Report No. PID7193 Project Name Honduras-Hurricane Emergency Project Region Latin America and the Caribbean Sector Multi-sectoral Project ID HNPE64083 Implementing Agency Ministry of Finance, assisted by Central Bank of Honduras Date this PID Prepared December 11, 1998 Projected Board Date December 22, 1998 Project Background On October 24, Tropical Storm Mitch was upgraded to a hurricane that quickly developed into one of the strongest and most damaging storms ever to hit Central America. At its height on October 26 and 27, Hurricane Mitch sustained winds of 180 mph and dumped heavy rains over Central America. Although the winds diminished as the hurricane traveled inland over Honduras on October 30, the storm continued to produce torrential rains, causing catastrophic floods and landslides. Within Central America, Honduras bore the brunt of Hurricane Mitch. The worst damage was in the Atlantic Coast, Sula Valley, the Central Region and the South, but no part of Honduras escaped some impact. Preliminary estimates indicate over 6,500 deaths and 15,000 disappeared persons. About 1.9 million people (almost one in three Hondurans) were affected, of which over 260,000 had to be placed in temporary shelters, including about 85,000 children under the age of five. The Hurricane damaged or destroyed an estimated 60 percent of main and secondary paved roads (1,600 km), 20 percent of unpaved secondary and tertiary roads (2,390 km) and 100 bridges (8 in Tegucigalpa). It damaged water systems in all major urban centers and caused partial damage to 1,500 rural systems. An estimated 60,000 homes were destroyed and about 160,000 damaged by the floods and mud slides. About 17 percent of schools were damaged, and those left standing have been used as shelters. Of the country's 27 hospitals, 14 were left without water and 16 report infrastructure damage. Damage to rural health posts and clinics is also believed to be extensive. Unlike previous natural disasters, Hurricane Mitch wreaked havoc in both of Honduras' largest cities, the capital Tegucicalpa, and San Pedro Sula. About 40 percent of the capital was damaged, half of its one million inhabitants were affected, and the city was cut off from the rest of the country for almost a week. Much of the Government's own institutional infrastructure was affected, including destruction of the Ministry of Education and extensive damage to the Ministry of Finance. San Pedro Sula, the country's industrial and agricultural heartland, suffered extensive damage to its international airport, road and bridge infrastructure, and its water and sewerage systems. IDA staff on the ground in Honduras moved quickly to help the Government coordinate with other donors and conduct a preliminary damage assessment. IDA also reallocated funds from existing operations, including disbursement of the second tranche of the Public Sector Modernization Adjustment Credit and its associated IDA reflows (totaling $38 million), which provided much-needed balance of payments support, and the restructuring/reallocation of about $65 million from the following ongoing investment projects: a recently-approved credit for the Social-Investment Fund Project, and the Basic Education, Rural Land Management and the Environmental Development Projects. Hurricane Mitch will have a substantial long-term impact on the economy of Honduras. The most serious damages were felt by the agriculture and infrastructure sectors. According to preliminary estimates, Hurricane Mitch destroyed 75 percent of maize and beans production, 10 percent of rice, and 8 percent of sorghum. The agro-export sector also suffered extensive damage, with destruction of 80 percent of bananas, 50 percent of shrimp and extensive damage to pineapples, melons, African palm, and sugar cane. The coffee sector was less affected, in the sense that coffee trees suffered little permanent damage, but access problems make it difficult to harvest, transport and dry much of this year's production. Tourism infrastructure in the Caribbean Coast and the maquila sector also suffered damage. The estimated lending amount is SDR 144.3 ($200.0 million equivalent). Project Objectives At the time the hurricane struck, IDA had various missions in the field. Together with staff of our Liaison Office in Tegucigalpa, those missions formed the core of IDA's emergency response team, supplemented by disaster specialists and other task managers who traveled to the country as soon as physical conditions permitted. Immediate needs included helping the Government to assess damage, prioritize interventions, and coordinate with other external donors. In the process, IDA has prepared its own three-part strategy to assist Honduras respond to this natural disaster. Emergency Financing, Macroeconomic Assistance and Debt Relief. The Government has an urgent need for emergency financing of much-needed imports, while sustaining macroeconomic stability. The proposed fast-track Hurricane Emergency Project would meet this immediate need. It complements actions by IDA in the two weeks following the hurricane to release the second tranche of the Public Sector Modernization Adjustment Credit and associated IDA Reflows, which provided balance of payments support at a critical juncture. At the request of several governments, IDA has established a Central America Emergency Trust Fund (CAETF) to which contributions can be made to support Honduras, and other hurricane-affected countries cover multilateral debt service payments. As soon as conditions permit, IDA and the IMF will carry out a comprehensive debt sustainability analysis which would determine Honduras' eligibility for the HIPC initiative. Short- to Medium-Term Rehabilitation. IDA staff