## EXECUTIVE SUMMARY (cr17331) ## Source details **Canonical URL:** [EXECUTIVE SUMMARY (cr17331)](https://www.imf.org/-/media/files/publications/cr/2017/cr17331.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17331.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17331.pdf.json) --- ### Fund-supported program - The Executive Board approved a blended 36-months Stand-by Arrangement (SBA) and 24-months Stand-by Credit Facility (SCF) arrangement on December 3, 2014 for the total access of SDR 129.5 million (51.84 percent of quota). - The SCF expired on December 2016. - None of the available purchases have been drawn. - The authorities indicated they will not purchase the amount that would be made available upon completion of these reviews, in line with their intention to treat the SBA as precautionary. - The authorities have agreed to publication of the staff report. ### Program status and performance criteria - All end-June 2017 and continuous performance criteria were met. - The indicative target on the National Electricity Company’s (ENEE) operating revenue-to-spending ratio was missed by a small margin due to upfront fees paid to the losses-recovery concessionaire. - Some performance criteria for end-December 2016 were missed; the 5th and 6th reviews have been combined to give authorities margin to correct policy slippages. - The authorities decided to establish their own targets for end-December 2017, including the same variables included in the SBA, to maintain policy credibility after the expiration of the Fund-supported program. Selected Performance Criteria, end-June 2017 (as presented) - NFPS balance - Target: -1,417 (In millions of Lempiras, cumulative flow) — Outturn: 4,472 - Central Government Balance - Target: -5,417 — Outturn: -1,493 - Net International Reserves (Floor, US$ millions, stock) - Target: 2,869 — Outturn: 3,259 ### Progress on structural benchmarks - Fiscal reforms - Implementation of the Fiscal Responsibility Law (FRL) is on track. - The new tax authority is operational. - Management of trust funds under budget regulations was not met because all trust funds still operate outside the expenditure control chain. - The tax procedural code enacted in January 2017 repealed criminal sanctions for tax fraud and contains provisions that erode incentives for tax compliance; authorities adopted ad hoc measures to avoid a reduction in tax collection. - Monetary and exchange rate policies - The Central Bank of Honduras (BCH) approved the strategic plan to modernize monetary policy. - BCH issued regulations to enhance the functioning of the interbank money-market and the FX market and reduced by 10 percent the FX surrender requirements. - Submission of a new BCH Law was postponed to allow for full ownership by the new authorities following the November elections. - Financial sector - A new bank resolution framework law was enacted. - The financial supervisor issued regulations to limit risk exposure from consumer loans by public pension funds; however, regulations still allow a large share of the pension portfolio to be invested in direct consumer loans. ### Recent developments (through mid-/end-2017) - Real GDP - Real GDP grew at 5¼ percent (y/y) through Q2 2017 (3¾ percent in similar period last year). - Inflation and exchange rate - As of August 2017, headline inflation reached 3¾ percent y/y, within the BCH target band (4±1 percent). - The Lempira appreciated ½ percent in nominal terms until end-August 2017 against the USD. - External position - In H1 2017, the current account posted a surplus of 1 percent of GDP. - As of end-August 2017, net international reserves covered the equivalent of 5 months of imports. - Fiscal performance - During H1 2017, the NFPS posted a surplus of ¾ percent of GDP. - In January 2017, the authorities placed an external bond of US$700 million at 6¼ percent yield (2013 placement: US$500 million at 8¾ percent yield). - Moody's upgraded the Government of Honduras' ratings to B1 from B2 and moved the outlook to stable from positive; S&P upgraded earlier in July. - EMBI sovereign spread at end-September 2017 reached historical low levels. - Banking system - As of July 2017, capital adequacy ratio (CAR) was 13¾ percent, above the 10 percent statutory minimum. - Non-performing loans were 2½ percent of the loan portfolio. - FX loans were 32 percent of the loan portfolio. - Deposit dollarization reached 32 percent in July, down from 35 percent at end-2016. - Social and security conditions - Poverty rate declined from 65 percent in 2013 to 61 percent in 2016. - Extreme poverty incidence: national 38½ percent; rural 52½ percent; urban 27¾ percent. - Gini coefficient is 0.53. - Informality is 75 percent. - The “Vida Mejor” program introduced in 2014 contributed to social spending expansion (social spending rose from ½ percent of GDP in 2009 to close to 2 percent of GDP in 2016). ### New policy initiatives and institutional changes - Tax procedural code (December 2016) - Introduces better tax codification and formalizes procedures, but repealed criminal sanctions for tax fraud and contains provisions decreasing incentives for tax compliance. - Customs - Customs administration separated from the tax authority; COPRISAO manages customs and adopted a strategic plan. - During January–August 2017, COPRISAO reported nominal customs duties up 11.2 percent (y/y). - A Honduran-Guatemalan customs union began operations in June 2017; around 80 percent of existing bilateral trade is tariff-free. - Financial sector laws and regulations - Financial stability council created to replace the early warning committee; council comprises central bank, financial supervisor, deposit guarantees fund, and ministry of finance with responsibilities for early warning, contingency plans, and recommending macroprudential measures. - Financial inclusion law seeks to extend services to SMEs and diversify public pension fund portfolios. - Credit card law aims to protect consumers, increase transparency, regulate interest rates and fees, and mandate disclosure of cost of credit card services. - Tourism promotion law - Seeks to grant concessions and tax exemptions to private tourism operators. ### Outlook and risks - Baseline projections - Real GDP growth in 2017 projected at 4 percent. - Headline inflation expected to reach 4½ percent (y/y) by end-2017 and return to the center of the target band of 4±1 percentage points by end-2018. - Current account deficit projected at 4.1 percent of GDP in 2017 and 4.3 percent of GDP in 2018, stabilizing around 4 percent over the medium term. - Projected NFPS deficits of 1.2 percent of GDP for both 2017 and 2018. - Honduras: Medium-Term Scenario (selected projections) - GDP at constant prices: 2017: 4.0; 2018: 3.6; 2019: 3.8; 2020: 3.8; 2021: 3.8; 2022: 3.8 (annual percent change). - Consumer prices (eop): 2017: 4.5; 2018: 4.0; 2019: 4.0; 2020: 4.0; 2021: 4.0; 2022: 4.0 (annual percent change). - NFPS net lending/borrowing (% of GDP): 2017: -1.2; 2018: -1.2; 2019: -1.0; 2020: -1.0; 2021: -0.9; 2022: -0.9. - Gross debt (% of GDP): 2017: 43.0; 2018: 44.1; 2019: 45.3; 2020: 44.2; 2021: 42.3; 2022: 38.7. - Current account balance (% of GDP): 2017: -4.1; 2018: -4.3; 2019–2022: around -4.0 to -4.1. - GIR (months of non-maquila imports): 2017: 4.7; 2018: 5.0; 2019: 5.1; 2020: 5.2; 2021: 5.2; 2022: 5.3. - Risks - External risks - Heavy reliance on the U.S.: around 40 percent of total exports and 85 percent of remittances are U.S.-linked. - Adverse U.S. performance could reduce growth and reverse capital inflows. - Temporary Protected Status (TPS) for Hondurans in the U.S. set to expire in January 2018; non-renewal could reduce remittances by around 7 percent per annum. - Faster-than-expected tightening of global financial conditions could pressure monetary policy and reserves given the crawling-like exchange arrangement. - Domestic risks - Failure to maintain fiscal prudence during the political transition remains low but possible. - Implementation of recent legislation (credit card law, tourism law) might undermine policy credibility and affect investor confidence and growth. ### Policy discussions — Fiscal policy (highlights) - For 2017 - NFPS deficit projected at 1.2 percent of GDP, slightly below the authorities’ 2017 target of 1.4 percent of GDP; the overperformance reflects slower...