No. E 157 VJITHir'i ONE'iVEEK 67082 This report is not to be published nor may it be quoted as representin the Bank's views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT .. REPORT ON THE MISSION TO HONDURAS May 15. 1951 Economic Department Prepared by: Vittorio Marrama TABLE OF CONTENTS Page I. THE HONDURAN ECONCMY 1 II. WORK OF THE IBRD MISSION 2 III. ESTABLISHl.1ENT OF THE BNF 3 1. The Law of the Banco Nacional de Fomento (BNF) 3 2. Credit Policies h 3. Develop~ent Activities h 4. Financing of the BNF , IV. OYLRATIONS OF THE BNF 5 l~ Internal Economy of Honduras 5 (a) Finances 5 (b) Occupational Distribution 6 (c) National Income 6 2. Credit Requirements of the Small Farmer 6 3. Distribution of BNF Funds 7 4. Rates of Interest 9 5. Credit Brigades 10 V. LCONCMIC DEV:GLOFEENT AND THE BNF 11 1. BNF Economic Development Policy for 1951 11 2. Long-Range Deve;Lopment Plans of the BNF 14 (a) Roads 15 (b) Innlligra tion 16 ( c) Povrer . Facilities 16 (d) Cooperatives 17 (e) Fiscal Reform 17 VI. RESULTS OF THE MISSION 18 HONDURAS Essential Statistics " Population (1950) 1.5 million National Income (1950) 200 million lempiras Index ~ Agri£-u'1tl:tral Prociuctiot1·12u;r-48 (1936-31 =100) (estimate) Excluding bananas 210 Including bananas 145 Index Value of Sales of Principal Industries 1947-48 (1943-44 =100) 204 Exports (1948-49) 85.9 million lempiras!! Bananas (1948-49) 58 0 6 " II Silver 6.6 II " Lumber 5.2 II " Coffee 2.8 " " Abaca 2.5 11 " Gold 1.4 " " Imports (1948-49) 67.9 II " International Reserves (December 1950) 36.6 II II Money Supply (December 1950) 46.4 " II Budget Receipts (1949-50) 32.4 If II Budget EA~enditures (1949-50) 32.1 " It Outstanding Foreign Debt (issue 1950) 1012 " II Index ~bolesale Prices December 1950 (1938-39 =100) 355.9 If If Curr8ney Zqui valents : U~S.$1 = Lempira 2 Lempira 1 :I U.S: ;1~o.50 Lempira 1 million = U.S. :;3500,000 11 Including valuation adjustment for banana exports. REPORT ON THE MISSION TO HONDURAS I. The Honduran Economy Honduras is a country I'd th an area of 150,000 square kilometers and a population of 105 million.. The terrain is mountainous, except on the NOl'th Coast" where the banana plpntations of United Fruit and Standard Fr'uit are locatedo The population in the interior lives in numerous separated valleys, which are interconnected, if at all, by very poor highways." The Honduran people are mostly "mestizo" (90% of the total); the majority - 63% according to a recent estimate - is illiterate. About 85% of the Honduran working population is occupied in agri- oultural pursuits. Corn is the basic food of the population, but 1\a1'f1r corn (maicillo),beans, rice, yuccas, bananas,. plantaL.'"ls and other vegetable products are also import~t. All these products are locally grown and traded; lack of good roads makes it difficult to sell them to outside mar- kets. The prinCipal export crops are bananas (entirely in the hands of the fruit oompanies), coffee, coconut" tobaooo and abaca. The livestock popu.... lation is comparatively large, with a predominance of cattle and hogs. A substantial number of cattle are exported. The national income of Honduras has been roughly estimated at 200 million lempiras equivalent to about 135 lempiras per capita; an amount which is very low even if compared with other underdeveloped countries. Fr~ the point of view of economic geography~ H~nduras can be divided into three zones: the ~~orth Coast with ita banana pJantations" the interior with an economy largely based on subSistence crops", and the territorY contiguous to El Salvador which grows both subsistence and com- mercial crops (coffee). This division ~nto zones is important ~ the Hon- duran economy since the,three zones are, to a considerable extent, econom- ically independent from one anothere The North Coast is centered on a banana. eoonomy and is relatively the most prC"sperous of the three zones. The interior lives at a near subsistence level, alnost completely detached from the other zones for lack of adequate roads. The zone contiguous to EI Salvador is in many respects integrated in the Salvadorean economy, El Salvador being the most convenient outlet for Honduran produots both as a consumption market and as a channel to international markets. The econemic disunity of Honduras is the result of, a complete lack of coordinated economic development in the past. Tegucigalpa, as the capital af the Republic and the residence of the Governinent" has never per- formed the function of coordinating and promoting economic development so that a focal po~nt for a proper integration of the national economy has never existed. 1J·ihile the interior remained at an economic standstill, in the other tViO zones dynamio forces were at work. The ~perations 01' the fruit companies and the gr~¥th of the neighboring Salvadorean economy ma- terially helped the development of the two zones located north and south- west. However, part of the econoJilic benefits accrue to the fruit companies and the Salvadorean economy rather than directly to Honduras. All in all, the - 2 - three zones of Honduras are poor, although they are poor in a different degree. Only a strong and coordinated movement towards economic develop- ment can unite the country economically; there is no doubt that such a movement must be undertaken by the Central Government in Tegucigalpa~ rron~ duras has recently taken three important steps in this directiopo They are: (a) the creation of a Central Bank; (b) the establishment of a National Development Bank; and (c) the introduction of an income tax. The Honduran Government requested mRD to send a technical mission to help in the organization and determination of the policy of the new De- velopment Bank (Banco Nacional de Fomento), soon after its establishment was approved by the National Congress (February 17, 1950). The 'Vvriter 'J';ras assigned to the Honduran Government to "serve as an advisor to the newly- established Banco Nacional de Fomento to assist in formulating development poJ..icies and programs,," The work in Honduras started on April 25, 1950, and ended on De- cember 31, 1950~ The most important phases of this work, together with the underlying issues, will be described in the follorring pages. II. Work of the IBRD 1,1is8ion The first two months of the mission in Honduras were spent pri- marily in establishing contacts vvith public officials, bankers, merchants, engineers, etc., in collecting material and statistical information on the Hondt~an economy and in the practical organization of the new Development Bank~ which was expected to begin operating on July lst& Visits to dif- ferent regions of Honduras were also madeo Both visits and talks proved to be useful in getting a firsthand knowledge of the economic conditiC'ns of the country as well as an insight into its development problems o The mission's main concern was with the practical organizaM.on of the new Banco Nacional de Fomento (BNF)o In carrying out this objec- tive, the