From Bad to Worse: The Xiomara Castro Administration Begins to Weaponize the Honduran State

Commentary by Ryan C. Berg

Published November 4, 2024

The United States once had big aspirations for the government of Xiomara Castro in Honduras. Elected on an anti-corruption platform and promising change, the Biden administration hoped for the antithesis to Juan Orlando Hernández, the former National Party president who now sits in U.S. prison after his conviction on drug trafficking charges. The Biden administration saw the Castro government as promising change through a progressive platform in a tough region where the United States typically has few good partners. Further, the Biden administration sought common ground with the Castro government, including Honduras, in some of its core regional initiatives. Despite hesitation, for instance, Castro received an invitation to Biden's Summit for Democracy in 2021. Vice President Kamala Harris attended Castro's inauguration and tried to forge leader-to-leader ties.

Yet a spate of corruption scandals, a diplomatic switch from Taiwan to the People's Republic of China (PRC), policies that disincentivize nearshoring and threaten the property rights of foreign direct investment made through the country's special economic zones (ZEDEs in Spanish), and a nepotistic governance style have all soured bilateral ties. As Honduras looks ahead to the 2025 elections for both the presidency and the Congress, President Castro appears to be weaponizing aspects of the Honduran state and focusing in on her opponents. For the next U.S. administration, Honduras will likely be a significant challenge in Central America to be solved, rather than a partner to leverage as the answer to tough problems-at least until Honduras itself holds elections in November 2025.

Criminal Penetration

A recent video showing a member of the ruling Castro-Zelaya family discussing campaign contributions from criminal organizations to Xiomara's husband Mel Zelaya's previous presidential campaign has placed President Castro under intense scrutiny. Ironically, the Castro administration swept to power on an anti-corruption message. Castro juxtaposed her administration to the prosecution and eventual conviction of her predecessor, Juan Orlando Hernández. As the video in question well demonstrates, the rumors are likely true-the Castro-Zelaya family appears embedded in some of the same criminal networks as its predecessor.

President Castro's response has exacerbated bilateral tensions. Upon release of the video, Castro abruptly and unilaterally departed from the 100-year-old extradition treaty with the United States. While Castro claims the timing was purely coincidental, coming so quickly after the video's release gave many Hondurans the impression that ulterior motives were clearly at play. Furthermore, it opened Castro to powerful claims of hypocrisy-the president was delighted to see her predecessor Hernández extradited while closing the door on such a fate for anyone in her extended family, freshly accused of involvement in drug trafficking and bribery. As part of her defense, Castro maintained that the United States was "interfering" in its domestic affairs, and even hinted at a purported coup plot unfolding against her. All of this was factually untrue.

Meanwhile, the Castro administration has made itself an outlier by aligning with Latin America's dictatorships in Cuba, Nicaragua, and Venezuela. In particular, alignment between Caracas and Tegucigalpa has been on full display of late: former defense minister José Manuel Zelaya (Xiomara's nephew) cavorting with Maduro's sanctioned defense minister Vladimir Padrino López during a recent visit to Venezuela. President Castro also immediately recognized Venezuelan dictator Nicolás Maduro's brazen election theft. This has brought to light the historic role of Honduras as a key airbridge for the criminal regime in Caracas to traffic narcotics into the United States. Many of these suspected flights head out over the Caribbean before banking left and landing for refueling at one of the numerous clandestine airstrips in Honduras' territory.

The Uncertainty of Foreign Direct Investment and the Battle Against ZEDEs

Since President Castro's election, her administration has had a testy relationship with the country's private sector. Castro came to office campaigning against the country's special economic zones, known as Zones of Employment and Economic Development (or ZEDEs, by its Spanish acronym), which established economic development zones with significant capacity to self-govern and attract private investment through regulatory platforms aimed at growth. Since their inception, Castro has chafed at the autonomy ZEDE operators have in developing regulatory standards used to attract investment. She has labeled the ZEDEs criminal, a threat to sovereignty, and undesirable by dint of their connection to her predecessor's administration.

In order to shutter the ZEDEs, Castro shepherded legislation through Honduras' Congress to repeal their ability to operate. Since the law enabling the formation of ZEDEs was itself a constitutional amendment, Honduras' Congress needed to pass the same legislation ordering the closure of ZEDEs in two consecutive legislative years to have the same character. After Congress failed to pass the legislation a second time, thus failing to undo the amendment, President Castro turned to her administration's influence over the Supreme Court to press the ZEDEs.