[text truncated in source] (document provides further fiscal policy discussion and medium-term fiscal consolidation elements). *Source: IMF staff report — EXECUTIVE SUMMARY (cr17331).* --- ### Box 2. Main Elements of the Fiscal Consolidation 2013-17 ### Overall outcome of fiscal consolidation - The NFPS deficit was lowered by 6¼ percentage points of GDP. - Fiscal consolidation was supported by both revenue and expenditure measures, including from public enterprises. ### Revenue measures and tax package - A comprehensive tax package was introduced at the beginning of 2014, which included: - 3 percentage points increase in the VAT rate (from 12 to 15 percent) - Increase in fuels taxes - Establishment of a minimum income tax to strengthen tax compliance - During the last four years, tax revenue increased by 3½ percentage points of GDP, twice the original program projections. - Sustained effort by the tax administration authority was the key for this outcome. - The authorities’ revenue mobilization strategy does not foresee changes in rates but instead measures to improve revenue administration. - Staff indicated two critical actions to ensure sustainability of revenue mobilization: - Restore tax authority’s enforcement mechanisms for tax collection; the new tax code has repealed the criminality of tax fraud, weakening compliance. - Rationalize tax expenditures. Honduras has tax expenditures of 7 percent of GDP. Despite new control procedures, additional exemptions were recently introduced (e.g., VAT exemptions for agricultural goods and tourism operator income tax). - For the new tourism law, staff estimates that exemptions could reach minimum of 1 percent of GDP over an 18-year period if the exemption is granted only for new investments; if additional existing projects are included, tax expenditures will be even higher. Tax Expenditures (In percent of GDP) — IMF staff estimates: - Corporate income tax 2.1 - o/w special regimes (ZOLI, ZOLT, ZOLITUR) 0.9 - Personal income tax 0.3 - o/w teachers 0.1 - VAT 3.8 - o/w food staples 0.7 - o/w credit cards 0.5 - o/w agriculture 0.3 - o/w special regimes (ZOLI, ZOLT, ZOLITUR) 0.2 - Fuel tax 0.7 - o/w termal generators 0.6 - Customs 0.1 - Total 7.0 ### Expenditure measures and wage bill - Most fiscal consolidation came from the central government and public companies. - The government implemented a wide-ranging expenditure rationalization plan focused on: - Rightsizing public sector employment and controlling wage growth - Reducing other current expenditure - Protecting capital spending with high social returns and proven capacity for speedy implementation - During the last four years, the wage bill of the nonfinancial public sector declined by 2.8 percentage points of GDP, with about ¼ of the reduction taking place outside the central government. - At central government and decentralized institutions: - Nominal wages were frozen during 2014-15 - 60 percent of unfilled posts were cancelled (except for health and education) - A census of public employees was conducted to identify and remove irregular workers - The authorities adjusted electricity tariffs and rightsized public enterprise workforces as part of putting public enterprises on a sound footing. ### Fiscal balances and composition (selected figures, Percent of GDP) - Balance of the Nonfinancial Public Sector by Entity (2013, 2014, 2015, 2016, 2017; Change 2017-2013): - Central administration: -7.9, -4.5, -3.0, -2.8, -2.8; Change 5.1 - Social security administration: 0.7, 0.4, 0.6, 0.7, 0.7; Change 0.0 - Public employees pension funds: 2.0, 1.2, 1.6, 1.6, 1.6; Change -0.4 - Other institutions: -0.1, 0.0, 0.0, 0.1, -0.1; Change 0.0 - Central Government: -5.4, -2.8, -0.9, -0.4, -0.6; Change 4.7 - Local governments: -0.3, -0.1, 0.1, 0.0, 0.0; Change 0.2 - General Government: -5.6, -2.9, -0.8, -0.4, -0.6; Change 5.0 - Nonfinancial public companies: -1.9, -1.0, -0.2, -0.1, -0.6; Change 1.3 - Nonfinancial Public Sector: -7.5, -3.9, -1.0, -0.5, -1.2; Change 6.2 - Compensation of Employees of the Nonfinancial Public Sector (Percent of GDP) (2013, 2014, 2015, 2016, 2017; Change 2017-2013): - Central administration: 9.8, 9.0, 8.4, 8.1, 8.0; Change -1.8 - Social security administration: 0.8, 0.6, 0.5, 0.5, 0.6; Change -0.2 - Public employees pension funds: 0.1, 0.1, 0.1, 0.1, 0.1; Change 0.0 - Other institutions: 1.6, 1.4, 1.2, 1.3, 1.2; Change -0.4 - Central Government: 12.2, 11.0, 10.3, 10.0, 9.9; Change -2.4 - Local governments: 0.5, 0.4, 0.4, 0.7, 0.8; Change 0.3 - General Government: 12.8, 11.5, 10.7, 10.7, 10.7; Change -2.1 - Nonfinancial public companies: 1.5, 1.2, 1.1, 0.7, 0.7; Change -0.7 - Nonfinancial Public Sector: 14.2, 12.7, 11.7, 11.4, 11.4; Change -2.8 - Balance of the Nonfinancial Public Sector — Revenues, Expenditure, and Balance (Percent of GDP) (2013, 2014, 2015, 2016, 2017; Change 2017-2013): - Revenues: 30.5, 31.0, 31.2, 32.6, 32.0; Change 1.5 - Of which Taxes: 15.6, 17.1, 18.0, 19.5, 19.1; Change 3.5 - Interest revenues: 1.5, 1.6, 1.3, 1.9, 1.7; Change 0.1 - Sales of goods and services: 6.7, 6.4, 5.9, 5.3, 5.6; Change -1.0 - Expenditure: 37.9, 34.9, 32.2, 33.1, 33.2; Change -4.7 - Of which Compensation of employees: 14.2, 12.7, 11.7, 11.4, 11.4; Change -2.8 - Goods and services: 10.6, 9.4, 8.2, 8.2, 8.4; Change -2.1 - Interest payments: 2.1, 2.1, 2.3, 2.8, 2.8; Change 0.8 - Net acquisition of nonfinancial assets: 5.0, 3.8, 3.8, 3.3, 4.6; Change -0.4 - Balance: -7.5, -3.9, -1.0, -0.5, -1.2; Change 6.2 - Memo: - Primary balance: -7.0, -3.4, 0.1, 0.3, -0.1; Change 6.9 - Public debt: 41.0, 41.3, 41.2, 42.5, 43.0; Change 2.0 ### 2018 budget and policy priorities - For 2018, the proposed budget targets a NFPS deficit of 1.2 percent of GDP (CG deficit of 3.4 percent of GDP), fully in line with the FRL. - The 2018 budget envisages a small fiscal adjustment of ¼ percent of GDP and a ceiling of 7½ percent increase in current spending. - Policies underpinning the proposed budget: - Moderate public wages increase: - An 8 percent nominal increase in the wage bill is proposed (5 percent average increase during the 2015-2017). - The increase reflects planned expansion of security forces, costs of the police reform (severance payments), and additional services required to expand coverage of conditional cash transfer (CCT) social programs. - The nominal growth in the wage bill excluding the expansion of security forces is about 6 percent. - Sustained increase in targeted social spending: - Additional funds for social spending particularly for the authorities’ flagship program “Vida Mejor”. - Expansion of CCT programs requires increased supply of educational and health services through higher expenditures. - Using a unified registry of beneficiaries will strengthen targeting. - Ongoing improvement in the efficiency of public spending: - Given FRL limits on current spending growth, the budget relies on efficiency gains. - The 2018 budget includes preparation of pilot projects for performance budgeting. ### Fiscal rules and public-debt outlook - The implementation of the FRL is ongoing. - A module was implemented into the information management system (SIAFI) at the spending unit to verify in real time compliance with the annual current spending target. - The debt-to-GDP ratio of the NFPS is expected to reach 43 percent of GDP, a modest increase relative to 2016. - The authorities’ medium-term fiscal framework (MTFF) projects a gradual reduction in public debt to 30 percent of GDP in the medium term. - The MTFF sets fiscal deficits targets lower than the 1 percent of GDP ceiling stated in the FRL. - This will be achieved by controlling growth in current spending, particularly the wage bill, and