Economics & Coffee

Remember way back to my first post, What is "El Ritmo de Cambio", where I mentioned this blog's title has two meanings, one pertaining to the rhythm of change, and the other to the rate of exchange? We have now come to my first post on the exchange rate and current state of the Honduran economy.

Why have I waited this long?


Well, the exchange rate for Honduras hasn't changed since 2005. That is, until now. The value of the Honduran Lempira (HNL) back in 2001 was 15.54 Lempiras to the Dollar (HNL/USD) and fell to 18.89 in 2005, where it has remained ever since in its ‘de facto’ fixed exchange rate regime (Historic exchange rates). Note: When the value of a currency falls in comparison to another, the quantity of lempiras required to purchase one dollar rises. This is why 15.54 to 18.89 HNL/USD is a decline in the value of the lempira. This past July, the Central Bank of Honduras decided to reactivate the exchange rate bands at +/- 7% with respect to the established base. Since reactivation, moneychangers have entered the market looking to make some money. There are some unspoken rules here that make things interesting. The Central Bank is accused of having a monopoly on foreign dollars (USD), meaning none of the other banks are allowed to hold on to the dollars they receive from remittances or tourists. They are required by law to sell these dollars at a fixed rate to the Central Bank, who can then take advantage of the variance in the exchange rate and sell those same dollars back at current rates to the banks and companies that demand them.

This change comes at an interesting time. It may very well be a direct consequence of the country’s revised credit rating in June. Standard & Poor's (S&P) country outlook for Honduras was revised from ‘stable’ to ‘positive’ and their credit rating was promoted to a 'B', good news despite the remaining 5 levels before investment-grade status is achieved. This means that S&P is slightly more confident that Honduras will be able to repay its debts. This is due in part to the country’s Stand-by Agreement with the IMF and “continued progress in strengthening tax collections.”

Taxes on coffee exports have also strengthened the ability of Honduras to reduce its fiscal deficit in the coming years. When this tax was imposed, it originally led to an increase in the amount of coffee being smuggled into Guatemala. Guatemalan coffee is very well-known, due in large part to Starbucks featuring Antigua Guatemala coffee, for its quality. This means coffee in Guatemala has been able to fetch higher market prices – higher than Honduras. Since much of the country’s coffee is produced near the border already, why not drive it to a Honduran “storage facility” located in Guatemala and then sell it at above-Honduran-market prices? Well, the tax has funded an increase in the availability of technical assistance to producers to help boost production, leading to an increase in quality and market prices available to Honduras. Ultimately, the trafficking has decreased in recent years and Honduras has emerged as the largest coffee producer in Central America (where it has always been, though unofficially).

Ritmo de Cambio: 18.8693 HNL/USD