Honduras
Executive Summary
Honduras contains all the ingredients for a thriving, prosperous economy: strategic location next to U.S. markets with a deep-water port, a rich endowment of natural resources, breathtaking tourist destinations, and hard-working people, including a significant cadre of skilled labor. Despite these advantages, per capita income in Honduras is the third lowest in all Latin America. Investors cite corruption, crime, and poor infrastructure and weak or nonexistent rule of law as the primary reasons that Honduras does not attract more of the private investment it needs to stimulate inclusive economic growth. According to the International Monetary Fund (IMF), real Honduran GDP grew by 12.5 percent in 2021, a rebound from the devastating effects in 2020 of the COVID-19 pandemic and twin hurricanes Eta and Iota. The IMF predicts the economy will grow by 3.8 percent in 2022.
The 2022 inauguration of Honduras first woman president, Xiomara Castro, marked the beginning of a new era in the country’s political economy. The participation of U.S. Vice President Harris at President Castro’s inauguration exemplified the strong U.S. commitment to Honduras. The two countries have committed to work jointly to address the root causes of migration, including by combating corruption and expanding economic opportunity. Since taking office, the Castro administration has launched initiatives to reduce corruption, improve education and public health, and create jobs.
These laudable efforts have been frustrated by fiscal challenges, including budget planning and debt management. Although the United States and international organizations including the IMF assess Honduras as low risk for debt distress, public messaging from the administration announcing a fiscal crisis roiled international bond markets, driving up the risk premium on Honduran debt. To address these budget shortfalls, the government announced it will utilize its foreign reserves to finance operations, which could put additional inflationary pressure on the economy. To help Honduras implement its social agenda without increasing its debt burden, the United States has begun a debt management technical assistance program with the Ministry of Finance.
In both public and private, the Castro administration emphasizes the need for job creation and private investment in Honduras. The government approved a new law in 2022 to facilitate the development and formalization of Micro, Small, and Medium Enterprises (MSMEs). The government’s Results-Based Governance system and other anti-corruption efforts are excellent examples of efforts to improve the investment climate. From the perspective of the private sector, however, these efforts have been overshadowed by policy decisions that have dramatically increased the uncertainty of investment returns. Chief among these was the May 2022 approval of a new energy law that threatens power generators with forced sale at a “just price” if they do not reduce their tariffs to the government’s satisfaction. The law provides no guarantee of future payment, stipulates that new energy investment must be majority state-owned, and all but eliminates private trade in energy. As a result of the new law, several private energy companies have discontinued planned projects in Honduras and are exploring investment opportunities in other countries in the region.
The Castro administration also eliminated the special economic zones known as “ZEDEs” by their initials in Spanish. The ZEDEs were broadly unpopular, and viewed by some as a vector for corruption, but their elimination raised concerns in the business community about the government’s commitment to commercial stability and the rule of law.
Another government policy contributing to uncertainty in the investment climate has been the elimination of the legal framework used by most businesses to employ per-hour workers. The law’s repeal fulfilled a Castro campaign promise, responding to criticism by labor unions that temporary work allowed companies to evade their social security obligations and exploit workers. Business representatives note, however, that many industries, including retail, tourism, and food service rely heavily on hourly labor and will be constrained by the new framework. Civil society representatives also point out that the change adversely affects women and students, who relied on hourly work to manage households and school schedules, although union leaders counter that the previous framework allowed employers to target women and young people for economic exploitation, given that their personal circumstances often do not allow them to take on full-time employment.
Many foreign investors in Honduras operate thriving enterprises. At the same time, all investors face challenges including unreliable and expensive electricity, corruption, unpredictable tax application and enforcement, high crime, low education levels, and poor infrastructure. Squatting on private land is an increasingly severe problem in Honduras and anti-squatting laws are poorly enforced. Continued low-level protests and strikes are additional concerns for private investors.
Despite these setbacks, over 200 American companies operate businesses in Honduras. Honduras enjoys preferential market access to the United States under CAFTA-DR, which has allowed for the development of intra-industry trade in textiles and electrical machinery, among other sectors. The proximity to the United States and established supply chain linkages means that opportunities exist to increase nearshoring sourcing to meet U.S. demand for a variety of goods. The White House “Call to Action to Deepen Investment in the Northern Triangle” is designed to coordinate increased U.S. investment in the region, including Honduras. This program, along with others, aims to support sustained and inclusive economic development in Honduras and surrounding countries.