Bank representative cooperated with a member of the ;Pan Lmerican Union and two Salvadorean experts. The work consisted primarily in rrriting the by-laws of the BNF and in setting up the various sections of the Bank, such as the section for the analysis ot loan applicatiOns, the accounting and legal sections, etc. During the first period of the work in Honduras, other problems arose and had to be dealt with, including some technical aspects of the foreign debt of Honduras and the distribution of the capital of the new Bank bet\'\Teen the Credit and the Development Departments. The preliminary phase of the work in Honduras terminated ~vith the inauguration of the BNF on July 1. Aft~r that, the problem of deter~ mining the policy of the new Bank was largely in the hands of the Technical Division, a semi-independent branch of the BNF established to study and advise the management of the Bank tID matters of general policy. This problem was apprQached along three lines: first the prob- lem of credit policy was studied; then the Division worked on the general policy of economic development to be carried out by the Govermnent with the technical assistance of the BNF; and finally the development policy of the Bank itself was taken up. This third step was given the lowest priority since the Bank's development operations were not scheduled to begin until January 1, 1951. The Government was brought into these discussions as early as possible because the Technical Division constantly attempted to emphasize that the Government \,las responsible for economic development, and that the creation of two new State Banks (the Central Bank was also inaugurated on July 1) did not by itself solve the problem of developmento It was real- ized that there were certain developmental activities (public utilities, highwa~~, education, health, etc.) which neither the Central Bank nor the Development Bank could perform, because financially and functionally they fell within the realm of government activities. Establishment III. - , of the BNF le> The La·', of the Banco Nacional de Fomento (BNF) According to the Law1 the BNF is divided into two departments, the Department of Credit and Operations and the Department of Development. These are actually tvlO different types of institutions: a credit service designed to provide banking facilities to those parts of the country which either never had such facilities before or required more of them, and a development office to perform various types of non-banking development activities, such as the establishment and promotion of research and ex- Ferimental services, the importation, e~portation, purchase, sale, ware- housing, etc. of capital goods and finished products, etc. The distinction between the two departments is clear-cut both functionally and financially. The experiences dl~ing the first six months of operation of the BNF, and comparative studies mape of similar institutions operating in Central America, have proved that this differentiation between banking and development activities is a'useful one. It is also intended to facilitate, after a certain time, the creation of the Department of Development as an entirely independent agency. In view of the fact that the Technical Division was supposed to occupy a key advisory position in the new Banl~ and that the law is not clear enough about the relationships between this Division and the Bank's Credi t Department, the principle was established in the by...lavrs that all matters of policy" both of credit and of development, should pass through the Technical Division, ~hich is directly responsible to the President, and that the Division should assist the Board of Directors and the other internal Committees on all policy matters. This procedure has been rigidly adhered to. This apparently formal point was emphasized because it was felt that a bank dealing with economic development needed a unit vihich would constantly coordinate operational policiese Only in this way did it ap- pear possible to avoid a gradual departure from the main objectives of the institution, particularly since it was - and oontinues to be - subject to pr~~~ur~a £ram the outaideo Puri~g this period the IBRD representative took charge of the Technical Division. 2. Credit Policies The Department of Credit and Operations was established to carry out short, .medium and long-term credit operations. The law defines the different kind of loans which can be made as follov{s: (a) lItavi9,tI (crop) loans which are granted for a period not exceeding 18 months and are nor- mally guaranteed by the products to be obtained with the investment of the loan; (b) "rei'accionario" (medium-term improvements) loans which are granted for a period not exceeding 4 years (or 1 years in exceptional cases) and are guaranteed usually by ehattel or land mortgages; (c) long- term loans, which are granted at terms ranging from 5 to 25 years andlmUst be g~aranteed exclusively by mortgages. ~NO seotions have been organized within the Department of Credit and Operations: the Short-Term Section which grants the loans mentioned under (a), .:;nd the 1.iedium-and-Long-Term Section which grants the loans mentioned under (b) and (c)Q 3. Development Activities The functions of the Department of Development are; (a) to provide all or part of the capital for private, public or mixed enterprises l and to buy and guarantee the cbliga- tions which such enterprises issue; (b) to market stocks and bonds of such enterprises under (a); (0) to organize and to participate in the organization and op- erations of enterprises and institutions related to the purposes of the Bank; (d) to establish, sponsor, and direct research institutes and experimental stations, to undertake stUdies, and grant scholarships; (e) to direct projects and development activities for the Government or for third parties; (f) to import, export~ bUy,sell~ lease,. store and transpol:'t machinery, tools, working equipment, seeds, fertilizers and other products; (g) to Serve as coordinatcrof the Government's policy ot economic development; and . . (h) to act as financial agent of the Government in contracting foreign loans for use in econQmic development. 