IMF Executive Board Concludes 2006 Article IV Consultation with Honduras

Public Information Notice (PIN) No. 07/31
March 8, 2007

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 February 21, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Honduras.1


The economy performed well in 2006, bolstered by a favorable external environment. In 2006, real GDP growth is estimated to have exceeded 5 percent. Private consumption was fueled by strong family remittances, while output in agriculture (including coffee), construction, and the financial sector expanded strongly. Inflation fell to around 5 percent, including due to the stable exchange rate and the use of administrative controls on selected prices. The external current account deficit remained contained, at about 1 percent of GDP, as higher family remittances offset a larger oil import bill and stronger non-oil imports related to buoyant domestic demand. While net international reserves rose by US$430 million, gross international reserves stayed broadly constant at around 4½ months of imports. Public debt declined to around 40 percent of GDP (60 percent at end-2005), reflecting debt relief from the IMF and World Bank under the Multilateral Debt Relief Initiative.

In 2006, the overall public sector deficit rose slightly to an estimated 2.1 percent of GDP. Tax revenues grew by an estimated 18 percent with respect to 2005 (to 18.1 percent of GDP), reflecting the economic recovery and the authorities' reform of the tax administration that includes the merit-based selection of officials and improved tax collection procedures. Priority spending, including public investment and anti-poverty programs, fell to an estimated 6.5 percent of GDP in 2006 (from 9 percent of GDP in 2005). At the same time, fiscal pressures emerged from higher wages, energy subsidies, net lending from public pension funds, and strained public enterprise finances. The wage agreements reached with various public sector groups in 2006 will lead to further increases in the wage bill in 2007 and beyond.

Against the background of falling inflation and the rapid growth of credit, the central bank lowered interest rates on its open market bills in the first half of 2006—from over 11 percent to 6 percent on six-month bills—and kept them stable for the rest of the year. Liquidity requirements on U.S. dollar bank deposits were lowered from 30 percent of deposits to 24 percent. The central bank is strengthening monetary operations and plans an upgrade of the payment system infrastructure.

The financial sector continued its recovery as a result of the revamping of the legal, prudential, and supervisory frameworks in recent years, and the economic recovery. Most banking indicators have improved, except the capital ratio that fell in 2006 (although it remains above the legal requirement) due to tighter prudential norms and the rapid growth of bank credit. Actions are being taken to address the need to strengthen banking supervision.

CAFTA-DR became effective for Honduras and the United States on April 1, 2006.

The three-year PRGF arrangement is scheduled to expire on February 26, 2007. The third review under the PRGF arrangement was completed on December 18, 2005.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for implementing policies that contributed to the improved performance of the Honduran economy in 2006, with above-trend growth, low inflation, and a stronger external sector. They welcomed the authorities' efforts to improve tax administration and their implementation of the legal framework for CAFTA-DR, which will create growth-enhancing opportunities. However, policy challenges have intensified, including from weakening public finances, an easing of monetary policy, and accelerating credit expansion.

Directors noted that strengthening fiscal policy will be important to entrench macroeconomic stability and create the conditions for sustained growth and poverty alleviation. They expressed concern that higher net lending, public sector wage increases, energy subsidies, lower trade tax revenues, and weakening state enterprise finances are putting pressure on the public finances in 2007 and over the medium term, constraining the fiscal space for essential anti-poverty and investment programs. Directors supported the authorities' efforts to enhance revenue collection and improve expenditure control, and called on them to further tighten the fiscal stance. Greater discipline needs to be exerted over the public sector wage bill, electricity and telephone tariffs need to be aligned with costs, net lending and non-priority spending should be curtailed, and energy subsidies reduced and better targeted. Directors observed that civil service reform and the implementation of a medium-term expenditure framework would contribute to improving the quality of public spending.

Directors welcomed the reduction of inflation to historically low levels. However, the strong economic expansion, combined with a weakening fiscal policy and an easing of monetary policy, cloud the inflation outlook. Directors stressed the need to tighten monetary policy as needed to secure the recent gains in inflation, and supported the authorities' intentions in this regard. At the same time, administrative measures to dampen inflation, including controls on prices in regulated industries and informal price agreements, were considered to cause economic distortions, and need to be dismantled.

Directors commended the authorities for their efforts to improve monetary policy operations and modernize the payments system. They encouraged them to recapitalize the central bank with marketable securities that carry market interest rates, to secure its financial integrity.

Directors welcomed the authorities' intention to garner support for a phased elimination of obligatory foreign exchange surrender requirements, and to move gradually toward a more flexible exchange rate regime. Key pre-conditions for greater flexibility include implementing a sound medium-term fiscal strategy, improving monetary operations, and enhancing the financial sector's resilience to exchange rate movements.

