Public Information Notice: IMF Concludes 2001 Article IV Consultation with Honduras

October 26, 2001

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On October 5, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Honduras.1


In 2000, the continued implementation of cautious demand policies helped achieve economic recovery following Hurricane Mitch. Real GDP expanded by 5 percent, while inflation fell slightly to 10 percent, and gross international reserves remained at about four months of imports of goods and services. The central government recorded a deficit of about 4½ percent of GDP, while the nonfinancial public sector recorded a small surplus, due to the fact that many public enterprises restrained their investment. Monetary policy remained cautious, while relying increasingly on open market operations. The benchmark 90-day CAM rate stayed at 14 percent through the year. However, external competitiveness deteriorated, and the financial sector remained fragile, despite tighter prudential supervision. Progress on structural reform was limited as the privatization of the telecommunications company was delayed, the reform of the social security system stalled, while the law for civil service reform, which will strengthen public sector wage policy, was not submitted to congress.

So far in 2001, macroeconomic policies have remained sound, in spite of pressures in the run-up to the presidential elections in November. The central government recorded a deficit of 1.2 percent of GDP in January-May (0.8 percent of GDP in the same period in 2000) as reconstruction spending continued to rise. Monetary policy remained tight as central bank credit contracted during the first half of the year. Notwithstanding the effects of the slowdown of growth in the United States and the collapse in world coffee prices, the index of real economic activity rose by 5.4 percent year on year through May (4.2 percent in the same period in 2000), while the 12-month rate of inflation slowed to 9.5 percent in August. At the same time, the real effective exchange rate appreciated by 4 percent during the first half of the year. In August 2001, the authorities concluded the Poverty Reduction Strategy Paper, which spells out the strategy to reduce the overall rate of poverty from 66 percent of the population to 42 percent by 2015.

The pace of structural reform has picked up somewhat in 2001, but the financial system has remained weak. Congress approved a law in May that will introduce a limited deposit insurance system in September 2002 and enacted a law in June that raises the ceiling on contributions to the social security system, and which will strengthen its financial position. A draft bill to regulate private pension funds was submitted to congress in May. With the objective of improving banking efficiency, an electronic check-clearing system began to operate in Tegucigalpa, which is to be extended countrywide by the year end.

Executive Board Assessment

Executive Directors commended the authorities for their efforts in maintaining macroeconomic discipline in spite of difficult economic conditions associated with the economic slowdown in the United States, the collapse in world coffee prices, and the drought affecting most of Central America. However, Directors expressed concern about the delays in implementing the structural reform agenda during 2000, including key privatizations and the reform of the electricity sector and the civil service. Some Directors felt that the real appreciation of the currency, brought about by high capital inflows and a significant increase in workers' remittances, could slow down a further broadening of the export base in the future. Directors welcomed the structural reform measures approved in May 2001 and the fact that fiscal and credit policies have remained tight so far this year.

Directors stressed that fiscal consolidation will require the maintenance of a cautious wage policy. In this regard, they observed that the government's decision to limit the teachers' salary increase in the 2002 budget, in line with targeted inflation, should help maintain a prudent fiscal policy. They urged the new government to keep wage increases in line with the overall program objectives. Directors encouraged the authorities to keep fiscal policy under close review and be prepared to take offsetting actions, if needed, to keep fiscal policy on course. They highlighted the need for expenditure restraint, particularly in the run-up to elections later this year.

Directors agreed that the stance of monetary policy envisaged in the program should help reduce inflation and protect the international reserve position. They welcomed the progress made by the central bank in increasing the role of open market operations in the conduct of monetary policy.

Directors welcomed the adjustment in exchange rate policy, which is designed to prevent any further real appreciation of the currency. In this regard, they urged the authorities to keep exchange rate policy under close review, with the objective of maintaining the viability of the external sector of the economy. Directors stressed the fact that competitiveness depends not only on setting a realistic path for the nominal exchange rate, but also on proper accompanying fiscal and monetary policies, as well as improvements in supply side productivity.

Directors stressed the importance of bringing the structural reform program back on track in the areas of financial supervision, civil service, and public enterprises to improve efficiency of the economy. They emphasized that solid progress in these areas will also be crucial to avoid potential fiscal pressures. In the area of financial supervision, Directors welcomed the proposed actions to reduce bank lending to related parties and provide adequate legal protection to the staff of the banking commission. They urged the authorities to deal aggressively with banks that fail to comply with prudential norms. Directors also commented that publication of prudential indicators will allow the market to discipline weak banks. They welcomed the authorities' request to participate in the FSAP program, which could help identify additional steps to strengthen financial supervision.

Directors emphasized the importance of submitting the civil service reform to congress by year-end as planned, as it will be a crucial step to strengthen the central government's wage policy and to maintain the wage bill in line with fiscal sustainability. They supported the efforts to continue improving governance and transparency, and welcomed the envisaged actions to improve fiscal transparency and strengthen the budgeting procedures. Regarding the public enterprises, Directors stressed the need for the authorities, in consultation with the IDB and the World Bank, to broaden the role of the private sector in the areas of electricity and telecommunications to improve economic efficiency over the medium term.

Honduras: Selected Economic Indicators

  1997 1998 1999 2000 2001

Real economy (change in percent)          
Real GDP 5.1 2.9 -1.9 5.0 3.5
GDP deflator 22.3 11.6 11.6 8.1 8.8
CPI (end of period) 12.8 15.6 10.9 10.1 10.0
Gross national savings (in percent of GDP) 19.9 22.6 19.3 19.5 19.4
Gross domestic investment (in percent of GDP) 23.8 25.4 23.4 23.5 24.3
Public finance (in percent of GDP)          
Combined public sector balance -3.1 2.3 1.4 1.0 -2.0
Nonfinancial public sector -1.5 2.4 1.4 0.8 -2.1
Central bank -1.6 -0.1 0.0 0.2 0.1
Central government domestic bonded debt 6.6 5.0 4.0 4.3 ...
Money and credit (end-year, percent change)          
Net domestic assets 13.4 15.9 -4.7 17.8 13.6
Credit to the private sector 47.5 38.6 20.9 15.4 16.8
Monetary liabilities 33.8 12.8 21.2 5.1 12.6
Interest rates (end of period)          
Average banking system lending rate 1/ 32.1 30.8 29.5 24.7 23.7
Certificate of deposit 1/ 21.7 21.7 18.6 14.9 14.7
90-day Treasury Bills 1/ 21.0 18.0 14.0 14.0 14.0
External sector (in percent of GDP)          
Trade balance -10.7 -14.4 -23.8 -21.1 -23.0
Current account (after official transfers) -3.9 -2.8 -4.2 -4.1 -4.9
Direct investment 2.7 1.9 4.4 4.4 2.9
Overall balance 3.6 1.5 1.6 -2.3 -1.6
Gross international reserves          
(in millions of U.S. dollars) 575 804 1,230 1,285 1,310
(in months of imports) 2/ 2.4 3.2 4.4 4.4 4.2
External public debt 77.1 64.9 79.1 78.0 75.1
Real effective exchange rate 3/          
(percent change, depreciation - ) 15.0 5.4 7.5 10.0 4.2

Sources: Central Bank of Honduras; Ministry of Finance; and IMF staff estimates and projections.

1/ As of July 2001.          
2/ Refers to the following year's imports of goods and services.    
3/ For 2001, refers to the change through July.        

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the October 5, 2001 Executive Board discussion based on the staff report.


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