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Smuggling Ousts Mitch As Top Coffee Threat
The Tico Times / January 5, 2001

By Larry Luxner

SAN PEDRO SULA -- The illegal smuggling of Honduran coffee through Guatemala is costing the Honduran government over $30 million a year in lost tax revenues, says Oscar Kafati, the country's minister of industry and commerce.

Kafati, who has spent most of his 70 years in the coffee business, says the problem is getting worse as the price differential grows between Honduran coffee, which is taxed, and Guatemalan coffee, which is not.

"Our production of coffee is one of the biggest in Central America. If we count the part that's smuggled, we're No. 1," he told The Tico Times in a recent interview.

"If we were in the quota system, it wouldn't affect us. But now, we don't have the system," Kafati explained. "Every time coffee is smuggled, the government doesn't receive the $5 per bag that it should. So when they smuggle, the Instituto Hondureño de Cafe (IHCAFE) loses that money. Five dollars per bag times 600,000 bags, equals $30 million in lost revenue."

"It's very difficult to control this. Our frontiers are very loose. The producers are pressuring us, as well as customs officials, to solve this problem."

Kafati, who like many leading Honduran politicians and executives is of Palestinian origin, said his family has been in the coffee business since 1933. Gabriel Kafati S.A. is the principal coffee roaster of Honduras, and the company owns 1,200 hectares of coffee plantations in El Paraiso, near the Nicaraguan border.

While Mitch was certainly the worst disaster ever to befall Honduras, causing 7,000 deaths and billions of dollars in damages during five days of fury in October 1998, its impact on the coffee industry was less severe than expected.

"After Mitch, everybody was expecting damages and a lower crop," said Frank Reese, commercial manager at Beneficio de Café Montecristo S.A. (Becamo) in San Pedro Sula. "Regarding quantitites, there was no effect. The main problem was infrastructure. There were some producers who lost coffee, though right now, the reconstruction of infrastructure is one of the first priorities."

Becamo is the most important of 40 companies officially listed as coffee exporters in Honduras, accounting for 15% of the country's production. About 70% of Becamo's production goes to Europe, another 20% to the United States and the remaining 10% to Asia.

"Coffee was the first product after Mitch to be exported," said Reese, acknowledging, however, that quality still isn't the best. "Honduras has a name for filler coffee, and right now it's the truth. It's still suffering."

In fact, at least seven coffee exporters have gone bankrupt in the past three years, representing 25% of the market.

In the 1998-99 season, coffee exports totaled $263.9 million, down $146 million from the previous harvest. Over that period, Becamo exported 453,510 bags, representing 15% of the total crop of 2.95 million bags. Other important Honduran coffee exporters were Hawit and Expocafé (11% market share each); Coex and Molinos de Honduras (9% each); Inaginsa and Sogimex (5% each); Incarsa and Excosa (4% each) and Cohmasa (3%).

Because Mitch virtually devastated the Honduran banana industry, coffee now ranks as the country's No. 2 foreign-exchange earner after apparel manufacturing.

According to Kafati, the Honduran government is giving 370 million lempiras (about $24 million) in aid to coffee growers,

Manuel Reyes, president of the Asociación Hondureño de Exportadores de Café (Adehcafe), says what concerns him most isn't recovery from Mitch, but the smuggling.

"We are very worried about this smuggling," said Reyes. "It's a big problem, because in the last crop about 500,000 bags of coffee were taken over the border into Guatemala without paying the export permit tax that is due."

Reyes, whose own company, Excafé, is a small player in the Honduran coffee industry -- exporting 80,000 to 100,000 bags a year -- says this smuggling is going on for two reasons: one, to avoid a $5-per-bag tax recently imposed by the Honduran government, and two, because Guatemalan coffee commands a higher price than Honduran beans anyway.

"We are not totally against the tax, but we think it wasn't the right time because the market was not doing so well," says Reyes. "Coffee prices were $90 a bag. To take $5 from that is a relatively important amount, so we think it would have been better perhaps to approve a tax depending on the price. For example, if prices were $90, you'd pay a per-bag tax of $3. At $110, the tax would be $4, and so on."

The tax, instituted in July 1999, was raised from $5 to $6 at the beginning of 2000, and is divided among three entities: IHCAFE, which gets $1 per bag to finance its operations; the government, which gets $3.25 a bag as repayment for a $22 million loan issued to coffee producers last year, and the Fondo Cafetero Nacional, a producers' organization, which gets $1.75 a bag to help the welfare of its members.

Stopping the smuggling of coffee will be very difficult, says Kafati, who agrees that widespread corruption has tainted the image of Honduras in the international investment community. But he says Honduras isn't alone in this regard.

"We have corruption in the government, but it's all over Latin America," he said. "For me, the most important thing to attract foreign investment is judicial security. We are improving in this matter. With new legislation in place, Honduras is now one of the best countries in the world to invest in."

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