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IMF Approves $202 Million Loan for Honduras

Row of houses in Honduras: The IMF projects a gradual recovery for Central American country and recommends structural reforms to boost long-term growth (photo: Newscom)

Central America

IMF Approves $202 Million Loan for Honduras

By Camila Pérez
IMF Western Hemisphere Department

October 1, 2010

  • Honduran economy recovering slowly from global recession
  • Policy agenda aims to restore economic stability, strengthen public finances
  • New loan to help secure donor support

The IMF’s Executive Board has approved a $202 million loan for Honduras to restore economic stability, strengthen public finances, rebuild investor confidence, and support economic recovery, the institution announced on October 1.

The 18-month loan will help Honduras, a country of 7.5 million people, address risks stemming from continued uncertainty in the global economic environment, provide a framework for implementing key reforms, and catalyze donor support. The government does not intend to draw on the resources made available under the new arrangement, unless the need arises.

Economy to recover gradually

Honduras was severely affected by the global slowdown and political turmoil during 2009. As a result, real GDP declined by 2 percent, the overall fiscal deficit widened, and gross international reserves declined owing to lower foreign direct investment and remittances. The fiscal deterioration was due to a sharp increase in current expenditure (mostly public sector wages) and weaker tax revenue. The financial position of public sector enterprises and pension funds also worsened.

The economic recovery is expected to be gradual and will depend on the rebound in economic activity of Honduras’ trading partners and the recovery of confidence. The IMF projects growth to reach 2˝ percent in 2010, driven by a pickup in agriculture and foreign direct investment.

Fiscal stability and room for social spending

The new program aims at a gradual process of fiscal consolidation to rein in current spending and help create space for increasing anti-poverty spending and public investment. Fiscal adjustment will start in 2010 and help to stabilize the public debt-to-GDP ratio at below 30 percent of GDP.

To achieve these objectives, revenues will need to increase, supported by a full implementation of the April tax reform and a substantial strengthening of tax administration. Implementation of fiscal reforms will also be crucial to improve the composition of public expenditure and strengthen the financial position of public enterprises and pension funds.

Under its economic program, the government will put in place fiscal reforms while improving the composition of public spending to give space for investment and social outlays to the poor:

• restoring the financial viability of public sector enterprises, including the electricity and telecommunications companies, by enhancing their operational efficiency and by regular tariff adjustments;

• strengthening the financial position of public pension funds through reforms to correct their growing actuarial deficits; and

• reallocating public spending to priority areas, including consolidation of anti-poverty spending in a new conditional cash transfer program aimed at covering a large share of families living in extreme poverty.

Monetary and financial policies

Monetary policy will safeguard the inflation and external objectives of the program. Specifically, the government will place central bank instruments to mop up excess liquidity and is committed to not resume central bank lending to the public sector or to any public sector bank.

As part of the program, the government also plans to upgrade its monetary policy framework in line with previous technical assistance recommendations. Reforms in the financial sector include upgrading the supervisory and regulatory frameworks, strengthening the financial safety net, and improving access to financial services.