic agricultural policy changes referred to above, which are summarized in the attached policymatrix. These plans will be executed over the next three years, the principal areas affected being thefollowing:

Land Tenure

16. The Agrarian Reform Act of 1962 (LRA) caused land tenure insecurity, restricted ownership rightsand promoted inefficient land use. Under that Act, landowners continually faced the risk of expropriationif they violated any of the many restrictions imposed on the use of their land, including a prohibition onland rental. The titling of farms with less than five hectares was prohibited and collective ownership wasforced on individuals. The fact that areas being used for certain crops were protected from the risk ofexpropriation led to distortions in the selection of crops in accordance with their profitability.

17. Law 31-92 has established a new legal framework to improve the economic environment of theagricultural sector. The new Law guarantees full property rights to all landowners within the lot size limitsestablished by the LRA; it legalizes land rental arrangements and co-investment; it revises and simplifiesthe land adjudication and titling process; it eliminates the prohibition on titling lands to farmers havingde facto rights to state lands who are living on farms smaller than five hectares; and it grants women equalrights of access to land.

18. These amendments will provide more secure land tenure to landholders and will facilitate theexpansion of the adjudication and dtling programs for national and community (eiidal) held land.

19. The Government has also approved regulations that include simplified land adjudication, titling,and registration procedures; criteria under which the property limitations establshed in the LMA maybe exceeded; the clear distnction between permitted and prohibited methods of indirect operation (share-cropping, partnership, and occupation), and the operation of the "seed capital" system.

Annex 3Page 4 of 31

20. Likewise, in accordance with the new Law, INA has been reorganized to adapt it to its new role,restricting its activities to administration of state-owned lands and focusing its efforts on adjudication andtitling of state-owned lands under the adjudication and tiing policies set out in the LMA. TheGovernnent has also prepared a Land Tenmue Action Plan, to be implemented over the next two years,to ensure proper execution of its new forestry policy.

21. To enhance the efficiency of the titling and registration system, the Government has clearly defimedCadastre's, COHDEFOR's, INA's, and Public Registries' responsibilities in these processes and has setup a permanent committee to oversee data harmonization and coordination among these institutions. Itis expected that these measures will speed up the process of titling and legalizing families and comunitieson forest land as detailed below.

22. During 1993-95 the Government will accelerate cadastal work in the departments not yet surveyedso as to complete the peaceful tiding of state-owned lands occWied by settlers and the regularization offamilies and communities on state forest lands within i maximum of four to five years. During 1993 INAwill concentrate its titling efforts on deprtment in which cadastral work has already been completed.Cadastral work in other parts of the country will also begin in 1993 and in 1994-95 INA will focus ondepartments in which this work has been initiated from 1993 onwards.

23. The Government acknowledges that one of the most important aspects of ensuring efficient executionof the Land Tenure Action Plan is that of ensuring sufficient resources for the subsector. For this purposethe Government will allocate the necessary fnds to implement the Plan, using a system of quarterly budgetadvances and payments. It wiUl also be necessary to ensure that INA uses the funds allocated to it efficientlyand consequently the Govermment will require operating and financial audits of INA activities.

Forestry Sector

24. The forestry sector has been affected by a set of outdated laws and policies that have promotedthe depletion of Honduras's significant forest resources and led to reduction of forestry activities on privatelands. The serious undervaluation of forest resources, due to the low standing-tree values, have led towaste and inefficiency in forest management. The public setor's concention on logging, sawing, andmarketing activities has acted as a deterrent to the private sector investm needed for sustained woodlanddevelopmnent and has prejudiced the state's ability to fulfill its duties to protect resources and theenvironment.

25. The forestry policy reforms contained in Law 31-92 are designed to promote the rational andsustainable use of Honduras's forestry resources; the Govenment's new policy measures thus include:(a) eliminating the Government's direct participation the acties related to production and markeingof forest products; (b) reonenting the Government's role towards management and protection of publicforests, regulation and oversight of private forest, fire protection, and forest exension and research; (c)requiring formulation of management plans as a pre-requisite for forest utilization both in public lansas well as private; (d) retning and guaraneeing ownehip rights to forest landolders with reet toforest resources, subject to submission of management plans; (e) exempting forest lands from futreexpropriation; and (f) allowing private sector entry into the production, insiion, and marketingof forest products.

Annex SPage 5 of 31

26. To achieve the LMA's objectives, the Government has approved regulations needed to enforceits forestry-related provisions. These regulations include, among others, rules for regularizing the positionof forest land settlers, resolving disputes and resetling and compensating communities that must berelocated as a result of the application of the new forestry policy. In addition, to ensure satisfactoryimplementation of the new forestry policy, the Government has prepared a Forestry Action Plan to beimplemented over the next two years.

27. This plan places particular emphasis on reorganizing COHDEFOR to adapt it to its newresponsibilities, namely, the identification of areas with forestry potential; application of public biddingprocess for sales of wood resources owned by the state; the establishment of public forest managementunits and preparation of management plans; regularization of the legal and other rights of settlers in _defacto occupation of stat-owned forest lands; establishment and evaluation of the System of ProtectedAreas and preparation of management plans to improve their protection, and implemenation of a systemfor monitoring the social and ecological impact of implementation of the changes in forestry policycontained in the LMA.

28. In general, communities and settlers in state forests will be regularized either by giving mediumand long-term leases or tides or by being incorporated into forest activities via the management plans tobe prepared as a prerequisite for the usufruct of forestry resources, whether public or private. TheGovernment's policy is to minimize involuntary resettlement as a consequence of the application of thene-w forestry policy.

29. As soon as the need for resettlement in any forest area is detennined, the Government will preparea resettlement and development plan for the communities to be relocated. This plan will among othefthings specify the institutions responsible for the various activities, identify the displaceme andresettlement zones, set out the compensation and development packages for the communities to be resettled,and stipulate the ways in which active community participation will be sought in the planning andexecution of the resettlement plan.

30. Regularizaion of the forest land settlers and the return of the rights of forest ownership to ownersof forest lands will be carried out in close cooperation with COHDEFOR, INA and the Directorate Generalof the Cadastre. The Government recognizes that, to minimze the length of the transition period, it isof the greatest importance that the process for returning these rights be effected quickly and in an orderlyfashion. However, care will be taken to recognize the legal and associated rights stemming from defoccupation by communities now located in forest areas.

31. The Government acknowledges that there are risks in implementing this process in view of thedeficiencies in the systems of property registraton and the limited coverage of the cadastre. To minimizethese risks, the Government will emphasize impletion of a dispute setlement mechanism withmeaningful representation of local counities and will speed up cadastral work, ideification of areaswith forestry potential, and reorganization and strengthening of COHDEFOR. With the assistance of theGerman development agency GTZ the Government intends to conclude the identf ication of forestry duringthe first half of 1993.

32. The Government also recognizes that it needs to ensure efficient allocation of state"Woned forestresources. Accordingly, the Governnt will begin the process of public bidding for the sale of publicforest. Whenever public bidding cannot be carried out, development of the forest will be pursued under

Annex 3Page 6 of 31

contracts with cotmnunities of farmers or individual small farmers settled on the forest lands. In anyevent, the management plans-which will be the basis for the bidding-will ensure adequate recognitionof the rights of the conmmunities located on forest lands.

33. The Government acknowledges that one of the most important aspects of ensuring efficientexecution of the Forestry Action Plan is that of ensuring sufficient resources for the subsector. For thispurpose the Government will allocate the necessary funds to implement the Forestry Action Planindependently of such resources as the sector may generate for the state, using a systemn of quarterlybudgetary advances. Likewise, it will be necessary to ensure that COHDEFOR makes efficient use ofTreasury funds allocated to it, and consequently the Government will require annual operating and financialaudits of COHDEFOR activities.

Rural Finance Sector

34. Several factors have traditionally distorted the iural finance sector, leading to inefficient allocationof resources, high fiscal costs, and severe limits on provision of financial services, especially for small-and mediun-scale producers.

35. These distortions have included, among other things: (a) broad, non-transparent interest ratesubsidies; (b) deficient administration of BANADESA, mainly due to poor credit practices that lackedproper technical standards, reflected in high losses over time; (c) deficiencies in the collateral system(guarantees and mortgages) and in the legal-regulatory system, which make it difficult to foreclose on loansin a timely and efficient manner; and (d) a weak legal framework for land tenure.

36. In accordance with its overall financial sector strategy, the Government of Honduras has madesignificant efforts in the last three years aimed at eliminating these distortions, including: (a) eliminationof interest rate subsidies through unification of all rediscount rates at a level equal to the marginal costof funds for commercial banks and (b) formulation and implem. tion of a plan to reorganizeBANADESA, including: cleaning up of its portfolio and capital restructure; lowering the level of realindebtedness permitted with the Cental Bank; adjustment of its lending and borrowing operations tomarket rates; privatization of nonfinancial activities; and cost reduction, including a substantial cutbackin personnel.

37. The Government recognizes that further significant changes in the financial system are stll requiredto ensure provision of financial services in the mral sector, particularly for small- and medium-scaleproducers. With this in mind, the Government has formulated a series of actions that are specificallyintended to achieve that objective, which are to be carried out during the period 1992-1995. Specifically,the Government will take action in the foliowing areas:

BANADESA: During the first half of 1993, altematives will be analyzed to determine the natureand timetable of the process to be followed to transfer this institution to the private sector. Theprivatization process will be initiated during the second half of 1993. To improve its financialposition, the institution is being reorganized, centering the efforts on cleaning up its portfolio.limiting its operational growth, avoiding additional asset degradation and, in particular, onpreparing the institution for privatization. To this end, the Government intends to maintain thevolume of Central Bank rediscounting at its August 30, 1991 level, adjusted for inflation, and notto transfer any Treasury funds to BANADESA. The Government also believes that after

Annex 3Page 7 of 31

implementation of Decree 77/92 no addidonal loan condonation for BANADESA beneficiarieswill be needed.

Land Credit Fund: A financial fund will be established during 1993 to be made available tofinancial intermediaries for the purpose of providing market-rate financing for small-scaleproducers to purchase rral lands. This fund will have the purpose of broadening access to landand developing an orderly and stable land market, as well as providing a permanent private systemof land financing. The Government funds made available to set up this fund will be limited tothose established in Article 69 of the LMA.

Private Rural Credit Banks: A system of private rural credit banks (Caias de Credito Ruralwill be established in 1993 to supply streamlined and timely financial services in the rural sector,especially to the smallest producers, in the various sectors of economic activity. The basicprinciples to be incorporated in the rules governing the operation of these banks will require themto be financially self-sufficient institutions, professionally administered under prudent standardsand practices, and appropriately supervised. The system will take shape as parties interested informing these banks come forward making cash capital contributions. The Government resourcesto set up these banks will be limited to those established in Article 43 and 44 of the LMA.

38. The Government is aware that the rural finance sector is only one part of the national financialsystem, and that commercial banks and other formal financial intermediaries will be called upon to providethe majority of the financial services that the sector requires.

39. The sector's greater competitiveness and the increased clarity in land tenue should lead to moreactive participation by those intermediaries as agricultural policy changes are implemented. Nonetheless,the Govermment is concerned that there may be an excessive delay in the bankdng system's reaction tothe new conditions in the agricultural sector. For this reason, early in 1993 the Govermment will launcha study to identify methods of promoting greater participation by the commercial banking system in therural sector, particularly in the financing of small-scale producers. The recommendations of the studywill be implemented during 1993.

40. A review of the legal-regulatory system will also be started, including an analysis of the systemof guarantees and mortgages as collateral for loans, with regard to their role in efficiently facilitatingcompliance with loan contracts. The Government expects to complete both studies during the first halfof 1993; actions based on those studies will be implemented in the second half of the year.

Administration of the Public Agricultural Sector

41. The organization, functions, and regulations of the public agricultural sector are in need of abroad-based and immediate reform, both to adapt to the new policy framework and to correct their inherentadministrative and managerial deficiencies. For this purpose, the Government is undertaking a series ofmeasures intended to: (i) improve coordination, budgeting, and control systems at the sectoral level; (ii)improve the allocation and use of sectoral funds; and (iii) strengthen organizational and managementcapabilities.

42. In this regard, and as stipulated in the LMA, the sector has established a Committee for AgriculturalDevelopment (CODA), which has the technical support of a Sector Planning Unit (UPSA) and an

Anmex 3Page 8 of 31

UPSA/Finance Ministry Technical Committee. Under the direction of the Minister of Naural Resources,the CODA will work to ensure that national and international fnds are used to support the new sectoralpolicies.

43. The Government, through the UPSA, has formulated and tested new planning and budgetingprocedures for the sector, including preparation of an integrated sectoral Annual Operational Programand a consolidated sectoral budget. Through the Technical Committee, the Ministry of Finance willcooperate with the CODA to ensure that expenditures executed during 1993 follow the agreed AnnualOperating Programs (POAs) and sectoral budget plans, so as to support implementation of the sectoralpolicies referred to above and spelled out in the various 1993-1994 Action Plans.

44. With regard to strengthening organizational and managerial capabilities, since mid-1992 theGovernment has implementing a Technical Cooperation Program finaced by the Inter-AmericanDevelopment Bank, to enhance the UPSA's capability in the areas of policy analysis, planning andbudgeting, administration and coordination of multilateral and bilateral financial aid. The Governmenthas also received substandal technical assistance support from US/AID to support the formulation andmonitoring of agricultural policy, which has strengthened UPSA's skills in these areas.

45. The Technical Cooperation Program includes also resources to support the reorganization ofCOHDEFOR and create the necessary technical and administrative capabilities to fulfill effectively its newpriority functions of protecting forests and the environment, and monitoring the social and environmentlimpact of the new forestry policy. In the case of INA and COHDEFOR the Government plans to useprivate contractors for the purpose of supplementing the available capability to carry out such tasks asthe management of protected areas and technical assistance (COHDEFOR) or cadastral and land titlingfunctions (INA).

Conlusion

We wish to reiterate that the Government of Honduras is fully committed to implementing thestabilization and economic development program described above and is also resolved to execute theAgricultural Sector Development Program contained in Decree Law 31/92. We are convinced that thisis the most effective and efficient way to increase the growth of the agricultur sector, improvemanagement of natural resources and, therefore, the well-being of the Honuran people, especially thosein the rural sector. Taking into account our significant progress in changing agricultural sector policy

Annex 3Page 9 of 31

and the medium-term program described above, the Government requests your favorable considerationin support of the Agricultral Sector Developmet Program.

