Honduras has A New Historic Opportunity, A Commentary by Rodrigo de Rato, Managing Director, IMF

March 1, 2006

By Rodrigo de Rato, Managing Director
International Monetary Fund
La Tribuna
March 1, 2006

The new administration of President Manuel Zelaya has a historic opportunity to entrench economic stability while ensuring that the benefits are more widely shared. The external economic environment is generally supportive, and regional initiatives are stimulating new dynamics of cooperation and enterprise. Domestically, Honduras enjoys macroeconomic stability. Finally, debt reduction is transforming the country's economic fundamentals. However, challenges remain, in particular to reduce poverty from levels that are still too high. My second visit to Honduras has allowed me to better understand how the country has achieved these successes and how the IMF can support the government's efforts to build upon recent achievements.

Strong global growth and low interest rates have provided a supportive external environment, notwithstanding higher oil prices. The international community has also backed Honduras, including through accelerated debt relief and financial support for new programs. In addition, there is greater opportunity for Honduras from regional initiatives, including the benefits of the Central America Free Trade Association (CAFTA).

Honduras was among the first countries to qualify for the Multilateral Debt Relief Initiative that was announced in mid-2005 and approved last December. As part of the Initiative, the IMF is providing 100 percent debt relief on all debt incurred by Honduras to the IMF before January 1, 2005 that remains outstanding. This amounts to more than US$150 million. Honduras has qualified for IMF debt relief because of its overall satisfactory economic performance, progress in orienting policies toward poverty reduction, and improvements in public expenditure management.

The IMF is already working closely with President Zelaya's government to support Honduras' economic program. The government's sense of ownership of economic reform to promote growth and jobs, and reduce poverty will be essential to preserve the achievements of recent years. The IMF staff listened carefully at a workshop last month as President Zelaya's experienced economic team presented the administration's policy priorities. Much progress therefore has been made toward a common understanding of the challenges facing Honduras, the government's strategy for addressing those challenges, and how the IMF can support that strategy as the authorities' priorities are incorporated into the 2006 budget and the broader economic policy framework.

The positive results of Honduras' economic program are clear. Honduras has paid a high price in the past for "stop-go" policies. But, with the economic program remaining broadly on track through the recent election period, the country has succeeded in maintaining the macroeconomic stability that must be the foundation for higher growth, more jobs and a reduction in poverty. In 2005, growth remained robust at 4.2 percent, while inflation fell to 7.7 percent despite higher fuel prices. The external sector has also strengthened significantly due to higher family remittances from abroad and higher exports. Fiscal discipline has been maintained through the control of public expenditures, in particular of the public sector wage bill. Structural reforms also have continued to advance, including the strengthening of the central bank's ability to conduct monetary policy and the tightening of prudential regulations to enhance financial sector soundness, particularly in relation to commercial banks' foreign currency operations.

Against this background of continued economic stability, prospects are good for continued growth and a further decline in inflation in 2006. This year will nevertheless be a challenging time for the budget, due to the short-term cost of important reforms such as CAFTA-DR; the liberalization of Hondutel; the financial situation of the electricity company ENEE; and the need to find a sustainable medium-term wage policy for the public sector, including teachers. Taking a long-term view in addressing these challenges will help keep the budget on a sustainable path, while allowing much-needed spending on investment and poverty reduction and maintaining global and regional competitiveness.

Two-thirds of Hondurans remain in poverty-this constitutes the essential challenge for the nation going forward. The IMF strongly supports the Zelaya administration's commitment to intensify the fight against poverty. Efforts to entrench economic stability and to reduce poverty must proceed hand in hand. The poor have the most to lose from instability, and therefore have the most to gain from policies that help to ensure stability. The government's efforts to sharpen the budget's focus on reducing poverty and improving the quality of such spending are steps in the right direction. Such measures will help Honduras make sustained progress toward the United Nations Millennium Development Goals, which aim to halve extreme poverty by 2015.

Large and indiscriminate subsidies at a time of high oil prices create severe economic distortions that ultimately make the plight of the poor even worse. The IMF supports the Honduran government's steps to return to a flexible pricing mechanism for petroleum products, as this will limit the cost of fuel subsidies and improve economic efficiency. At the same time, it is important to cushion the impact of high oil prices on vulnerable groups, and the Honduran authorities have introduced targeted subsidies and an expanded social safety net.

The new government assumed office in January in a demonstration of democracy in Honduras. While the new administration will establish its own policy priorities, its commitment to protect the core elements of the existing economic program will position Honduras to make significant gains in entrenching growth and fighting poverty in the years to come. The IMF is proud to associate itself with the successes Honduras has achieved, and stands ready to assist in solidifying a prosperous future for all Hondurans.


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