4. Financing of the BNF upon inauguration of the B1fFthe government contributed to the capital of the Bank 1.4 million lempiras, which represented the yield of an exohange tax collected over.a number of years. Furthermore,. the State will allocate to the Bank 15% of the proceeds of the newly established in- come tax and the receipts from a 10% customs surcharge. In 1950, when in- come tax was paid only by the United Fruit Company, the proceeds. amounted to 487,000 lempiras. In 1951, they are expected to amount to 750,000 to 800,000 1empiras o The proceeds of the custom surcharge are estimated at 58,000 lempiras per month: up to December 31, they had reached a total "'f approximately 350,000 lempira!!!. At the end of 1950, the capital of the Bank was 2.2 million lem- piras (see Balance Sheet in Table I). This sum represents slightly more than 1% of the estimated national income and 7% of fiscal expenditures. Besides the previously mentioned allocations by the Government, the BNF can raise funds through collection of deposits (sight, saving and tenm de- pOSits), rediscount operations with the Oentral Bank" and bpnd issues. However, since a private capital market is practically non...existentand is not likely to be created in the near future, it is expected that the BNF will operate, at least for some time, with its own capital and by re- discounting its short-term portfolio with the Central Bapk. To date, the Bank has been operating exclusively \vith its own capital. IV • Operations of the BNF 1. Internal Econom:'i' of HondUras (a) Finances The structure of the Honduran credit market at the time qf the inauguration of the BNF was as follows: 4~%' of the po.:rtf.olio 'O.f 21.7 million lempiras held by the private banks operating in. Honduras consisted of loans for real estate, construction and purchase; 35% went to1Qans for commercial activities; and another 10% consisted of personal loans. Only - 6 - 10% ~f the portfolio of the private banks consisted of loans for agricul- tural and industrial activities. Loans were usually guaranteed with mort- gage on rural andl preferablYI urban properties. (b) Occupational Distribu~ Tentative estimates of the occupational distribution of the Hon- duras working population indicate that roughly 84% are engaged in agr:i.cul- tural and livestock pursuits, 6% in mining l manufacturing l and handicraft, about 3% in building construction and 7% in services (transportation, banking l government, etc.). Although no statistics are available on the system of land tenure~ it is known that the land is fairly well divided into small holdings which very often are part of a larger plot of land legally belonging to the whole local community (e.iidce). These ejidcs originally were established with the idea of avoiding concentration of land in large properties; apparently they have fulfilled their purpose. There are large landholdings in Honduras as in other Latin American countries, but on the whl'lle small landholdings characterize Honduran agricultureo lNhen one deducts from the total agricultural population the number of work-· ers employed by the fruit companies (probably 10% of the total) and the big and medium-size landovmers (roughly another 10%), it appears that ap- proximately 70% of the total working population of Honduras is made up of small farmers. (c) National Income No accurate national income estimates are available in Honduras. Preliminary figures are expected to be ready by the middle of this year. For the time being, therefore, it is impossible to evaluate what portion of the total income is produced by small farmersG Sufficient evidence exists, however, to indicate that this portion is very modest indeed, pro- viding bare subsistence levels. 2. Credit Requirements of the Small Farmer The small farmer has enjoyed practically nn credit facilities, The result has been, throughout the years, a severe exploitation of the small producer by the local big landovmer or merchant, and not infrequently by large commercial houseS ~ Annual rates of interest of 24% and 36% or even higher have been commnn\vith the result that small properties were often lost to the local lender who enjoyed a monopoly position. Becalme of his low real income, the small farmer has always Jeen in need of funds to cover his living expenses and his costs of production. Usually he is compelled ei~~er to sell his crop in advance or at the har- vesting time to the advantage of the local big landmmer-merchant who pro- fits by the seasonal decline in prices when he buys the c~op at the moment of the harvest. A statistical survey carried out in an important and - 7- representative producing zone of Honduras - the Valley of Coma~~gua - indicates that the cereal producers who sell their crops at harvest time get 50% of the retail price, and those who sell in advance get only 34%. The local lender gets shares of 22% and 38% respectively, the balance going to transport and retail mark-ups. In order to help the small farmer, it appears necessary to pro- vide him vdth an alternative source of funds before and after the harvest. The two most important means to accomplish this seem to be: (1) short-term crop loans; and (2) storage facilities for the purpose of (a) storing the products, (b) giy;-ng credit on these products, or (c) buyi~g the products at established minimum prices. These devices are complementary. Short-term crop loans without storage facilities would leave the farmer unassisted at the moment of the seasonal decline in prices, storage facilities without short-term crop loans vTOuld not benefit those farmers who for the lack of subsistence funds have to sell their crop in advance. Besides short-term credit and storage facilities, the small far- mer needs medium-term improvement loans to increase his long run produc- tivity. Since Honduran agriculture is prLmitive, high returns per unit of investment are to be expectede Other non-banking develo:r;ment activities, such as extension services, ought to accompany improvement loans but it is important to note that these other means of increasing productivity do not occupy the same order of priority as short-term crop loans and storage facilities 0 3. Distribution of BNF Funds AccordL~g to the Law, part of the capital of the Bank is allocated automatically to the Credit Department,. and another part must be distrib11ted by the Board of Directors betiveen the Credit Department and the Development Department~ The part subject to distribution is the 15% coming from income tax proceeds (see po $). At the suggestion of the Technical DiviSion, this part has been allocated almost entirely to the Development Department. At the end of December, total available capital l'' TaS distributed as lollovr s: 1.8 million lempiras to the Credit Department and 0.4 million lempiras to the Developnlent Department. The Technical Division was confronted vdth the following problems in connection with the distribution of the funds available for credit operations: (1) how to distribute them among short, medium and long-term l ....ans; (2) how to distribute them among agricultural, livestock and indus- trial activities - and in each of these fields, among different sectors. In view of the IL~ited amount of available funds, careful distribution was essential. ~he first question was solved by suggesting a greater concentra- tion of funds on short-term operations in order to meet the most urgent needs of the Honduran small producers wh,., require pri.'lllarily crop and small improvement loans. The Board of Directors ~f the Bank vms advised to dis- tribute the funds as follows: 60% on short-term crop loans and short-term L~provement loans, 25% on medium-term improvement loans and 15% on long- term mortgage loans. The suggestion was