Sincerely,

/s/ Ricardo MaduroPresidentCentral Bank of Hondurasand Coordinator of Economic Cabinet

Is/ Benjamin Vilianueva Tabora 18s Mario Nuflo GameroSeretary of State Secreutay of StateDepartment of Finance and Deprnent of Natual ResourcesPublic Credit

Anmex 3Page 10 of 31

HE3ONDURh$

AGRICULSE CTOR MODERNIZATIONAN1D DEVELOENTM ]PROGRA

LAND TENURE

PLAN OF ACTION

I. Objectives

The objectives of the Govenmnent of Honduras' land tenure reforms are as follows: (a) to bring aboutmore efficient land use through development of a stable, secure tenure system in which the State seeksto ensure property rights, whether public or private, thereby achieving greater investment and thus greateremiployment in the sector; and (b) to improve the efficiency of the adjudication and titling process, withdue regard for the preferences of beneficiaries, and to speed up this process with a view to completingit at medium term, estimated at three to four years. This latter goal will be achieved through the approvaland subsequent implementation of the regulations to the Agricultural Modernization Law 31-92 and therestructuring of INA, which will focus its activities in providing permanent titling of land to completethis program as quickly as possible.

H. Targets

Listed below are the minimum actions which the Government undertakes to carry out in the Land Tenurearea in order to achieve the objectives indicated above.

Actions Prior to Release of the Second lranche of the Credit

1. Present evidence of satisfactory implementation of the new land tenure policy, in particular, that:

(a) at least 5,000 new land titles have been issued to eligible beneficiaries;

(b) cadastral work is under way in at least two departments previously agreed with the Bank;

(c) at least 50% of INA's portfolio in arrears as of June 30, 1992, arising from its land titlingprogram under the LRA, has been privately contracted to a specialized collection agency;

(d) funds for the seed capital scheme budgeted within the SRN do not exceed 25% of INA'stotal budget in any particular )ear;

(e) the plan to reduce INA's labor force has been substantially completed; and

(f) the agreed plan to divest INA's assets and activities not related to the land titling programis on target.

2. Present satisfactory terms of reference for undertaing a financial and operational audit of INA'srecords and accounts.

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Prior to Release of the Third Tranche

1. Present evidence of satisfactory implementation of the new land tenure policy, in particular, that:

(a) at least 35,000 new additional land titles have been provided to eligible t meficiaries;

(b) cadastral work has been completed in at least 25% of the area without cadastre as of June30, 1992;

(c) all INA's portfolio in arrears as of June 30, 1992, arising from its land titling programunder the LRA, has been privately contracted to a specialized collection agency;

(d) funds for the seed capital scheme budgeted within the SRN do not exceed 25% of INA'stotal budget in any particular year;

(e) INA's work force does not exceed 800 persons; and

(f) all INA's assets and activities not related to the land titling program have been divested.

2. Present satisfactory audit report based on agreed TIOR.

HI. Strategy for achieving the objectves

Listed below are the complementary actions that will facilitate attainment of the targets indicated earlier.These actions may be revised by mutual agreement between the Govermnent and the IDA.

.1. To be completed by December 30, 1992:

(a) Identification of the teams of private contractors who will be invited to submit proposalsfor the delivery of the services to be contracted out by INA, and decision on how theywill be informed of the decisions.

(b) Identification of NGOs and PDOs that might be interested in cooperating in any permanenttitling requested by members of cooperatives or other associations of farmers.

(c) Establishment of the timetable of activities for the Commission that will be responsiblefor coordinating the cadastral survey to be undertaken in the country by domestic orforeign contractors, to start prioritizing and coordinating the work to be carried out assoon as possible. The Commission will be made up of staff from INA, COHDEFOR,and the Departnent of Cadastre and the Interior. In the case of INA, semi-annual targetswill be set for the information required beginning on January 1, 1993, to permit the landtitling program to be completed within 28 to 36 months.

(d) Detailed estimate, in terms of number and costs, of what is involved in resolving andpaying-off for land that was subject to expropriation. Tentative timetable for the workto be carried out over an 18-month period.

(e) Start evaluating INA's information management capacity for carrying out the plan ofaction.

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(f) Identification of the procedure to be followed by INA in soliciting proposals for itsaccount payable, whether for tiding land or others. In addition, idenify a detailedaccounting of delinquent and current balances on those account.

(g) Identification of a procedure to expedite the transactions involved in the replacement ofprovisional titles and occupancy guarantees by permanet titles.

2. To be complet by January 30, 1993:

(a) Inplementation of INA's organizational chart, structure and manual of functions basedon a maximum staff of 800 persons.

(b) Preparation and approval of the terms of reference for teams of private contractors whowill be performing selected fumctions that can be contracted out by INA.

(c) Tentative or final ements with NGOs and PDOs that wish to cooperate in the task ofissuing permanent land titles to cooperatives or other associations of farmers who sorequest.

(d) Agreement of the two departments on which cadastral work will be undertaken on apriority basis.

(e) Preparation and approval of the criteria for establishing the roster of contractors to beinvited to submit proposals to participate in the competitive bidding for the cadastalsurvey to be conducted first in the two departments agreed, and subsequety, in the eightremaining departments. Opening of this roster in the Department of Cadastre andinvitation to register.

(f) Titling and delivery of at least 300 pmanent land titles.

(g) Estblishmentof, and definitive dmetable for, the procedure to be used in resolving casesinvolving expropriations.

(h) Establishment of relevant procedures and implementation of improvemnts to INA"sinformation management capacity.

(i) Preparation and approval of the terms of reference for inviting bids on the collection ofINA's claims.

(j) Start-up the smlined system for reguarizing dtles.

3. To be completed by June 30, 1993:

(a) Opening of roster of contractors; invitation to bid, and award to private contractors ofselected functions that can be conacted out by INA.

(b) Signing of contracts with the NGOs and PDOs selected, and start-up of their activities.

An= 3Page 13 of 31

(c) The Depamen of Cadastre to have requested bids and have awarded the contrat(s) forcarying out the castral work, to have started the work and to have delivered the ilreports to INA.

(d) Titling and delivery of at least 13,000 peannt lmnd tites.

(e) Initiaton of the final setdement process for at least 100 files involving expropon.

(t) Start-up of INA's enhanced computer system at both the central and the regional level.

(g) Invitation to bid, contract award, and start of collections of INA's claims.

(h) Finalization of sales of INA"s nonessentl assets.

4. To be completed by D15tS, 1993

(a) INA fimctions that can be contrcted out to be fully operated by private conftrors.

(b) Completion of at least 20% of the work contacted out to NGOs and PDOs.

(c) Delivery by the D qarmet of Cadastre to INA of the cadastrl data conacted for thisperiod (data from two previously agreed departmen).

(d) Tiling and delivery of at lest 23,000 additonal pemunent land titles.

(e) Final settlement of 100 fles involving previous eopriations, and iniation of the sameprocess for at least another 200 cases.

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HONlDUA

AGRCUR SECTOR MODERATIONAMl DEELPEN PROGRA

FORESTRY PLAN OF ACTION

I. OBJECTIVES

The objective of the Honduran Government's reforms in the forestry sector is to achieve sustinedeconomic growth within the framework of a sound environmental policy that safeguards biodiversity.This objective will be achieved through the approval and subsequent implementation of the regulationsto the Agricultural Modernization Law 31-92 and the restructuring of COHDEFOR. The activitiesidentified in the plan of action will serve to establish the guidelines for implementing the program ofreforms in the forestry sector. The key areas of the plan of action are as follows:

1. Forest Propty Rights: To restore forest user rights to those who can prove land tenure andownership. Private owners of forest lands will be required to draw up management plans to guideand monitor the use of private forests.

2. ent of Public Forests: Public forest land will be subject to management plans thatpromote sustained forestry activities, while at the same time: (i) safeguarding the user rights ofthe communties and settlers established in affected areas; and (ii) protecting areas of criticalimportance.in terms of their amenity value, such as land, water, conservation, and biodiversity.The process of selling timber and other goods and services derived from public forest lands willbe steered toward a transparent, competidve and efficient market that reflects world price levelsfor similar goods and services.

3. Environmntal Prot n: To protect and manage a representative sample of all the ecosystemsthat exist in the country, by consolidating the Honduran Protected Areas System so as to protectfragile ecosystems or areas that merit protection by reason of their biodiversity or other environ-mental considerations. To improve the monitoring of forests and to step up punitive efforts todiscourage activities that result in enviormental degradation.

4. Reform of the Stae Foresty Ad itration (AFE): The emphasis of the public forestryadinisration should be shifted from a commercial forestry corporation (COHDEFOR) towarddevelopment of a forestry agency (APE). The new APE will be responsible for: (i) administeringpublic forest lands from the standpoint of harvesing, environmental protection, and conservationof nture and of protected wildlife reserves; (ii) regulating, monitoring, and ensuring compliancewith forestry legislation on all forest lands; (iii) supporting private forest-sector marketingfunctlons (owners of private forest lands, forestry industry, municipalities and ejidos, and societyat large); and (iv) providing forestry extension services, particularly to groups of small forestryoperators. In addition, the organizational unit responsible with enforcing the law should havesufficient autonomy to ensure that the laws are applied on both private and public forest lands.

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II. TARGETS

The following are the minimum actions which the Government undertakes to carry out in the forestrysubsector.

Actions prior to release of the second tranche of the credit

Present evidence of satisfactory implementation of the new forestry policy, in particular:

(a) satisfactory implementation of the agreed plan to restnctre APE;

(b) all potential forest lands in Honduras have been identified on the basis of the agreedcriteria;

(c) forest resources from public lands eligible and suitable for commercial forestry use areallocated on a competitive and efficient basis under procedures acceptable to IDA;

(d) at least 10 public forest management units (PFMUs) have been established, and usufructrights of communities on at least 50% of the PFMUs have been formalized, orresettlement plans, if needed, are being executed;

(e) management plans for at least 5 PFMUs are being executed;

(f) an evaluation, under agreed terms of reference, of the relevance and relative moraceof protected areas, both existing and proposed by APE, has been completed; and

(g) satisfactory implementation of the agreed program to monitor the social and enrimpact of the forestry reform program.

2. Present satisfactory terms of reference to undertake a fincial and operational audit of APE'srecords and accounts.

Actions prior to release of the third tranche of the credit

I1. Present evidence of satisfactory implemention of the new forestry policy, in particular:

(a) implementation of the plan to restructre APE is subsntly completed;

(b) all PFMUs have been identified;

(c) all PFMUs in cadastral areas have been regularized, mna tplans are in execution,and usufruct rights of at least 50% of the commuities have been formized;

(d) at least 70% of all PPMUs have management plans in execudon, and plams to reglarizeusufruct rights of communities have been prepared;

(e) management plans for at least 15 protected areas are being established;

(f) satisfactory execution of resettlement plans, if any; and

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(g) satisfactory implementation of the agreed program to monitor the social and evioeimpact of the forestry reform program.

2. Present a satisfactory audit report on AFE's operations based on the agreed terms of reference.

Mll. STRATEGY

1. Listed below are the complementary actions that will facilitate attainmem of the targets indicatedearlier. These actions may be revised by mtual agreement between the Goverment and IDA.Implemeation of the reforms embodied in the Agricultural Modenization Law will require majortechnical, administrative and budgetary changes in the state forestry sector over the next 24mouths. During this period, COHDEFOR will consolidate its conversion to a forestry serviceand discontinue its production and marketing activities. Under the Modeization LAw, the newforestry service will emphasize the management and protection of state lands and the monitoringof private forestry activities.

2. To be complted by Janry 30,1993

(a) approval of the Regulations on forestry aspects of the Modenization Law (Decree 31-92of April 6, 1992), which will cover at least the following aspects:

(i) the role and responsibilities of AFE;

(ii) that public stumpage proceeds and other public sector revemes geneated by APEshould bepart of the Treasury's income;

(iii) standards for the management plans to be submitted to APE as prerquisite toutilize private and publicly owned forest resources;

(iv) procedures to demonstrate the right of use of forest resources to forest landowners;

(v) transitional dispositions to idendfy public forest areas;

(vi) rules for the establishment of dipute settlement mechm in forest areas;

(vii) policies and procedur to regulaize commurties in national forests and/or tocompensate farmers in cases of involuntary resettlement; and

(viii) regulations to establish and manage Protected Forest Areas and to promotebiodiversity conservation.

(b) approval of the Work Plan for identifying potential for forety land, using a methodologyto be agreed among APE, INA and the National Cadastre. Tle plan should also includeactions to identify those areas primarily suited to comm ial havestng of timber (orother forest products).

(c) initiation of timber sales and other private goods and services from publicly owned forestlands, using a transparet, competitive and efficient biddig ssm The system must:

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(i) set a base price below which forest products may not be sold; and

(ii) assure participation by the greatest possible mber of buyers in a corpetitivemanner.

(d) present a Plan of Action for implementing the restructuing of APE that covers at leastthe following aspects:

(i) management of publicly owned forest lands (National Forests and Protected Areas)for production, enviromental protection and nature conservation;

(ii) supporting functions concerned with marketing by private forest-sector groups(owners of private forest lands, foresty idustry, municipalities and ejidos, andsociety at large);

(iii) sufficient autonomy and administrative capacity to regulate, monitor, and ensurecompliance with forestry legislation on both private and public forest lands, andimposition of sanctions in the event of noncompliance with the pertinent law;

(iv) establishment of a Price Informatlon Systm to provide data on domestic andworld prices for relevant forest products in different parts of the country;

(v) establishment of a monitoring system to identify the impact of forest sectorreforms on the environment, the economic and social sectors, and the mesuresto prevent, mitigate, correct and compensate for possible negative impacts,ensuring that the latter are dealt with in a timely and appropriate manner;

(vi) a new personnel management system, and measures to promote decelntrizationthat reflect operational needs in field locations remote from the capital;

(vii) identification of fiuctions, such as extension, fire control, reforesttion, andmanagement of publicly owned lands, that can be contracted out to the privatesector; and

(viii) establishment of the autonomy of ESNACIFOR.

(e) preparation of terms of reference for evaluat the relevance and relative importance ofexistng Protected Areas and those proposed by APE.

