Honduras - Politics, government, and taxation

Since gaining its independence from the Spanish empire in 1821, Honduras has been plagued by political and financial instability. Changes of government have often been accompanied by violence and bloodshed. Rebellions, coups, and civil wars characterized much of the 20th century.

Two parties, the Partido Liberal (PL) founded by Celeo Arias in the 1880s, and the Partido Nacional (PN) established in 1902 by Manuel Bonilla, have dominated Honduran politics for the last century and continue to play a predominant role. The PN, which garners support from the military, is the more conservative of the parties, with strongholds in less-developed rural areas. The PL is more to the political left and draws support from an urban base, although it has a constituency among rural landowners as well.

Honduras has spent much of its independence under military rule. A break in military control occurred in 1955 when a group of military reformers staged a coup and installed an interim government, paving the way for constitutional elections. In 1957, a civilian, Ramon Morales, was elected to a 6-year term as president. Morales introduced agrarian reforms and social welfare legislation, including social security provisions. He also introduced a labor code to protect the rights of workers, and took Honduras into the Central American Common Market, a free trade zone made up of 5 Central American countries. In 1963 a military coup prevented Morales from running for a second term. General Oswaldo Lopez Arellano became the country's leader and placed agricultural development and the banking system under government control.

The military ran the country until 1981, when Honduras was returned to civilian rule. In 1982 a new constitution was drafted, and in 1986 Roberto Suazo Cordoba of the Liberal Party was elected president, marking the first peaceful transition of power between civilians in over 30 years.

The Liberal Party held the presidency for 4 years. Then, in 1990 the Nationalists took over with the election of Rafael Leonardo Callejas. Callejas moved to bring the military under civilian control, and instituted fiscal reforms to stabilize the economy, concentrating primarily on deficit reduction and currency stabilization. His presidency, however, was marred by allegations of corruption. Despite his reforms, the Liberal Party, under the leadership of Roberto Reina, regained the presidency in 1994. Under Reina the economy improved, with growth reaching 5 percent in 1997. International reserves were increased, and inflation dropped to 12.8 percent a year.

The current president of Honduras is Carlos Flores Facusse, a member of the Partido Liberal. In November 1997 he was elected to a 4-year term which began in January of 1998. His party holds over half the seats in the 128-seat National Congress. The Honduran government remains highly centralized despite slow-moving reforms to increase the power and participation of local municipalities.

Efforts to decentralize the political system (to give more power to the leaders of local governments) have been accompanied by economic reforms, with the government loosening its control over various economic operations, including those in the financial sector. In 1997, the Central Bank of Honduras was given greater independence in an effort to strengthen the country's financial system. In 2000 mandatory currency reserves were lowered from 25 percent to 19 percent. The government hopes that lowering reserve requirements and giving banks higher liquidity will increase loan disbursements and stimulate the economy.

Flores has also instituted a series of tax reforms designed to boost private investment and reduce the fiscal deficit. Flores reduced export tariffs , most notably in the banana sector, cutting duties from 50 cents a box to 4 cents. He also lowered the business income tax from 42 percent in 1997 to 25 percent in 1999. In order to offset losses from the cuts, the administration raised the sales tax from 7 percent to 12 percent. Flores has also undertaken efforts to increase privatization. The state-owned telecommunications company, Empresa Hondurena de Telecomunicaciones (Hondutel), and the state-owned electric company, Empresa Nacional de la Energia Electrica (ENEE) are prime candidates for privatization.