IMF Executive Board Concludes 2010 Article IV Consultation with Honduras

Public Information Notice (PIN) No. 10/84
July 16, 2010

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 July 12, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Honduras.1


Even though a benign external environment, spikes in foreign direct investment and remittances inflows, and substantial debt relief contributed to episodes of high growth in Honduras over the past decade, the country remains one of the poorest countries in Central America with limited progress in establishing conditions for sustained long-term growth. In part, these outturns may be explained by the fact that many successful economic reforms undertaken in the first half of the 2000s, which justified the completion of the Highly Indebted Poor Countries and Multilateral Debt Relief Initiative programs by the international community, were abandoned or even reversed in the latter part of the decade.

During 2009, the economy of Honduras was strongly affected by the global slowdown and a period of severe political turmoil. Real GDP fell by about 2 percent, while lower world oil and food prices contributed to a sharp decline in end-year headline inflation to 3 percent (10.8 percent in 2008). The fiscal position deteriorated significantly, and the overall public sector deficit widened from 1.7 percent of GDP in 2008 to 4.6 percent in 2009, reflecting lower tax revenues (driven by the economic slowdown) and a large increase in current expenditure (mostly public sector wages). The fiscal deficit was financed largely with costly domestic bonds, central bank credit, and accumulation of domestic arrears.

Since late 2008, monetary policy has been largely accommodative. Central bank’s policy rate and reserve requirements were lowered, and credit to the public sector expanded significantly, contributing to a loss of international reserves. As in the rest of the region, weak external demand and rising unemployment in the United States resulted in a sharp fall in exports and remittances. Imports fell even more, on account of lower international commodity prices and weak domestic demand. As net capital inflows fell more than the current account deficit, gross international reserves declined to US$2.3 billion by end-2009 (3½ months of imports) from US$2.7 billion at end-2008 (4¾ months of imports), and the decline in net international reserves was even larger.

A gradual recovery in economic activity is expected in 2010. A pickup in foreign direct investment (mostly in the maquila and telecommunications sectors) and a rebound in agriculture are expected to result in real GDP growth of 2¾ percent. Headline inflation is projected to increase to about 6 percent, mostly reflecting rising international oil prices and domestic utility tariff adjustments. Meanwhile, the economic recovery and rising oil prices are expected to widen the external current account deficit to about 6 percent of GDP. The overall deficit of the public sector is expected to narrow slightly to about 4 percent of GDP, as revenue gains from tax measures approved earlier in the year would be partially offset by higher domestic expenditure.

Executive Board Assessment

Executive Directors noted that the global slowdown and domestic political tensions in 2009 had an adverse impact on the Honduran economy. This led to a sharp deterioration in macroeconomic imbalances, fueled in part by expansionary policies. Directors stressed that it will be necessary to take prompt measures to restore macroeconomic stability and support the incipient economic recovery, and to establish the conditions for sustained long-term growth. The authorities’ renewed efforts to strengthen its dialogue with the Fund are welcome.

Given the large deterioration of the fiscal position, Directors recommended a strategy aimed at reducing the public sector deficit and improving the composition of expenditure. This will require continuing strengthening tax administration and expenditure management (including effective control of the public sector wage bill and subsidies) and adopting a multi-year budgetary framework supported by prudent public debt management. A comprehensive reform of public enterprises and public pension funds will also be necessary to improve their efficiency. This strategy will help create fiscal space for higher public investment and social spending, and allow a timely response to adverse shocks.

To keep inflation under control and protect the international reserve position, Directors supported a tightening of the monetary stance. They underscored the need to halt central bank financing of the public bank. Directors noted that the de facto peg of the lempira to the U.S. dollar has been an important nominal anchor. Nonetheless, to safeguard competitiveness and strengthen the external position, Directors deemed appropriate considering a gradual increase in exchange rate flexibility, supported by fiscal consolidation, wage moderation, and a prudent monetary policy.