also based on the necessity ot keeping the portfolio of the bank as liquid as possible until some exper- ience has been acquired, and on the advisability of limiting the volume of long~termoperations until a larger volume of voluntary savings becomes available. The second problem, that of the distribution of the funds among different economic activities, was solved by suggesting a larger concen- tration on agricultUral and livestock activities, with 60% going to agri- culture and 20% to livestock pursuits. Only 10% was assigned to industrial and other undertakings, leaving another 10% for credit operations such as refinancing of old debts. Among the different activities, a heavier co~ centration was suggested on those which yield products (coffee, wheat, sugar cane, cotton, cat tIe and dairy products) which either can be exported or can replace imports. They are also the activities most l:i,kely to give higher returns per unit of investment. Promotion of agricultural activi- ties which are exchange-earning or exchange-sewing vras considered advisable because of the necessity of leaving more room in the foreign exchange bud~ get for greater imports of capital goods for development purposes, and on the advisability or restricting the ne'!1 Bank in its initial period as a banking institution to those operations which are, on the whole, less risky than those connected with subsistence crops. A maximum limit of 20,000 lempiras for each credit operation was suggesteo. by the Technical Division and accepted by the Board of Directors. From July 1 to December 31, loans were approved totalling 599/ 855 lenpiras, with an average of 31 100 lempiras for each operation (Table III). Loans actually disbursed amounted to 389$858.52 (Table I). The extensive work done by the Bank in appraising loan applications, the number of which far exceeded the number of loans granted, can be observed in Table III. This table and others pertaining to loan operations give a some- what distorted picture because the data include a six months loan of 100,000 lempiras granted to the Compania Azucarera Hrndurena for finanCing its sugar crop. Table VI is especially affected by this loan. If this loan is ex- cluded" the table would show that 40% of the total amount loaned was for small loans of 5,OOD lempiras or less. This must be considered ql,lite an achievement considering the short period of operation of the Bank~ .:.. 9 - A condensed view o,f.' the credit operations of the.BNF from july 1 to December 31, 1950, is presented in the foll~Ning table (in thousands of lempiras): Major destination of TYEe of Loans Approved Disbursed -----_ disbursed loans ... _-,.....- Crop loans 262 200 97% Agricultural Livestock Improvement loans 189 85 93% Agricultural Livestock Mortgage loans Total 149 600 110 395 - 82% Hefinancing 75% Agricultural LivestoOk In actual operation it developed that the market was pressing particularly for long-term loans for the refinancing of old debts, but the Technical Division soon controlled this pressure by establishing a ceiling and other limitations on such operations~ Eventually, the refinancing op- erations diminished until they disappeared, nevertheless in December the actual distribution of the portfolio VTa.S still somewhat distorted compared 1Ivi th the planned one, as a result of the refinancing operation carried on in the first fe"1 months (see Table V,,. There are sOll.1'J.d indications that in the following months the actual distribution wilrl gradually approach the planned one" From the time that the quest~on of refinancing loans arose, the Technical Division endeavored to impress upon the Board of Pirectors of the BNF that even if a "passive" credit policy was admis.s!ble in the initial period.of operationl it Vlould not be justified later on., It was argued that an lIactivell credit policy which would endeavor to channel credit into preViously selected fieldS instead of follovling the demand of the market, was a necessary conditionfor the success of a development bank. By nOVi. this concept of the "active" credit policy has been accepted by the Direc- tors of the BNF. 4~ Rates of Interest Another important problem in the field of credit polioy has been rates of interest" According to the law, the new Central Bank is author:'" ized to establish maximum rates of interest and commissions which the banks may payor charge for their lending or borrowing operations. Such ceilings were established by a Central Bank resolution of June 29. For the so... called direot credit operations of the BNF in Tegucigalpa the ceil:i,ngs v,rere 8% interest rate plus 1% camnission on long-term mortgage loans, and 6% preferential interest rate for short-term crop loans and medium-term im- prQvement loans. It was m&de clear at the time of the Central Bank resolu- tion that the BNF would propose a different syste~ of rates of interest to be applied to the credit operations of the local rural agencies· of the Bank. This neW system of rates for rural or indirect credits was outlined by a - 10 - Delegation of the Banco Naciona.l .of Costa Rice in the following weeks. The propesed rates were higher than these for direct credits established by the Central Bank resolution of June 29, the justification being that the admin. istratien expenses for rural credit are much higher than those fer direct credit. . the Technical Division censistently opposed this system of int- erest rates, arguing that there was no reason to force down the rates of interest l.n a market where the operations to be financed primarily by the BNF had usually paid rates ef at least 24% annually. The Division further arguEd thB.t ceilings established for direct credits were too low considering the current situation of the Honduran credit market, where an average rate of 8% had been the ruleifor bank loans'muab less ~ensive and. risky than those of the ~e It was further pointed out that the lew ceilings were bound to cause difficulties in raising additional funds in the money and capital markets. Finally the Division declared that the discriminatien between direct and rural credits, it justified' for purely administrative reasons, was not justified at all on social and economic grounds. The Technical Division maintained in this connectien that ene ef thefunda w · mental ebjectives ef the BNF was to' impreve inc erne distribution and that a unified system of interest rates was one of the means to' this end. A n~­ bel' of memeranda were prep?red by the Technical division on this subject. The Central Bank, however, decided not to change the ceilings for direct credits and en September 29 m~imum rates for rural credits were es- tablished as fellews: 8% interest rate plus 1% cemmission on long-term mortgage leans, and 6% interest rate plus 2% corrmissien on shOrt-term crep loans and medium-term improvement leans. A ceiling of 2,000 lempiras was fixed for ~ach niral credit eperation. The Technical Division thereupon suggested to the Board of Direc- tel'S