Press Release: IMF Executive Board Completes the Second Program Review and Financing Assurances Review Under Honduras' PRGF Arrangement

March 29, 2005

The Executive Board of the International Monetary Fund (IMF) has completed the second review of Honduras' performance and the financing assurances review under an SDR 71.2 million (about US$107.5 million) Poverty Reduction and Growth Facility (PRGF) arrangement approved on February 26, 2004 (see Press Release No. 04/29).

The completion of this review allows Honduras to draw a further SDR 10.17 million (about US$15.4 million), bringing the total amount released under the arrangement to SDR 30.5 million (about US$46.1 million). In completing the review, the Board waived the nonobservance of one performance criterion on public sector wages, taking into account compensatory measures and the package of monetary, fiscal, and structural measures that have been implemented to safeguard the program objectives.

Following the discussion of the Executive Board on March 28, 2005, Mr Agustín Carstens, Deputy Managing Director and Acting Chair, stated:

"Honduras' performance under the program supported by the Poverty Reduction and Growth Facility has been satisfactory. The solid implementation of macroeconomic policies and progress with structural reforms had yielded favorable results. In 2004, GDP growth rose to about 5 percent, with a recovery broadly based across all sectors. Moreover, inflation has stabilized, after drifting up in 2004 mainly on account of high oil prices, and the external sector has strengthened significantly. These achievements were facilitated by the authorities' efforts to establish a broad social consensus which made it possible to address challenging policy issues. Looking forward to 2005, growth is expected to continue at a relatively fast pace.

"The authorities remain committed to the policy objectives of boosting growth, reducing poverty, and achieving financial stability. They intend to achieve this through further fiscal consolidation, financial sector reform, and other structural measures aimed at improving productivity and economic efficiency.

"The authorities' fiscal strategy for 2005 aims at a further reduction of the public sector deficit, while public investment and anti-poverty spending are to increase. The higher spending will be financed by higher external grants and by compensating savings elsewhere in the budget, including through the continued implementation of a prudent wage policy.

"Monetary policy, to be effected largely through open market operations, aims to reduce inflation to under 7 percent in 2005. The authorities have also announced that the rate of crawl will be reduced somewhat in 2005, consistent with maintaining a competitive exchange rate, in line with projected inflation differentials.

"Honduras' key challenge in the period ahead will be to protect the core elements of its program during the election period and beyond. Key structural reforms envisaged for 2005 cover the areas of tax administration, central bank monetary operations, and a continuation of the financial sector reform.

"The authorities completed their second annual progress report on the Poverty Reduction Strategy Paper (PRSP) through a broad-based consultation process. The report conveys the authorities' continuing commitment to poverty reduction, and presents a coherent framework for guiding the implementation of the government's poverty reduction strategy.

"However, addressing risks to the strategy will require continued fiscal consolidation; strict implementation of the financial system reform; prioritization of programs; and strengthening public accountability of social programs.

"The authorities have made substantial progress on the structural reform agenda embodied in the HIPC completion point triggers, including satisfactory track record of implementation under the PRGF arrangement and the PRSP. As a result, Honduras has in principle reached the completion point under the enhanced HIPC Initiative, pending action next week by the World Bank's Executive Board. After the provision of enhanced HIPC assistance and additional bilateral assistance, Honduras' debt is expected to fall to sustainable levels," Mr. Carstens stated.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper, or PRSP. This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies, to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 ½-year grace period on principal payments.


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