Public Information Notice: IMF Concludes 2005 Article IV Consultation with Honduras

April 13, 2005

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 March, 28, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Honduras.1


Growth in Honduras rebounded strongly in 2004, ending a period of low growth. Over the last decade, growth had been adversely affected by natural disasters and worsening terms of trade, exacerbated by a difficult policy environment. To break the unfavorable cycle, the authorities embarked on a medium-term economic reform program in late 2003, aimed at re-establishing macroeconomic and financial stability, strengthening growth, and reducing poverty.

The authorities' program included measures to consolidate the public finances and strengthen monetary policy and the financial sector; address poverty with a focus on education and basic health care; and enhance growth prospects by infrastructure development, improvements in the private investment environment, and trade liberalization. To ensure social consensus in support of the program, it also incorporated measures to improve governance and social equity.

The economy performed robustly in 2004, reflecting sound policies and broadly favorable external conditions. Growth rose to about 5 percent, with a rebound across all sectors, including agriculture. On the demand side, growth reflected mainly higher investment and exports. Inflation stabilized at around 9 percent at the end of the year, after moving higher during much of 2004 mainly because of high oil prices. Despite a sharply higher oil bill, the external position strengthened significantly on account of higher remittances, exports, and capital inflows. Net international reserves rose by just under US$500 million. Moreover, the deficit of the overall public sector fell to 3 percent of GDP (from about 5 percent of GDP in 2003), despite significantly higher spending on poverty-reduction programs and investment.

Important progress was made in structural reform. The legal and regulatory framework for the financial sector was upgraded; the tax code and penal code were amended; and legal, judicial, and electoral reforms were introduced. Honduras ratified the DR-CAFTA in March 2005.

For 2005, growth is projected to remain buoyant, at over 4 percent of GDP. The external current account deficit is expected to narrow significantly (reflecting the completion of last year's large infrastructure projects), and the net international reserves position to remain strong. The 2005 budget envisages a further improvement in the public finances, with the overall public sector deficit declining to 2.5 percent of GDP.

Executive Board Assessment

Executive Directors welcomed Honduras' improved economic conditions, which reflect the implementation of sound macroeconomic policies and progress with structural reforms, supported by strong worker remittances and foreign capital inflows. In 2004, economic growth accelerated and inflation stabilized, after drifting up in response to oil price increases; and the external position has strengthened significantly. The fiscal position improved markedly in 2004, owing in particular to successful control of the wage bill—an important step towards long-term sustainability.

Directors noted that, despite recent achievements, important vulnerabilities and challenges remain. Specifically, they noted the need to make permanent the progress made under the program in containing public sector wages including, in particular, a durable resolution of issues related to teacher's wages. Directors also encouraged the authorities to press ahead with their efforts to strengthen the financial sector further, and stressed the need for continued implementation of prudent fiscal and monetary policies through the upcoming election period. They welcomed the authorities' efforts to promote policy continuity through the political transition.

Directors also observed that the substantially improved medium-term outlook hinged on strengthened institutions and governance, including the modernization of tax administration and the central bank, and judicial, electoral, and administrative reforms. It was noted that these steps would contribute to the achievement of poverty reduction objectives and the Millennium Development Goals.

Directors commended the authorities for keeping the fiscal program on track. Noting the authorities' success in controlling the wage bill in 2004, Directors observed that this policy had permitted a much-needed increase in spending on investment and poverty programs, while at the same time reducing the overall fiscal deficit. Looking forward, Directors stressed the importance of continued adherence to the 2003 salary law and the July 2004 wage agreement, to ensure that the growth of the wage bill remains consistent with macroeconomic stability and the economic and social objectives embodied in the PRSP. To further strengthen the public finances, Directors encouraged the authorities' efforts to broaden the tax base, improve tax administration, and raise the quality of public spending. In this regard, they noted that it would be important to monitor the impact of trade liberalization on public finances and institute offsetting measures, if necessary.

Directors welcomed the authorities' action plan to improve monetary operations, including steps to upgrade securities, improve the auction process, strengthen liquidity forecasting, and adopt a new operational target. Directors noted that these reforms will allow the central bank to further strengthen the framework for monetary policy implementation and thereby enhance its ability to achieve low inflation and safeguard financial stability.

Directors observed that the crawling band exchange rate system has helped to anchor inflation. Looking ahead, to increase the economy's resilience to shocks and facilitate adjustment to structural change, Directors recommended a gradual move toward greater flexibility of the exchange rate, while noting the preconditions for such a move, including the modernization of monetary operations.

Directors welcomed the ratification of the Central American Free Trade Agreement, noting that it would promote competitiveness, and improve growth prospects for Honduras. At the same time, they observed that the implementation of the anticorruption strategy would aid capital formation, and financial market and infrastructure development.

Directors welcomed the progress achieved in strengthening the financial sector. In particular, they noted the improvements in the regulatory framework and the supervisory regime. Directors observed that the main challenge now is to enforce the improved prudential norms across all banks, by using the enhanced tools provided by the new laws. Directors urged strict compliance with the timetable to increase provisioning levels, and encouraged the authorities to further improve banks' loan classification practices by incorporating the risks associated with borrowers' unhedged dollar positions.

Honduras: Selected Economic and Financial Indicators










Real economy (percentage change)


Real GDP 1/






GDP deflator






Consumer prices (end of period)







Public finances (percent of GDP)


Consolidated public sector deficit






Consolidated primary deficit






Public sector debt (percent of GDP, end of period)







Money and credit (end-year, percentage


Net domestic assets






Of which


Nonfinancial public sector






Private sector






Broad money







Interest rates (average)


Deposit rate (six months)






Lending rate (more than one year)







External sector


External current account balance (percent of GDP)






Change in net international reserves


(millions of U.S. dollars, increase -)






Gross international reserves (in months of


next year imports of non-maquila goods and






Terms of trade (percentage change)






Real effective exchange rate (end of period) 2/






Sources: Central Bank of Honduras; ministry of finance; and IMF staff estimates and projections.
1/ For 2004 preliminary Fund staff estimates.
2/ As of end-December 2004.

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.


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