| Measure | Year | Index/Rank | Website Address |
|---|---|---|---|
| TI Corruption Perceptions Index | 2021 | 157 of 175 | http://www.transparency.org/research/cpi/overview |
| Global Innovation Index | 2021 | 108 of 132 | https://www.globalinnovationindex.org/analysis-indicator |
| U.S. FDI in partner country ($M USD, historical stock positions) | 2020 | USD 1,111 | https://apps.bea.gov/international/factsheet/ |
| World Bank GNI per capita | 2020 | USD 2180 | https://data.worldbank.org/indicator/NY.GNP.PCAP.CD |
4. Industrial Policies
The 2017 Tourism Incentives Law offers tax exemptions for national and international investment in tourism development projects. The law provides income tax exemptions for the first 10 years of a project and permits the duty-free import of goods needed for a project, including publicity materials. To receive benefits, a business must be located in a designated tourism zone. Restaurants, casinos, nightclubs, movie theaters, and certain other businesses are not eligible for incentives under this law. Foreigners or foreign companies seeking to purchase property exceeding 3,000 square meters for tourism or other development projects in designated tourism zones must present an application to the Honduran Tourism Institute at the Ministry of Tourism. The buyer must prove a contract to purchase the property exists and present feasibility studies and plans about the proposed tourism project.
The Honduran government historically has offered four primary tax-advantaged structures to incentivize investment in Honduras: the Free Trade Zone (ZOLI), the Free Tourism Zone (ZOLT), the Industrial Zone for Export Processing (ZIP) and the Temporary Import Law (RIT). Although there has been no formal announcement, the Castro administration has expressed its intentions both publicly and privately to eliminate these tax incentive structures.
Both ZOLIs and ZIPs allow foreign investors tariff and tax incentives for export-only manufacturing. The following cities have been designated as free zones: Puerto Cortes, Omoa, Choloma, Tela, La Ceiba, and Amapala. The government allows the establishment of ZIPs anywhere in the country. Currently, ZIPs are located in Choloma, Buffalo, La Lima, San Pedro Sula, Tegucigalpa, and Villanueva. Companies operating in ZIPs are exempt from paying import duties and other charges on goods and capital equipment. The RIT allows exporters to introduce raw materials, parts, and capital equipment (except vehicles) into Honduras exempt from surcharges and customs duties if a manufacturer incorporates the input into a product for export (up to five percent can be sold locally). Additional information on these incentive programs is available from the National Investment Council (https://www.cni.hn).
In April 2022, President Castro abolished Honduras’ Zones for Employment and Economic Development (ZEDEs), the largely autonomous economic zones created by the Honduran National Congress in 2013. Opponents viewed ZEDEs as an unconstitutional abrogation of Honduran sovereignty, ceding national territory and resources to rich investors who would elude Honduras’ already weak oversight of environmental standards, property laws, human rights, and labor standards, while providing no economic benefit to ordinary Hondurans. ZEDE owners saw them as an opportunity to spur economic growth through secure, privately-run enclaves with their own tax and regulatory schemes, security forces, and dispute-resolution mechanisms, as well as a model of how life could be in Honduras with more government efficiency and less corruption. ZEDE owners, who are exploring possible litigation, say they relied in good faith on the legality of the ZEDE law and have tried to negotiate with the Castro Administration to identify a mutually satisfactory way forward, but the government has so far been unwilling to engage in talks.
Honduras ratified the World Trade Organization’s (WTO) Trade Facilitation Agreement (TFA) in July 2016, agreeing to expedite the movement, release, and clearance of goods, including goods in transit. The TFA also sets out measures for effective cooperation between customs and other appropriate authorities on trade facilitation and customs compliance issues. According to the WTO/TFA database, Honduras’ current rate of implementation of TFA Category A notification commitments stands at 58.4 percent. The Honduran government has received significant technical assistance from the U.S. government to meet compliance requirements in publication, notification, advance rulings, border agency cooperation, and establishing a national trade facilitation committee. Honduras, Guatemala, and El Salvador operate a trilateral customs union to foster and increase efficient cross-border trade, but implementation challenges persist. Honduras uses digitized import permits for agricultural products to reduce costs and dispatch times. Honduras and Guatemala also use an online pre-arrival screening protocol to reduce border times and transit costs for goods.
With U.S. support, the GOH has advanced several initiatives to facilitate trade and reduce dispatch times and costs at key land and sea borders. Use of high-spec tablets by Aduanas (Customs) at Puerto Cortes has reduced dispatch times by over 30 percent; expansion of tablet use is envisioned to La Mesa as well (San Pedro Sula airport Customs). A streamlined inspections manual for to be adopted by Aduanas and the National Health and Agrifood Safety Entity (SENASA) as well as additional IT developments to integrate Aduanas and SENASA inspection systems will further compound time and cost reductions at key land and border crossings. Trade policy is overseen by the National Trade Committee, chaired by the Minister of Economic Development.