Directors noted that the domestic financial system has weathered the crisis relatively well. They advised continued vigilance and a strengthening of the financial sector safety net. They welcomed the authorities’ intention to address the shortcomings identified in the 2009 Financial System Stability Assessment (FSSA), including by focusing supervision on controlling risks, effectively enforcing capital charges and provisioning requirements, and enhancing liquidity monitoring. They commend the authorities for their efforts to address deficiencies in their Anti-Money Laundering/Countering the Financing of Terrorism regime, and encouraged to further align it with international standards.

Directors expressed regret over the limited progress toward sustained long-term growth and poverty reduction and the reversal of economic reforms. They welcomed the authorities’ plan to develop a comprehensive reform agenda for the next four years. High priority needs to be given to reforms aimed at strengthening the public finances and the climate for business and private investment, including the framework for private-public partnerships.

Honduras: Selected Economic Indicators


      Prel. Proj.
  2006 2007 2008 2009 2010


(Annual percentage change, unless otherwise indicated)

National income and prices






GDP at constant prices

6.6 6.3 4.0 -1.9 2.8

GDP deflator

5.3 6.9 10.9 4.4 4.9

Consumer prices (end of period, eop)

5.3 8.9 10.8 3.0 6.2

Exchange rate (eop, depreciation -)






Lempiras per U.S. dollar

0.0 0.0 0.0 0.0 ...

Real effective rate

1.7 2.2 5.5 7.5 ...

Money and credit






Net domestic assets of the financial system1/

30.3 40.8 8.6 8.8 9.0

Combined public sector credit 1/

-9.0 2.1 4.8 15.0 10.9

Private sector credit

28.1 32.4 9.8 4.9 7.1

Broad money

21.6 18.2 5.3 0.9 8.1

Lending rate (eop, in percent)

13.8 13.4 17.6 17.1 ...

Deposit rate (eop, in percent)

7.6 8.1 9.2 10.6 ...


(In percent of GDP)

Combined public sector 2/






Noninterest revenue and grants

22.5 23.0 24.6 23.2 23.5

Noninterest expenditure

24.8 25.2 27.3 28.7 27.7

Primary balance

-2.3 -2.2 -2.7 -5.5 -4.3

Net interest payments

-0.4 -0.6 -1.0 -0.9 -0.1

Public saving

2.6 2.2 2.7 -0.9 -0.6

Capital expenditure

4.8 5.3 6.0 5.9 5.4

Overall balance

-1.9 -1.6 -1.7 -4.6 -4.1

Savings and investment






Fixed capital formation

27.3 32.4 32.6 22.6 22.3

Gross national savings

23.6 22.1 19.7 19.4 16.0


  (In millions of U. S. dollars, unless otherwise indicated)

External sector






Gross international reserves 3/

2,824 2,733 2,691 2,331 2,331

(in months of imports) 3/ 4/

4.4 3.5 4.7 3.6 3.4

Change in net international reserves (increase -) 3/

-449 102 57 347 0

Change in adjusted NIR (increase -) 3/ 5/

-460 122 173 657 121

External current account balance (percent of GDP)

-3.7 -9.0 -12.9 -3.2 -6.4

(excluding official transfers)

-5.5 -10.2 -14.1 -4.0 -7.2

Exports, f.o.b. (annual percentage change) 5/

4.5 9.6 11.7 -21.2 7.4

Imports, f.o.b. (annual percentage change) 5/

11.6 21.7 18.2 -28.1 11.1

Public sector debt (in percent of GDP) 6/

31.7 19.6 20.2 23.7 27.2

Public sector external debt (in percent of GDP) 6/

27.9 16.4 16.7 17.2 18.8

Public sector external debt service (in percent






of exports of goods and services) 7/

2.5 1.9 1.4 4.4 2.6
Sources: Central Bank of Honduras; Ministry of Finance; and Fund staff estimates.
1/ In relation to base money at the beginning of the period.
2/ Authorities fiscal projection for 2010.
3/ Includes the one-off allocation of SDR 104.8 million in August, 2009.
4/ Refers to the following year's imports of nonmaquila goods and nonfactor services.
5/ Goods only.
6/ Includes medium- and long-term public and publicly guaranteed external debt after HIPC, beyond HIPC and MDRI.
7/ 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. An explanation of any qualifiers used in summings up can be found here:


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