that the Bank operate at the ceilings, but although this suggestion was accepted, there is no doubt that even at these rates the new Bank w:i.11 have bigger lesses than expected in its initial peried ef eperation in view of the high administrative expenses. The loss for thefirat au months of eperatj,l')n amounted to 106,000 lempiras (see Table II). Because the BNF is a State Bank, the.Technical Division has net been toe concerned about these losses, which were in effect a further subsidy to agricultural and livestock undertakings. It is expected that as the volume ef operations increases the lesses will diminish. $. Credit Brigades One of the most interesting aspects of the BNF'swork in the credit field has been its efforts to' reech the small preducers. Since the establishment of a satisfa,ctery netwerk ef rural credit agencies would take considerable time, "Credit Brigades" were erganized, staffed by Bank persennel, to travel to economically important regiens of the country for the purpese of making loans to the small farmerso - 11 ... During the first four months of operations ending in December, a substantial number of small credits vrere granted, particularly crop loaDIS. The political ~pact of theee leans was probably even greatGr than their €lGonomic etfecto 'l'he plan is gr's.d\1Bli..y to ccnvc:rt tho Brigatd&~ into pe:rmanont Locnl Credit Ccu...Us1ons cr P.ural Credit ;~genc:ies .. The Technical Division has periodically reviewed the credit op- erat~ons and the composition of the portfolio in order to see whether or not they comply with the recommendations and if not, to urge the Board of Direotors to make appropriate changes 0 In a number of cases the Techrd.cal Division w~s asked to express its opinion upon particular loans which, either because of their nature or their amount, represented a departure from the established rules. v. Economic Development and the BNF 1. BNF Economic Develo}:ment Policy for 1921 According to the law, the B~? was scheduled to start its develop- ment operations on January 1, 1951. Extensive preparatory work was required from the Technical Division, including obtai.'1ing assurances that tec!mical assistance would be forthcoming in the field of agricultural development. Following is a summary of ~e activities initiated by t~e Division: (1) expediting of negotiations between the Government of rton- duras and the Institute of Inter-American Affairs for the - establishment of a STICA 1/ service in Honduras; (2) arranging 'with the FAO for a mission of agricultural ex- perts to assist the Bank in its prograo of agricultural development 0 The mission was expected to include experta in the following subjects: (a) credit supervision; (D) grain storage facilities; (c) planning for agrioultural development; and (d) forestry; and (3) preparing a plan of investment for the BNF's Development Fund for 1951. At the end of December, the Government of Eonduras had already entered into final negotiations with the Institute of Inter-Arr:erican Af... fairs and the STrCA service was expected to be established early in 19~1. A contract had been signed \7ith FAO for the services of the necessary agri- cultural expertso 'With regard to the plan of investment of the Development Fund, the Technical Division suggested two exploratory missions by the ENF to neighboring countries to study the organization and policy of mOre advanced 1/ Servicio Tecnica In'ternacional Cooperativa A~icola~ - 12 - development institutions. The two mi~sions, one to Guatemala (l1iFOP) and the other to Costa Rica (Banco Nacional and Consejo Nacional de la Pro- duccion) took place in the first half of August and November, respectively. On the basis of the observations made during those missions and of the studies carried out meanwhile (the result of which has been largely summarized in the section of this report dealing with credit policy and op~ erations), the Techn:\.cal Division produced a memorandum containing detailed suggestions on how to distribute in 1951 the funds available for develop- ment activities. 'A slightly revised edition of that memorandum was approved by the Board of Directors in November. The p~an prepared by the Technical DivisiOn is based on two funda- mental principles: (a) that the development worker the new Bank· should, center . upon the agricultural and livestock activities of the country, with particularempbasis on fostering subsist- ence crops; and (b) that d~ing 1951 the Bank shoald perroit a certain amount of experimentation in its development projects, reserving until later, possibly in 1952, concentration on those fields which experience will indicate are the most profit- able for speeding up the process of economic development. The funds to be distributed in 1951 ~ong different development activities amount to 650,000 lempiras, which include a balance of 425,000 lempiras brought forward from 1950 and an estimated 225,000 lempiras to be added during 1951. Following the suggestions of the Technical Division, the funds have been allocated as follows: (1) Administrative expenses of the Development Depart- ment and additions to permanent assets (2) Studies for the general plan of economic develop- ment and for the plan of agricultural development 41,600 (3) Investments in "indirect" development 338,000 (4) Scholarships and studies for investment of direct development 25,000 (5) Investments of "direct" development 94,880 Total 6S0,OOO The expenditures under (1) include administrative expenses and expenses for office equiFment, for technical instruments and for a library. The expenditures under (2) include those which will arise in connection - 13 - • with the foreign experts requested from FAO and from the U.S. Government, as part of the Point IV program. Of particular importance are the expenditures under (3) which in the opiniQn of the Technical Division will be basic to the Bank's future activities in the field of economic development. The investments in this sector have been distributed as follows: (a) Pilot-project for different experimental activities (pr~~arily subsistence crops and livestock) 90,000 (b) Grain storage for corn and beans in the valley of Comayagua (80 kIn. Northwest of Tegucigalpa) 60,000 (c) Two warehouses in coffee producing zones (;:arcala and [;1 Parais 0 ) 100,000 (d) General warehouse in Tegucigalpa 50,000 (e) Establishment of coffee nurseries 20,000 (f) Veterinary service 15,000 (g) Publications and other means of instruction 3,000 Total 338,000 It will be noticed that 62% of the aV'ailable funds in this section have been allocated to the establishment and equipment of storage facilities. The expenditures under (4) include the costs of scholarships for training of Hondurans abroad in agriculture and stockbreeding, and the cost of studies to be mude by experts on temporary aSSignment on activities in which the Bank may directly participate, such as textile production, cement, etc. The expenditures under (5) cover direct investments