preserving gains in tax collection. ### Monetary policy (related contextual measures) - Staff and the BCH agreed on a broadly neutral monetary policy stance. - Inflation expectations are within the target band and financial conditions are stable. - The BCH has maintained the policy rate constant at 5½ percent since June 2016 while mopping up liquidity from external bond issuance through stepped up issuance of central bank bills. - Staff supported the BCH decision to reduce the inflation target band from 4.5±1 percent to 4.0±1 percent. - The lower inflation target range might require stricter monetary conditions if inflation expectations leave the new target range, given an essentially closed output gap and the risks balance. - Modernizing the monetary policy framework: - Authorities decided to adopt a forward-looking approach based on an inflation targeting framework. - Strengthening the interbank market by fostering operations with collateralized securities. - In February 2017, surrender requirements for foreign exchange were reduced by 10 percent; the released foreign currency is traded in a foreign exchange interbank market. - Authorities are strengthening in-house capacity for macroeconomic modeling, forecasting, and policy analysis. - Reform of the central bank framework law has been delayed to allow full ownership by the new government. *Sources: Honduras Ministry of Finance and IMF staff estimates* --- ### Box 3. Journey to Implement Inflation Targeting ### Progress in preparing for Inflation Targeting (IT) - Enhanced market infrastructure: - Developed an interbank money market and a FX market, which was created once the process of phasing out FX surrender requirements started with the reduction by 10 percent. - Improved BCH decision-making: - Strengthened BCH’s macroanalysis unit. - Legal and institutional groundwork: - Initiated analysis of the legal framework for the new BCH law with clearer mandate to pursue price stability as primary objective. - Fiscal dominance reduction: - Successful implementation of the FRL to date seen as an important step towards reducing fiscal dominance. ### Challenges to monetary reform and transmission - Monetary transmission: - Transmission from the monetary policy rate to lending rates remains imperfect; markets remain segmented and mostly uncollateralized. - FX market development: - FX interbank market is off to a good start but continued progress with the elimination of FX surrender requirements is needed. - Safeguards and legal reforms: - BCH is strengthening its safeguards framework, but the recommended legal reforms to enhance its autonomy and governance structures remain outstanding. - BCH has approved a plan to adopt International Financial Reporting Standards with effect from FY2018. - Plans to submit central bank law reforms to congress have been delayed. ### Next steps agreed with authorities and policy recommendations - Central bank law: - Enact a new central bank law that provides the BCH the mandate, governance arrangements and instruments to ensure a successful implementation of IT. - Institutional and operational changes: - Continue to enhance BCH’s decision-making process to make it more forward-looking and adopt organizational changes consistent with the new regime. - Communication and transparency: - Enhance internal and external communication strategy, including the production of quarterly monetary policy reports, to better anchor expectations. - Exchange rate flexibility: - Allowing exchange rate flexibility would be appropriate as market conditions improve. - Staff suggested that with the stronger economy and the considerable reduction in fiscal dominance, there is room to allow the exchange rate to be more market-based. - The recent reduction in surrender requirements is welcome and further reduction would be desirable once market conditions allow. - Operational priority: - Immediate priority remains reforming the central bank law to give it a clear mandate to achieve price stability. ### Financial sector policy and vulnerabilities - Banking system soundness: - Banking system remains stable with satisfactory capital and liquidity levels. - Around 80 percent of funding come from deposits, limiting exposure to external shocks. - Growth in credit to the private sector stood at 10½ percent (y/y) as of August. - FX and dollarization risks: - FX risk remains important as the credit dollarization rate is still high (30 percent as of June-2017). - Recent legislative risks: - Credit card law: - Caps on credit card interest rates: maximum rate equal to 2.7 times the weighted average annual lending rate in Lempiras of the banking system (currently about 20 percent) subject to a cap of 54 percent. - Potential negative effects: reduced banks’ profitability, curtailed issuance of new credit cards for low-income earners, greater informal lending, and discouraged financial inclusion. - Last BCH financial stability report: 70 percent of credit cards have credit lines below US$1,600. - Financial inclusion law: - Allows public pension funds to provide consumer and housing loans to affiliates using trust funds (20 percent of their investment portfolio each one). - Allows provision of working capital loans for SMEs using similar mechanism (up to 10 percent of the portfolio). - Since mid-2016, public pension funds have significantly expanded consumer loans, especially the teachers’ pension fund (IMPREMA); pension funds argue loans are fully guaranteed by future pensions. - Financial supervisor plans to step-up monitoring of risks, including assessment of banks’ measures to protect profitability and capital adequacy. - Pension fund risks: - Use of pension funds to finance consumption needs a structural solution including better assets-liabilities management schemes. - Excessive concentration of the portfolio in one product entails both a financial and macroeconomic risk. - Expanding funds’ operations to SMEs could be risky and generates fiscal contingencies. ### Program, fiscal and structural context relevant for IT - Energy sector reforms and fiscal implications: - Loss-reduction concessionaire delivered a reduction in losses of 3¾ percent (0.2 percent of GDP in additional revenues), on track to meet the November 4 percent target. - Rightsizing program in ENEE concluded with a 60 percent reduction in the workforce. - Tariffs adjusted quarterly on a cost-recovery formula; as of June, tariffs had been increased by 10 percent compared to 2016. - Program financing and debt outlook: - Program remains fully financed; all financing needs are covered for the next 12 months based on external and domestic operations. - Domestic financial system, especially pension funds, currently possesses ample liquidity to support financing plans. - Authorities do not plan to draw the amount available upon completion of final reviews, treating the Stand-By Arrangement as precautionary in 2017. - Capacity to repay the Fund remains adequate; balance of risks manageable. - Potential access under the program would have only a modest effect on external debt; risk of debt distress is considered moderate per the latest debt sustainability analysis. - Debt sustainability analysis shows improved prospects relative to previous review; medium-term fiscal projections show a declining path in the public debt over GDP ratio. - Structural reforms and governance: - Measures to tackle corruption: MACCIH mission installed April 2016; special tribunals established; law on financing, transparency and oversight of political parties and campaigns enacted; prosecutions ongoing. - Honduras 20/20 Plan implementation ongoing to generate 600,000 jobs during 2016–20; prioritized sectors: tourism, textiles, intermediate manufacturing, and business process outsourcing; agriculture and housing to be included later. - Customs union with Guatemala launched; study estimates union could increase GDP growth by around ½ percent and favor textiles, chemical, and petrochemical industries. - Program performance and macro stance: - Authorities met all performance criteria for end-June 2017, and all but one indicative target (ENEE’s operating revenue-to-spending ratio). - Neutral monetary policy stance remains broadly appropriate in the near-term; BCH should remain vigilant and ready to tighten if inflation or credit growth accelerate and there are signs of overheating. - Fiscal stance for 2018 in the proposed 2018 budget is appropriate: moderate adjustment locks in consolidation while allowing moderate increases in public wages and increased social and infrastructure spending. ### Staff appraisal highlights - Support for IT transition: - Staff welcomes steps taken to move towards an inflation targeting framework to guide monetary policy. - Creation of interbank-money market progressing steadily; reduction by 10 percent in FX surrender requirements is fostering creation of foreign interbank market. - Staff encourages accelerating reduction of FX surrender requirements to create a more vibrant FX market and increase exchange rate flexibility. - Institutional reforms and fiscal institutions: - Fiscal institutions need further strengthening to lock in achievements: increase budget transparency, accountability, and control, phase out extra-budgetary vehicles. - Reducing tax exemptions and strengthening enforcement of tax laws remain critical tasks, including closing loopholes and fighting evasion and tax fraud. - Increasing social spending requires major efficiency gains and prioritizing programs with large positive impact assessments. - Financial sector supervision: - Continuous regulatory efforts required to address vulnerabilities: assess risks from excessive household debt (particularly credit cards); implement structural solutions for pension fund asset-liability management; monitor fiscal contingencies from pension fund activities. - Program endorsement: - Considering authorities’ performance and commitment, staff supports completion of the fifth and sixth reviews under the Stand-By Arrangement. *Source: Box 3. Journey to Implement Inflation Targeting (cr17331).* --- ### External Position, Debt Sustainability, and Risks ### Debt and external indicators — key baseline figures and projections - External current account and reserves - Current account deficit (percent of GDP): 2017: -4.1; 2018: -4.3; 2019–2022: around -4.0 to -4.1. - Net international reserves covered the equivalent of 5 months of imports as of end-August 2017. - Public and external debt (selected) - Gross debt (% of GDP): 2017: 43.0; 2018: 44.1; 2019: 45.3; 2020: 44.2; 2021: 42.3; 2022: 38.7. - Public sector debt (percent of GDP): 2014: 42.3; 2015: 42.3; 2016: 43.5; 2017: 43.5; 2018: 44.3; 2019: 45.0; 2020: 42.8; 2021: 40.5; 2022: 39.8. - External debt (nominal) selected: 2014: 37.2; 2015: 36.5; 2016: 35.9; 2017: 38.2; 2018: 37.9; 2019: 38.4; 2020: 38.6; 2021: 37.9; 2022: 37.2. - PPG external debt (selected): 2017: 32.2; 2018: 32.3; 2019: 33.1; 2020: 33.3; 2021: 32.7; 2022: 32.0. - Debt service and financing needs - Debt service-to-exports ratio (percent): 2017: 16.1; 2018: 16.0; 2019: 15.4; 2020: 19.8; 2021: 15.1; 2022: 16.6. - Total gross financing need (Billions of US$): 2017: 1.4; 2018: 1.5; 2019: 1.3; 2020: 1.8; 2021: 1.3; 2022: 1.6. - Remittances and external buffers - Gross workers’ remittances (Billions of US$): 2017: 4.2; 2018: 4.2; 2019: 4.4; 2020: 4.5; 2021: 4.6; 2022: 4.8. - Remittances are around 18 percent of GDP; direct annual impact on remittances from TPS non-extension estimated at US$300 million (1.5 percent of GDP). ### DSA findings and stress-test highlights - Risk assessment - Despite marked improvements on public and external debt indicators, the risk of external debt distress remains moderate. - Stronger than expected fiscal consolidation, and a reduced current account deficit strengthen resilience. - FRL passed in 2016 is an important structural reform to reduce future risks. - Sensitivity analyses - Baseline PV of Debt-to-GDP Ratio (percent) in 2017: 40; 2018: 40; 2019: 41; 2020: 38; 2021: 36; 2022: 35; 2027: 29; 2037: 10. - Scenario A1 (Key variables at historical averages) drives PV of Debt-to-GDP higher: 2017: 40; 2018: 43; 2019: 47; 2020: 49; 2021: 50; 2022: 53; 2027: 66; 2037: 92. - Export shocks and one-time depreciation shocks produce the most extreme stress outcomes for many indicators; the most extreme shock for debt-service-to-revenue corresponds to a One-time depreciation shock. - Policy-relevant implications - Continued fiscal consolidation and reduced current account deficit have materially improved external resilience but risk remains moderate — sustained policy implementation is necessary to shift risk assessments lower. - Stress tests indicate vulnerability to export shocks and one-time depreciation shocks; policies to diversify export base, strengthen foreign exchange buffers, and preserve concessional financing terms would reduce downside risks. *Source: IMF staff estimates and projections (tables and figures as provided in the chapter).* --- ### Annex I. Linkages with the U.S. Economy ### Migration and remittances - More than 550 thousand Hondurans (6 percent of total population) resided in the U.S. as of 2013. - Remittances from the U.S. currently stand at around 18 percent of GDP. - According to the Central Bank of Honduras, remittances serve as a main source of income for more than 45 percent of those who receive them. - Remittances growth: - 13.5 percent (y/y) in the first half of 2017. - 5.4 percent in 2016. - The direct annual impact on remittances of non-extension of the Temporary Protection Status (TPS) for Honduras stands at about US$300 million (1.5 percent of GDP). ### Trade, FDI, and macro spillovers - Market exposure: - About one-third of Honduras’ goods exports excluding maquila are sold to the U.S. - Two-thirds of total exports are sold to the U.S. - FDI: - FDI stock from the U.S. stands at around 12 percent of GDP. - Growth spillover: - Staff estimates that a one-percentage-point growth increase in the U.S. leads to about 0.9 percentage points higher growth in Honduras, 0.4 percentage points above a simple average for the CAPDR countries. - Potential policy-change spillovers: - Reverting from CAFTA-DR tariffs to most-favored nation treatment could lead to a permanent loss in the level of annual GDP of 0.6 – 1.0 percent. *Source: IMF staff, Annex I. Linkages with the U.S. Economy.* --- *Source: IMF staff report (cr17331).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Fund-supported program - The Executive Board approved a blended 36-months Stand-by Arrangement (SBA) and 24-months Stand-by Credit Facility (SCF) arrangement on December 3, 2014 for the total access of SDR 129.5 million (51.84 percent of quota). - The SCF expired on December 2016. - None of the available purchases have been drawn. - The authorities indicated they will not purchase the amount that would be made available upon completion of these reviews, in line with their intention to treat the SBA as precautionary. - The authorities have agreed to publication of the staff report. ### Program status and performance criteria - All end-June 2017 and continuous performance criteria were met. - The indicative target on the National Electricity Company’s (ENEE) operating revenue-to-spending ratio was missed by a small margin due to upfront fees paid to the losses-recovery concessionaire. - Some performance criteria for end-December 2016 were missed; the 5th and 6th reviews have been combined to give authorities margin to correct policy slippages. - The authorities decided to establish their own targets for end-December 2017, including the same variables included in the SBA, to maintain policy credibility after the expiration of the Fund-supported program. Selected Performance Criteria, end-June 2017 (as presented) - NFPS balance - Target: -1,417 (In millions of Lempiras, cumulative flow) — Outturn: 4,472 - Central Government Balance - Target: -5,417 — Outturn: -1,493 - Net International Reserves (Floor, US$ millions, stock) - Target: 2,869 — Outturn: 3,259 ### Progress on structural benchmarks - Fiscal reforms - Implementation of the Fiscal Responsibility Law (FRL) is on track. - The new tax authority is operational. - Management of trust funds under budget regulations was not met because all trust funds still operate outside the expenditure control chain. - The tax procedural code enacted in January 2017 repealed criminal sanctions for tax fraud and contains provisions that erode incentives for tax compliance; authorities adopted ad hoc measures to avoid a reduction in tax collection. - Monetary and exchange rate policies - The Central Bank of Honduras (BCH) approved the strategic plan to modernize monetary policy. - BCH issued regulations to enhance the functioning of the interbank money-market and the FX market and reduced by 10 percent the FX surrender requirements. - Submission of a new BCH Law was postponed to allow for full ownership by the new authorities following the November elections. - Financial sector - A new bank resolution framework law was enacted. - The financial supervisor issued regulations to limit risk exposure from consumer loans by public pension funds; however, regulations still allow a large share of the pension portfolio to be invested in direct consumer loans. ### Recent developments (through mid-/end-2017) - Real GDP - Real GDP grew at 5¼ percent (y/y) through Q2 2017 (3¾ percent in similar period last year). - Inflation and exchange rate - As of August 2017, headline inflation reached 3¾ percent y/y, within the BCH target band (4±1 percent). - The Lempira appreciated ½ percent in nominal terms until end-August 2017 against the USD. - External position - In H1 2017, the current account posted a surplus of 1 percent of GDP. - As of end-August 2017, net international reserves covered the equivalent of 5 months of imports. - Fiscal performance - During H1 2017, the NFPS posted a surplus of ¾ percent of GDP. - In January 2017, the authorities placed an external bond of US$700 million at 6¼ percent yield (2013 placement: US$500 million at 8¾ percent yield). - Moody's upgraded the Government of Honduras' ratings to B1 from B2 and moved the outlook to stable from positive; S&P upgraded earlier in July. - EMBI sovereign spread at end-September 2017 reached historical low levels. - Banking system - As of July 2017, capital adequacy ratio (CAR) was 13¾ percent, above the 10 percent statutory minimum. - Non-performing loans were 2½ percent of the loan portfolio. - FX loans were 32 percent of the loan portfolio. - Deposit dollarization reached 32 percent in July, down from 35 percent at end-2016. - Social and security conditions - Poverty rate declined from 65 percent in 2013 to 61 percent in 2016. - Extreme poverty incidence: national 38½ percent; rural 52½ percent; urban 27¾ percent. - Gini coefficient is 0.53. - Informality is 75 percent. - The “Vida Mejor” program introduced in 2014 contributed to social spending expansion (social spending rose from ½ percent of GDP in 2009 to close to 2 percent of GDP in 2016). ### New policy initiatives and institutional changes - Tax procedural code (December 2016) - Introduces better tax codification and formalizes procedures, but repealed criminal sanctions for tax fraud and contains provisions decreasing incentives for tax compliance. - Customs - Customs administration separated from the tax authority; COPRISAO manages customs and adopted a strategic plan. - During January–August 2017, COPRISAO reported nominal customs duties up 11.2 percent (y/y). - A Honduran-Guatemalan customs union began operations in June 2017; around 80 percent of existing bilateral trade is tariff-free. - Financial sector laws and regulations - Financial stability council created to replace the early warning committee; council comprises central bank, financial supervisor, deposit guarantees fund, and ministry of finance with responsibilities for early warning, contingency plans, and recommending macroprudential measures. - Financial inclusion law seeks to extend services to SMEs and diversify public pension fund portfolios. - Credit card law aims to protect consumers, increase transparency, regulate interest rates and fees, and mandate disclosure of cost of credit card services. - Tourism promotion law - Seeks to grant concessions and tax exemptions to private tourism operators. ### Outlook and risks - Baseline projections - Real GDP growth in 2017 projected at 4 percent. - Headline inflation expected to reach 4½ percent (y/y) by end-2017 and return to the center of the target band of 4±1 percentage points by end-2018. - Current account deficit projected at 4.1 percent of GDP in 2017 and 4.3 percent of GDP in 2018, stabilizing around 4 percent over the medium term. - Projected NFPS deficits of 1.2 percent of GDP for both 2017 and 2018. - Honduras: Medium-Term Scenario (selected projections) - GDP at constant prices: 2017: 4.0; 2018: 3.6; 2019: 3.8; 2020: 3.8; 2021: 3.8; 2022: 3.8 (annual percent change). - Consumer prices (eop): 2017: 4.5; 2018: 4.0; 2019: 4.0; 2020: 4.0; 2021: 4.0; 2022: 4.0 (annual percent change). - NFPS net lending/borrowing (% of GDP): 2017: -1.2; 2018: -1.2; 2019: -1.0; 2020: -1.0; 2021: -0.9; 2022: -0.9. - Gross debt (% of GDP): 2017: 43.0; 2018: 44.1; 2019: 45.3; 2020: 44.2; 2021: 42.3; 2022: 38.7. - Current account balance (% of GDP): 2017: -4.1; 2018: -4.3; 2019–2022: around -4.0 to -4.1. - GIR (months of non-maquila imports): 2017: 4.7; 2018: 5.0; 2019: 5.1; 2020: 5.2; 2021: 5.2; 2022: 5.3. - Risks - External risks - Heavy reliance on the U.S.: around 40 percent of total exports and 85 percent of remittances are U.S.-linked. - Adverse U.S. performance could reduce growth and reverse capital inflows. - Temporary Protected Status (TPS) for Hondurans in the U.S. set to expire in January 2018; non-renewal could reduce remittances by around 7 percent per annum. - Faster-than-expected tightening of global financial conditions could pressure monetary policy and reserves given the crawling-like exchange arrangement. - Domestic risks - Failure to maintain fiscal prudence during the political transition remains low but possible. - Implementation of recent legislation (credit card law, tourism law) might undermine policy credibility and affect investor confidence and growth. ### Policy discussions — Fiscal policy (highlights) - For 2017 - NFPS deficit projected at 1.2 percent of GDP, slightly below the authorities’ 2017 target of 1.4 percent of GDP; the overperformance reflects slower...[text truncated in source] (document provides further fiscal policy discussion and medium-term fiscal consolidation elements). *Source: IMF staff report — EXECUTIVE SUMMARY (cr17331).* ### Box 2. Main Elements of the Fiscal Consolidation 2013-17 ### Box 2. Main Elements of the Fiscal Consolidation 2013-17 ### Overall outcome of fiscal consolidation - The NFPS deficit was lowered by 6¼ percentage points of GDP. - Fiscal consolidation was supported by both revenue and expenditure measures, including from public enterprises. ### Revenue measures and tax package - A comprehensive tax package was introduced at the beginning of 2014, which included: - 3 percentage points increase in the VAT rate (from 12 to 15 percent) - Increase in fuels taxes - Establishment of a minimum income tax to strengthen tax compliance - During the last four years, tax revenue increased by 3½ percentage points of GDP, twice the original program projections. - Sustained effort by the tax administration authority was the key for this outcome. - The authorities’ revenue mobilization strategy does not foresee changes in rates but instead measures to improve revenue administration. - Staff indicated two critical actions to ensure sustainability of revenue mobilization: - Restore tax authority’s enforcement mechanisms for tax collection; the new tax code has repealed the criminality of tax fraud, weakening compliance. - Rationalize tax expenditures. Honduras has tax expenditures of 7 percent of GDP. Despite new control procedures, additional