A study carried out by the International Finance Corporation (IFC) has identified agriculture/agribusiness, manufacturing, business process outsourcing (BPO) and digital financial services (DFS) as the sectors best suited to driving growth and job creation in Honduras over the next five years.
“These sectors have significant potential to drive growth and create jobs and could play a greater role in enabling private sector-led growth in Honduras and export diversification,” the IFC noted. The IFC, which is the private sector arm of the World Bank Group, outlined the four sectors in its Country Private Sector Diagnosis (CPSD) report released recently in the Honduran capital, Tegucigalpa.
It added that Honduras’ agriculture sector, which is a key pillar of that country’s economy, can generate jobs by diversifying beyond traditional goods and contributing to foreign exchange via exports.
Of the other sectors it wrote: “Manufacturing has a strong revealed competitive advantage based on an established industrial base with the potential for moving into more complex, higher value-added products. BPO has the potential to harness a demographic dividend and create jobs and contribute to export diversification by transitioning to higher-value outsourcing services. Increased financial services for MSMEs would allow businesses to invest and add jobs, while digital financial services reduce the business cost and widen the reach of these services for MSMEs.”
In Honduras, agriculture and agro-processing contribute almost 23 per cent to gross domestic product (GDP) and employ 36.5 per cent of the national workforce, according to the report. Honduras produces a wide range of agricultural products and primary commodities; and the country has diverse crop, livestock, forestry, and fishery subsectors. Proximity to large consumer markets in the United States and Canada allows Honduras to overcome the limitations of its small domestic market. Supported by a liberal trade regime, Honduras is a globally competitive producer of coffee, fruits, vegetables, and crustaceans, the report also acknowledges.
“Strengthening the competitiveness of the poultry, dairy, and staple-grains subsectors could greatly expand the socio-economic impact of agricultural trade,” the IFC added.
“Honduras also has unexploited opportunities in non-traditional agricultural products, including high-value vegetables, cocoa, cashew nuts, crustaceans, horticulture, and agro-forestry products; and the country can add value to its agricultural export portfolio by improving product quality, expanding processing, and identifying complementary value chains for current products including coffee, avocados, and tilapia.”
The key constraints to growth in that sector were identified as the lack of access to high-quality inputs, financing, infrastructure, logistics services, knowledge systems, and food quality and safety verification, as well as exposure to climate change impacts.
As for the manufacturing sector, the IFC report outlined that Honduras’ light manufacturing sector, which is largely built on the maquila model, shows a strong revealed competitive advantage in several products. Under the maquila model, foreign factories are able to set up, using incentives, and produce for the export market. Maquilas currently account for over half the country’s manufacturing sector and around nine per cent of GDP, providing about 167,000 direct and 500,000 indirect jobs in textile production and 13,000 jobs in electronics.
“Recent reforms to the law of free trade zones are expected to spur an increase in foreign direct investment (FDI), which could generate about 15,000 new jobs. Some anticipated investments involve the production of more complex, higher value-added goods, such as artificial fibres and car seats,” the report stated.
Three major projects that are currently in various stages of development will expand the country’s capacity to produce synthetic fibres and garments as well as woven fabrics.
Turning to the BPO sector, the report pointed out that the sector is already one of the fastest growing in Honduras, but still offers opportunities to create high-quality jobs while increasing domestic value addition. The country has a young English-speaking workforce that quickly adapts technology and is in the same time zone as central parts of the US and Canada.
“To take full advantage of this opportunity, the Honduran BPO subsector will need to develop a wider range of higher-value functions and digital services, such as software development, information security, business analytics, and social media production and management. An existing skills mismatch in the subsector offers opportunities for BPO companies to transition an overqualified workforce into new higher-value services, albeit with training programmes to close the skills gap.”
The report, however, added that to foster faster growth, the country would have to work on removing inhibitions such as insufficient access to telecommunications infrastructure, the inadequate capacity of national telecommunications networks, low levels of broadband penetration, complex registration processes, and skills mismatches.
DFS, which is the fourth sector identified for rapid growth in Honduras, is recognised as one which could catalyse growth and diversification among micro, small and medium-sized enterprises (MSMEs). The report said that while the Honduran financial sector is stable, liquid, and well capitalised, it, nevertheless, can target the provision of greater financial intermediation to MSMEs, and DFS can offer cost-effective solutions tailored to their unique circumstances.
“The digital economy itself has enormous growth potential, and various local initiatives and incubators — notably in San Pedro Sula — are fostering digital innovation. Transitioning to e-government services could boost the growth of the information technology subsector — enhancing productivity and accelerating job creation across the economy — and kick-start digital financial flows while improving the quality of governance, lowering the cost of public administration, and facilitating regulatory compliance,” it outlined.
Currently, Honduras’ financial sector offers a variety of DFS solutions for MSMEs, including noncash merchant payments, advanced data analytics, underwriting process automation, value chain and supply chain financing, and nonfinancial services (for example, business management tools).
On the flip side, insufficient capital, limited access to financial infrastructure, and regulatory gaps slow the development of digital financial services among institutions best placed to serve MSMEs, it was argued.
The IFC said fully leveraging the potential of these sectors will require the Government to address key obstacles to productivity and competitiveness.
“The most binding constraints on private sector development in Honduras are (a) high production costs due to relatively high minimum wages (except in the manufacturing sector), expensive and unreliable electricity, burdensome tax compliance, and security costs associated with crime and violence; (b) insufficient capital due to skills shortages or mismatches arising from inadequate tertiary education and vocational training, limited credit access (particularly among MSMEs) due to high collateral requirements and high borrowing costs, and inadequate infrastructure, especially road networks, public utilities and broadband services; (c) weak governance and regulatory risks due to onerous processes for formalisation, market entry and exit, and other elements of regulatory compliance, as well as uneven implementation of laws and policies and a high degree of policy uncertainty.”