are working with counterpart Government agencies and other development partners to reprogram IDA operations and/or process supplemental financing to provide for urgent rehabilitation of damaged social and economic infrastructure. Given the extent of the damage and the need for quick support, IDA staff believe that reprogramming of the existing portfolio-as opposed to designing a new, multi-sector hurricane rehabilitation project-is the fastest and most flexible way to meet Honduras' short and medium-term rehabilitation needs, given that speed is of the essence. In addition to reprogramming several existing credit amounts to finance about $100 million of rehabilitation-related expenditures, supplemental funding will be proposed for several ongoing projects. These figures may change as work with Government counterparts and other donors - 2- continues and as medium-term rehabilitation needs are better defined. Longer-Term Reconstruction. As a result of the economic and social devastation caused by Hurricane Mitch, as soon as conditions permit, IDA's Country Assistance Strategy will need to be reformulated to support the longer-term reconstruction of Honduras. While the priorities which we are supporting (including human capital, targeted poverty interventions and community participation, rural development, environment, and institutional strengthening) are likely to remain valid, it is likely that IDA will need to direct a much larger volume of resources toward infrastructure rehabilitation, especially transport and water (depending on the support from other donors). Strengthening the country's institutional capacity for disaster preparedness and management will assume even greater importance, and the emphasis on decentralization and local partnerships, which is already a strong feature of our portfolio, will become more important than ever in the recovery process. Finally, the role of other parts of the Bank Group in supporting private sector development is likely to grow. The proposed Hurricane Emergency Project is part of the first phase of IDA's strategy to assist in the reconstruction of Honduras. It would assist the Government in maintaining macroeconomic stability while helping to finance import costs associated with rebuilding infrastructure, production levels, and emergency imports. IDA support is being closely coordinated with other multilateral and bilateral agencies. Besides the assistance under this proposed emergency recovery operation, IDA, in coordination with other multilateral agencies and bilateral donors, is also assisting with rehabilitation through the reallocation of resources from IDA-financed projects in the portfolio (as described above). Project Description The Hurricane Emergency Project will provide immediate, quick-disbursing support to finance a positive list of imports needed for the rehabilitation effort while supporting macroeconomic objectives. The project will, inter alia, provide assistance for imports of: (i) construction materials, vehicles and fuel that are needed for rehabilitation of physical infrastructure; (ii) seeds, fertilizers (excluding pesticides), equipment, materials, machinery and fuel needed to reestablish agricultural production; (iii) medical supplies and equipment needed for the hospitals, health centers, health posts and outreach programs; (iv) school supplies and equipment for schools and educational facilities that were partially/totally destroyed; and (v) machinery, spare parts and equipment for commercial and industrial companies. Project Implementation The project will be implemented by the Ministry of Finance in close collaboration with the Central Bank of Honduras since it will largely support import financing requirements. The credit will finance 100 percent of the delivered cost of general imports, excluding import duties and taxes, subject to a positive list to be agreed with the Government. Adequate quarterly reporting and audit trails will be provided by the Ministry of Finance and the Central Bank of Honduras. Project Timing -3- The project will be implemented over a one year period and is expected to be completed by December 31, 1999. Environmental Category In accordance with the Bank's Operational Directive on Environmental Assessment (OD 4.01, Annex E), the proposed operation has been placed in Category C and does not require an environmental assessment. Benefits The import financing under the proposed credit will provide timely balance of payments support to the Government in view of the additional import demands generated by the effects of Hurricane Mitch. The counterpart funds generated by the sale of foreign exchange will provide the Government with an important source of non-inflationary finance at a time when there will be need for additional public spending and pressure on revenues due to lower economic growth. The balance of payments support to be provided under this credit will be critical in maintaining macroeconomic stability while rehabilitating and restoring productive capacity, and ensuring the adequate supply of essential equipment, materials and commodities for the social and economic sectors. It will complement the support for short- and medium-term rehabilitation that will be provided through the restructuring/reprogramming of ongoing operations in the portfolio, and assistance provided by other multilateral and bilateral agencies. Contact Point: The InfoShop The World Bank 1818 H Street, N.W. Washington, D.C. 20433 Telephone No. (202)458 5454 Fax No. (202) 522 1500 Note: This is information on an evolving project. Certain activities and/or components may not be included in the final project. Processed by the InfoShop week ending December 18, 1998. - 4 -