exemptions were recently introduced (e.g., VAT exemptions for agricultural goods and tourism operator income tax). - For the new tourism law, staff estimates that exemptions could reach minimum of 1 percent of GDP over an 18-year period if the exemption is granted only for new investments; if additional existing projects are included, tax expenditures will be even higher. - Tax Expenditures (In percent of GDP) — IMF staff estimates: - Corporate income tax 2.1 - o/w special regimes (ZOLI, ZOLT, ZOLITUR) 0.9 - Personal income tax 0.3 - o/w teachers 0.1 - VAT 3.8 - o/w food staples 0.7 - o/w credit cards 0.5 - o/w agriculture 0.3 - o/w special regimes (ZOLI, ZOLT, ZOLITUR) 0.2 - Fuel tax 0.7 - o/w termal generators 0.6 - Customs 0.1 - Total 7.0 ### Expenditure measures and wage bill - Most fiscal consolidation came from the central government and public companies. - The government implemented a wide-ranging expenditure rationalization plan focused on: - Rightsizing public sector employment and controlling wage growth - Reducing other current expenditure - Protecting capital spending with high social returns and proven capacity for speedy implementation - During the last four years, the wage bill of the nonfinancial public sector declined by 2.8 percentage points of GDP, with about ¼ of the reduction taking place outside the central government. - At central government and decentralized institutions: - Nominal wages were frozen during 2014-15 - 60 percent of unfilled posts were cancelled (except for health and education) - A census of public employees was conducted to identify and remove irregular workers - The authorities adjusted electricity tariffs and rightsized public enterprise workforces as part of putting public enterprises on a sound footing. ### Fiscal balances and composition (selected figures, Percent of GDP) - Balance of the Nonfinancial Public Sector by Entity (2013, 2014, 2015, 2016, 2017; Change 2017-2013): - Central administration: -7.9, -4.5, -3.0, -2.8, -2.8; Change 5.1 - Social security administration: 0.7, 0.4, 0.6, 0.7, 0.7; Change 0.0 - Public employees pension funds: 2.0, 1.2, 1.6, 1.6, 1.6; Change -0.4 - Other institutions: -0.1, 0.0, 0.0, 0.1, -0.1; Change 0.0 - Central Government: -5.4, -2.8, -0.9, -0.4, -0.6; Change 4.7 - Local governments: -0.3, -0.1, 0.1, 0.0, 0.0; Change 0.2 - General Government: -5.6, -2.9, -0.8, -0.4, -0.6; Change 5.0 - Nonfinancial public companies: -1.9, -1.0, -0.2, -0.1, -0.6; Change 1.3 - Nonfinancial Public Sector: -7.5, -3.9, -1.0, -0.5, -1.2; Change 6.2 - Compensation of Employees of the Nonfinancial Public Sector (Percent of GDP) (2013, 2014, 2015, 2016, 2017; Change 2017-2013): - Central administration: 9.8, 9.0, 8.4, 8.1, 8.0; Change -1.8 - Social security administration: 0.8, 0.6, 0.5, 0.5, 0.6; Change -0.2 - Public employees pension funds: 0.1, 0.1, 0.1, 0.1, 0.1; Change 0.0 - Other institutions: 1.6, 1.4, 1.2, 1.3, 1.2; Change -0.4 - Central Government: 12.2, 11.0, 10.3, 10.0, 9.9; Change -2.4 - Local governments: 0.5, 0.4, 0.4, 0.7, 0.8; Change 0.3 - General Government: 12.8, 11.5, 10.7, 10.7, 10.7; Change -2.1 - Nonfinancial public companies: 1.5, 1.2, 1.1, 0.7, 0.7; Change -0.7 - Nonfinancial Public Sector: 14.2, 12.7, 11.7, 11.4, 11.4; Change -2.8 - Balance of the Nonfinancial Public Sector — Revenues, Expenditure, and Balance (Percent of GDP) (2013, 2014, 2015, 2016, 2017; Change 2017-2013): - Revenues: 30.5, 31.0, 31.2, 32.6, 32.0; Change 1.5 - Of which Taxes: 15.6, 17.1, 18.0, 19.5, 19.1; Change 3.5 - Interest revenues: 1.5, 1.6, 1.3, 1.9, 1.7; Change 0.1 - Sales of goods and services: 6.7, 6.4, 5.9, 5.3, 5.6; Change -1.0 - Expenditure: 37.9, 34.9, 32.2, 33.1, 33.2; Change -4.7 - Of which Compensation of employees: 14.2, 12.7, 11.7, 11.4, 11.4; Change -2.8 - Goods and services: 10.6, 9.4, 8.2, 8.2, 8.4; Change -2.1 - Interest payments: 2.1, 2.1, 2.3, 2.8, 2.8; Change 0.8 - Net acquisition of nonfinancial assets: 5.0, 3.8, 3.8, 3.3, 4.6; Change -0.4 - Balance: -7.5, -3.9, -1.0, -0.5, -1.2; Change 6.2 - Memo: - Primary balance: -7.0, -3.4, 0.1, 0.3, -0.1; Change 6.9 - Public debt: 41.0, 41.3, 41.2, 42.5, 43.0; Change 2.0 ### 2018 budget and policy priorities - For 2018, the proposed budget targets a NFPS deficit of 1.2 percent of GDP (CG deficit of 3.4 percent of GDP), fully in line with the FRL. - The 2018 budget envisages a small fiscal adjustment of ¼ percent of GDP and a ceiling of 7½ percent increase in current spending. - Policies underpinning the proposed budget: - Moderate public wages increase: - An 8 percent nominal increase in the wage bill is proposed (5 percent average increase during the 2015-2017). - The increase reflects planned expansion of security forces, costs of the police reform (severance payments), and additional services required to expand coverage of conditional cash transfer (CCT) social programs. - The nominal growth in the wage bill excluding the expansion of security forces is about 6 percent. - Sustained increase in targeted social spending: - Additional funds for social spending particularly for the authorities’ flagship program “Vida Mejor”. - Expansion of CCT programs requires increased supply of educational and health services through higher expenditures. - Using a unified registry of beneficiaries will strengthen targeting. - Ongoing improvement in the efficiency of public spending: - Given FRL limits on current spending growth, the budget relies on efficiency gains. - The 2018 budget includes preparation of pilot projects for performance budgeting. ### Fiscal rules and public-debt outlook - The implementation of the FRL is ongoing. - A module was implemented into the information management system (SIAFI) at the spending unit to verify in real time compliance with the annual current spending target. - The debt-to-GDP ratio of the NFPS is expected to reach 43 percent of GDP, a modest increase relative to 2016. - The authorities’ medium-term fiscal framework (MTFF) projects a gradual reduction in public debt to 30 percent of GDP in the medium term. - The MTFF sets fiscal deficits targets lower than the 1 percent of GDP ceiling stated in the FRL. - This will be achieved by controlling growth in current spending, particularly the wage bill, and preserving gains in tax collection. ### Monetary policy (related contextual measures) - Staff and the BCH agreed on a broadly neutral monetary policy stance. - Inflation expectations are within the target band and financial conditions are stable. - The BCH has maintained the policy rate constant at 5½ percent since June 2016 while mopping up liquidity from external bond issuance through stepped up issuance of central bank bills. - Staff supported the BCH decision to reduce the inflation target band from 4.5±1 percent to 4.0±1 percent. - The lower inflation target range might require stricter monetary conditions if inflation expectations leave the new target range, given an essentially closed output gap and the risks balance. - Modernizing the monetary policy framework: - Authorities decided to adopt a forward-looking approach based on an inflation targeting framework. - Strengthening the interbank market by fostering operations with collateralized securities. - In February 2017, surrender requirements for foreign exchange were reduced by 10 percent; the released foreign currency is traded in a foreign exchange interbank market. - Authorities are strengthening in-house capacity for macroeconomic modeling, forecasting, and policy analysis. - Reform of the central bank framework law has been delayed to allow full ownership by the new government. *Sources: Honduras Ministry of Finance and IMF staff estimates* ### Box 3. Journey to Implement Inflation Targeting ### Box 3. Journey to Implement Inflation Targeting ### Progress in preparing for Inflation Targeting (IT) - Enhanced market infrastructure: - Developed an interbank money market and a FX market, which was created once the process of phasing out FX surrender requirements started with the reduction by 10 percent. - Improved