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Press Release No. 99/11
March 26, 1999
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Approves Three-Year Arrangement Under the ESAF for Honduras

The International Monetary Fund (IMF) has approved a three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF)1 for Honduras in an amount equivalent to SDR 156.75 million (about US$215 million) to support the government’s economic program for 1999-2001. The first annual loan, equivalent to SDR 76 million (about US$104 million), will be available in two semiannual installments, the first of which, equivalent to SDR 59.85 million (about US$82 million), will be available on April 12, 1999.

Background

In the first half of the 1990s, the Honduran authorities implemented IMF-supported programs aimed at achieving sustained economic growth and alleviating poverty. Fiscal imbalances were reduced, and progress was made in reforming the tax system, allowing greater autonomy for the central bank, and liberalizing interest rates and the exchange and trade systems. However, real GDP growth averaged less than 4 percent a year, inflation stood at 26 percent at the end of 1996, and the external position remained weak.

Economic performance improved in 1997 and continued to strengthen during the first nine months of 1998. Real GDP growth accelerated to 5 percent in 1997 and to an estimated 5 percent in the 12 months ended in September 1998. Fiscal performance also improved during January-September 1998, with a narrowing of the central government deficit to about 2 percent of GDP from 3 percent of GDP in calendar year 1997.

In late October 1998, however, hurricane Mitch struck Honduras and caused a disaster of unprecedented proportions, which lead to great human suffering and virtually crippled the economy. Estimates of the damage to the economy indicate that direct losses of inventories and fixed assets amounted to about 50 percent of annual GDP. For calendar year 1998 as a whole, the key economic effects of the hurricane included a slowdown in real GDP growth to an estimated 3 percent, an increase in unemployment, a pickup in the 12-month rate of inflation to 15 percent, and a widening of the central government’s and balance of payments deficits.

Medium-Term Strategy and the 1999 Program

The main objectives of the authorities’ economic program are to achieve a rapid, sustained recovery and address the considerable social needs, which have become more pressing as a result of the hurricane. The main targets are a recovery in the rate of real GDP to about 5-6 percent a year by 2000-01 following an expected decline in real GDP by 2-3 percent in 1999, -mainly reflecting the extensive damage to the agricultural sector, a reduction in the 12-month inflation rate to 13-14 percent by December 1999 and to 8 percent by end-2001, and the maintenance of an international reserve position equivalent to 3-4 months of imports.

The government is preparing a revised budget for 1999 aimed at shifting spending priorities toward emergency relief and reconstruction, containing the growth in nonemergency expenditures, and strengthening revenue through improvements in tax administration. However, in view of the large size of the emergency relief and reconstruction needs, the program contemplates a marked widening of the combined public sector deficit in 1999 to about 8 percent of GDP that is expected to be financed almost entirely by concessional loans and debt relief.

Prior to the hurricane, indications were that the Honduran external debt indicators did not reach the thresholds required for eligibility under the Heavily Indebted Poor Countries (HIPC) Initiative.2 In the wake of the hurricane, the staffs of the IMF, World Bank, and Inter-American Development Bank have begun work on a comprehensive reassessment of the country’s debt situation and prospects for debt relief in the context of the initiative.

Structural Reforms

The authorities have maintained their commitment to reforms aimed at stimulating private investment and economic growth, increasing public sector savings to meet the significant social needs over the medium term, and strengthening the financial system. In the public sector, the program’s main objectives are to complete the process of transferring control of the telephone company to a private partner, conclude the privatization of the electricity distribution network, and grant concessions to the private sector for the management and operation of public works and airports. Also, to raise the efficiency of the public sector, the authorities are undertaking a reform program aimed at restructuring the civil service though the elimination of duplication and overlapping among institutions, and the reclassification of positions and salaries to ensure that skilled staff can be attracted and retained.

In the financial sector, the government has started to identify and address weaknesses in the legal and institutional framework for bank supervision. Also, over the period of the ESAF arrangement, the authorities will take steps to implement the recommendations of the banking commission resulting from the ongoing on-site inspection of banks.

