Mr. Stanley Fischer
Acting Managing Director
International Monetary Fund
700 19th Street, N.W.
Washington, D.C. 20431
Dear Mr. Fischer:
1. Economic developments in Honduras have been broadly positive,
as the country continues on the path of economic recovery and consolidated macroeconomic
stability. We remain strongly committed to our program and to the policies that
are being supported by a three-year arrangement under the IMF’s Poverty Reduction
and Growth Facility (PRGF) which began in 1999.
3. The authorities of Honduras have worked with the staff of the Fund to
new policies and targets to be implemented and pursued in the year 2000 as set
out in the attached memorandum with attached tables. Honduras will conduct with
the Fund a review of the second year of the arrangement to be completed no later
than December 31, 2000. In order to support our program and efforts, we would
like to request the disbursement of the third loan of the arrangement described
in EBS/99/37 and our letter of November 12, 1999, in the amount of
SDR 16.15 million.
4. Besides consolidating the economic recovery and macroeconomic stability,
and continuing with the structural reforms, it is our desire to further enhance
the transparency of our policy commitments. Accordingly, we intend to make public
the attached memorandum of economic policies and request that it be placed on
the IMF internet web site.
Memorandum of Economic Policies
1. Our 1999 stabilization and reform program was successful in
supporting the recovery and reconstruction following Hurricane Mitch, and in laying the basis for
sustained growth in many areas. The decline in real GDP of 1.9 percent was less than
anticipated, end-year inflation fell to 10.9 percent, and gross international reserves reached
a comfortable level equivalent to 4.3 months of imports. The central government fiscal deficit was
contained at 4.1 percent of GDP, and public savings reached 5.5 percent of GDP.
Structural reforms continued, especially with privatization and financial sector reform.
2. Despite these developments, faster growth is clearly needed given that
more than half of Hondurans live in poverty. We are firmly committed to consolidating
macro-economic stability and to undertaking more ambitious structural reform to achieve higher,
poverty-reducing growth. To this end, we will increase the emphasis on growth-enhancing
policies in the framework of the medium-term program for
March 1999-February 2002, for which the IMF is providing financial support under
the PRGF Arrangement. The remainder of this memorandum details the macroeconomic and
structural objectives and measures for the period ahead. A summary of the measures is in the
attachment. We believe that the policies set out below will be sufficient to achieve the program's
objectives, but are ready to take additional measures and seek new understandings with the IMF
should the program diverge from its specified targets.
A. Macroeconomic Objectives and Policy
3. We believe that 5-6 percent economic growth and single-digit
inflation are achievable in the medium-term. In 2000, growth is expected to be
4-5 percent of GDP while inflation would stay between 9-11 percent. Regarding the
balance of payments, we will aim at limiting the current account deficit in 2000 to
9 percent, and for a decline to 6-7 percent in the following. Foreign investment and
inflows of official finance would help maintain reserves at four months of imports in the medium
term. The overall public sector deficit in 2000 is expected to reach about 4 percent
of GDP and be fully financed from external sources. The deficit would decline to about
3 percent of GDP in the following years. Public savings would attain 5.5 percent of
GDP in 2000 and increase to over 6 percent in the medium term. High public sector
savings will release resources to the private sector and help foster long-term growth.
4. To achieve the ambitious growth and inflation objectives, we will
continue our prudent fiscal and monetary policies and intensify the structural reform process.
Fiscal policy will aim at containing current expenditures while allowing an increase in social
expenditures, and reconstruction outlays. Monetary policy will remain prudent to achieve the
program's inflation target. Structural reform will aim at fostering private sector initiative,
investment, and conditions for robust sustained growth. The priorities in the structural area will
include continued progress with privatization, financial sector reform, and deregulation. We are
also committed to developing a comprehensive strategy to improve governance, including
measures to increase transparency in fiscal and monetary policies, and that reduce the potential for
corruption. With these measures we expect to continue to receive adequate support from the
international community to make the achievement of our ambitious goals
B. Fiscal Policy
5. The task of fiscal policy will be to create a basis for medium-term fiscal
viability with higher social expenditures. In 2000, we will aim at containing the central
government deficit at about 7 percent of GDP, while allowing social expenditures to
increase from 9 to over 11 percent of GDP and capital expenditure from 6 to
9 percent of GDP between 1999 and 2000. These objectives are within reach, because we
expect revenue performance to remain strong and the growth of nonsocial current expenditure to
be contained. If revenue performance is below program projections, we stand ready to curtail
nonsocial current expenditures beyond those programmed.