BCH decision-making: - Strengthened BCH’s macroanalysis unit. - Legal and institutional groundwork: - Initiated analysis of the legal framework for the new BCH law with clearer mandate to pursue price stability as primary objective. - Fiscal dominance reduction: - Successful implementation of the FRL to date seen as an important step towards reducing fiscal dominance. ### Challenges to monetary reform and transmission - Monetary transmission: - Transmission from the monetary policy rate to lending rates remains imperfect; markets remain segmented and mostly uncollateralized. - FX market development: - FX interbank market is off to a good start but continued progress with the elimination of FX surrender requirements is needed. - Safeguards and legal reforms: - BCH is strengthening its safeguards framework, but the recommended legal reforms to enhance its autonomy and governance structures remain outstanding. - BCH has approved a plan to adopt International Financial Reporting Standards with effect from FY2018. - Plans to submit central bank law reforms to congress have been delayed. ### Next steps agreed with authorities and policy recommendations - Central bank law: - Enact a new central bank law that provides the BCH the mandate, governance arrangements and instruments to ensure a successful implementation of IT. - Institutional and operational changes: - Continue to enhance BCH’s decision-making process to make it more forward-looking and adopt organizational changes consistent with the new regime. - Communication and transparency: - Enhance internal and external communication strategy, including the production of quarterly monetary policy reports, to better anchor expectations. - Exchange rate flexibility: - Allowing exchange rate flexibility would be appropriate as market conditions improve. - Staff suggested that with the stronger economy and the considerable reduction in fiscal dominance, there is room to allow the exchange rate to be more market-based. - The recent reduction in surrender requirements is welcome and further reduction would be desirable once market conditions allow. - Operational priority: - Immediate priority remains reforming the central bank law to give it a clear mandate to achieve price stability. ### Financial sector policy and vulnerabilities - Banking system soundness: - Banking system remains stable with satisfactory capital and liquidity levels. - Around 80 percent of funding come from deposits, limiting exposure to external shocks. - Growth in credit to the private sector stood at 10½ percent (y/y) as of August. - FX and dollarization risks: - FX risk remains important as the credit dollarization rate is still high (30 percent as of June-2017). - Recent legislative risks: - Credit card law: - Caps on credit card interest rates: maximum rate equal to 2.7 times the weighted average annual lending rate in Lempiras of the banking system (currently about 20 percent) subject to a cap of 54 percent. - Potential negative effects: reduced banks’ profitability, curtailed issuance of new credit cards for low-income earners, greater informal lending, and discouraged financial inclusion. - Last BCH financial stability report: 70 percent of credit cards have credit lines below US$1,600. - Financial inclusion law: - Allows public pension funds to provide consumer and housing loans to affiliates using trust funds (20 percent of their investment portfolio each one). - Allows provision of working capital loans for SMEs using similar mechanism (up to 10 percent of the portfolio). - Since mid-2016, public pension funds have significantly expanded consumer loans, especially the teachers’ pension fund (IMPREMA); pension funds argue loans are fully guaranteed by future pensions. - Financial supervisor plans to step-up monitoring of risks, including assessment of banks’ measures to protect profitability and capital adequacy. - Pension fund risks: - Use of pension funds to finance consumption needs a structural solution including better assets-liabilities management schemes. - Excessive concentration of the portfolio in one product entails both a financial and macroeconomic risk. - Expanding funds’ operations to SMEs could be risky and generates fiscal contingencies. ### Program, fiscal and structural context relevant for IT - Energy sector reforms and fiscal implications: - Loss-reduction concessionaire delivered a reduction in losses of 3¾ percent (0.2 percent of GDP in additional revenues), on track to meet the November 4 percent target. - Rightsizing program in ENEE concluded with a 60 percent reduction in the workforce. - Tariffs adjusted quarterly on a cost-recovery formula; as of June, tariffs had been increased by 10 percent compared to 2016. - Program financing and debt outlook: - Program remains fully financed; all financing needs are covered for the next 12 months based on external and domestic operations. - Domestic financial system, especially pension funds, currently possesses ample liquidity to support financing plans. - Authorities do not plan to draw the amount available upon completion of final reviews, treating the Stand-By Arrangement as precautionary in 2017. - Capacity to repay the Fund remains adequate; balance of risks manageable. - Potential access under the program would have only a modest effect on external debt; risk of debt distress is considered moderate per the latest debt sustainability analysis. - Debt sustainability analysis shows improved prospects relative to previous review; medium-term fiscal projections show a declining path in the public debt over GDP ratio. - Structural reforms and governance: - Measures to tackle corruption: MACCIH mission installed April 2016; special tribunals established; law on financing, transparency and oversight of political parties and campaigns enacted; prosecutions ongoing. - Honduras 20/20 Plan implementation ongoing to generate 600,000 jobs during 2016–20; prioritized sectors: tourism, textiles, intermediate manufacturing, and business process outsourcing; agriculture and housing to be included later. - Customs union with Guatemala launched; study estimates union could increase GDP growth by around ½ percent and favor textiles, chemical, and petrochemical industries. - Program performance and macro stance: - Authorities met all performance criteria for end-June 2017, and all but one indicative target (ENEE’s operating revenue-to-spending ratio). - Neutral monetary policy stance remains broadly appropriate in the near-term; BCH should remain vigilant and ready to tighten if inflation or credit growth accelerate and there are signs of overheating. - Fiscal stance for 2018 in the proposed 2018 budget is appropriate: moderate adjustment locks in consolidation while allowing moderate increases in public wages and increased social and infrastructure spending. ### Staff appraisal highlights - Support for IT transition: - Staff welcomes steps taken to move towards an inflation targeting framework to guide monetary policy. - Creation of interbank-money market progressing steadily; reduction by 10 percent in FX surrender requirements is fostering creation of foreign interbank market. - Staff encourages accelerating reduction of FX surrender requirements to create a more vibrant FX market and increase exchange rate flexibility. - Institutional reforms and fiscal institutions: - Fiscal institutions need further strengthening to lock in achievements: increase budget transparency, accountability, and control, phase out extra-budgetary vehicles. - Reducing tax exemptions and strengthening enforcement of tax laws remain critical tasks, including closing loopholes and fighting evasion and tax fraud. - Increasing social spending requires major efficiency gains and prioritizing programs with large positive impact assessments. - Financial sector supervision: - Continuous regulatory efforts required to address vulnerabilities: assess risks from excessive household debt (particularly credit cards); implement structural solutions for pension fund asset-liability management; monitor fiscal contingencies from pension fund activities. - Program endorsement: - Considering authorities’ performance and commitment, staff supports completion of the fifth and sixth reviews under the Stand-By Arrangement. *Source: Box 3. Journey to Implement Inflation Targeting (cr17331).