(f) presetaion of a satisfactory draft of the Forest Maagement Regulationsl (IManagementPlans) to be issued by APE.

3. To be completed by Febry 28, 1993

(a) preparation of APE's new mamnal of functions and procedures.

11 TheSe should be snple and reus-orented, and d&efr uts and rqummem should be dda_d by size ofpperty (rangln rom minimmles and conte for vey sm holdings, to di plans for lae propedes wherensud mmhaet is feasible).

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(b) presentation of acceptable drafts of the following specific regulations to be issued by APE:

(i) Regulations on Forest Protection; and

(ii) Regulations on the Public Forest Management System.

(c) approval and entry into effect of the Forest Management Regulations (Management Plans).

(d) contract awarded for the evaluation of Protected Areas on the basis of agreed terms ofreference.

(e) contract awarded for the technical assistance to monitor the social and environmentalinpact of the refonms.

4. To be completed by March 31, 1993

(a) identification of all public forest management units (PPMUs) in all departments wherecadastral data are available, marking the start of the Land Tenure Regularization Programfor such forest lands.

(b) initiation of the process of regularizing comunities and individual families in PFMUsin areas where cadastral data is available, and preparation of resettlement and developmentplans, as appropriate.

(c) preparation of an Action Pau to consolidate the Protected Forest Areas System, includingthe regularization of tenure of the lands involved.

(d) preparation of drafts of the following specific regulatons to be issued by APE:

(i) Regulations for the Proted Forest Areas System; and

(ii) Regulations for the Management of Municipal and Ejida Forest Lands;

(e) present a Proposal for the Creaion of a Foret Bond System to finance technicalassistance from private consultants to small forest land owners. The proposal shouldindicate the legal and fmncial reuiments for implementing the program;' and

(f) present a mechanism for setding disputes over private forest lands that cannot be resolvedby the procedure agreed between COHDEFOR and INA; if necessary, regulations shouldalso be presented.

5. To be completed by October 30, 1993

(a) promulgation and entry into effect of:

2/ The system of bonds will be an alternative to directemployment of dle foresay service by AFE, as a means Ofproviding technical assistance. It will allow for die disbursement of budget fun4s to eligible pardcipans to pay fbrprivately offered technical assisce services.

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(i) Regulations on Forest Protection;

(ii) Regulations for the Public Forest Management System;

(iii) Regulations for the Protected Forest Areas System; and

(iv) Regulations for the Management of Municipal and Ejida Forest Lands;

(b) to be implementing the social and environmental impact monitoring system and to haveconcluded the flights under this monitoring system;

(c) to provide evidence that measures have been taken to transfer fully and to guaranteeownership and use of timber resources to the owners of forest lands;

(d) satisfactory implementation of AFE's restructuring Plan and, in particular, to be operatingunder the new organizational structure and in accordance with the new manuals offunctions and procedures;

(e) to complete the identification of all potential forest lands and officially adopt the resultingoperating level map;

(f) to be conducing sales of timber from publicly owned forest lands using a transparent,competitive and efficient bidding system;

(g) to have identified and regularized at least 250,000 hectares of public forest lands,established at least 10 public forest management units (PFMU), regularized the presenceof communities and individual families in at least 50% of such PFMUs, and be executingany resettlement plans that may have been found necessary.

(h) to have prepared management plans and be executing them in at least five public forestmanagement units;

(i) to have completed the evaluation of all protected areas in the system in accordance withagreed terms of reference;

(j) to have prepared management plans for 10 protected areas, including programs to regular-ize land tenure for public registration and to regularize communities and individualfamilies in the PFMUs, as well as resettlement plans wher needed;

(k) to demonstrate that it is implementng the Forest Bond System; and

(1) to demonstrate that it is executing the environmental and social impact monitoring system.

6. To be completed by October 30, 1994

(a) to have identified all public forest management units;

(b) to have regularized the presence of communides and individual families in all public forestmanagement units in areas which have been surveyed;

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(c) to have management plans under execution for at least 70% of the total number of publicforest managemen units;

(d) to have created, re-created or eliminated all the proteted areas needed to make theProtected Forest Area System representative;

(e) to have prepared management plans for at least half the number of protected areas andstarted to implement at least half of these managemern plans;

(f) to have regularzed the presence of comnities and individual families in 30% of thetotal area of the Protected Forest Areas System;

(g) to be executing any resettlement plans identfied as necessary and justifiable;

(h) to have substantiatly completed the transition to the new AE in accordance with theagreed plan; and

(i) to demonstrate that it is execting the enviromnental and social impact monitoring system.

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HONDURASAGRICUL SECTOR MODERNIZATION

AND DEVELOPMENT PROGRAMRUTRAL FINANCIAL SECTOR

PLAN OF ACTION

1. OBJECTIVES

The main objectives of the Honduran Government's reforms in the rural financial sector are: (a) to assure theprovision of adequate financial services in the rural sector, especially for small and medium-scale producers; (b) toimnprove the allocation of credit resources; (c) to reduce state involvement in rural sector fnancing; (d) to lowerthe fiscal costs associated with subsidized interest rates and losses by BANADESA; (e) to increase commercialbank participation in rural sector financing; and (f) to give small producers access to credit facilities for thepurchase of land.

To achieve these objectives, five areas of action have been defined:

1. BANADESA: The objective with respect to BANADESA is to see its function of providing bankingservices in the rural sector - particularly to small and medium-scale farmers - performed by a financiallyself-sufficient, efficient and viable financial entity. To this end, it has been decided to divest it from thepublic ;ector by selling it to the private sector, either wholly or by selling its assets separately. Whilea suitable assessment of the agency is being obtained and the initial steps toward privatization are beingtaken, the aim is to have BANADESA continue to operate under a restructuring program designed to focusefforts on restructuring its capital and cleaning up its portfolio (in accordance with Decree-Laws 31-92and 71-92), to avoid expansion, and to prevent further deterioration of its assets.

2. LAND CREDIT FUND: The objective of creating this fund is to enable small-scale producers to buyrural land on market terms, with the aim of expanding access to the land, developing an orderly and stableland market, and fostering the emergence of a permanent private system of land financing.

3. PRIVATE RURAL CREDIT BANKS: The aim of creating private rural credit banks (Cajas Rurales)is to provide quick and timely financial services in the rural sector, for all the economic activities carriedout by the smallest producers. To this end, the Cajas Rurales must be solvent and financially self-sufficient, operated on efficient business principles, including adequate provisioning rules, and supervisedby a competent ageac.

4. INCENTIVES TO THE FORMAL FINANCIAL SECTOR TO EXPAND m INVOLVEMENT INAGRICULTURAL CREDIT: The objective in this area is to foster greater participation by thecommercial banking system and other formal financial intermediaries in the provision of financial servicesin the rural sector, especially to small-scale producers.

S. IMPROVEMENTS TO GUARANTEE SYSTEMS AND LEGAL/REGULATORY FRAMEWORKTO EFFECT CREDIT CONTRACTS: The objective in this area is to remove deficiencies in the systemof guarantees (collateral, mortgages, etc.) and in the legal/regulatory system that hamper the effectivenessof credit contracts, particularly in the rural sector.

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D[. TARGETS

Listed below are the minimum actions which the Government undertakes to carry out in order to achieve theobjectives outlined for the rural financial system.

Actions prior to release of the second trauche of the credit

1. To have completed the study to develop a scheme to promote increased participation of formal financialintermediaries in agricultural credit, under agreed terms of reference, and have presented a plan toimplement the agreed actions.

2. To have initiated the agreed Plan of Action to divest BANADESA, based on the recommendations of theevaluation carried out under the agreed terms of reference.

3. Present evidence that Cental Bank funding to BANADESA has been limited to its August 30, 1991 level,adjusted for inflation, and that there has been no additional Treasmuy funding.

4. Provide evidence that the "land credit fund " to the extent that it is operative, is functioning in accordancewith the agreed regulations.

5. To have approved the legal bases for operating the "Cajas Rurales' and established, as a minimum that:(a) they will be financial institutions supervised by a competent regulatory entity; and (b) they will befnancially self-sufficient.

6. Provide evidence that "Cajas Rurales' to the extent that they are operative, are fimctioning in accordancewith the agreed rules and regulations.

Actions prior to release of the third tanche of the credit

I. Satisfactory progress in implementng the agreed Plan of Action to promote increased participation byformal financial intermediaries in the rural financial markets.

2. Substantial progress in implementing the agreed plan of action to privatize or liquidate BANADESA.

3. Present evidence that Central Bank funding to BANADESA has been limited to its August 30, 1991 level,adjusted for inflation, and that there has been no additional Treasury funding.

4. Provide evidence that the "land credit fund," to the extent that it is operative, is functioning in accordancewith the agreed regulations.

5. Provide evidence that "Cajas Rurales", to the extent that they are operative, are functioning in accordancewith the agreed rules and regulations.

EL. STRATEGY

Listed below are the complementary actions that will facilitate ataim of the targets indicated earlier. Theseactions may be revised by mutua agreement between the Government and IDA.

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1. BANADESA

The divestiture of BANADESA, combined with its critical financial and administrative situation, calls formajor efforts to clean up its portfolio and reorganize its capital position to avert further deterioration andprepare the entity for sale, in whole or in part, to the private sector.

Pending actual divestiture, BANADESA will implement in full the provisions for cleaning up its portfolioset forth in the Agricultural Modernization (Law 31-92 and Portfolio Reorganization (Decree 71-92); cutits administrative expenses; transact its business at market rates of interest; restrict its indebtedness to theCentral Bank (net of any debt taken over by the central government), so as not to exceed, at any pointin time, the August 30, 1991 level, with adjustments for inflation on January 1 each year; and not receiveany budget allocation either to support its operations or as a capital transfer. Because of the transitionalprocess envisaged for BANADESA, mobilization of funds from the public will be handled with caution.At the same time, as an essential step prior to divestiture, BANADESA will be fully evaluated and aspecific strategy will be defined for its full or partial sale to the private sector.

2. LAND CREDIT FUND

To achieve the objectives sought in a reasonable time ftame and avoid inefficiencies and unwanted transfersof wealth, the following basic criteria will be adopted in defining and implementing the land credit fimd:

(a) no new state-owned institution will be created either as a real estate or finance instituton;

(b) it will be a line of credit available to any eligible established financial intermediaries that wishto participate;

(c) Government financing of the fund will come solely from resources earmarked in Article 69 ofDecree-Law 31-92;

(d) credit risks will be borne by the fianmc-ial intenmediaries, ot by the fimd;

(e) financing will be at market interest rates;

(f) participation by financial intermediaries will be conditional primanly on their solvency andcompliance with relevant provisioning regulations;

(g) the mechanism will be sufficiently open to enable the private sector to cofinance land purchasesfrom the outset. It wil' also function as the prime mover behind a basically private system offinancing that is open both to beneficiaries and to non-beneficiaries of Agrarian Reform;

(h) the land eligible to be purchased using fimd resources will be both public and private land suitablefor fanning;

(i) qualification of beneficiaries will be by an automatic, objective and expeditious process; and

a,) responsibility for supervising compliance with the rules will rest with the Superntendency ofBanks.

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3. PRIVATE RURAL CREDIT BANKS

To attain the desired objectives, it will be necessary to use great care in designing the class of financialentities to be known as private rural credit banks, and to determine what their regulatory, operational andsupervisory rules should be in order to reasonably assure their sustained viability over time.

The system will be built up out of private entities that are sufficiently strong and financially self-sufficient,regulated and supervised by a competent agency. It will thus take shape as specific parties interested informing banks come forward with cash capital contributions, and its creation should not be artificiallyforced.

To this end, the following basic principles vYi,' be followed:

(a) account will be taken of the financial services that small-scale rural producers need. Accordingly,a satisfactory diagnosis will be made of why those needs have not been met and the prospects thatthe new land ownership conditions will stimulate interest on the part of traditional financialintermediaries;

(b) a clear understanding will be needed of how to resolve problems arising from the high degree ofhomogeneity of the groups associated witi any particular bank: (a) bunching of credit risks (sameproducts, in the same region, at the same time); and (ii) deficits and surpluses occurring at thesame time for the entire group;

(c) the approach to resolving possible conflicts of interest in the roles of lender and borrower willbe clarified (those responsible for lending policies are also the beneficiaries of the credit);

(d) clear ground rules will be provided regarding the form of legal corporation they should adopt,agreed property concentration, policies and methods of capitalization, and distribution of profits;

(e) there will be specific requirements that prospective interested entities must meet to qualify as abank, including capital, legal, economic and fmancial, and human resource aspects, and, aboveall, submission of a viable proposal. In particular, the only transfers from the Government tobe taken into account are those indicated in Decree 31-92 (up to 70 percent of the returns on theGoverment trusts managed by BANADESA);

(f) a satisfactory regulatory framework wili be defined that will assure its administration in line withprudential rules generally accepted for financial intermediaries. This framework will include asa minimum the following aspects:

(i) minimum capital, and maintenance of its value in real terns (adjustment for inflation);

(ii) capital adequacy (debt ratio);

(iii) diversification of assets (by borrower and by "equal-risk" economic activity);

(iv) mandatory accounting policies;

(v) mandatory external audit and related re(rArements;

(vi) minimim rquments for intemal control systems;

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(vii) activities permitted and prohibited (should be limited to the mobilization and placementof funds);

(viii) asset risk control and provisioning policies;

(ix) regulation of financial caps, such as terms and interest rates;

(x) policy on disclosure of information to associates and the public at large;

(xi) specific restrictions on lending to directors, senior executives and, in general, to anyindividuals or grou.ns having lending authority;

(g) an efficient supervisory agency will be established (or an existing one will be used), with sufficientpowers, including:

(i) the requirement that prior authorization be obtained to form a bank, and the power tointervene and liquidate a bank with substandard management or problems of financialinstability;

(ii) access to all books, files, documents, etc.;

(iii) power to request general or special information both from the bank and from any of itsdirectors, executives, or employees;

(iv) authority to issue accounting, asset and liability valuation, and regulatory guidelines ingeneral;

(v) power to demand the creation of provisions for dubious debts and the write-off ofunrecoverable assets;

(vi) authority to require capital increases, either through capitalization of profits or in the formof additional special contributions;

(vii) power to impose sanctions, including monetry fines;

(viii) in general, all powers conferred on it by law with respect to entities under its supervisionunder the Honduras' Suprintdency of Banks.