of the Bank in industrial activities which are ex,Pected to pr~mote the economic progress of the country. The Technical Division has pointed out, however, -~at the sum allocated to these expenditures must be considered as fleXible, in the sense that it _could be transferred, if necessary, to supplement other ex- penditures included elsewhere in the program. In the opinion of the Tech- nical Division, it would be premature for the Bank to start investment pro- grams of this nature which would reliuire substantial funds not yet availalile to the Bank. The purpose of the plan of investments prepared by the Technical Division is to test the feasibility of attaining two main objectives of de- vel~pment: (1) a direct increase in the productivity of the farmer and stocl~breeder; (2) elimination of the local"marketing and credit monopolies" which profit by the lack of storage facilities and rural credit. -14- As part of this investment plan, the Technical Division suggested that economic and statistical investigations be carried out in those zones in which the Bank 1'1il1 concentrate activities during 1951 and in subsequent years. A model of such investigations has been set up in a study prepa.red by the Technical Division (in cooperation with statistical experts) on the conditions of production and marketing of cereals in the valley of Ccma~~gua, where a grain storage, together with a rural credit agency, is to be estab- lished according to the current investment plan9 This model will be fol- lowed by other investigations of similar character, such as those to be undertaken in the two coffee producing zones where the plan of investment 1.'iill probably include the cQnstruction of warehouses with fac;i1i ties for processing coffee beans. It is not possible at the moment to predict how the development activities for which the BNF is directly responsible will evolve, but the Technical Division at least has attempted to lay the groundwork - through its planning operations - for the successful undertaking of these activities. Another noteworthy action taken by the Technical Division '\i'Jas in connection with the use of reserves in excess of foreseeable commercial re- quirements. The Technical Division suggested assigning a part of the avai.l- able sum for purchases of agricultural machinery and iJllplements. By the end of December, the Bl!J"F had ready a list of agricultural machinery and imple- ments to import from abroad for early approval by the Board of Directors of the Ban.~ and by the Central Bank. The planned eJ~penditure amounts to 1.5 million lempiras. 2. Long-Range Development Plans..E.f the BNF The Technical Division very early raised the problem of the gen- eral economic development of Honduras. Since nothing or almost nothing had been done previously in this field, the Technical Division pojnted out that the creation of the tyro neY" State Banks (the B~'F and the Central Bank) offered a good opportunity to start working systematically toward general economic development; that the establishment of the two Banks was to be con- sidered as the first step to'vrard an active economic development policy and not the final one; and that the work of the Banks could be successful only if complemented by a well coorQinated and decisive effort of the Government toward the same objectives. Since the law of the BNF states that the Bank may "serve as coor- dinator of the Government f s policy of economic development, II the Tecbnj,cal Division suggested the following steps: (1) to concentrate the function of studying and planning for economic development in the hands of the DeveloFment De- partment of the BNF; (2) to start, as soon as possible, statistical investigations in order to learn the relevant economic magnitudes such as - 15 - national income, capital formation, etc., which are. in- dispensable in the preparation 6f estimates regarding the investment capacity of the country; (3) to establish the principle of a General Development Plan which should be prepared in the fiscal year 1951-52 on the basis of the statistical investigations mentioned under (2) and put into execution in the fiscal year 1952...53 J (4) to initiate immediately planning studies on those matters which, in the opinion of the Technical Division, will occupy high priority in any future general development plan. I The Government aecepted the suggestions under (1) and (2). Con- sequently, soon after the employment of a statistical expert from El Sal~ vador, the statistical investigations were started (September) and a thorough functional and financial reorganization of the General Statistical Office was undertaken. At the end of December both the statistical investi- gations and the reorganization of the Statistical Office ~ere well under . way. It is expected that preliminary statistical investigations ,vill be reao.y by the middle of 1951. On points (3) and (4), the Technical Division suggested focusing efforts upon the following matters: highways" iramigration for agricultural colonization and hydroelectric facilities. These fields of immediate .action were selected on the basis of stUdies made by the International ~onetary Fund ldssion in 1949 and of independent investigations made by the Bank mission which revealed that the major bottlenecks in the economic develop- ment of Honduras are the lack of an adequate network of rQads, the 10\1'1 population density in sorlle regions and the lack of electric pOl'.rer both for consumption and industrial uses. (a) ~ Honduras has almost 1,300 kilometers of all types of roads ~~ich, compared to the area of the country, gives a coefficient of 0.008 kilometers per square kilometer. By comparison the density of roads in other Central American republics is 0,060 in El Salvador, 0,095 in Guatemala and 0.020 in Costa Rica. In Honduras no road is paved and probably more tha"l 40% are in very bad condition. It is clear that economic development depends to a large extent upon'the construction of an adequate network of highways over a reasonably short pcr~od of time. Since the work of the BNF in the field of the general economic development was proceeding at a satisfactory pace, the Technical Division decided to accelerate the progr~, particularly in regard to the activit~es of the Highway COJmnission. In order to start the execution of the highway program in the fiscal year 1951-52 and in view of the preliminary results - 16 - of the investigations by the Commission the Technical Division suggested that action be taken (1) to obtain an allocation of about three mill:i.on lempiras out of existing revenues, in addition to the 3.5 million already budgeted for highway construction; (2) to propose the early reform of two direct ~es (the tax on rural and urban properties and the iTh~eritance tax) for raising additional funds for highway construction; (3) to shift the control of the funds from the Highway Treasury (a government agency) to the Development Department of the BNF under the