- On the revenue side, we will maintain our efforts to improve tax administration
to maintain central government current revenue above 18 percent of GDP. Over the
program period the Internal Revenue Office will ensure (i) a firm application of the
penalties available under the 1997 tax code (including heavy fines, temporary closures of
businesses, and imprisonment); (ii) expanding the coverage of large tax payers register to
establish better control, thereby reducing tax evasion; (iii) increasing access to third-party
sources of information for cross-checking of purchases and tax returns; and (iv) review the
structure of indirect taxes with a view towards reducing the number of tariff bands to reduce
incentives for fiscal fraud. Moreover, by end-June 2000 legislation will be submitted to
congress aimed at further improving the income tax system and bringing it in line with
international standards by clarifying income and cost definitions.
- On expenditures, we will persist in containing nonsocial current expenditures.
During 2000, we will limit current transfers unrelated to social and poverty programs and
continue to apply the regulations issued in August 1999 which place strict limits on
expenditure on fuel, travel, and the purchase of vehicles to limit expenditures on goods and
services to 2.4 percent of GDP. The increased capital spending during 2000
and 2001 reflects the continuation of reconstruction projects initiated in mid-1999 and the
strengthening of social programs. They are expected to be financed mostly by grants, concessional
loans and debt relief.
- The central government wage bill will not exceed 9 percent of GDP in
2000 and 9.3 percent of GDP in 2001. Based on redundancies identified in the study
commis-sioned as part of the modernization of state, several existing vacant posts will be
cancelled in 2000 and 2001, voluntary early retirement with adjustment aid will be conducted
before end-June 2000, and the retrenchment of civil servants at the administrative level will take
place during 2001 yielding savings of about 0.2 percentage points of GDP. To maintain the
central government wage bill at a sustainable level in the future, we will undertake the following
actions. We will approve legislation in October 2000 to reform the civil service and establish a
comprehensive and uniform civil service wage policy in time to be effective for the 2001
budget. The law will include clear and objective criteria for annual wage increases based on
comparable average increases in private sector wages, productivity and/or merit. We will provide
a draft of the wage-setting criteria before the IMF Board discussion on the second review of the
arrangement under the PRGF, and a draft legal text of the uniform principles of wage policy and
wage-setting criteria by end-June 2000. We will accelerate the civil service reform program
in 2000 with World Bank and IDB collaboration by (i) completing the
reclassification of jobs, and the profiling and auditing of each position by end September 2000;
(ii) preparing an action plan for retrenching redundant personnel, mostly at the
administrative levels by end-October 2000; and (iii) completing the wage scale
reclassification by end-June 2001 to decompress the salary structure and incorporation of factors
such as responsi-bility and seniority by June 2002. We will also undertake a comprehensive
assess-ment of public expenditures, and review plans for the hiring of new teachers in 2000 in
collaboration with the World Bank. The results of the civil service retrenchment, public
expenditure and education policy reviews, and their potential implications for the 2001 wage bill
will be discussed during the next review of the program.
- On other expenditures, we will maintain the annual value of public transport
subsidies at no more than L 114 million, and electricity subsidies at L 280 million.
We will improve the targeting of existing subsidies towards the poor by increasing the
progressivity of the electricity subsidy structure by end-June 2000 and reviewing the
subsidies to public transport in Tegucigalpa by December 2000. Electricity tariffs will be
increased by 16 percent before end-April 2000 to maintain the marginal cost pricing
system for the electricity company. To improve expenditure control, the government will continue
to simplify the government accounts at the central bank by end-December 2000 and
continue with the outside monitoring of external assistance and regular audits of external
6. Social security and pension reform will be a key component of our
social policy framework. Creating a sound pension system will help reduce poverty among the
elderly, contribute to the development of the financial system by increasing the availability of
long-term funds, and foster economic growth by allowing more long-term private investment. As
a first step for reform, an action plan will be approved by end-April 2000 for separating
(operationally and on an accounting basis) the IHSS pension fund from the health fund, and a
separate plan for restructuring the institution. We will also establish immediately a working group
to settle pending claims between the government and the IHSS by end-March 2000.
Moreover, by end-June 2000, another working group will be created to analyze options for
longer-term pension reform, and a draft law will be submitted to congress to regulate private
pension funds by end-December 2000. Supervision of existing public pension funds will be
improved. We will take concrete steps to implement the recommendations of the inspections to
increase the transparency and efficiency in the operations of the funds.