4. INCENTIVES TO THE FORMAL FINANCIAL SECTOR TO EXPAND ITS INVOLVEMENT INAGRICULTURAL CREDIT

To achieve the objective in question, it is planned to conduct a study to define specific incentive schemesfor fornal financial intermediaries. Based on the results of this study, a Plan of Action will be drawnup, and agreed with IDA, to implement any measures considered desirable in order to promote more rapidpenetration by formal financial iteredia into the rural financial services market.

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5. IMPROVEMENTS TO GUARANTEE SYSTEMS AND LEGAL/REGULATORY FRAMEWORK TOEFFECT CREDIT CONTRACTS

To achieve the objective in question, it is planned to conduct a study to identify (a) the problems arisingfrom the system of credit guarantees (collateral and mortgages) and (b) the effectiveness of the legal/regulatory system. This study should produce concrete proposals aimed at improving the system so asto facilitate credit, particularly toward the rural sector. It is also planned to implement the proposals putforward in the study.

Listed below are the complementary actions that will facilitate attainment of the targets and objectives indi-cated earlier. These actions may be revised by mutual agreement between the Govermment and the Bank.

By January 30, 1993

(a) approval of the regulations for the land credit fund, containing the basic principles set out above;and

(b) dernonstrate that Central Bank funding to BANADESA has been maintained at its August 30, 1991level, adjusted for inflation, and that there has been no additional Treasury funding.

By March 30, 1993

(a) to have tendered and initiated the evaluation of BANADESA with a view to its divestiture;

(b) show significant progress in implementing Decrees 31-92 and 71-92 on cleaning up of theportfolio, and present concrete evidence of having initiated actions to collect from delinquentborrowers who are not beneficiaries of the portfolio rehabilitation program and from those fallinginto arrears;

(c) completion of an internal study on the profitability of BANADESA's offices, and of a plan andspecific strategy for closing those that are not viable;

(d) present concrete evidence that it has begun to privadze the operation of BANADESA's sales ofinputs and started direct negotiations or prepared the final terms of reference for tender;

(e) to have invited bids for the study on improving the guarantee system;

(f) to have put up for bid the study on incentives to the financial sector; and

(g) to have initiated the study on improving the guarantee system.

By August 30, 1993

(a) to have completed the evaluation of BANADESA in accordance with the agreed terms ofreference, and agreed on the strategy for implementing the plan to divest BANADESA;

(b) present concrete evidence of continued efforts to collect from BANADESA's deliquentborrowers;

(c) to have completed the privadzation of BANADESA's input 00eratioos;

(d) show significant concrete progress in closing BANADESA's unprofitable offices; and

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(e) to have completed the study on imprving the guarantee system, and prepared a plan of actionfor carrying out the recommendations of the study.

By November 30, 1993

(a) to have started the process of divesting BANADESA in accordance with the time frame containedin the agreed Plan of Action;

(b) demonstrate that Central Bank fnding to BANADESA has been mintined at its August 30, 1991level, adjusted for inflation, and that there has been no additional Treasury funding.

(c) show concrete progress in closing an additional number of BANADESA's unprofitable offices;and

(d) to have completed the study on incentives to the financial sector, and prepared a plan of actionfor carrying out the recommendations of the study.

By July 30, 1994

(a) to have made substantive progress in implementing the agreed Plan of Action for the divestitureof BANADESA;

(b) to be implementing specific agreed actions to stimulate participation in the rural financial sector;and

(c) to be implementing specific agreed actions to improve the guarantee system.

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HONDURASAGRICULTURAL SECTOR MODERNIZATION AND DEVELOPMENT PROGRAM

PUBLIC ADMINISTRATION AND EXPENDITURE

PLAN OF ACTION

I. Objectives

The main objectives of the Government's reforms in the area of public administration are to redefine therole of the state in the sector and to improve sector planning and coordination by making more effectiveuse of the budgeting system to support specific priorities of the new sector policy. To this end, actionwill focus on the following areas:

1. strengthening the sector's planning, coordination and resource allocation capacity in accordancewith the new policy;

2. ensuring that the policies, programs and organizational structures of institutions within the sectorare responsive to and supportive of the new sector policy; and

3. improving the managerial and budgetary capacity of these institutions with a view to speeding upthe implementation of new programs and investments.

H. Targets

Listed below are the actions which the Government undertakes to carry out in the area of publicadministration and government expenditure in order to achieve the objectives indicated above.

Actions Prior to Release of the Second Tranche

Present evidence that the policy on Institutional Strengthening and Government Expenditure is beingsatisfactorily implemented, in particular:

I . that the Annual Operating Plans (POAs) and budgets for 1993 (and for any other year previouslyagreed between GOH and IDA) have been executed in support of the new agricultural policy.

2. that the POAs and budgets (current expenditure and investments) for 1994 for the sector as awhole, and for sector institutions (SRN, INA, IHMA, AFE, and BANADESA) reflect and supportthe sector policies agreed under this credit and under SAL II. These are to have been approvedby the Economic Cabinet and presented to IDA before being submitted for approval to theSecretariat of Finance and Public Credit.

3. satisfactory implementation of the previously agreed Policy Support (PSP) Program to strngthnthe capacity of the sector's public institutions.

Actions Prior to Release of the Second Tranche

Present evidence that the policy on Institutional Strengthening and Government Expenditr is beingsatisfactorily implemented, in particular:

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1. that the POAs and budgets for 1994 (and for any other year previously agreed between GOH andIDA) are being executed in support of the new agricultural policy;

2. that the annual operadng plans and budgets (current expenditure and investments) for 1995 forthe sector as a whole, and for the sector insdtutions (SRN, INA, IHMA, APE, and BANADESA)do reflect and support the sector policies agreed under this credit and under SAL H. These areto have been approved by the Economic Cabinet and presented to IDA before being submitedfor approval to the Secretariat of Finance and Public Credit.

3. satisfactory implementation of the previously agreed PSP to strengthen the capacity of the sector'spublic institutions.

M. Overad strtg for achieving the objectives

Listed below are actions which will facilitate attainment of the objectives and targets indicated earlier.These actions may be revised by mual agreement between the Government and IDA. The objectiveswill be achieved through integrated and complementary actions in the following areas:

1. In the course of 1993, the sector's managerial capacity will be str hened by accelerating andconsolidating CODA/UPSA's current programs and improving the sectoral systems Oel programplanning and management and sectoral budgeting.

2. In the first few months of 1993, a technical assistance package will be launched to define andinstitutionalize the new organizational structures of the insdtutions and the new systems andprocedures that require strengthening in order to improve the managerial capability of the differentsector institutions.

3. In mid-1993, preparation of the 1994 POAs and budgets will begin, with a view to defining andinitiating the new programs of services and investments in support of the new agricultural policy.

Actions to be completed by December 31, 1992

1. complete the process of revising and adjusdng the institutioal POAs and budgets for 1993 so asto assure adequate funding to implement the action plans in the areas of land tenure, forestry, andthe rural financial sector. These should be approved by the Economic Cabinet and the Secretariatof Finance and Public Credit;

2. propose definitive funding for the technical cooperation program to strengthen the capacity of thepublic institutions in the sector (to plan, coordinate, admunister and implement the policy reformsagreed under this operation and under SAL 11), and begin the process of selecting consultants;and

3. prepare an integrated summary of the technical cooperation projects in the agricultural sector underexecution or to be initiated in other sector institutions, with fumding from other donors.

Actions to be completed by March 31, 1993

1. to have completed the evaluation of the 1992 budget and of the POAs and budgets for the sectoras a whole and for each of the insdtitons that comprise the agricultural sector; and

2. the PSP for institutional strengthening and budgetary improvemens is opeating satisfactorily.

Annex 3Page 30 of 31

'Acton to be completd by Jue 30, 1993

1. to have complete the evaluation of the budget for the frs quarter of 1993 and of the POAs andbudget for the sector as a whole and for each of the insdtutions that comprise the agriculturalseaor; and

2. presentaton of the instruction sheet for preparing the POAs and budgets for 1994;

3. the PSP for institutional strengthening and budgetary improvements is opeaing satisfactorily.

Acdon to be complaed by July 30, 1993

1. presentation to CODA, for review and evaluation, of the 1994 POAs and bxudgets for the sectoras a whole and for each of the institutions that comprise the sector, in support of the new sectorpolicy. These should include a schedule of investnents.

Actions to be completed by August 30, 193

1. presentaton of the 1994 POAs and budgets for the sector as a whole and for each sector institutionto the Economic Cabinet and IMA, prior to their submission to the Secretariat of Finance andPublic Credit.

Agtions to be completed by September 30, 1993

I1. to have completed the evaluation of the budget for the second quarter of 1993 and of the POAsand budgets for the sector as a whole and for each of the institutions that comprise the agriclturalsector; and

2. the PSP for institutional strengthening and budgetaty improvemens is operating satisfactorily.

Actios to be compleded by March 31, 1994

1. to have completed the evaluation of the 1993 budget and of the POAs and budgets for the sectoras a whole and for each of the institutions that comprise the agricultura sector; and

2. the PSP for institutionat strengthening and budgetary improvements is operaing satisfactoily.

Actions to be comletd by June 30, 1994

1. to have completed the evaluation of the budget for the fist quarter of 1994 and of the POAs andbudget for the sector as a whole and for each of the insdtutions that comprise the agriculturalsector; and

2. presentation of the instruction sheet for preparing the POAs and budgets for 1995;

3. the PSP for insdtutional stregthening and budgetary improvements is Opting satisfactorily.

Actdons to be completed by July 30, 1994

1. presention to CODA, for review and evaluation of the 1995 POAiand budgets for the sectoras a whole and for each of the institutions that comprise the sector, in support of the new sectorpolicy. These should include a schedue of investments.

Ame= 3Page 31 of 31

Ac0on to be cmpleted by Augut 30, 1994

1. preseaion of the 1995 POAs and budgets for the sector as a whole and for eah sector insuionto the Economic Cabinet and IDA, prior to their submission to the Secreiat of PFine andPublic Credit.

Actions to be completed by September 30, 1994

1. to have completed the evaluation of the budget for the second quarter of 1994 and of the POAsand budgets for the sector as a whole and for each of the institutions that comprise the agriculturalsector; and

2. the Policy Support Program for institutional strengthening and budgetary improvent isoperating satisfactorily.

LlVHllAGSACLWAwUPP.uCY.1zr

Annex 4Page 1 of 3

HONDURAS

AGRICULTURAL SECTOR ADJUSTMEN CREDIT

Implementation of Agricutural Sector Reorms

1. The current administration headed by President Callejas that took office in January1990, embarked on a bold program of economic reform based on fiudamental redefinition of the roleof the state. Within over three yeas of implementing its adjustment program, the Government hasaccomplished major changes in macroeconomic and agricultural policies as outlined below. Reformshave been implemented in foreign exchange management, fiscal and monetary policies, and tariffstructure and administatve trade controls. Agricultual policy reforms implemented during the lasttwo years as part of the overall adjustment program, and supported by SAL n, included reforms inagricultural trade policy, agricultural price policy, marketing of basic grains, food subsidies and ruralfinancial sector.

Trade Poicy:

(a) The temporary export tax for non-traditional exports was eliminated in October 1990and that for traditional exports was reduced to 25 percent of its original level.

(b) Tariff dispersion was reduced from its previous range of 0-90 percent to a 4-35percent range as of January 1991; and to a 5-20 percent range early in 1992.

(c) The 10 percent surcharge on agricultural products and byproducts was eliminated inNovember 1991 among Cental Americavn countries and are expected to be eliminaedworldwide before the end of the year.

(d) Since May 1991, the private sector is allowed to fully participate in basic grainimports, eliminating the import monopoly of IHMA.

(e) Ihport permits and other restrictions imposed by the Ministry of Economy (WE) 'An anumber of agricultural products were gradually eliminated during 1990 and early1991. Import permits for basic grains (corn, beans, rice and soybeans) previouslyrequired by the Government's IHMA were abolished in May 1991. In addition, inSeptember 1991, IHMA ceased issung statistical registration forms for imports-transferring this fimction to the Central Bank's External Financing RegulatoryDepartment.

(f) Quantitative Export Restrictions imposed by the ME on a number of agriculturalproducts have been gradually eliminated during the last two years. Export permits arerequired only for low-quality coffee.

Annex 4Page 2 of 3

Nice PoHcy:

(a) Guaranteed producer prices for basic grains set by IHMA were eliminated in February1991. A price band system for corn, through the establishment of a variable levy,was introduced in February 1992. Currently, Honduran domestic grain prices are areflection of international prices and are substantally higher, in real terms, than thoseprevailing prior to 1990.

(b) All price controls for the major agricultural products have been eliminated. TheGoverrnent eliminated price controls imposed by the ME on all agricultural productsand their derivatives except for low-quality coffee. This commodity is subject tocomplex trade negotiations among Central American countries. The Goverment isaddressing price liberalization for this commodity in the context of a CentralAmerican initiative on agricultural trade and price policy harmonization. Coffeeprices are expected to be liberalized during 1993. In October 1991, the domesticprice of ground coffee was increased and a 50 percent price band was intoduced.This band allowed coffee prices to rise closer to free trade levels.

Basc Grain Marketng and Food Subsidies:

(a) In May 1991, IRMA took steps to withdraw from two of its most important andtraditional activities: monopolizing imports and trading grain. During the third andfourth quarters of 1991, all grain imports have been carried out by feed compounders,industrial users and other small grain traders.

(b) The Government has redefined the role of IHMA, and restructured it by partiallydivesting IHMA's storage facilities, infrastructure and other assets related to inmportsand marketing activities. To that end, IHMA is in the process of seUling all its storagefacilities except the one in Tegucigalpa. The latter will be used to operate a strategicfood reserve equivalent to about one-and-a-half weeks (or about three percent) of theanmal consumpdion of com and beans. At least four grain storage facilities isexpected to be auctioned before the end of May 1993, while the remainder will benegotiated directly before June 30, 1993.

(c) IHMA's role has been redefined -rom direct marketing of basic grains toadministering the price band systtbn, the strategic reserve, and to providing satisticalinformation of grain trade. The regulations to operate the storage reserve wereapproved by GOH authorities by end of May 1993.