supervision of the High- way Commission. A letter to the President of the Republic to this effect was drafted for the Highway Commission~ Towards the end of the year, it became clear that the Government was not contemplating any action on the proposal. Although the Technical Division strongly emphasized the urgency of the highway program, for various reasons the Directors of the Bank were not agreeable to taking a strong stand against the Government so that for the time being theproposal~s put asideo Shortly afte~vards the Technical Division suggested, in full agreement vdth the Central Bank, another line of action to expedite the highway program, namely, the utilization of part of the international mone- tary reserves of' Honduras (which are far beyond those required +£ a deteri- oration of the balance of pa:yments sho'U~d take place) for purchasing high- way machinery and implements. Honduran international liquid reserves auount to 36 million lempiras or ~>18 million, whioh is 80% of the money supply. At the end of December the ne'!;'! proposal was still under consideratj_on by the Government. (b) Immigration With regard to the suggeeted immigration scheme, one must take into aooount that the average density of population in Honduras is (accord- ing to the last census) 10 inhabitants per square kilometer compared with densities of 58.0 in El Salvador, 32¢8 in Guatemala and 2000 in Costa Rica. Horeover, a comparison of the census of 1945 with that of 1930 shows that substantial movements of population from the interior toward the North Coast and the region ot the capital took place during that 15-year period, with the result that Some regions of the interior, potentially rich in re- sources, are now underpopulated~ It is believed that agricultural co10n- izationof those areas by groups of foreign immigrants with their higher technical experience may result in a net benefit to the regions themselves and indirect*y to the entire Honduran economy. (c) Power Facilities In a study on the Rio Lindo power project in Honduras, prepared by the IBRD in 1949, it was pointed out that in 19h5 the total installed p~ver capacity in Honduras amounted to 4,500 kw ~~th a produetion of 15 million kwh. Of this capacity, about 70% belonged to the United Fruit Com. pany. The situation has not changed appreciably since 1945 with the result that both the light and power rates are very high in Tegucigalpa and other - 17 - important towns. In such circumstances, the use of power for industry and private consumption is practically precluded to large sectors of the econ- omy. At some stage of its economic development, Honduras has to face the problem of power supply if real progress is to be achieved. The Technical Division proposed the creation of three Permanent Commissions" with the assistance ot three foreign experts" to prepare studies and plans on the problems of h~ghvva~, immigra,tion and the hydroe1ect:dc resources of Honduras. Recommendations were accepted by the Board of Diree- tors of the BNF and by the Government, and the Commissions started their work in September 1950. Technical aid was requested from the IBRD which decided, however, that the assistance requ,ired was of a character that would be better furnished under tbep'oint Four program of the U.S. Govern- ment, to whom the request was transmitted. At the end of December, the work ot the Honduran.Commissions waS well under way, but no definite negotiations had yet taken place in respe~t to the foreign experts. (d) Cooperatives Another important activity in the field of general development carried out by the Technical Division was th9'- launching of a campaign for the establishment of cooperatives. Since there is no legislation in Hon- duras adequately dealing vnth cooperatives" the staff of the Technical Di- vision prepared a bill for submission to the National Congress. A member of the staff participated in the Regional Seminar held by the Pan American Union last November in El Salvador in order to get the advice of experts on the subject of cooperatives. At the end of December, the bill prepared by the Technical Divis~on was being reviewed by a Special Commission of the Board of Directors of the BNF, and it is expected that the bill will be presented in the current session o.fthe National Congress. (9) Fiscal Reform Since a General Development Plan of the nature described would involve heavy additional public expenditures,the Technical Division soon raised the question of a fiscal reform. The Division recommended that this reform should take place during 19$1, possibly with the technical assist- ance of an international organization" It ?las pointed out by the Technical Division that the reform should be comprehensive, taking into account all aspectb of taxation inclusive of state taxes, municipal taxes, tariffs and tax exemptions, and that the tax system must be geared as far as possible to ability to payo Until last year, fiscal revenues were derived almost entirely from indirect taxation thereby discriminating against the lowest inc!)me groups" l!ith the introduction of the new income tax last year an import,ant step was taken toward a more balanced fisoal structure, but the tax system still is largely regressive. In view of the necessity of rais- ing additional funds, one has to envisage an increase in indirect taxe~ equi tably distributed, as weJ~ as an early revisien of the existing direct taxes such as the tax on urban and rural properties and commercial estab- lishments and the tax~ inheritances, which at present yield in the aggregate - 18 - le~~ than one per cent of total revenues. A major fiscal reform was recommended to shift the tax burden to middle and high income groups, although the Technical Di"V'ision was aware of the potentially unfavorable effects which such a redistribution of the tax burden might have on the volume of savings. It was felt, however, that the potential ~epercussions on the level of savings could be disregarded. In Honduras' present state of economic development it seems more important to devote resources to the formation of social overhead capital such as roads, port facilities, schools, etce, than to the accumulation of capital in the hands of private entrepreneurs who, in accordance vdth local tradi- tion, invest the major proportion of their savings in landed property or hold them idl.e in the form of foreign balances" The suggested fiscal re- form was favorably received by the BNF, but was neither accepted nor re- jected by the Government. It has become apparent that the Government is not yet ready to give the matter serious consideration. V!. Results of the Mission .P V~hile in Honduras, the writer was also teaching at the National University. .A new "Department of Economic Sciences" was established in May 19.50 and the vn-iter taught a course on "Principles of Economics" to a class which was attended by 108 students representing a cross-secti0n of the Hon- duran population. Classes were held four