Recently, the country's Supreme Court ruled that the legal foundation of the ZEDEs is unconstitutional. The Castro administration has paired this ruling with legislation meant to remove immunity protections from members of Congress-potentially applied retroactively. This means that under one interpretation, members of Congress-mostly Castro's opposition, National Party members-who voted for the legislation authorizing ZEDEs more than 10 years ago, could be found guilty of treason for having voted in favor of the unconstitutional special economic zones. Castro has presented the removal of immunity protections as an effort to curb corruption and increase transparency in the legislature.

Unsurprisingly, Western companies are observing the Castro administration's attacks on the ZEDEs as a bellwether for the country's ability to attract investment, especially nearshoring investment. While the ZEDEs remain in operation-one ZEDE has galvanized over 100 million USD in investment-the Castro administration's incessant actions have had a chilling effect on overall foreign direct investment (FDI) in Honduras. With a youthful population and a potential demographic dividend, Honduras must generate more robust economic growth to meet the expansion of its working-age population. Without greater FDI, the country stands little chance of meeting that challenge, exacerbating outmigration and furthering reliance on remittances as a percentage of the country's GDP (at present, that number stands at 25 percent). Given the country's difficulty in attracting FDI historically, ZEDEs were meant to increase the attractiveness of investing in Honduras. A lack of Western FDI will likely necessitate a further doubling down on the relationship with China for economic development.

The Advance of PRC Influence

In previous pieces of CSIS analysis, the Americas Program assessed that economic policies that drove out Western investment and made Honduras less attractive for Western-linked FDI would also make the country more likely to drop diplomatic recognition of Taiwan and turn to the PRC for alternative sources of development. This is exactly what transpired in 2023.

Instead of working with Taiwan to identify bankable projects, President Castro has been accused of trying to extort Taiwan. Normally, the country gives around 100 million USD to Honduras annually. Sources recall that President Castro asked Taiwan to double its aid and forgive around 600 million USD in past loans. In total, Castro's government stands accused of requesting about 2.5 billion USD in additional assistance. When Taiwan balked at these figures, in March 2023, Honduras announced a diplomatic switch to the PRC. The Castro administration gave Taiwan 30 days to vacate its embassy.

Rather than work to crowd in private investment and attract Western capital for infrastructure projects, the Castro government opted to accede to the PRC's Belt and Road Initiative instead. Furthermore, Chinese companies, including state-owned enterprises like Huawei, are busy expanding their influence throughout Honduras. As China grows its influence in Central America, the biggest remaining danger is that neighboring Guatemala changes its diplomatic recognition, too. Guatemala is the largest country still recognizing Taiwan diplomatically in terms of population size.

Nepotistic Governing Style

President Castro has governed with a familiar set of individuals around-her family. Governing the country is largely a family affair, with only a small circle of trusted individuals appointed to key posts in the presidential cabinet. Castro's husband and former president Mel Zelaya also has family members all over the administration. President Castro has two sons who serve as her private secretary and presidential adviser. Multiple Zelayas and Castros serve in the country's congress, including Mel Zelaya's brother and Xiomara's daughter. And there is also the erstwhile Secretary of Defense who resigned shortly after his visit to Venezuela.

Conclusion

At this point, there seems little disposition in Tegucigalpa to work collaboratively with Washington. In fact, as domestic scandals have accumulated, President Castro has doubled down on nationalism and her paranoid fulminations against the United States. Particularly problematic are her attacks on the private sector, promises to expropriate U.S. investment in the country's special economic zones, and diplomatic closeness with the region's authoritarian axis of Cuba, Nicaragua, and Venezuela. Given that Mexico under the Morena Party exhibits some of these same characteristics, and Nicaragua is already a full-blown dictatorship in the Central American isthmus, the United States will need a more robust strategy for pursuing its interests in Honduras. For now, the best strategy may well be a defensive one focused on guaranteeing the ability of the U.S. private sector to operate in Honduras, protecting investments made under the Central America-Dominican Republic Free Trade Agreement, and urging greater transparency in Honduran dealings with the PRC.

Ryan C. Berg is director of the Americas Program and head of the Future of Venezuela Initiative at the Center for Strategic and International Studies in Washington, D.C.

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