Many U.S. companies that operate in Honduras take advantage of the commercial framework established by the Central American and Dominican Republic Free Trade Agreement (CAFTA-DR). Substantial intra-industry trade now occurs in textiles and electrical machinery, alongside continued trade in traditional Honduran exports such as coffee and bananas.
The government rushed the opening in December 2021 of an incomplete, controversial new airport, Palmerola, designed to reduce costs for airlines, passengers, and shipping companies once cargo processing procedures have been fully implemented. The airport connects with a recently completed highway (the ‘Dry Canal’) to the Pacific coast and with another highway to the Caribbean coast and its deep-water port – for a sea-to-sea logistics and transit system. As of this writing, cargo functions are not operational at the airport and drive time to Tegucigalpa is approximately an hour and a half.
The Honduran government encourages foreign investors to hire locally and to make use of domestic content, especially in manufacturing and agriculture. The government looks favorably on investment projects that contribute to employment growth, either directly or indirectly. U.S. investors in Honduras have not reported instances in which the government has imposed performance or localization requirements on investments.
The Honduran government and courts can require foreign and domestic investors that operate in Honduras to turn over data for use in criminal investigations or civil proceedings. Honduran law enforcement, prosecutors, and civil courts have the authority to make such requests.
5. Protection of Property Rights
Honduran law recognizes secured interests in movable and real property. The Chamber of Commerce and Industry of Tegucigalpa (CCIT) and the Chamber of Commerce and Industry of San Pedro Sula (CCIC) both manage their own merchant records. The national property registry is managed by the Property Institute. The right for CCIT and CCIC to administer their own merchant registries is derived from a concession in Honduras’ secured transactions law.
Land title procedures have been an issue leading to investment disputes involving U.S. nationals who are landowners, especially, but not limited to, the tourist destination of Roatan. Title insurance is not widely available in Honduras and approximately 80 percent of the privately held land in the country is either untitled or improperly titled. Resolution of disputes in court often takes years. There are claims of widespread corruption in land sales, deed filing, and dispute resolution, including claims against attorneys, real estate companies, judges, and local officials. Although Honduras has made some progress, the property registration system is perceived as unreliable and represents a constraint on investment, particularly in the Bay Islands. In addition, a lack of implementing regulations leads to long delays in the awarding of titles in some regions.
The legislative framework for the protection of intellectual property (IP) rights , which includes the Honduran copyright law and its industrial property law, is generally adequate, but often poorly enforced. Honduras has enacted legislation to implement its obligations under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) of the World Trade Organization (WTO). Honduran law protects data exclusivity for a period of five years and protects process patents, but does not recognize second-use patents. The Property Institute and Public Ministry handle IP protection and enforcement.
CAFTA-DR Chapter 15 on Intellectual Property Rights further provides for the protection and enforcement of a range of IP rights, which are consistent with U.S. and international standards . There are also provisions on deterrence of piracy and counterfeiting. Additionally, CAFTA-DR provides authorities the ability to confiscate pirated goods and investigate intellectual property cases on their own initiative.
The Honduran legal framework provides deterrence against piracy and counterfeiting by requiring the seizure, forfeiture, and destruction of counterfeit and pirated goods and the equipment used to produce them. The law also provides for statutory damages for copyright and trademark infringement, to ensure monetary damages are awarded even when losses associated with an infringement are difficult to assign.
Digital piracy is widespread and frequently ignored in Honduras, especially by telecommunications companies. The Special Prosecutor for IP will not investigate a case unless it receives a complaint from a rights holder. Often, rights holders do not submit complaints because of either the perceived bureaucratic process or the fear of losing business. In addition, sentencing for IP crimes remains ineffective to deter future violations. IP violators typically receive a three-to-six-year sentence and an approximately $2,000 fine. If a sentence is less than five years, however, the convicted party can choose to pay a larger fine and not serve any jail time.
Honduras is not listed in United States Trade Representative’s 2021 Special 301 Report or its 2020 Review of Notorious Markets for Counterfeiting and Piracy.
A list of local attorneys is available at https://hn.usembassy.gov/u-s-citizen-services/local-resources-of-u-s-citizens/attorneys/. The U.S. Commercial Service office also maintains a screened list of attorneys through its Business Service Provider (BSP) directory . The American Chamber of Commerce Honduras works with U.S. and Honduran companies that encounter commercial challenges, including intellectual property rights issues ( http://www.amchamhonduras.org/ ). For additional information about national laws and points of contact at local IP offices, please see World Intellectual Property Organization’s country profiles: http://www.wipo.int/directory/en/ .
