Natural Resources and Energy

Mining, the mainstay of the Honduran economy in the late 19th century, declined dramatically in importance in the 20th century. The New York and Honduras Rosario Mining Company (NYHRMC) produced US$60 million worth of gold and silver between 1882 and 1954 before discontinuing most of its operations.

Mining’s contribution to the GDP steadily declined during the 1980s, to account for only a 2 percent contribution in 1992. El Mochito mine in western Honduras, the largest mine in Central America, accounted for most mineral production. Ores containing gold, silver, lead, zinc, and cadmium were mined and exported to the United States and Europe for refining.

Energy Sources

Honduras has for many years relied on fuelwood and biomass (mostly waste products from agricultural production) to supply its energy needs. The country has never been a producer of petroleum and depends on imported oil to fill much of its energy needs.

In 1991 Honduras consumed about 16,000 barrels (2,500 m3) of oil daily. Honduras spent approximately US$143 million, or 13 percent of its total export earnings, to purchase oil in 1991. The country’s one small refinery at Puerto Cortés closed in 1993.

Various Honduran governments have done little to encourage oil exploration, although substantial oil deposits have long been suspected in the Río Sula valley and offshore along the Caribbean coast. An oil exploration consortium consisting of the Venezuelan state oil company, Venezuelan Petroleum, Inc. (Petróleos de Venezuela, S.A. — PDVSA), Cambria Oil, and Texaco expressed interest in the construction of a refinery at Puerto Castilla in 1993, with production aimed at the local market.

Fuelwood and biomass have traditionally met about 67 percent of the country’s total energy demand; petroleum, 29 percent; and electricity, 4 percent. In 1987 Honduran households consumed approximately 60 percent of total energy used, transportation and agriculture used about 26 percent, and industry used about 14 percent. Food processing consumed about 50 percent of industrial sector energy, followed by petroleum and chemical manufacturing.

Electric Power

Honduran electrification is low and uneven relative to other countries in Latin America. The World Bank estimates that only about 36 percent of the Honduran population had access to electricity (20 percent of the rural population) in 1987. The country’s total capacity in 1992 was 575 megawatts (MW), with 2,000 megawatt-hours produced.

A mammoth hydroelectric plant, the 292-MW project at El Cajón, began producing electricity in 1985 to help address the country’s energy needs. The plant, however, soon became heavily indebted because of the government’s electricity pricing policies (not charging public-sector institutions, for example) and because of the appointment of political cronies as top management officials. El Cajón also developed costly structural problems requiring extensive maintenance and repairs.

Officials estimated that the government’s decision to provide free service to publicsector institutions contributed to a 23 percent increase in publicsector consumption in 1990. Experts estimated that additional electrical generation capacity would likely be needed to keep pace with demand.

The Honduran Congress assumed authority for setting electric prices beginning in 1986 but then became reluctant to increase rates. Under pressure from the World Bank, it did agree to a 60 percent increase in 1990, with additional increases in 1991. To offset these increased rates for residential users, the National Congress initiated a system of direct subsidies that ran through 1992.

Water Supply and Sanitation

Water supply and sanitation coverage in Honduras has increased significantly in the last decades. However, the sector is still characterized by poor service quality and poor efficiency in many places. Coverage gaps still remain, particularly in rural areas.

In 2003, a new Framework Law for water supply and sanitation was passed. It includes service decentralization from the national utility SANAA to the municipalities. It also creates a policy council and a regulatory agency. Nevertheless, the new institutions remain weak and the process of decentralization has been slow. Furthermore, there is no policy of sector financing.

Manufacturing

The country’s manufacturing sector was small, contributing only 15 percent to the total GDP in 1992. Textile exports, primarily to the United States, led the Honduran manufacturing sector.

The maquiladora, or assembly industry, was a growth industry in the generally bleak economy. Asian-owned firms dominated the sector, with twenty-one South Korean-owned companies in export processing zones located in the Río Sula valley in 1991. The maquiladoras employed approximately 16,000 workers in 1991; another nine firms opened in 1992. Job creation, in fact, is considered to be the primary contribution of the assembly operations to the domestic economy.

The export textile manufacturing industry all but wiped out small, Honduran manufacturers, and food processors, whose goods were historically aimed at the domestic market, were also adversely affected. The small Honduran firms could not begin to compete with the assembly industry for labor because of the maquiladoras’ relatively high wage scale of close to US$4 per day. Small firms also found it increasingly difficult to meet the high cost of mostly imported inputs.

Membership in the Honduran Association of Small and Medium Industry (Asociación Hondureña de Empresas Pequeñas y Medianas) declined by 70 percent by 1991, compared to pre-maquiladora days, foreshadowing the likely demise of most of the small shops.

Honduran domestic manufacturers also suffered from increased Central American competition resulting from a trade liberalization pact signed in May 1991 by Honduras, El Salvador, and Guatemala. Overall, the Honduran manufacturing sector has mimicked other sectors of the economy—it is mostly noncompetitive, even in a regional context, because of insufficient credit and the high cost of inputs. Relatively high interest rates and a complicated investment law have also inhibited the foreign-dominated manufacturing sector from taking off.

The government-sponsored Puerto Cortés Free Zone was opened in 1976. By 1990 an additional five free zones were in operation in Omoa, Coloma, Tela, La Ceiba, and Amapala. A series of privately run export processing zones were also established in competition with the government-sponsored free zones. These privately run zones offered the same standard import-export incentives as the government zones. Most of the government and privately run zones were located along the Caribbean coast in a newly developing industrial belt.

Firms operating outside of the special “enterprise zones” (either privately run, export-processing zones or governmentsponsored free zones) enjoy many of the same benefits as those operating within the zones. The Honduran Temporary Import Law permits companies that export 100 percent of their production to countries outside the CACM countries to hold ten-year exemptions on corporate income taxes and duty-free import of industrial inputs.

Analysts continue to debate the actual benefits of the shift away from the import-substitution industrialization (ISI) policies of the 1960s and 1970s toward a new focus on free zones and assembly industries in the 1990s.

Critics point to the apparent lack of commitment by foreign manufactures to any one country site or to the creation of permanent infrastructure and employment. They question whether new employment will be enough to offset the loss of jobs in the more traditional manufacturing sector. A value of US$195 million to the Honduran economy from assembly industries in 1991 — when the value of clothing exports was greater than that of coffee — was a compelling argument in favor of the shift, however.

Construction

High interests rates, particularly for housing, continued to hurt the Honduran construction industry in 1993, but danger from high rates was partially offset by some public-sector investment. Privatization of formerly state-owned industries through debt swaps also negatively affected construction as prices for basic materials such as cement increased and credit tightened.

A major devaluation of the lempira added to the already high cost of construction imports. Construction contributed 6.0 percent to the GDP in 1992.