Press Release No. 05/280

Press Release: IMF Executive Board Completes Third Program and Financing Assurances Reviews under Honduras' PRGF Arrangement

December 16, 2005

The Executive Board of the International Monetary Fund (IMF) has completed the third review of Honduras' performance and the financing assurances review under an SDR 71.2 million (about US$102.7 million) Poverty Reduction and Growth Facility (PRGF) arrangement approved on February 27, 2004 (see Press Release No. 04/29).¹

The completion of this review allows Honduras to draw a further SDR 10.17 million (about US$14.7 million), bringing the total amount released under the arrangement to SDR 40.68  million (about US$58.7 million). In completing the review, the Board approved the request for waiver and modification of performance criteria. The Board waived the non-observance of the performance criterion on unfinanced budget appropriations.

Following the discussion of the Executive Board, Mr. Agustín Carstens, Deputy Managing Director and Acting Chair, made the following statement:

"The Honduran authorities' implementation of sound macroeconomic policies and progress with structural reforms under their Fund-supported program have continued to produce positive results. In 2005 economic growth has remained robust, while inflation will fall despite higher fuel prices. The external sector has strengthened significantly on account of substantial family remittances and higher exports. Prospects are good for continued economic growth and a further decline in inflation in 2006.

"The fiscal position has also strengthened, owing in particular to control over public expenditures—including the wage bill—and better-than-expected tax collections. Resolute implementation of the authorities' medium-term fiscal strategy will be critical to maintain macroeconomic stability and fiscal sustainability. Key fiscal challenges ahead will be to keep control over the wage bill in a sustainable manner, including by integrating teachers' benefits and salaries, to implement a prudent budget for 2006 and other identified measures to offset the fiscal impact of telecom reform and the implementation of the Central American Free Trade Agreement, and to address the deteriorating financial condition of the public electricity firm.

"Structural reforms continue to advance, including the strengthening of the central bank's ability to conduct monetary policy and reduce inflation. Prudential regulations are being tightened to enhance financial sector soundness, particularly in relation to commercial banks' foreign currency operations. The authorities are also returning to a flexible pricing mechanism for petroleum products to limit the cost of fuel subsidies and improve economic efficiency. To cushion the impact of high oil prices on vulnerable groups, the authorities have introduced targeted subsidies and an expanded social safety net.

"Honduras is now entering a political transition, with a new government taking office in January 2006. While the new administration will establish its own policy priorities, its commitment to protect the core elements of the economic program will position Honduras to make significant gains in entrenching growth and fighting poverty in the years to come," Mr. Carstens said.

¹ The staff report for the PRGF review with Honduras will be made available at a later stage if the authorities consent.