9. Corruption
In February 2022, President Castro fulfilled her campaign promise to request support from the UN for an international anti-corruption commission (CICIH). A UN Technical Assistance Mission visited Honduras in May 2022 to begin work on the request. The commission would continue the work started by the OAS Mission Against Corruption and Impunity in Honduras (MACCIH) which left Honduras in 2020 after the former administration failed to renew its mandate. Though details are still under discussion, the commission would likely fill an investigative and prosecutorial role similar to MACCIH. Its mandate would likely extend beyond the current administration. Several risks remain; notably, a broad amnesty law passed in February 2022 that would prevent the commission from investigating a significant number of cases, and unclear financing for the commission.
U.S. businesses and citizens report corruption in the public sector and the judiciary is a significant constraint to investment in Honduras. Historically, corruption has been pervasive in government procurement, issuance of government permits, customs, real estate transactions (particularly land title transfers), performance requirements, and the regulatory system. Civil society groups are critical of recent legislation granting qualified immunity to government officials and a 2019 law that gave the highly politicized government audit agency a first look at corruption cases. Congress repealed the latter in 2022. In 2018, Congress passed a revision of the 1984 penal code that lowered penalties for some corruption offenses. The new code went into effect in June 2020 and was retroactively applied to several high-profile corruption cases resulting in a spate of dismissals and retrials. In late 2020, the GOH created a new Ministry of Transparency to act as the government’s lead institution in coordinating and implementing efforts to promote transparency and integrity and prevent government corruption. The Castro government further institutionalized the ministry’s anti-corruption mandate, naming it the Ministry of Transparency and the Fight against Corruption. The Castro administration’s Government by Results initiative should pay off in decreased vulnerability to corruption, and the ministers of Health and Economic Development both signed cooperation agreements with the country’s Anticorruption Council.
Honduras’s Rankings on Key Corruption Indicators:
| Measure | Year | Index/Ranking |
|---|---|---|
| TI Corruption Index | 2021 | 23/100, 157 of 180 |
| MCC Government Effectiveness | FY 2022 | -0.12 (35 percent) |
| MCC Rule of Law | FY 2022 | -0.42 (10 percent) |
| MCC Control of Corruption | FY 2022 | -0.40 (16 percent) |
The United States Foreign Corrupt Practices Act (FCPA) deems it unlawful for a U.S. person, and certain foreign issuers of securities to make corrupt payments to foreign public officials for the purpose of obtaining or retaining business for directing business to any person. The FCPA also applies to foreign firms and persons who take any act in furtherance of such a corrupt payment while in the United States. For more information, see the FCPA Lay-Person’s Guide: http://www.justice.gov/criminal/fraud/ .
Honduras ratified the UN Anticorruption Convention in December 2005. The UN Convention requires countries to establish criminal penalties for a wide range of acts of corruption. The UN Convention covers a broad range of issues from basic forms of corruption such as bribery and solicitation, embezzlement, trading in influence, and the concealment and laundering of the proceeds of corruption. The UN Convention contains transnational business bribery provisions that are functionally similar to those in the Organization for Economic Cooperation and Development Anti-Bribery Convention.
Honduras ratified the Inter-American Convention against Corruption (OAS Convention) in1998. The OAS Convention establishes a set of preventive measures against corruption; provides for the criminalization of certain acts of corruption, including transnational bribery and illicit enrichment; and contains a series of provisions to strengthen the cooperation between its states’ parties in areas such as mutual legal assistance and technical cooperation.
Companies that face corruption-related challenges in Honduras may contact the following organizations to request assistance.
José Mario Salgado
Director General of the Prosecutor’s Office
Honduran Public Ministry
Direcciongf2018@gmail.com
The Public Ministry is the Honduran government agency responsible for criminal prosecutions, including corruption cases.
Association for a More Just Society (ASJ)
Carlos Hernandez
Honduras Country Director
Residencial El Trapiche, 2da etapa Bloque B, Casa #25
+504-2235-2291
info@asjhonduras.com
ASJ is a nongovernmental Honduran organization that works to reduce corruption and increase transparency. It is an affiliate of Transparency International.
National Anti-Corruption Council (CNA)
Alejandra Ferrera
Executive Board Assistant
Colonia San Carlos, calle Republica de Mexico
504-2221-1181
aferrera@cna.hn
CNA is a Honduran civil society organization.
U.S. Embassy Tegucigalpa, Honduras
Attention: Economic Section
Avenida La Paz Tegucigalpa M.D.C., Honduras
Telephone Numbers: (504) 2236-9320, 2238-5114
Fax Number: (504) 2236-9037
Companies can also report corruption through the Department of Commerce Trade Compliance Center Report a Trade Barrier website: http://tcc.export.gov/Report_a_Barrier/index.asp .