Public Information Notice: IMF Concludes Article IV Consultation with Honduras
December 21, 1999
|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 December 8, 1999, the Executive Board concluded the Article IV consultation with Honduras.1
In the year since Hurricane Mitch struck, Honduras' economic performance has been satisfactory, and broadly in line with the undertakings contained in the ESAF-supported program that was approved in March 1999.2 Output declined in the first semester on account of the serious damage to crops and infrastructure caused by the hurricane, but there are some indications of the beginning of a gradual upturn in economic activity based on a recovery in the banana sector, robust growth in the maquila industry, and a rebound in tourism and construction. For the year as a whole, real GDP is expected to decline by 2-3 percent, as envisaged in the program. In October 1999, the 12-month inflation rate fell to 10.5 percent, from 16.3 percent a year earlier, and gross international reserves of the central bank reached the equivalent of 3.6 months of imports of goods and services.
Based on a strengthening of tax administration and the financial performance of the decentralized public sector agencies, the deficit of the nonfinancial public sector for the year as a whole is expected to be limited to about 6 percent of GDP, compared with 8.3 percent of GDP in the program. Also the current account deficit is expected to reach 9½ percent of GDP, 3 percentage points below the programmed level. The deficit is being financed by external concessional loans and debt relief as well as by private sector capital inflows related in part to the reconstruction of damaged production facilities. In the first nine months of the year banking system liquidity increased markedly reflecting the fiscal performance and a marked slowdown in private sector credit. The interest rate on treasury bills fell from 18 percent at end-1998 to 14 percent at end-October 1999.
Progress was made in carrying out the structural reforms agreed under the program. Notably, the invitation for bids for shares in the telecommunications company was issued in November; the remaining obstacles to private sector participation in infrastructure projects have been removed; and bids have been invited for the private sector management of the country's main airports. In the civil service, work has started on reclassifying positions and implementing a new salary policy, and in collaboration with the IDB and the World Bank, work has begun on promoting greater transparency in public contracting and procurement, and in ensuring the full participation of civil society in the design of a strategy for poverty alleviation. Also, the regulatory framework in the financial system is being strengthened, and a program is underway to bring banks' capital requirements closer in line with international standards. Delays were experienced in initiating reforms in the social security scheme, but the government is working with World Bank staff on a firm action plan for these reforms.
Executive Board Assessment
Executive Directors commended the authorities for their efforts to preserve economic stability in the difficult period following last year's devastating Hurricane Mitch, noting that under the Poverty Reduction and Growth Facility (PRGF) arrangement, inflation had been reduced, the international reserve position had strengthened, and progress had been made in privatization, public sector reform, and in tackling the most pressing social needs. However, Directors observed that Honduras still faced significant challenges in the period ahead, and stressed the need to further consolidate macroeconomic stability, speed up the implementation of structural policies, and address the social conditions, which had become more difficult following the hurricane.
Directors welcomed the fiscal performance achieved in 1999. They stressed that an adequate level of public savings was an essential counterpart to the significant inflows of external assistance aimed at restoring the country's physical and social infrastructure. In this connection, they urged the authorities to maintain firm control over spending, and in particular to resist pressures for excessive increases in the wage bill in the period leading up to the presidential primaries, to avoid undermining fiscal consolidataion over the medium term. Directors also urged the authorities to give a high priority to shifting budgetary allocations toward the social sectors, particularly by reducing those subsidies and transfers not specifically targeted to the poor. They supported the ongoing efforts to strengthen tax administration, broaden the tax base, and set appropriate public sector tariffs.
Directors noted that the government's objectives of promoting a sustained economic recovery and bringing inflation further down would require a combination of sound fiscal policies and judicious use of open market operations. These policies had helped lower significantly the treasury bill rate, although a few Directors were concerned that persistent high real interest rates on bank loans could adversely affect a recovery in private investment. Directors noted that timely actions by the authorities to address the problem in a small private bank was instrumental in preventing adverse effects on the rest of the financial system. They stressed that in order to further strengthen confidence in the banking system, the authorities should give high priority to approving the legislation to establish a credible deposit insurance scheme and enforcing prudential and supervisory regulations. Directors welcomed the authorities' intention to seek technical assistance in these areas.
Directors observed that, based on existing conditions and recent indicators, the current exchange arrangement in Honduras appeared adequate. While the main constraints to an export-led recovery at this time were the damaged road network and other infrastructure, they agreed that it would nevertheless be important to monitor closely developments in competitiveness.
Directors welcomed the recent advances in the government's privatization program, particularly in the telecommunications, infrastructure, and airport sectors. They stressed the need to conclude these initiatives promptly, and to move forward with the privatization of electricity distribution. Such actions would permit increased private investment; provide resources to help address poverty and other pressing social needs; and allow the authorities to focus their attention on the reconstruction program.
Regarding other structural reforms, the key priorities for 2000 would be to initiate promptly measures to strengthen the social security scheme, continue to restructure the civil service, and maintain confidence in the banking system by bringing the regulatory framework closer in line with international standards.
Directors welcomed the initial steps made by the authorities to enhance transparency and accountability. They stressed the importance of improving governance, both to sustain the good will that Honduras enjoys in the donor community, and to help attract higher levels of foreign direct investment. Directors welcomed the authorities' effort to create wider opportunities for consultation with civil society on strategies for reconstruction and for addressing poverty. They stressed that continued close attention to these broad goals would be important, particularly in view of Honduras' eligibility under the HIPC Initiative. Directors looked forward to discussing in 2000 Honduras' poverty reduction strategy and encouraged the authorities to complete the work currently being done on poverty assessment.