times a week in the evening. The course was organized to emphasize the fundamental concepts of national in- come and its composition and to point towards problems of economic develop- ment. The work at the University also included the preparation of a plan of stUdies for the neW economic department. Although this plan was prepared ~dependently, it closely resembled the plan suggested by the San Carlos University of Guatemala for the unification of economic studies in Central Arner ica. There are reasons to believe that the results of the Bank mission in Honduras have been satisfactory to such an extent as to justify the con- sideration of missions of a similar character to our underdeveloped member countries, particularly the smaller ones. It is of direct interest to the Bank that the Honduran Government, upon the suggestion of the BNF and the Central Bank, authorized the Inter- natl.onal Bank to utilize without any limitation the 18% of the Honduran quota, The Government also decided to invest ~~l million into IBRD bonds. Possibly the most important achievement of the mission has been the creation in the BNF and outside the Bank 'particularly in the University) of a group of persons who understand the problems of economic development of their country and knOll{ what measures are to be taken in dealing with them. This achievement can be credited to the fact that the IBRD mission remained in Honduras eight months, giving the i~iter ample opportunity to - 19 - familiarize himself with the country, its people and its problems. The fact that the BNF wa,spn a sound working basis by the end of December is also a result of the long and frequent discussions and planning sessions between the Bank representative and the directors of the BNF. It is doubtful whether similar results can be obtained in a shorter period of time. TABLE I HONDURAS Balance Sheet of BNF as of December 31, 1950 ASSETS Cash Foreign Exchange Loans and Discounts Short-term crop vii th untransferred security and discounts L 144,025 .. 57 Short-term crop with mortgage security 52)~lOoOO ijedium-term improvement with mortgage security 84.,,30J .+o91 Long-term mortgage 109,;U8,,04 Deferred Accounts 130 t 997.19 Bank Equipment 495;458067 Jylinus Reserve for Amortization ___5;;;...o*..;;..,5~~ 43.;937.49 Other Assets ___-'-c......715 .85 i ' Total Assets LIABILITIES Deposits L 31,460.17 Sight L 6,,377.28 Saving 1;;,158 .. 50 Restricted 23,924 .. 39 Deferred Accounts 18.45 Other Liabilities 3$130<,,95 Capital 2,2342 105 .. 21 Total Liabilities L 2v268t'71h.C?2 TABLE II H01'JlJURAS S1(at~mentof.:rr(?t1t . , . and, Loas . Qi.13NF a6.of.D~cember·3l, 1950 Expenditures, Salaries and wages 1 76,706.39 Board of Directors 5.. 690.30 General expenditures Rent 14,700.00 Office equipment 3,830 .. 93 Communications 41.18 Per diem 8,815.84 l\fainten~nce and repair of vehicles 1,159080 Eaintenance and repair of real estate 27.50 ~:iaintenance and repair of office equipment 51035 Public relations and publications 345 .. 00 Social security for employees 192.00 Representation expenses 554.00 Depreciation 5,,521018 Others 2".987022 Total general expenditures 28,226~50 Interests 66.45 TOTAL Receipts Interests L 2,698.83 Commissions 13.10 Exchange Profits 419.61 Other 31.78 1 4,163.32 BALANCE 106,;,26.32 TOTAL L 1102689.64 TABLE III HONDURAS Movement of Loan Applications tp BNFfrom July 1 to December 31, 19;0 i Number of Total Applicatio!!! L Loan APplications Approved 193 599:-855 0 00 Loan Applications Rejected 67 625".815.00 Loan Applications i1ithdrawn 46 251,100000 Loan Applications Pending Action 6 85,ilOO.OO Loan Applications in Process 110 445:: 990..:.22 TOTAL 4~2 21= OO~" 960" Qo - - TABU; IV . "I HONDURAS Approved Loans of BNF(i1s ot December 31,1950, . , ··Clas~ifiejtibil TyPe· Number of .Amount of %of T;ype of Loan . Loans Loans Total , ~ Long....term mortgage loan,s 21 L 148~680.00 2>.8 Medium-term improvement loans 56 la9,11550~oo 31.6 Shqrt~term crop loans - 116 261t 625,.00 43<&6 TarAt - 193 ~ t 5992 855(lOO - 100.0 ..... TABIE V HONDURAS hpproved Loans of BNF as of December 31: 19$0, Classified bZ PurEose - No. :Qe6tination . . Amount % of Total -.~-~ 1 Refinanoing L 124~360.00 20.,73 2 Purchase of properties 20,500 .. 00 3.42 3 Permanent improvement 53,.405.00 8.90 4 Agricultural machinery and implements 54~6l5.00 9.11 .5 Recondi tioning of pasture grounds 3~900.oo 0.65 6 Purchase of working animals 3,,800.00 0.63 7 Purchase of dairy cattle 34,800.00 5.80 8 Purchase of beef cattle 52,850.00 8.81 9 Coffee crop 63,620.00 10.61 10 Sugar cane orop 137,270.00 22.88 11 Subsistence orops 22,935.00 12 Industry 27;.800 00 0 --h~ TarAL L 599 ;t855.:£g 100.00 ~-- TABLE VI HONDURAS Approved Loans of BNF as of December- 3~" 1950¥ I Classified bY' Amount 4 ; No. of lunount 1/ Amount of Loans LoanS' (lempiras} From L 25.00 to L 100.00 25 1~562 101 .. 00 500.00 58 17~l.i.oo 501 .. 00 1,000.00 18 13,500 1,001.00 2",000.00 32 48,,000 2~OOl .. OO 5:;000 •.00 32 112,000 .5~001.00 10,000.00 15 112,500 10 11001 .. 00 15)000.00 7 87,500 lS;JOO1.DO 20,000.00 4 70 .. 000 20,000.00 or more 2 137,,392 193 599:J855 , 11 This column has been statistically calculated. The error has been corrected in the last figure, that is the one which refers to loans of 20.000 lempiras or more. TABLE VII' HONDURAS pis bur sed CroE Loans of BNF as of December 312 195"0 2 Classified by Purpose With With untransferred mortgage % of AGRICULTURE - security securit,y Sub-Total Total Total -- Coffee 21;. 7:35.00 7,,950.00 29,685,,00 Sugar 114~845000 ~160.00 119~. 005" 000 Corn 685.00 6,,300.00 6.,.985.00 Beans 3,.5"00000 ~Q£.~ Sub-Total 137" 265.00 21.f 910.00 l59~175tJOO 159,115.00 79.68 LIVESTCCK Beef cattle 2,.000.00 30$000.00 32~000oOO Dairy cattle I. 3t;100c.00 200.00 F 3;)00 .. 00 Sub-Total 51'100.00 30.,,200.00 35,,300.00 35,,300.00 17.67 INDUSTRIAL Vlood boxes 2,Je000.00 2$000.00 Turpentine 11'800.00 1",800.00 Tanning 11 5"00.00 Is 500,,00 Sub-Total 2,000.00 3,300.00 5,300 0 00 5,300.00 2.65 -- TOTAL 144.z)65,,00 55;ulO,,0.Q - 199;;.?7:P ~;OO - 199.~ 715.00 10.~~9_ TABLE inr HONDURAS ~isbursed Imp~ovement Loans ofBNF as of Decembe~ ,31,1950, Classified by Purpose AGRlCut'l'URE 4 ; Coffee 8;,240.00 Sugar caIlfJ 2,,125.00 Corn 1,000.00 Potatoes 500.00 Drainage and irrigation 200.00 Installations u,lOO.OO Purchase of working animals 2~2.30.00 Machinery and implements 33,.105.00 Fences 1.950.00 Refinancing 2,700.00 Sub-Total 65.71 LIVESTCCK Dairy cattle 9.. 400.00 Machinery and implements 2~200.00 Installations 5".500.00 Pasture 3#280.00 Fences 2,220 •00 Su~-Total 22,900.00 OTHER Refinancing 2,000.00 Fences n.e.s. 3,,400.00 Constructive 1,000.00 Sub-Total 6,uoo.00 7.49 TOTAL 85,.450,00 100.0 TABLE n HONDURAS I Disbursed ]~.ort~age Loans of BNF as of December 31, 1950, 91assified by Purpose Lempiras % of Total ; Refinancing 90,,3 00 • 00 82<:>24 Construction o~ rural houses 4,$00,,00 4.10 Purchase of rural properties ,1,,000.,00 1.3.,66 TOTAL lO9 l 800 e OO 100 9 0 --- -