The financial sector has strengthened in recent years, although vulnerabilities remain. Directors supported the authorities' efforts to enhance prudential norms, including on credit dollarization and bank capital. A key challenge will be to strengthen bank supervision, particularly over consolidated financial groups and banks' dollar operations. With bank credit in foreign currency expanding rapidly, the authorities should monitor carefully provisioning practices and the classification of transactions with unhedged borrowers. Directors advised the authorities to delay further reductions in liquidity requirements on dollar deposits until supervision of banks' dollar operations is further strengthened.

Directors welcomed the authorities' actions to improve the business environment through infrastructure investment and the reduction of red tape, as well as the new transparency law aimed at improving governance and accountability. They supported the authorities' strategy to allow private participation in infrastructure projects. They noted that macroeconomic stability achieved through an appropriate policy mix, reliable and consistent investment rules, and a more market-oriented energy sector policy will also help to improve the investment climate.

Directors welcomed the authorities' intention of continuing to explore additional steps to reduce poverty and stimulate macroeconomic growth. They looked forward to further strengthening of the fruitful cooperation between the authorities and the staff.

Honduras: Selected Economic Indicators

  2003 2004 2005 2006 2007




Prel. Prog. Est. Proj.

(Annual percentage change, unless otherwise indicated)

National income and prices


GDP at constant prices

3.5 4.7 4.1 4.5 5.5 4.8

GDP deflator

7.7 8.5 10.3 7.8 4.7 6.8

Consumer prices (end of period, eop)

6.8 9.2 7.7 5.0 5.3 6.0

Exchange rate (eop, depreciation -)


Lempiras per U.S. dollar

-5.0 -4.9 -1.2 ... ... ...

Real effective rate

-3.0 -1.4 0.9 ... ... ...

Money and credit


Net domestic assets 1/

33.2 3.0 21.5 30.6 28.9 22.1

Combined public sector credit

45.9 -38.2 3.6 -24.5 2.0 2.2

Private sector credit

11.9 15.4 18.2 15.6 26.5 19.7

Broad money

14.0 19.2 19.6 17.9 21.1 14.1

Lending rate (eop, in percent)

18.0 18.2 17.2 ... ... ...

Deposit rate (eop, in percent)

11.0 11.1 10.6 ... ... ...
(In percent of GDP)

Combined public sector


Noninterest revenue and grants

26.0 26.7 26.4 26.9 25.6 24.9

Noninterest expenditure

30.6 29.3 28.1 28.9 28.3 29.7

Primary balance

-4.6 -2.6 -1.7 -1.9 -2.6 -4.8

Net interest payments

0.5 0.3 -0.1 -0.2 -0.5 -0.8


0.5 3.0 2.9 4.5 2.9 1.0

Capital expenditure

6.2 6.5 6.0 7.5 4.8 5.1

Overall balance

-5.1 -2.9 -1.6 -1.7 -2.1 -3.9

External financing

1.9 4.5 2.1 2.0 0.8 1.2

Domestic financing

3.2 -1.6 -0.7 -0.3 1.4 2.8

Savings and investment


Fixed capital formation

24.0 28.1 22.4 24.9 23.2 22.3

Gross national savings

20.0 22.1 22.1 22.0 22.1 19.8
(In millions of U. S. dollars, unless otherwise indicated)

Balance of payments


Gross international reserves

1,398 1,936 2,295 2,395 2,595 2,751

(in months of imports) 2/

3.7 4.5 4.5 4.8 4.4 4.4

Change in net international reserves (increase -) 1/

77.2 -495.6 -352.5 -177.0 -430.0 -141.0

External current account balance (percent of GDP)

-4.0 -5.9 -0.4 -2.9 -1.2 -2.5

(excluding official transfers)

-7.4 -8.9 -3.1 -6.5 -3.6 -4.6

Exports, f.o.b. (annual percentage change)

1.2 15.8 11.4 4.6 7.8 3.9

Imports, f.o.b. (annual percentage change)

8.2 21.1 13.9 13.8 20.1 14.4

Public sector debt (in percent of GDP) 3/

81.1 79.5 60.6 58.9 39.4 39.5

Public sector external debt (in percent of GDP)3/

70.6 68.2 50.1 48.4 28.9 27.4

Public sector external debt service (in percent

of exports of goods and services) 4/

8.3 6.1 6.1 4.0 4.3 3.5

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

1/ Includes adjustments made for NIR and NDA due to Fund MDRI debt relief granted in January 2006 ($155 million).

2/ Refers to the following year's imports of nonmaquila goods and nonfactor services.

3/ Includes medium- and long-term public and publicly guaranteed external debt after HIPC, beyond HIPC, and MDRI.

4/ Debt service paid.

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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