7. We are also committed to improve fiscal transparency and
accountability. The focus of our efforts in this area has been the establishment of mechanisms
that would ensure the full accountability of resources combined with simplified and transparent
procedures for public sector procurement. We are committed to improving the budget process by
evaluating domestic practices against the IMF's Code of Good Practices on Fiscal
Transparency by December 2000.
C. Monetary Policy and the Financial Sector
8. Reducing inflation to single digits in the medium term is one of the
principal objectives of our macroeconomic stabilization program. Lower inflation contributes
to a less volatile exchange rate, and facilitates business and investment decisions, which enhances
the economy's growth potential. Moreover, price stability directly benefits the poor who because
of their greater reliance on cash holdings suffer disproportionally from the inflation tax. The
inflation objective will be pursued mainly through a tight control of base money.
- We intend to reach this year's inflation objective mainly by auctioning monetary
absorption certificates (CAMs) to ensure adequate liquidity of the banking system, but also expect
help from the contractionary effect of expected decreases in net public sector credit. Net
international reserves at the end of the year will remain above US$1000 million, while the
growth of broad money is expected to decelerate to 15.3 percent in 2000. Base money is
expected to decline by -0.9 percent due to the planned reduction in mandatory investment
requirements (see below). Net domestic assets of the banking system are projected to grow by
21.5 percent in 2000, of which credit to the private sector would expand by
- Reaching the medium-term inflation and growth targets of the program will be facilitated
by increased efficiency in monetary policy. Consistent with our overall strategy of minimizing the
distortions associated with our interventions in the economy, we are determined to gradually shift
from direct controls such as mandatory investment requirements to market-based
instruments of monetary policy, notably the issuance of CAMs at market interest rates. We will
thus lower the mandatory investment requirements (MIR) for commercial banks from
13 percent of deposits to 7 percent in December 2000. This will facilitate the
establishment of a more indicative market-based reference interest rate for the economy, deepen
the market for CAMs, increase the transparency of monetary operations and the efficiency of
financial intermediation, and potentially reduce the spread between lending and deposit rates.
- To strengthen the CBH's independence to conduct monetary policy, we will review
options for resolving the financial burden on the central bank deriving from the zero interest bond
it received in 1997 in compensation for exchange rate losses on government loans.
- To increase the efficiency of financial intermediation, we are committed to improve the
payments system. As a first step we will speed up the development of an electronic, fully
integrated check-clearing system to make it operational in December 2000. The norms
governing this system and regulating its administration by the private sector will be introduced by
end-June 2000. This system will greatly reduce the time and costs involved in settling
payments, and could be used as the basis for a future interbank market in foreign exchange and a
more efficient market for public securities.
9. We are committed to continue strengthening financial regulations and
prudential supervision. A sound financial system is a prerequisite for efficient
intermediation, macroeconomic stability and growth. The establishment of clear rules for financial
operations is important to lower risks and spreads.
- Regulatory frameworks for insurance and reinsurance companies and for the stock
exchange plus an incentive-compatible deposit insurance system (that replaces the existing full
coverage system) will be approved in 2000. We will also submit to congress before end-2000
legislation to regulate private pension funds.
- On prudential supervision, the banking commission (CNBS) will complete its program of
on-site inspections of all banks by end-June 2000. The minimum risk weighted capital asset
requirement will be increased to 10 percent by end-December 2000. In the given case of
banks not meeting the prudential standards, the CNBS will require those banks to complete a
timed recovery program agreed with the CNBS, involving corrective measures necessary to
ensure sound banking practices-including the suspension of the distribution of profits and of the
opening of new branches, and the introduction of tighter controls over their lending practices and
the sale of assets. The program of on-site inspections will be further extended to finance
companies and saving and loans institutions, which will permit the CNBS to insist on corrective
actions that will strengthen these financial intermediaries. These steps are expected to be
completed by end-December 2000.
- The CNBS will continue to strengthen the technical capabilities of its inspectors and
analysts through participation in domestic and international seminars and courses.
D. Structural Policies
10. Achieving higher poverty-reducing growth will be difficult without
increasing the level and productivity of investment. Given the limited resources of the
country, attracting foreign investment is one of our priorities. We will place priority on
consolidating and accelerating privatization, which will be key to achieving higher growth, and to
reducing regulations and simplifying administrative procedures. We also intend to improve the
current international perception of high corruption in Honduras, since this hurts the investment
climate and compounds the poverty problem. Furthermore, the prevalence of poverty especially in
the rural areas calls for greater attention to removing obstacles and improving incentives for
agricultural production and exports.