(d) Untargeted food consumption subsidies have been substantially curtailed since theinitiation of the macroeconomic adjustment program. A pilot targeted food stampprogram has been successfully implemented and expanded under the second PHIS.

(e) The Government is retring BANASUPRO. The latter is buying and sellinggoods at market prices and is privatizing a number of its outlets. During 1991 and1992, BANASUPRO did not receive any trasfers from the Central Government andhas only received loans which are being serviced. Instead, the BANASUPRO basicfood subsidy program has been replaced by a smaller, tageted food assistanceprogram developed through the Honduran Socal I¢vemet Fnd (e.g., FamilyAceiatangp Pmroam and Fnnd Vnuchs for Sinde Mothers).

Annex 4Page 3 of 3

Rural Finandcal Sector

2. The Govenmnent has introduced a number of important reforms to the rural finacialsector. Under the Fourth Agricultural Credit Project (Loan 2991-HO), the Government agreed to: (a)pool together under the administration of UPCA all foreign-financed agricultural credit lines; and (b)gradually adjust rediscount and interest rates on all agricultural credit lines (except for basic grains),in order to first equalize the rates among credit lines, and then adjust them to reflect the marginal costof fimds to commercial banks and market on-lending rates. These policy commitments have beencomplemented and deepened under SAL II in which the Government agreed to: (a) adjust rediscountand interest rates on all agrcultural lines to the levels of other credit lines; (b) unify administration ofall agricultural rediscounted credit lines under UPCA; (c) adopt a program to eliminate directed creditlines; and (d) restructure the rual financial system, in particular BANADESA. The actions taken sofar are described below.

(a) The GOH has liberalized all the commeial bank lending rates except thosereliscounted by the Central Bank.

(b) The GOH has equalized rediscount rates on all its caedit lines financed by the CentralBank and is implementing a fully satisfactory program of quarterly adjusments of therediscount rate in accordance wih the marginal cost of fuIds for commercial banks,effectively eliminating the subsidy element previously embodied in the rediscount rate.

(c) As part of SAL n conditionality, the GOH is implementing a restructring program ofBANADESA. In accordance with this plan, BANADESA has: (i) laid off 45 percenof its personnel; (ii) increased to market levels lending rates on a portion of itsportfolio and borrowig rates; (iii) stopped lending to public sector institutions andproviding loans in excess of US$50,000 equivalent to a single borrower; and(iv) started to divest from its non-financial activities. While some progress ininmplementing the r eons of the restucturing plan were evident, GORduring 1991 and early 1992 failed BANADESA to improve overall loan recovery dueto Government's announcent of a debt forgiveness program in the summer of 1991.Due to the mixed experience in implementing the agreed restructing plan, theGovernment has agreed to divest BANADESA during the execution of the proposedAGSAC to allow greater pardciation and the development of more efficient financialintermediaries in ural financing.

L:\HNOA5ACMSARXBUFW.PMNNM.bif

Ann 5Page 1 of 2

HONDURAS

AGRICULTURAL SECTOR ADJUSTMENT CREDfT

Polcy Support Progiuk

1. The proposed Policy Support Program (PSP) expected to cost about US$500,000 will beimplemented over approximately 15 month and would finance technical assistance for four majorareas which represent bottlenecks to policy coordination and implementation. It would:

(a) Assist UPSA and through it also CODA in 1993 sector policy management byproviding needed skills in:

- economic policy analysis- investment pipeline planning- budget planning and execution, and- institutional strengteing

(b) Strengthen UPSA and Ministry of Finance understanding of technical sector issues andassist the UPSA/Ministry "Comib6 Tkcnico' in sector budget management andoversight during 1993 and 1994;

(c) Provide practical problem-solving assistance in titling and cadastral work, bankingmanagement, and natural resource policy planning; and

(d) Help UPSA to follow-up imple ton of the actions to be taken in Land Temnre,Forestry, Rural Finance, and Public Administration and Expenditure areas, as agreedwith the IDB and IDA as part of this operation. Also help UPSA to coordinate thetechnical assistance provided by other donors to the sector insdtutions, in particular,to the forestry sector (see Annex 6 Appendix A). It will also help UPSA preparereports and other information needed to supervise the two policy loans.

2. The PSP would consist of:

(a) National experts (81 person/m or $140,000)

- Economist with policy management experience - 15 person/m- Budget systems and irformation management - 12 person/m- Organization and management - 12 person/m- Natural resources economist - 12 person/m- Land titling and cadastral systems - 12 person/m- Banking management - 12 person/m- Other short term assistance - 6 person/m

3. Expatriate experts 36 person/m ($360,000)

- Economist with policy management experience - 9 person/m- Oranizadon and management expert - 9 person/m

Ane SPage 2 of 2

- Tiding and cadastral systems expert - 3 person/m- Banking management expert - 3 person/m- Other short term - 3 person/m

The PSP would be financed by USAID as part of its Technical Assistance Program in support of theimplementation of the new agricultural policy emerging from the new LMA. Iternational andnational experts contraed under the PSP would be nomiaed by the Government in consultationwith IDA and IDB.

UMOSARWAC .BUM.MLANNW.Xf

Anne 6Page 1 of 10

HONDURAS

AGRICULTURAL SECTOR ADJUSThET CREDiT

Envronmenl and Ecoondc Impact Amsesmentof the Changes In Forestry Policy Embodied In Law 31-92

Introdtion

1. This operation is clasvified as "B9 in tems of its environmental impact. A fiFe-standingenvironmental assessment exercise was considered to be inappropriate because the entire sector adjustment creditis designed to create new policies and proccaures for environmentally sustainable management of forest and landresources in the country. Instead, this Annex./ analyzes the expected economic and environmental impact ofthe forestry policy and struural changes embodied in the Law for the Agriculture Modenzation andDevelopment of the Agricultural Sector (LMA) (Law 31-92) and which will be supported under the AGSAC.Most current environmental analyses in Honduras are based on the 1989 Environmental i ofile, which in turnis based on data from 1988 or earlier. However, since the new law changes the existing situation quitedrastically, trend extrapolation may be quite irreevant and this analysis is largely conjectural.

The Forestry Sector In Hondurs

2. The forestry sector in Honduras has great potential. Over the years, only a small part of thispotential has been realized because of well-intentioned but misguided policies and most in an unsustainblefashion. In part this was also due to lack of technical kaowhow and popuation pressure leading to agriculturalexpansion on unsuitable lands. While data are scarce and unreliable (often not being much better than roughestimates), the following iformation summazes the current staus of the forestry sector.

3. Honduras has a surface of about 11.2 million ha, of which 7.6 million is charcteized as suitableonly for forestry. Of this 7.6 million ha with a forestry potential, 2.4 million ha are broadleaf forests, 2.9 millionha are coniferous forests, and 2.3 million ha are deforested.2/ These figures refer to actual forest land use orcover: no information is available about potential forest land uses, and there is only sketchy information aboutareas classified or to be classified as national parks, bioreserves or protected areas.

4. No firm data are available on forest land owneship. Mission esdmates are that about 30 percenof the coniferous forests are-communally owned (or ejidal land) and about 27 percent is privately-owned, vrylitie of it in large blocks and almost nodting by the forest product industryj/ The staMowned forests (about43 percent) occur in large contiguous blocks in Districts such as in Olancho and La Mosquitia. This makes themvery aacive from a forest management point of view.

5. The same estmates place state ownerip of the broadleaf forests, including potential areas, atover 70 percent. It is in this category where the encroachment problem is most prevalent. Some reports point

1/ This Annox is basd on a pae pepared by COHDEFOR 'AnAilsis de PsiMca y EsratS Porestles en el marco de k LeYdt Modemizaci6n y DesaoMo del SectorAcola dated August1992 Ser repo prped by COHDPOR, PAO UNDPand blaral donors acive in Honduas' fty sector, as well as mIs4 findinps durwn the course of ptoject prepuari

'Esadfcas Poresas 19899 by COHDEPOR and FAO/UNDP and mision stdmates based on GTZICOHDEFOR 1992Honduras foresty lad use map deved frm satlte imay

3i Land tue esdmates wer based on an 11 percent sample of 10:000 cadastal maps fom the seven DeParnen aeysurvqed.

Anne 6Page 2 of 10

out that as much as 200,000 fanilies in Honduras, or about one fourth of the county's total population, couldbe living on these public lands.. Most are defacto owners.

Impact of the Privatizatlon Provision

6. Forest resources were nationalized in 1974 without compensation to landowners and given toCOHDEFOR to manage. The privatization provision in the LMA foresees the return of the use of the forest landto the landowners: This provision is likely to have the following impacts:

a. Short-term Inpact on Income and Prodon. Private and communal owners will be able to selthe smmpage in a free and open market to the highest bidder, and keep the proceeds forthemselves. Hence, the stumpage will generally fetch a higher price than the 25-35 lempiras/mtthat had been fixed by COHDEFOR until December 1992; also, the owner will receive the fullamount rather than just a small fraction.4/ Maintaiing the artificially low price on wood frompublic lands could thus have lead to: (i) a temporary acceleration of the harvest on public landsin a transition period (undl the stage fee on public lands is increased to at least its parity withprivate lands) but in any case, only until April 6, 1993, when no timber can be cut on forestlands (be they private or government-owned) without an approved management plan as providMfor under the LMA; and (ii) a dampening of the potental price increase on private lands if thesubsidy (undervaluation) of wood on public lands would have condinued. It is unclear, however,whether the commercial harvest on public lands has accelerated recently; to minimize thispossibility, and supported by the the AGSAC, on December 1992 stumpage fee on public landswere increased to its parity on private lands and starting May 1993 no commercial harvestng isbeing allowed without an approved management plan in either public or private forest land.

Another development may take place m the short run. From 1987 onwards,COHDEFOR has stimulated the usage of mobile circular sawmills to handle thinning. With thepresent relaive lack of institutional supervision, use of these sawmills may shit to handling moreremunerative large trees (resulting in high grading rather than in thinning), and cuttig more ofthese than permitted. In summary, in the short rnm (until the new land tenure system is acceptedand/or COHDEFOR can properly monitor the forest), some accelerated cuttig may be takingplace in the belief that the system may change again (as it has often in the past). To minimzethis possible short-term negative impact, supported by the AGSAC, COHDEFOR is benigrestruured and empowered to closely monitor forestry activities on both public and private land.

b. Long-term Impact on Income and Producton. In the long rn, forest owners will have anincentive to husband their land and forest resources, particularly in the case of the pine forestwhere growing trees is financially attractive and can be done at minimal cost. The legiimizationunder the LMA of forest usage is reinforcing secure ownership, which is essential for investingand caring for trees, and which should have strong positive environmental impacts in the long-run.5/

In the case of broadleaf foresu, the long-run impact is more problematic, since growingtrees for wood is not as economically auractive in those areas as in the pine regions. High ratesof return are possible for fuel wood plantations in broadleaf forests, however. Fuelwood in

If Since 1974, COHDEFOR has managed al1 forest cover in Honduras (both on private and stt landa has provded pveforest landowners wih a mninimum (less dan 5percen) of income generated from holands.

'*AnMlsis de Poftdcas y Estrategias Forestaes en el Marco de la Ley de Modernimcon y Desario dd Sector Agicola.August IM. prepared by COHDEFOR.

Anmne 6Page 3 of 10

Honduras is increasingly in short supply, currently selling at 70 lempiras per m3 delivered, andgiven the increasing population, it is unlikely that the price will go down. Planting fuelwoodunder conditional long-term contracts would be encouraged among current settlers in thebroadleaf forest, provided the environmental impact is positive: where fuiewood production orother nroducts is not feasible for ecological or ecmnomic reasons, only a light and very occasionalharvest will be possible. Enforcement of a minimum harvest would be difficult in view oftraditional considerations and current population pressures. Given the population pressures andthe curret weak monitoring of COIDEFOR, the environmental impact of the privatizationprovision of the LMA on broadleaf forest would be either marginally positive or neutral.

On balance, both owners of broadleaf and of pine forests will be better-off financially. To theextent that incentives work, the forest sector will be better-off because of improved husbandryand control by the landowners, either private or the state. That means that on balance, the long-term environmental ipact of the privatization provision of the LMA would tend to be positive.

c. Impact on Social Foresty System. The social forestry system was established at the timeCOHDEPOR was also established in 1974 under Decree No. 103-74. The purpose was to allowCOHDEFOR to better integrate commnnities axid small farmers in the nmagem of the fcrestresource. Under social forestry, cooperatives and/or organized groups of farmers could signcon s with COHDEFOR to use the forest resources of a particular land, be this private orpublic. The LMA specifically protects roles and involvement of communities and small farmersin the management of the national forest lands. Therefore, the regulations to the LMA providefor the involvement of communities in forest management to the greatest extent possible; and thegreater the involvement, the larger the self-interest of the community to husband and sustainablymanage the forests. GTZ has reviewed the potendal impact of pratzatdon en social forestryacdvities (primarily resination and mamnal harvesting/woodworking),§ and (oncluded that thesocial forestry groups could be developed under the LMA on municipal and ejidal lands. Itreports, however, potentially negative impacts for 13 current social foresty groups involving anestimated 500 persons on privately-owned land.2I If the number of people were to be small,it should be possible to accommodate their activities on public lands-or even on private landsagainst payment. These possibilites (as well as others) will be explored and developed byCOHDEFOR as part of its social forestry program, with the objective of minimizing the possiblenegative impact of the LMAA on social forestry actvities and on people currently settled onprivately-owned lands. With the elimation of the right to lands currently assigned to theforestry industry by COHDEFOR ("areas tributarias") as a result of the LMAA/, there isconsiderable ;cope for the development of social forestty which should help counterbalance anynegative impacts for those social forestry groups active on the private lands or for people settled

/ Resultado de la Reubiaclon del Campesino como Consecuencis de la Ley de ModernlzacionAgricola y las Medidas a TonarProducto del Proceso," August 1992, prepared by GTZ.

j1 A more comprebensi-ve defininon of social forestry (Including harvesting with oxen and seed collection) is used in the earlier-cited COHDEFOR report. That report lists 100 groups with a combined membership of 6,000, implying tha the persons underthe social forestry program who could be negatiely acted by the privadation of forest cover on private lands would be lessta 1,000.

y This proedure has been suppotted by COHDEFOR since 1978 altough has no legal basis. It has ofken benoeed fotproduct firms at the expense of communiy rgh.

