The Economic Cost of the De Facto Regime

Then we have the fallout from world reactions to the change. We had the public media condemnation from large countries such as the US throwing their support behind Zelaya and thus indirectly a lack of confidence arises in the minds of investors and company owners in Honduras, amplified by the still recovering global economy. We additionally have non-humanitarian aid being cancelled by many countries, including the US as noted below, reducing the de facto government's ability to help businesses and other institutions in Honduras through the economic recovery.

Indeed when the US cut it's aid on 3 September we can see a sharp rise in the cost of the euro against the lempira, a sign of falling economic confidence and those in Europe perhaps selling Lempiras in liquid or capital form.

Next we have labour forces protesting and striking against the de facto government which has been covered elsewhere in HTW and this results in a reduction in the labour force and productive capability of the country, as well as again making investment and continuation of business riskier.

Jesus Canahuati, Business Council of Latin America, told the Bloomsburg news that as much as $200 million in investment has been lost since the regime change. The country's long-term credit rating has also been downgraded since 11 September from B+ to B, five levels below the lowest ideal investment grade of BBB-. Such disruption and uninspiring information then leads to global commerce being reduced and, as we all know, the export of goods from Honduras is a vital aspect of the country's GDP.

Finally there is the impact upon tourism. With other Latin American countries so close to Honduras tourists are being advised that the country is not the safest place to experience Central America right now and as such the vital income Honduras receives from tourists is also being reduced.  As an example, here is what the British Foreign & Commonwealth Office is advising about travel to Honduras:

"We advise against all but essential travel to Honduras for the duration of the current crisis. Following three months of forced exile, President Zelaya returned clandestinely to Honduras on 21 September and has taken refuge in the Brazilian Embassy. His supporters continue to demonstrate in the Capital.  There is a cordon around the Brazilian Embassy and the focus of the demonstrations has moved to the limits of the cordon, the University of Tegucigalpa and other parts of the city. As a result of these events the situation in Honduras, particularly the capital Tegucigalpa, is tense and unpredictable and may deteriorate very quickly."

All these factors led Alcides Hernández, who teaches economics at National Autonomous University in Tegucigalpa, to tell Bloomsburg news that these combined factors are costing the country was probably costing the economy about $20 million a day, a colossal amount and Honduras cannot support this for long.

As such, many have claimed the de facto government is warping and misleading the world and Hondurans on the state of the economy and their control over it, and thus trust is another cost of the change. Here is an example of a possible move by them to hide these economic woes.  

When trawling through Honduran economics news I stumbled across this press release from the CBH (but it's in Spanish). Summarised it states that the de facto government received around $150 million as part of their allocated Special Drawing Rights, which I've discussed in a previous blog post. I've waited to see if any more news comes up concerning this discrepancy but as of today what I've posted is as far as we have got.

Looking at the most recent update from the IMF concerning Honduras we find that the de facto government is at the moment unable to use the SDR's I wrote about in a previous post because the IMF has not decided whether to accept the government.

Here is the link, and the relevant passage, I quote from David Hawley, External Relations Department of the IMF:

"The Fund recently approved a global allocation of SDRs of about $250 billion in special drawing rights. These are intended to supplement the reserves of all 186 members of the IMF. Honduras's share of this allocation proportional to its quota in the Fund, is about $163 million. However, the present regime in de facto control is not able to use these SDRs until a decision is made whether the Fund will deal with this regime as the government of Honduras."

Now this was posted on September the 10, yet the press release from the CBH concerning receivership of $150 million is dated 31 August, with the final $13 million (to make the $163 million mentioned by Hawley) coming in the next week i.e. by 7 September.

There is further evidence that the IMF are not the ones "fiddling" the dates from a testimony from Edwin Araque, who you may remember was until recently the president of the CBH. On an interview to Radio Globo in Washington D.C. on 2 September he claimed the move by the CBH was "an accounting trick."

It has also been alleged that this release from the CBH was designed to try and distract or counterbalance the impending announcement from the US that they would suspend non-humanitarian aid to the country (which did occur on 3 September).

Clearly the dates do not add up and we have to wonder at the reasons why either party would misinform us of the financial situation. Now it could be the IMF has already transferred the money but is trying to keep in favour with world powers that have sided by Zelaya by claiming they have "not decided" whether to accept the de facto government. On the other hand it could be that the de facto government wants to show that it is able to look after Hondurans and can receive the same treatment and financial aid from the major funds and institutions.

Obviously this is a crude and simple explanation for the discrepancy on both sides, yet the question still remains.

So there we are. Quite the pickle and as many commentators have said there needs to be political stability and acceptance before the economy can pick back up. Isolation from the international community can only be resolved with politics, not economic policy.