11. We are committed to enhancing our good governance policies.
This is a complex problem that must be attacked from many sides: emphasizing prevention as
much as legal prosecution. We will prepare a comprehensive good governance policy to deal with
these concerns. In a globalized environment, transparency of policies is also critical to retaining
the trust of the country's external financial, trading, and development partners.
- One principal element of the new policy will be to minimize potential corruption by
reducing the discretionary powers public officials can exercise in their exchange with the public.
We will therefore critically review all government regulations having to do with internal
and external commerce. We will also seek to streamline and simplify the tax and subsidy systems.
In light of the especially serious problems in the customs administration, this effort will be
initiated with a working group that will produce proposals for simplifying the tariff system,
especially by reducing the number of rates.
- Another element of this strategy will be increased transparency of policies. We
will gradually strive for compliance with the codes for transparency in fiscal policy and monetary
and financial policies that have been published by the International Monetary Fund. In the first
instance we will evaluate our domestic practices in light of these codes.
- To support economic policies generally, and especially for implementing the Poverty
Reduction Strategy, there is great need for compiling more and better economic and
socio-demographic statistics. We intend to establish a separate agency for Statistics and
Census, and approve the relevant law that has already been submitted to congress. We will also
consider committing to the IMF's General Data Dissemination System (GDDS), which is a tool to
develop a coherent strategy for improving statistics with emphasis on coverage, periodicity,
timeliness, quality, and integrity and access to information by the public. More accurate
information about the country's economy contributes to lower country risk and improves
- We are also committed to reform the country's legal system to make it more
efficient by implementing the new penal and procedural codes in February 2002.
12. We shall initiate measures to improve competitiveness and the
- To improve competitiveness of nontraditional agricultural exports, and to improve
governance, we will simplify the licensing and regulatory regime for cargo transport by extending
the annual operator license from 1 to 5 years by December 2000. Furthermore, we are
committed to further liberalize the transport sector in the medium term.
- We will also simplify regulations to attract more domestic and foreign investors. We are
reviewing existing procedures and have prepared a draft law that would simplify requirements for
company establishment, replace the requirement of prior auditing with ex-post auditing, and
eliminate the "judicial qualification". This draft law will be submitted to congress by
June 2000. We shall also establish a public/private sector working group to review all
unnecessary licenses and regulations to reduce incentives for corruption and lower cost of doing
business in Honduras. Once the regulatory framework has been simplified we shall reactivate the
one-stop window for invest-ment approvals in 2001
13. We are determined to speed up privatization in 2000. We
will conclude the sale of the telecommunications company Hondutel by end-June 2000. The
concessioning of the country's four international airports was done in March 2000. These
should provide an important boost to investment and to the program's growth targets. To speed
up privatization of electricity distribution, the Framework Law on the Electricity Sector will be
approved in October 2000. A contract with the IFC is expected to be approved by
congress by end-December 2000, designating the latter as investment banker for the
planned privatization of electricity distribution. To advance the privatization of ports, we will
work with the IDB to design a proposal to incorporate the private sector in the management,
operation, and financing of ports. The study is expected to be completed in
end-October 2000. To facilitate private concessions in the provision of water and sewage
services we shall approve the Framework Law for the Water and Sewage Sector by
14. The expected interest proceeds of Hondutel privatization will be used
for invest-ments in the education, health, and social sectors as stipulated in Decree 244-98 and
Decree 89-99. The funds will be deposited in an account abroad and invested together with
the country's foreign reserves in international capital markets. Annual interest proceeds from the
fund will be used for social investment as stipulated by the decree. Rules and regulations
governing the account will be drafted by end-June 2000.
E. External Sector
15. On foreign exchange rate policy, we shall continue the crawling band
system. To improve competitiveness of exports we shall eliminate remaining export taxes
and submit to congress a plan to restructure the coffee sector. We shall continue to manage debt
prudently and abstain from market-related loans. We shall also conclude remaining bilateral
negotia-tions with Paris Club creditors on Mitch-related reschedulings by June 2000. We
will continue to work towards reaching the HIPC decision point in 2000.
F. Program Monitoring
16. During the second year of the PRGF-supported program, the program
will be monitored based on quantitative performance criteria for June 2000 and indicative
targets for December 2000 set on a cumulative basis from end-December 1999
(Tables 1–6), and structural performance criteria and
benchmarks (Table 7). A mission to conduct a review of
the program will take place no later than October 2000, that will among other things
require the completion of a satisfactory agreement with IMF staff on the outline and
objectives of the draft 2001 budget. The review should be completed no later than December
2000, subject to the satisfaction of the quantitative and structural performance criteria as set out
in Tables 1 to 7 attached to the