Ane 6Pag 4 of 10

on, and using the forestry resources of, privately owned land they do not themselves own.21In other words, the limited number of adversely afected participants among the currn socialforestry progrms could be compesated by the private owners to whom the forest cover is beingreturned and/or through their enlarged Involvement in socia1 forestry activities on public forestlands, especially now that the LMA has eliminated the land curreny reserved for the forestindustry.

While the data available indicate only a small (and manageable) negative impact of theLMA on social forestry, there is a fear among some donors and Hondurans that the LMA mightlead to a greater polarzation between lanowoers and the landless living in forest areas. Thisis mainly because of the often fragile and informal relations that have developed between thesetwo groups with respect to land use. However, under the new law, these arrangements wouldbe made fimer through the formalization of the role of communities and small amners inManagement Plans for public land (which account for over 70 percent of the land area underbroadleaf forest and over 40 percet of dhe pine forest) and even in private forest, at least fora transition period. These procedures are stipulated in the regulations to LMA.

Finally, socal foresty in Honduras is not a new concept. Several groups of indigenouspeople (for example, in La Mosquitia) have been managing sustainably both broadleaf andconiferous forests for centuries. Even though increased populationpressure, social considerationsand technology have changed the situation, valuable lessons can and are being derived from suchpractices, as well as experience elsewhere, especially since the new law will affect the poor andindigenous groups.

In summary, as a result of the implementation of the LMA, owners of both broadleaf andpine forests will be, on balance, much better-off financially; so will the communities settled inpublic forest to the extent that they can be (and should be) regularized and embraced under aredefined and enlarged social forestry program, as is envisioned under the LMA. To the extentthat the incentives derived from secure ownship work, the forestry sector will be better offbecause of improved husbanding and management control; the latter will also be furtherencouraged through the Forestry Mangeme Plans system (paras. 11 and 12). On balance, thesocial impact of the application of the privatization provision of LMA would tend to be positive.

Iupact of Land Titliog and Rg on

7. The legitiumzation of forest usage reinforces secure ownership, an essential condition wheninvesting in and caring for trees. It further eliminates the idea that forest land, is "wild" land which is expectedto mean that induced fires to provoke changes in land use will decrease substa y. Therefore, theenvironmental impact of land titling and regulaization under the law should be strongly positive. However, inthe short nm (until the new land tenure system is accepted), there may be some accelerated cutting in the beliefthat the system may change again as it has often in the past.

8. An additional concern is that given the limited coverage of the cadastal system and the complexlandownship situation1g/, the titling of the land accompanyig privatzaon could lead to an ilegal

2/ The Netherlnds and Fhnland a also suppording social forestry projects, boh amd at die conirous fors and armed atimprovbg reson and the utilzaion of tmber and improving comnumity parciaon. PAO is presemly negotating a jointcooperative assistance program wit COHDEFOR to estabish a social foresty and epsion system coveing al lands wilb aforestay vocton and abned at incorpotdng the farmers and icm the i tfott managemt plans.

lI Only 7 of t 18 De parm have ben Wy covered by th ca e system. n addition propery records ar deficint, andcoordtion amng INA, COHDEFOR, Cadro and Registro Nacional is not cealy defied

Amex 6Page 5 of 10

appropriation of public lands. (At present, there is no data available on the extent of forest land that might beon dispute.) The absence of up-to-date records on titles promises a period of legal wrangling; if not handledproperly, this could prolong and aggravate the uncertnty surrounding forest land ownership, which would havenegative implications for sound forest management. To counter these potental problems, under the AGSAC theGovernment would speed up the cadastal work and support the development of an arbitration system that wouldallow a fair representation of the farmers and a speedy resolution of conflicts without having to take cases tocourt.

9. The illegal appropriation of public lands could be most acute in broidleaf forest areas where thestate owns most of the land and where invasion by the landless has been most prevalent. In order to avoiddislocation and severe social unrest in these conditions, there is little else that can be done but regularize, by andlarge, the existing situation. This would be done by giving conditional titles or long-term occupancy leases tothe occupants if they indeed have occupied and used the land for a number of years, and if the area of individualsinvolved is small (say, 1 to 10 ha); under such parameters, abou 200,000 families in possibly one millionh.ectares of broadleaf forest could be involved (para. 5). In many cases the forests in quesdon are not occupiedbut used, more or less intensively, by groups of families. In such of communal usage, a community forestryprogran would be arranged using as a prototype the Intenive Management Area (AMI) approach (with whichboth COHDEFOR and CIDA have considerable expertise). jJ Communry forestry would be formalized byproviding the communities with long-term usufruct leases as part of the social forestry program. Once the currentsituation (which has grown out of COHDEFOR's old management system) is regularized through the provisionof long-term conditional leases, and which would realistically take at least a couple of years, strong political willwould be required to limit furather invasions.

10. The regulaization of the status quo of occupants is painful since it would undoubtedly involveland which should be forest, especially in broadleaf areas. GOH recogizes that in the regularization process,it would need to be careful in providing security, perhps by providing conditional medium-term leases to beexchanged in response to performance by the settlers for long-term ones. An absence of enforcement of publicland ownership after any regularition will need to be particularly guarded agamst. However, with sufficientpolitical will, the short-run negative (or neutral, recognizing the present status) environmental impact will beoutweighed by the long-na positive social and environmental impact associated with secure public ownership andan orderly and well-managed community forestry arrangement for the udlization of the broadleaf forests.

11. Removing occupants from either public or private land is a delicate and difficult task, andtherefore would be limited to extremely critical casem. Only in very critical cases would existing occupants offorest land be removed or bought out (e.g., ia the case of core national parks and significant watershed areas)as a measure of last recourse. It should be pointed out, however, that the LMA does not change the legal statsof the protected areas and, therefore, does not require the Govermnent to resettle occupants. However, theGovermnent could decide to exercise its current rights to preserve legally establshed protected areas in whichcase it might consider defraying the costs of settlement in core protected areas. It is encouraging thatCOHDEFOR has developed a methodology to handle resettdement in the Rio Platano Bioreserve. This reservewas legally created in 1980. It is located in the Departments of Olancho, Colon and Gracias a Dios and covers525,000 ha. The Government, with technical and fina l assistance from K&W, is currently reassessing itsrelevance as a bioreserve to determne actions to properly protect the area. It has estmated the need to resettle

11/ Anlisis d Poliftcas y Estratlas ... by COHDEFOR, dtd Auus 19, noes dt in 1990 there were 47 AMJ in 8brestry regions, involving 26 naal com es whh almost 136,000 persom ctive on 185,000 ha. These AUMT arr mostk,if not exclusively, bated in the bdlafWest and on public (nonal) forest lands.

Annex 6Pag 6 of 10

about 90 families currently living in the core of this area.12/ Clear policies and rules to handle involuntayresettlements consistent with the Bank's Operational Directive 4.30 on Involuntary Resettlement, are part of theregulations of the forestry chapter of the LMA. These regulatirnns state: (a) the cas in which resettlement willbe considered; (b) the institutions responsible for resettlement; (c) that a resettlement plan must be prepared assoon as the need for resettlement is identified; (d) that any resewllement action must include an appropriatecompensation package as part of the plan; ar. (e) that community participation must be an important element inresetdement activities.

Impact of the ReqWremen to Submit Managemen Phm

12. The LMA requires that private and public forest landowners submit a management plan forapproval prior to the use of any forest product after April 6, 1993. Rules and regulations for the submission ofmanagement plans have been carefllly developed. If the requirements were too onerous, the small forestlandowner or user, in particular, will continue to lack incentives to sustainably manage the resource. On the onehand, if the requirements were too liberal, an unintended de acto change in land use may result, especially inthe broadleaf forests. Therefore, the management plans will be output-oriented (i.e., providing incentives to theowner and/or user in an economic way). The approved regulations leave plenty of leeway in determining the useof forest management, including sylvo-pastoral, community forestsy, agro-forestry, shelterwood and partial-cutand mono-tree culture in intensively-managed tree stands. The regulations for the management plans allow or,in certain cases, recommend social forestry, community forestry, agroforestry, and sylvo-pastoral arrangements.The approval process would be speedy (including automatic approval in case of bureaucratic default), transparentand impartial. Finally, the monitoring by the refenred COHDEFOR would be consistent, ax4 include well-publicized remedial actions in appropriate cases. Regulations contining sanctions for violating the forestryaspects of the LMA have been approved by GOH. If carried out properly, the environmental benefits of forestmanagement plans would be highly positive at a cost which is not burdensome.

13. Several donors have been assisting COHDEFOR in the design of standards and norms for forestmnanagement plans, including IDA, IDB, CIDA and FAO. Under the AGSAC, It would be required that thesepls include: reforestation requirements; protection plans (against fire, insects, disease and cattle); involvementof small farmers and communities (especially, but not limited to, public lands); the minimum standards forlogging, road construction and harvesting acdvities; and environmental statements in cases of large forest plots(over 100 hectares). Management norms, standards and plans provide not only for sustanability but also for thesafeguarding of the nonmarketable or intangible goods and services (the externalities) provided by the forests.One of these multiple products that is of paramount importance in Honduras IS the watershed function of theforests; individual owners would be induced to take a more holistic view of a watershed through the nmangmeplans. In summary, the implementation of the management plans, if carefully done, is expected to be highlyenvironmentally positive.

Impact of Changes in the Mandate of the Public Forest Ad (AfE)

14. The LMA essentially takes the public sector out of forest product manufacturig, markeing andexports. Given the inefficiencies and losses that have been incurred by the public sector in these areas over time,this can only have positive economic benefits. The environmental impacts of the eliminated mandates are likelyto be neutral or even posidve if COHDEFOR-the new Public Forest Administation (APE) - is able toconcentrate on its refocused functions.

WI Docwent by Arnulfo Mesn and Luls Conales, dated Sept 1992, endded 'Pofcas y Estaegibs parm Rubicacidn de Colonosdel auqueNacina o Zona Ndcleo de la Biosra del Rio Platano. The domt is not a policy srategyd that can (or should)readily be applied to the many diverse siutions whih ae likel to arise in Honduas, but it is impressive in its sansiivty, andIn its care and involvement of the communities and .persons concered, icldn suh other governmn agencies as INA,CADASTRO, municipalities and dte army. Equally bnportant is de het tmat h appeas to have been found acceptable by dt.persons ponially involved in the relocation and it appears to be a very low cost approach (as it was ineded to be).

Annex 6Page 7 of 10

15. Under the LMA, COHDEFOR is given a clear mandate to manage public forests with a multiple-use goal, and to monitor and provide service to private forest landowners. Its mandate also includes thehusbanding, management and provision of many of the externality functions of forests. In other words,COHDEFOR is moving away from its largelv exclusive emphasis on timber production and its predominantconcem with the pine fores=s. It would pay more attention to the protection role of forestry, biodiversity,watersheds and national parks. With the elimination of COHDEFOR's role in commercW activities, it wouldbe easier for it to concentrate its efforts in strengthening its stewardship and management of protected areas.Within COHDEF.OR, the Netherlnds is contemplating a program to help it deal with the management anddevelopment of the protected areas; the German government has been involved in strengthening COHDEFOR'sremote sensing function, which is important for its intended monitoring role.

16. Given the urgency of the restructurirg of COHDEFOR for the success of the implementation ofthe new policies, the Bank and IDB have readied a package of technical assistance programs which has helpedCOHJDEFOR develop an organization responsive to its changed mandate (see para. 26). Implementation of thisassistance (financed by iDB) started in August 1992. In summary, the change in mandate of the APE, if properlyimplemented, would be environmentally positive. The need to restructure COHDEFOR to respond to its newmandate under the LMA will be monitored under the AGSAC.

Effect of Allocating Public Forest Resources on a Competitive and Efficient Bass

17. The requirement for open and competitive pricing of the stumpage on public lands and the implicitelimination of "tributary rights' for industry is likely to lead to higher raw material prices for the forest productmanufacturing sector, especiaUy when coupled with free entry of foreign investment (which is permitted underthe LMA). This, in turn, is likely to lead to higher wood prices for private forest landowners. Higher rawmatenal prices are even more likely when one considers the lack of reforestation and sustainable forestmanagement practices that now characterize the Honduran forestry sector. Higher prices would lead to thefollowing:

a. More intensive management and some presentiy uneconomic forest management activities maybecome economic (e.g., reforestation; thinning; more effective fire prevention, detection andcontrol; weed control; and fuelwood plantations).

b. An accelerated closure of the inefficient mils with a corresponding job loss; because of over-capacity built up during periods of umustably high harvestmg rates (at least given the lack ofproper forest management), this trend is already underway.

c. An increased utilization Qess waste) of the forest and more careful harvesting. In the pine forest,as much as 40 percent of the raw material is presently left to rot. This increased utilization isrestricted economically to stems and large branches, leaving other materials in the forest.

d. An increase in the recovery rates at the miUls by as much as 25 percent.

e. An accelerated shift in utilization to the highest and best use of the raw material. For example,the larger dimensions will go to those mills that can afford to pay the highest prices, to theplywood mills rather than to the sawmills. Coupled with the elimination of marketing and exportcontrols, there till be no abnormal incentives to produce broomsticks (prev usly uncontrolledby COHDEFOR) rather than lumber (which was controlled).

f. An increased differentiaton in production for difent market segments (e.g., for the U.S.,Europe, the Caribbean, and domestic markets), which could lead to lower product prices in thedomestic market for many forest products.

Annes 6Pap 8 of 10

18. in summary, in the short-rn while some segments of the forestry sector could be hurt financaWly,others will benefit. In the long-rn, the forestry sector will be much better-off economically and e.In the short-term, and in balance, there might appeat to be a negative enviromental impact due to higher rawmaterial prices since they might lead to accelerated cuttin, some of it illegal. While illegal cuttlg is quiteconnon now and probably has been so since COHDEFOR's inception in 1974. However, illega cutting onprivate land should be reduced given the owners' icentive to police. In the long-run, a more efficient inxuty,less waste, and more intensive maagent and reforestation will have positive environmental befits.