Addressing the Social Needs

The government’s social sector policies focus on tackling poverty through faster economic growth, and improving the delivery and targeting of basic health, education, and social safety net services, with priority given to disease prevention, neonatal and child care, and minimum nutritional support. The program also contemplates the creation of a fund to finance the repair of low-income houses.

The Challenge Ahead

The Honduran authorities’ efforts to implement sound policies in the past few years and their determination to continue to pursue these policies in the face of enormous difficulties presented by the hurricane provide evidence of their commitment to the program. Much of the program’s success depends, however, on a continuous flow of external assistance and debt relief.

Honduras is an original member of the IMF’ its quota3 is SDR 129.5 million (about US$177 million), and its outstanding use of IMF credit currently totals SDR 78.7 million (about US$108 million).


Honduras: Selected Economic Indicators




Prel.

Prog.


1995

1996

1997

1998

1999


(Annual percentage changes, unless otherwise indicated)

National income and prices






GDP at constant prices

4.2

3.7

5.1

3.0

-3.0

GDP deflator

24.8

22.4

22.7

13.7

15.3

Consumer prices (end of period)

26.8

25.5

12.8

15.7

13.0

(period average)

29.5

23.8

20.2

13.7

13.6

External sector (data on U.S. dollars)






Exports, f.o.b.

27.6

9.6

8.0

4.5

-22.5

Imports, c.i.f.

12.3

12.0

15.9

14.7

17.2

Effective exchange rate (depreciation -)1






Nominal rate

-12.7

-12.0

-2.6

-6.5

...

Real effective rate

5.8

0.3

15.0

5.4

...

Central government






Current revenue

46.8

18.8

28.7

27.6

-7.7

Expenditure and net lending

19.7

21.2

21.9

39.1

40.3

Money and credit






Net domestic assets2

3.6

16.2

12.9

15.1

14.4

Public sector

-8.7

-4.5

-11.4

-14.3

0.0

Private sector

15.4

25.0

35.5

28.4

18.7

Money and quasi-money

20.8

32.2

43.3

23.6

14.4

Interest rate (on certificate of deposit)

17.1

19.9

21.7

18.0

...


(In percent of GDP)

Central government overall balance

-2.8

-4.1

-3.2

-3.2

-8.6

Revenue and grants

18.3

17.3

17.1

19.3

17.1

Expenditure and net lending

21.1

21.4

20.3

22.5

25.7

Financing of the nonfinancial public sector

2.7

3.6

1.3

0.9

8.3

Foreign financing

4.7

3.8

2.9

1.5

7.8

Domestic financing

-2.0

-0.2

-1.6

-0.6

0.5

Public sector savings3

7.1

5.8

6.9

5.6

2.2

Combined public sector balance4

-3.5

-4.7

-2.9

-1.4

-8.7

Fixed capital formation

23.0

23.3

25.5

23.0

25.5

External current account deficit

-4.5

-4.8

-3.9

-3.0

-12.5

(excluding official transfers)

-8.6

-8.2

-6.9

-6.6

-16.3

Gross national savings

18.5

18.5

21.5

20.0

13.0

External public debt inclusive of Fund credit

101.2

94.8

78.8

71.6

80.2


(In percent of exports of goods and services)

Debt-service ratio (before debt relief)

33.0

32.6

24.6

20.2

18.7


(In millions of U.S. dollars)

Change in net international






reserves (increase -)

-116

-98

-280

-168

-45

Gross international reserves

296

283

548

770

918

(in months of imports)

1.9

1.6

2.7

3.3

3.4

Stock of external debt

3,952

3,767

3,650

3,788

4,385

Stock of external debt arrears

127

179

120

136

0

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




1Change in the annual average rate.






2In percent of banking system liabilities to the private sector at the beginning of the period.

3In 1998-99 excludes HONDUTEL saving, estimated at 1.5 percent of GDP a year.

4Includes operational losses of the central bank.







1The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and to improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years, with a 5-year grace period.
2The HIPC Initiative entails coordinated action by the international financial community, including multilateral institutions, to reduce to sustainable levels the external debt burden of heavily indebted poor countries which pursue IMF- and World Bank-supported adjustment and reform programs, but for whom traditional debt-relief mechanisms are insufficient.
3A member’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.

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