Impact on EmploymentTable 1: Potentoa hrpact on Emloymet

19. Table 1 provides the best and Industrial Units of the New Lawestimates of the impact of the LMA onemployment in the short-run. In the long- AtifviSX 1212 Possible Inmact for 1993-98run, say by the year 2000, employment in si lvulture & 16,000 Inere in eplovent perhapsforest activities and the number of mills or Extraction by 25X.the total manufacturing capacity for thedferetfor p ctsashould . Satailting 5,300 Decrease in aployt, probebldifferent forest products should increase severe, by as asch as 30-iSOLsignificantly (although there is an obvioussignficWy (lthugh her is n o ous Plywood & Secondary 9,200 Constant employmant or slighttrade-off between the number of mills sad Pieing expansion, by as much as IOLnull capacity). This would happen if

Honduras realizes more fblly its forestry Other Direct Services 2,500 Constant eaployuent.and sectoral growth potential: as forest Fuelwood 23,500 Constant eoploament or stighttlmanagement practices iemsify, more and increased if fuetwood plantations arhigher-quality wood could be grown onthe same or even a smaller area, thus Woodshops, Artisans, 10,000 increase in epltoyment could beincreasing the potential for set-asides for etc. cosiderabLe b as such as 25national parks, bioreserves, watersheds. Total Employment 66,500 An increase of 10-25w on balance.

No. of Sawnitll 92 Contraction by as much as 50-7St.Impact on ftotected Foret Arsus

No. of Plywood Hills 2 No changes or expansion.

20. Currenty there are 51 No. of Uoodshops, etc. 4,000 Expanson could'be aoidosable.forestry areas tha have been declared go of Stfck Produer 11 Numer could ndlegally protected, with an additional 27 . .new areas recently proposed. The total Note: Figures indicste persons employed or maber of establishmmnts.area under this Protected Arm SYstem - Both 1989 situations and possible Impacts are based an Vort

(already established and proposed) is about1.2 million ha or about 10.4 percent of the nation's area.l/ At present there is no legal deinDition of whatconstitutes a bioreserve; as a result, these are presety treaed as Protected Forest Areas, and as such areadministered as a special category under the forestry law, includig matters related to ownership status andpopulation relocation (if any).

21. Another problem of the Promcted Forest Areas system is duth notwithstandig the talk aboutecotounsm, protected areas will be costly rather than come- ting activities, a fact that will have to bereflected in COHDEPOR's budget. The international commnity support the program, as Asown by itsinvolveme in helping the Government implement improved man ement practices in a number of protectedareas. Other donor projects are being prepared among them an important institutional development project aimedat strengtenng COHDEFOR's abiliy to manage and develop protcted areas (possibly to be fimded by theNetherlands) and projects aimne at specific national parks, wildlife refiges and bioreserves.

jVI Self-analysis of COHDEPOR dated Augu 1992. AddWonab, the 1989 Perfil Ambient de Hondums" contains a is ofpmtected areas und lit six agencies responsible br dIe proced areas: COHDEFOR, SANBA, IA, FuOdadn CURO,SALADO/UNAH and Bax.

Annex 6Page 9 of 10

22. COHDEFOR would evaluate for omission or duplication the present list of protected armas, areview that could be easily fimded witi collateral donor assistance. There are indicatgor, for example, that thebioreserves do not include the pine forest ecosystem and that midland areas are under-represent. Similarly,some areas envisioned as bioreserves (e.g., Rio Plataio) appear to be too large. Under the AGSAC,COHDEFOR is reqired to evaluate the relevance and relative importance of the existing and proposed protectedareas. In summary, the reorientation of the role of COHDEFOR supported under the AGSAC, if properlyimplemented, could have positive environmental consequences for protected areas.

Impact of the Enforcement of the LMA

23. The LMA does provide for law enforcement through its regulations. The 1984 Acu*o 634:Reglameno General Forestal provided a good basic enforcement franework but its provisions were uot widelyused. It was Cierefore, imperative for the regulations of the LMA to specify the procedures, sanctions, penaltiesand appeal process to enforce the intent of the new law, and that COHDEFOR be empowered with themanagement capacity and political will to enforce the new policy.

24. Without a stringent enforcement process-the regularization process envisioned to stopencroachment and destruction, the management plan requrement before harvesting, the concept of protectedareas, the requirement to arrive at competitive prices for the raw material from public lands, in short the wholestructural reform envisioned by the law to stop deforestation, to provide inceives to engage in forestmanagement, and to eliminate wastefl practices and discretionality in resource allocation-will be nullified andthe past environmental degradation wil continue. The underpinning of stringent enforcement is an accurate andup-to-date monitoring scheme. With remote sensing and GIS techniques, such monitoring schemes ( one at theregional or district level, another at the national level) have been agreed with COHDEFOR; GTZ has providedan initial proposal for a scheme at the national level through the elaboration of an actual land use map and theprovision for regular updates (to be provided shortl). In addition, GOH has ensured complement financing fortechnical assistance to strengthen COHDEFOR's monitoring funcdon (see parm. 26). GTZ will also supportshortly the elaboration of a forestry potential land map. In short, the technological means to detect violations andto monitor forestry activities are within COHDEFOR's capabilites. An unbiased and tmspae enforcementprocess has been developed (in fact, parts of it exist) with a strong political wiUl to carry it through.

impat of Ailowing a Tr ton PeMiod

25. The allowance for a transition period (until April 1992 according to ae LMA) is an extremelyrisky element in any law and particularly so in forestry in Honduras. On the one hand, it has been necessary forthe sector to continue its operations. But with COHDEFOR in relative disarray, its field staff demoralized,considerable uncertinty about the near future as it relates to orgaization of the new agency and its funding, theforest has been left largely unatended during most of 1992 and 1993. This was coupled with the act thatHonduran forest landowners have seen many changes in their lifet : from free forestry use before 1974, tonationalization of the forest cover, to the provision of forestry rights to benefit the few (as in the case of tnbutyrights), and back now to the use of the forest by the landowners, subject to an approved naee plam Itis therefore possible that in the short-run some landowners have tried lo maximize reurns without concern aboutlong-term environmental considerations. The provision for a transition period may have positive hort-nmeconomic benefits derived from an acceleraing cutting; surely its enviomental consequences are likely to havebeen negative, especially if people sense that the unceainty were to be prolonged. Therefore, regulations to theForestry Chapter of the LMA were issued prior to Board Presentation and COHDEFOR reuuhred with fUmandte and strong political will to be able to enforce the new forestry policy.

Progrom n and Technc Al

26. IIDA will monitor the implementtion of the foresty progrm by COHDEFOR. The key stategydocument to do this would be the Foremny Action Plan agreed to with the Governm and attached to the Letter

Annx 6Page 10f o 10

of Agriculura Developmt Policy. This is a con ve program of phased policy actions and instutionalreform. Specific actions and performance criteia must be satisfactorily comphled with prior to each trancherelease. To eue proper Inhpi on of the action plan and credit conditionalities, the Bank and 1DB, inconsultation with odter it l , prepared and agreed with the GOH on a Forestry TechicalAssuAmce Progrm (Appendix A). Finally, to provide a basi for evalating the success of the program, aForestry Mordroring System woui be implemetd by COHDEFOR to ensure that the policy reformi are havingthe intded results (Appendix B). The latter would be financed as a complemet to the Policy SupportProgram. The techical assistce program would be implemented with a combination of resources from PNUD,GTZ, and CIDA and other bilateal donors. The role of IDA and IDB would therefore be to coordinateintoenational technical assitane to COHDEFOR.

X

Aeuz 6

HONDURAS

AGlaCULTURA.L SECTORE ADJUSUG CIMD 11

On-Going Technc As to the Forestry Setr

SUBJECT INSTiTUTION DURATION

Forestry Policy Sttement. PNUD/ FAO 2.5 mouth

General Forestry Regulation. PNUD/ FA0 1.5 month

Identification of potenal forestry GTZ 2.0 mouthareas.

Protected areas system: CIDA, NedherlaDds, to be deteminedconsolidation, regulation, evaluation GTZ/KFW, USAIDand implemtion

Regulatons to return forest resources IBRD 1.0 mouthto forest land owners. ._.

Establish the public foresty PDFI CAPOR 6 monthsmanagement system.

System to allocate public forest PAO 5 montsresources.

Management Plans, stadards, C IDA, EDB underway; totd not yetprocedures and regulations. determind

Retruuing of the forestry public IDB, FAO 12 monthsinstitution and institutionaldevelopment.

Social and Envionmental Monitoring GTZ, IDB to be dtermnedSystem

Orgnzation, techniques and PNUD/ FAO 2 monthsmethedology to enforce the newpolicy. _ -_

Social forestry and iion of PNUD/CIDAJGTZ, o"going projects beingcomhmnities. Norway retuctured to adapt to new

I______________ ___ ,..legal fram ework.

@cU61l,pCtfhRd

Annex 6Appendix BPae I of 2

HONDURS

AG1ICULTURL SECTOR ADJUSMi CREDIT

Sodl and Eaviromental Impact of theFortr Sector Prorm Monitorn Systm

L Objuecve

To establish a so_o-envronent moniting system (SEMS) to evaluaW the Impact ofpoliy-driven. reform in Honduras' agr-foetry sector. Ihe purpose of SEM is to providethe GOH and the Bank wth: (i) an early waing system Idening areas where biodiversityis dtatened; ad ) wher lendtee conflicts may eerg as a consequence of the policyrefom; and (ii) Infomadon usefW for evaluaion of polcy sdjustme and its negativeImpact The systm must be sensitive to detct sor m changes in land use patterns, yetCost-O,ctvt enOUgh to be Implemented by the APE (COHDEFOR). Ihe Informaion andanalysi geneted by the monitoring system will be the bsis for evuatig the impact of thepolicy reforms and the r n of actions required to mitigae adverse social orenomenW ip

M Specos

The mnimum secifica for the syatm should include the followvig:

1. Integrated Monitor. Esablish proceures for close itgraton and coordinaonOf socia and enl monitoring such tht the soca nioring compoubut canprovie a 'must observ notice to the envIonmental componen and vice-versa.

2. Ail Monitoig. Develop an aeri photogrhy ad/or video componentcombinng: (i) sel imagery, annualy collected for the GOB by GI2 and/or othernternational donor agencies with i) rcighto over a stratified samling

of 20 sites based on the type of forest cover (Oowland broadeaf, bradeaf cloudforest, highland pine foress, and lowlnd pine forest). Ident populaion density(derived frm the 198 ceus da at the lowes level of enumeraton) and setdemepatterns in *bufer zon." Thes ffgt a not Intended to provde a nationalIventoq, but rate to locate iible modficat In ground cover so as to Ientifytrouble spots.

3. Fow n Buffwr Zone. Conduct bi-annual 10day ran using dual-video cameras along segme of aeas tha have been Identiied as the "buffer zones"for human pentation into the fiest in the low-alttudo, broadleaf forest areas, low-altiue pine fiorst areas, and hgheralttude pine fror, including sdected enclavepine forest areas in the more dely populated areas of Ceral and WestenHondura.

4. MM n IMtoig. Based on analysis of sr naance flights, follow up in thefidd wit a socia Impat monitoring team to darmine the land tenure sitation of the

Anmex 6Appendix BPage 2 of 2

observed area and reasons for the observed environmental changes. Determinewhether the observed impact is linked directly or indirecdy to policy changes or is it aconsequence of unrelated social and/or enviromental changes.

5. Soial Impact Indicators. Develop and maitain impact indicators to determineextent and nature of social impact. SEMS should collect indirect indicators of socialforestry conditions including: (i) price of fuelwood in urban and rural areas; (ii)number of land tenure disputes in selected areas most likely to be influenced by thepolicy reforms; (iii) cases of forced or involuntary resetdements; and (iv) otherrelevant socioeconomic data. Also, mainain an open communication with non-governmental organiations (NGOs) who collect their own data on environmental andsocial condidons of inhabitants of Honduras' forest areas. This should include thestats of indigenous peoples and the designated protected areas to determine whetheror iot these changes are a result of the policy-driven changes or other factors (e.g.local level, endemic disputes preceding the policy changes).

6. Protected Areas. Monitor a sample of five protected areas with reconaisnce(dual-video camera) overflights, followed by social ments. Evaluate protecdon,settlement encroacent or ot huan forms of endangerment to the enviroent,and any other significant developments related to changes in social or environmentalconditions of the area.

7. Data Base Development. Create and maintain SEMS data in a format suitable foruse by the Bank and NGOs. The social monitoring unit should maintainconfidentality of source of information, in accordane with internationally- recognizedethical standards of social science investigation, unless the informant requessotherwise.

m. Project Adn--1I tatlon nmd Reporting

The SEMS project is to be established by agreemen of the Bank and the Government prior toBoard presentation. It is recommended that the project be implemened by a suitable local orinternational firm with experience in forestry monitoring systems. The project managershould present reports to the Bank regarding the impact of the reforms on an "as advisablebasis" at a Minimum of twice a yeor. The reports should iden issues for discussion withGOH by Bank loan supervision missions. If roquested, the project manager will, twice ayear, present a seminar in Washington, D.C. to Bank staff and invited NGOs regarding thearvroneaml and social impact of the policy reform programs. The design and operation ofthe SEMS project will be included in the terms of refeence of the Bank loan suvisionmissions. It should be noted that saisfactory implementation of the monitoring system is aconditon of Second and Third Tranche disbursement.

c:\ul__amc.~.yI ib

Ann 7Page 1 of 2

HONDURAS

AGRICULTURAL SECTOR ADJUSTMENT CREDff

Supplementay Credit Data Sheet

Section I: Timetable of Key Events:

(i) Time taken by the Country to prepare project: 32 months

(ii) Project prepared by: Secretary of Natural Resources, Institue of Agrrian Refonn,Agricultural Development Bank, Honduran Corporation for Forestry Development the CenhtalBank, and the Superintendency of Banks

(iii) First Presentation to the Bank: June 1990

(iv) Depature of Appraisal Mission: May 1992

(v) Completion of Negotiations: December 1992

(vi) Planned date of Effectiveness: August 1993

Section II: Spea Bank Impl tatIo Acdo

None

Secton in: Speial Condtons:

1, The following actions have been taken before Board h o:

(a) Law 31-92 containing satisfactory modifications to the land tenure and foresty policies wasenaod 'ii April 1992 (para. 65);

(b) Regulations to implement the enacted land tenure and forestry chapters of Law 31-92satiactory to IDA have been approved by GOH (paras. 72 and 77);

(c) GOH has initiated implemention of the agreed Land Tenure Action Plan (parm. 72);(d) Implementation of the agreed Forestry Action Plan has been initd (par. 72)(e) Satisfactory progrs in the implementation of the resrcuring plan of BANADESA (pam.

86);(f) Satisfactory basic prnciples to establish and operate rural credit bank and satisfactory

regulations to establish and operte the land credit fumd have been approved by GOH (para.87);

(O) Satisfactory 1993 POAs and budgets for the sector and for SRN, INA, IEMA, APE andBANADESA (para. 91) have been approved by the Economic Cabinet; and

(h) GOH has approved on the PSP and its financing, satisactory to IDA, to stregthen sectorplanning, management and imlemation capabilities to underake proposed policy reforms(pa. 92).

Annex 7Page 2 of 2

2. Second Trandie Relese would be conditional on satisfactory progress in implementation of theGovermment's Agricultural Sector Modernization and Development Program, including the maintenance of asupportive macroeconomic framework, and the following actions:

(a) Satisfactory implementation of the Land Tenure Action Plan (para. 72 and Annex 3);(b) Satisfactory implementation of the agreed Forestry Action Plan (para. 80 and Annex 3);(c) Satisfactory TOR to undertake a financial and operational audit of INA's and AFE's records and

accounts (paras. 72 and 80);(d) Evidence that the Central Bank funding to BANADESA has been limited to the August

30, 1991 level, adjusted by inflation, and that there has been no additional treasuryfunding (para. 86).

(e) GOH has completed the study to promote increased participation of financial intermediaries inagricultural credit as agreed with IDA, presented a plan to implement ommended actions, and hasinitiated implementation of the agreed plan of action to divest BANADESA based on therecommendations of the evaluation carried out under agreed TOR (para. 86);

(f) GOH has approved satisfactory rules and regulations to establish and operate the rural credit banks,based on the agreed basic principles, and provide evidence that, to the extent the land credit fund andthe rural credit banks are operational, are functioning in accordance with agreed schemes, rules andregulations (para. 87); and

(g) Satisfactory implementation of the agreed Public Administration Action Plan (paras. 91 and 92).

3. Tird Tranche Release would be conditional on satisfactory progress in implementation of the Govermnent'sAgricultural Sector Modemization and Development Program, including the maitenance of a supportivemacroeconomic framework, and the following actions:

(a) Satisfactory implementation of the Land Tenure Action Plan (para. 72 and Annex 3);(b) Satisfactory implementation of the Forestry Action Plan (para. 80 and Annex 3);(c) Satisfactory audit report of INA's and APE's operations based on agreed TOR (paras. 72 and 80);(d) Evidence that the Central Bank funding to BANADESA has been limited to the August

30, 1991 level, adjusted by inflation, and that there has been no additional treasuryfunding (pan. 86).

(e) Substantal progress m implementing the agreed recommendations of the study to promote increasedparticipation of flnarcial interediaries in rural financial markets and of the agreed plan to divestBANADESA (para. 86);

(f) GOH has provided evidence that land credit fund and the rural credit banks, to the extent that they areoperational, are fimctioning in accordance with agreed schemes, rules and regulations (para. 87); and

(g) Satisfactory implementation of the agreed Public Administration and Expenditure Action Plan (para. 91and 92).

L:UEFAGSAMMUPf.PRANNM7.BUF

HONDURAS

AGRICULTURAL SECTOR ADJUSTMENT CREDIT

ACTION PLANS: a Pr

~ALACTIONS TARGEr STATUS COMI4EI| . ~~~~~~~~~~DATI;

LA TENURE__. ntificationof private teams to deli sevnices to be 12-3092 Complied. INA has prepared a list of potnil con_a . They will prepre acontrted out by INA. . more dealed list asgg specific services to ea pinvte tm.

2. o f f NGOs and PDOse d im providing 1212.02 Complied. INA has pepared a list of interested NGOs ad PDOs. However, there- litles. is lak of fms' berest to dcange provio ddes for pmanenones.

3. rmetab! of actvities of the Committee to coordinat dhe 12302 Partally Complied. Agmen betwee INA and Cadastre has been finalzd and a actioncadastr survey (INA. COHDEFOR. and tbe Deparment of Cadastre pba prepared.and te Itrior).4. EstImte for resoling and paying-off expopriatd land. 12930.2 In progress. INA is rently prparing such estiate.S. Start evauting INA's information manageme system. 12-3042 Complied. INA bas stared dhe evaluadon. Tbis sod inrcde a detiled plan of

actm6. Mdi e of the procedur to be folowed by INA in 12-30.92 In Progres . INA and Haiena ae prepring a proposal. According with the LMAsolcit poosas for ollecting its account paable. colection will be the responsibility of Hacienda.7. Steamined procedue to rplace poviond ties for 12-3092 Compled. Procedre has been compleftd. INA wi investte appare lak ofPer-anen ones.

farmers' interost In changing provisa tiles for pemanet ones (see 2_____ _____ ____ _____ ____ _____ ____ _____ ____ _____ __ __ ____ _____ _ __ _____ ____ _ aboaove)

S. Implementadon of INAs orgnzatonl char, bsed on a 01-30-93 Complied. As of end June 1993. DNA had 816 staff compaed to 1.900 in Jamnymaxinam staff of 800 persons. _1992. As of August it plans to have less than 800.

Annex 8ae 1.1o6

ACIIONS TARGET STATUS COMMENT_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _D A TE

9. AWova of TOR for tams of prate cons vho will 0103 Partialy Complied. TOR for reconversion are being revewed.be perfming sedcted functions contractd out by IDA._

10. Agreements wih NGOs and PDOs that wM cooperate isuig 01- 3 In progrss. Ageements wi be sigped by end Angust 1993.pemaet hand tidles._

_ _ _ _ _ _ _ _

11. Agreement of the two deparuments on which cadastral work 01.30-93 Complied. The two Departents are Ocotepeque and Lempira.will be udertk on a prior basis.

12. Apovl of the crteria for the roster of conactor for 01.30-93 Complied. Section criteria have been ppalred by INA and Cadstr D rmenLcadstml survey. _

13. Titling and deliy of at least 300 pemnent lnd tdes. 01-3 Complied. As of end June 1993, INA had issued about 1000 pm t tiles.14. . Timetable to resolve cases involving exprop.atons. 01-3 In progess. NA has prepaed a timetable but has to resolve some gal issues

concning the subject

15. Stat implmenting mpovements to INAs i_naton 01-93 Part complied. INA has prepared a partil diagnsis and fomulate aemes tomanagement S9Stem. _____________ improxe the sysem Mnas prpared are being adjuased.16. Appoval of TOR to invte bids to colect INAs clims. 01-30-93 Partaly compLied. TOR under prepqario Expee to be completd by end Sepmbe.17. Sa-up of stemlind system for regulrizig tides. 01-3 Complied. NA has b ee using tde approved steamlne system sice fie begin

_________ ___ _____ ________ of this year.

18. Inti to bid, and contract awrd for slctd funchon to 0630-3 ParY compled. Only pr contrac for aastre work have been selftd. Invitationbe _oonctl out by INA. to bid wi be Isued by ead August.

19. Sgipn of conats with ONGs and PDOs to pvide 60 Acdon must be Aeatvs wil be sudied to im replacement of prvional tdesp laneltdes. redefined. for pemanent ones. Prom Jamary to May 1993, only 26 povisnal

tides have been replac due to brmes lack of intest (see 2 above).20. Have requested bids and awaded the conta for carying 639 In progress. As soon as fnds are povided, bids would be ased immediat*. Workout te adtl work. is expeced to stt in oarly Agus

Anne 8Pags 2 of6

DAUTALACTIONS TAIGET STATUS COMMiWlS

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ D A T E 21. iling and del of at las 13,COO pmtland titles. 063493 Prtiay complted. Due to the lak of fimds only 1000 pmnti s have been delivered.

With adequate fning now avaible, i esmated that between 8 -I ___________________________________________________ ______________ 10,000 permanent titls wil be devered befor e end of this year.22. Iniation of stulem proess of at ea 100 files nvolving 06%-33 In progress. The bave been some legal probkms l do Dis actvCitY. Howev.expropriation. DINA estimates that 25 cae will be solved by mid July. and 75e___ _ __ _a_d_ addiona ones by the end of August.

23. Startup of INAs enhaced compte system at both centa 06-30-93 In pess. INA wm review and 4mprove the proposed sohidon. Funds will beand regional level. pvded for its implmentai

24. Contract awad, and have staed colecto of INAs claims. 06-93 Not yet strted. Accordg to LMA, fitnds must go to M. de Hacienda and nt to INA.Hacienda is undertaking this acion.

25. Finalization of sales of IAs nonessentalassets. 0643Sbs y There have been moe than 10 importt assetalready sold oradvanced. transfrred to other nstitio. Five less iporta are in pgss and

the rest should be sod in dte next 3 to S monts.

iF°oREST PLAN OF ACTION

r. Aprval of the Reglto on fresty aspecls of the LMA 01-30-93 Complied. Satsactory reglato he been appoved by COHDEPOR. TheyDecree 31-92 of April 6, 199). _were approved by the President on July 9, 1993.

2. Apovl of the Work Plan for identi potea frest 01-30-93 Parigaly compLied. Methodology was agreed. Work plan is under implementioland, usig a methodology to be agreed among AFB, INA and theNationm Ckfastre.

3. initiation of an auco stem for the sales of forest goods 01-30-93 Parutay compLied. One aucton of wood pmducts from one publi firest was carried-out byand sevys from publicly owned frest lnds. COHDEFOR on Febray 1993. However, due to legal claims from old

contracts the auction was declared vacant GOH has cay u ethat accog to the LMA all concessions provided prior to the L.MAhave expired. A new auction is schoduled to be announced by end Julyand three additonal ones by early August 1993.

4. Pesent a Plan of Acion for impmenting the resttuing 01-3043 Complied.of APE.

Annex aPage 3.of6

INiTALAC1IONS TARGET STATUS COMIMENT________________________________________ DATE '_. _

S. Prepadon of TOR for evalting the rlevance and relative 01%.093 Complied.Importance of existg Protected Areas and those prvposed by APE. . ___

6. Presentto of a saisfactory draft of the Forest Management 01-30.93 Complied. COHDEFOR is curently incpoatig IDAs comments.Rguatons(Management Plans) to be Issd by AFE.

7. Peparation of APE's new manua of finctons and 02-28-93 In progress. Draft s now wnder review incorporating _WS comnts.

8. Presenai of acceptable drafts of (i) rgUons on Forest 02-28- Complied. Documets hae been approved by COHDEFORs Boad of Diretors nProtctin and (it) regulation an the Publi Fors Mangement eary JUly.SYL_

9. Approval and entry ino effect of the Forest Managemet 02-2893 Pardaly compled. Mangeme Regulaton aprved by COHDEFOR enered into efctRegulaions (nagem Plans). in April 1993. Action plan to prepr maagement plans is beigimphemend.

10. Conta awarded for the evalion of Ptmcted Areas on 02283 In progress. Offers to evabt thee protected areas are under review. Process wasthe basis of agreed ms of rfrence. affected by budgetry constrains.

11. Contract awarded for the tcna aSSine to monitor the 02-28-93 In progress. GTZ and USA) have shown interst to finance this c _mponensocial and envIonmental impac of the refoms. However, they caot commit resources m the shon run. Thereaoe.needed finds to in the system in 1993 will be provided by GOH1.Conhtr is expected to be tendered by mdd August.

12. Idficaton of as publc fores magement unks in aR 03.81-93 In progress. 7 departments have been idendfied as having cadastal daa available.|d _parte?here cadustral daa are available. _a_In mn gathering in other departments will star by mid Augus13. Inldation of the process of regulariig c and 03-31-3 In progress. COHDEFOR has signed 19 contts with c mns. Con needindividuelnfmies in PFMUs In areas wee ca ral data Is import revsions which are being done by COHDEFOR.

14. Preparton of an Actdon Plan to consoldate thProtected 03-31-93 In progess. Program prepared wi be approved by COHDEFOR after concludngForest Ans Sysm inenal conutadon now in progress.

Annge 8P!aga 4 o. 6

flMALACrIONS " TAlGEI SrATUS COMMNTS

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ D A T E .

I5. Preparatn of following specific regulatio daft to be 03431-93 bn progress. COHIDEFOR is incorporating IDA's commes. They wil be isuedissued by APE: (I Regulati for the Protected Forest Areas Systenm befbre end July 1993.and h Reguatios for the Management of Municipal and EjidaForest Lands.

16. Present a Propol for the Creation of a Forest Bond System 0"1-93 In pogress. Based on successful schemes in other countries COHDEFOR isto finance technical assistance from priate consultants to smal forest prepaig pwposal to str scheme on a pilot basis.land owners.

17. Present a mechanism for settng diputes over prat fPorest 03-31-93 In progrs. Rules to opem the mechanism established in the regulations are mnderlands t cannot be resolved by dte procedre agreed beween peparao.COHDEFOR and INA.

RURAL FINANCIAL SECITDR

1. Approval of the reglation for the land aedit fond. 0-30-93 Complied. Saftsfctory reguladons were apprved by the Cental Bank's Board ofDieors on Ma 7, 1993.

2. Dmaonsa tfat Central k funding to BANADESA has 01-30- Complied.been mantined at its Agut 30. 1991 level, adjusted for aion,and 1hat there has been no addidona Treasury fumding.

3. To have tendered and initiahtd the evaluation of 01-30-93 In progess. Ltes of invitation to consuling fims were sent by end of May.BANADESA. Contact is eped to be signed by ed luly.

4. Sltqw significant progress In inmpementing Decs 31-92 and 01-3 In progress. BANADESA is making substan progss collecting from deiquent71-92 on cleaing up of tde portolo, and present evidece to collect borrowers.from deqent beowes.

S. Competn of an intrnal study on the proftability of 01-93 Compied. Based on that study, BANADESA is restructuring its branches andRANADESAs offlce. operaions. lt has reduced its peoel from 1.082 in 1990 to 57S by

_._ June 1999. --

6. P t concret enene dt t has begun to ptvat the 0133 Complie. Contract to prvatize these serviceswas signod on Jmue 9, 1993.opmaon of ANADESAs saes of hiuts.

pap 5 of 6

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