* ### 5.75 percent . ### 5.75 percent . ### Fiscal Position and Public Finances - The fiscal position strengthened considerably in 2016, driven mainly by a reduction in the central government deficit. - Improvements owed to an increase in tax revenue from measures adopted in early 2014 and a reduction in spending, mainly due to strict limits on wages and the postponement of investments. - Nonfinancial Public Sector: - Primary balance: series includes -3.4, -4.5, -7.0, -4.7, -3.4, 0.1, -0.2, 0.3, -0.1, -0.1, 0.1, 0.4, 0.3, 0.2, 0.2 (percent of GDP for 2010–2022 entries shown). - Overall balance: -3.2, -4.4, -7.5, -5.4, -3.9, -1.0, -1.2, -0.5, -1.5, -1.2, -1.2, -1.0, -1.0, -0.9, -0.9 (percent of GDP). - Central Government (percent of GDP): - Overall balance and primary balance series shown for 2010–2017 p/ with similar improvement pattern. - Central Government Statement of Operations (levels, in millions of Lempiras): - Revenue: 75,978 (Act. 2014); 81,527 (Prog. 2015); 88,175 (Act. 2016); 92,169 (Rev. 2017); projected 99,389 (Prog. 2018) increasing to 157,166 (Proj. 2022). - Taxes: 68,598 (2014) rising to projected 143,439 (2021) and 157,166 (2022 figure is revenue total; taxes projected 143,439 in 2021). - Expenditure: 94,769 (2014) to projections 182,815 (2022). - Net lending (+)/borrowing (−): -18,792 (2014), -16,900 (2015 Prog.), -13,793 (Act. 2016), -15,004 (Rev. 2017), -13,593 (Prog. 2018) with net financial transactions equal to net lending. - Gross debt (millions of Lempiras): 192,365 (2014), 210,771 (2015), 212,822 (2016), 232,491 (2017 Rev.), 239,508 (Prog.), 259,503 (2019 Prog.) ... up to 418,454 (Proj., memo). - Gross debt excluding BCH recapitalization: 180,333 (2014) ... 390,812 (Proj. 2021). - Nominal GDP (in billions of Lempiras): 414.6 (2014), 440.5 (2015), 457.4 (2016), 481.3 (2017 Rev.), 491.3 (Prog.) ... 790.2 (Proj. 2022). ### Public Sector: Nonfinancial Public Sector Statement - Revenue (millions of Lempiras): 128,693 (Act. 2014); 138,255 (Prog. 2015); 142,734 (Act./Rev. 2016/2017); projected rising to 257,882 (Proj. 2022). - Expenditure (millions of Lempiras): 144,767 (Act. 2014); 147,532 (Prog. 2015); 147,085 (Act. 2016); projected 264,869 (Proj. 2022). - Net lending (+)/borrowing (−): -16,073 (2014), -9,277 (2015 Prog.), -4,351 (Act. 2016), -5,782 (Rev. 2017), projected -6,988 (Proj. 2022). - Gross total debt (millions of Lempiras): 171,059 (2014), 189,840 (2015), 188,628 (2016), 201,451 (2017 Rev.), rising to 306,114 (Proj. 2021, memo). ### Macroeconomic Growth, Inflation, and Medium-Term Framework - Real GDP growth: 3.1 (2014), 3.6 (2015), 3.6 (2016), 4.0 (2017), projections 3.6–3.8 for 2018–2022 (series shows 3.63.83.83.83.8). - GDP deflator (annual % change): 6.8 (2014), 6.4 (2015), 3.7 (2016), 5.9 (2017), projections 3.8–4.0 thereafter. - CPI inflation (eop): 5.8 (2014), 2.4 (2015), 3.3 (2016), 4.5 (2017), projected 4.0 (2018–2022). - Investment and saving (percent of GDP): - Gross domestic investment: 23.0 (2014), 25.6 (2015), 23.2 (2016), 25.9 (2017), projected ~26.0–26.9 (2018–2022). - Gross national savings: 16.0 (2014), 20.1 (2015), 19.4 (2016), 21.8 (2017), projected 21.4–22.8 (2018–2022). ### Balance of Payments and External Sector - Current account balance (percent of GDP): -7.0 (2014), -5.5 (2015), -3.8 (2016), -4.1 (2017), projections around -4.0 to -4.1 (2018–2022). - Exports f.o.b. (millions of US$): 5,556 (2014), 5,674 (2015), 5,443 (2016), 6,178 (2017), projected up to 7,260 (2022). - Imports f.o.b. (millions of US$): -8,523 (2014), -8,583 (2015), -8,162 (2016), -9,196 (2017), projected -10,753 (2022). - Transfers (net) / Remittances (percent of GDP / levels): - Transfers (net) in levels: 3,638 (2014), 3,835 (2015), 3,991 (2016), 4,308 (2017). - Remittances (percent of GDP) series: 15.9, 15.7, 16.7, 17.1, 17.0, 17.6, 18.6, 18.0, 19.3, 18.3, 18.0 (2014–2022 entries shown). - Net International Reserves (millions of US$): 2,032 (2014), 1,665 (2015), 2,211 (2016), 2,271 (2017), then up to 4,413 (Proj. memo series in other tables). - Gross reserves (end period, millions of US$): 3,698 (2014), 3,992 (2015), 4,172 (2016), 4,483 (2017), projected 5,930 (2022). - External public debt (percent of GDP): 28.3 (2014), 28.6 (2015), 28.6 (2016), 32.3 (2017), projections 32.5–39.9 through 2022. ### External Financing Needs and Sources - Current account deficit (millions of US$): 1,372 (2014), 1,144 (2015), 811 (2016), 920 (2017), projected 1,103 (2022). - Debt amortizations (millions of US$): 319 (2014), 354 (2015), 388 (2016), 419 (2017), projected 703 (2021). - Subtotal requirements and sources roughly match in projections (financing gap entries mostly 0 or small; Financing gap: 0 (2014), 177 (2015), 0 (2016), 100 (2017), 100 (2018–2022 entries as shown). - Capital flows: Foreign direct investment (net) remained a key source: 1,315 (2014), 1,113 (2015), 801 (2016), 1,102 (2017), projected up to 1,388 (2021). ### Monetary and Financial Sector - Summary accounts of central bank and financial system: - Net International Reserves (in millions of US$): 3,504 (2014), 3,809 (2015), 3,868 (2016), 4,273 (2017), projected 5,883 (2021). - Net Domestic Assets growth and composition details provided; credit to the private sector (local currency and foreign currency breakout). - Broad Money (M4) levels (millions of Lempiras): 223,429 (2014), 242,292 (2015), 273,913 (2016), 300,082 (2017), projected 466,487 (2022). - Broad money (percentage change): 13.2, 8.4, 13.1, 9.6, 8.5, 9.0, 9.0, 10.1 (series shown). - Private sector credit (percentage change): 10.7, 10.4, 10.8, 11.4, 11.5, 10.4, 10.5, 9.9. - Central bank yields and market indicators: - Yield on Central Bank Paper: (1-30) day and (31-360) day series shown in charts (values not tabulated as numbers in text). ### Banking Sector and Financial Soundness - Bank Assets: 220,277 (2009) rising to 487,691 (M6 2017) in millions of Lempiras. - Bank indicators (selected, in percent unless otherwise indicated): - Capital adequacy (Regulatory capital to RWA): 14.3 (2009), 14.9 (2010), 14.9 (2011), 14.7 (2012), 14.5 (2013), 14.6 (2014), 14.0 (2015), 13.8 (2016), 13.7 (2017, M6). - Non-Performing Loans to total loans: 4.7 (2009), 3.7 (2010), 2.9 (2011), 3.3 (2012), 3.4 (2013), 3.3 (2014), 3.0 (2015), 2.9 (2016), 2.6 (M6 2017). - Return on assets (ROA): 1.2 (2009), 1.3 (2010–2012 trend), 1.5 (2013), 1.4 (2014–2016), 1.3 (M6 2017). - Return on equity (ROE): 12.6 (2009), 12.5 (2010), 13.2 (2011), 15.9 (2012), 14.5 (2013), 13.4 (2014), 14.6 (2015), 14.6 (2016), 11.9 (M6 2017). - Liquidity metrics: Liquid assets to total assets ~21.1–27.3 (series); Liquid assets to total short-term liabilities ~52.2–73.8 (series). - Dollarization: Deposits in foreign currency percent of total ~30.0–30.5; Credit in foreign currency percent of total ~25.1–31.7. - Financial Stability Heat Map and Credit Cycle (quarterly indicators through 2017Q1): - Overall Financial Sector Rating: M (multiple quarters). - Credit cycle rated L (low) across quarters; Credit-to-GDP (%): ~55.0–55.5 in memo items. - NPL ratio range quarter-to-quarter: 4.0, 3.3, 3.4, 3.4, 3.7, 3.1, 3.7, 3.6, 3.5, 2.9, 2.6. ### Key Indicators and Memoranda (selected exact figures) - Population (2016): 9.1 million. - Life expectancy at birth in years (2015): 73. - Per capita income (PPP, 2016): 4,738 (U.S. dollars). - Percent of population below poverty line (2016): 61. - Unemployment rate (2016): 7.4. - Worker’s Remittances (percent of GDP): series shows 15.9 (2014), 15.7 (2015), 16.7 (2016), 17.1 (2017), and 18.0 (projected). - Nominal GDP (in millions of US dollars, memo): 19,688 (2014), 20,729 (2015), 21,367 (2016), 22,675 (2017), projected 26,774 (2022). *Sources: Ministry of Finance, Central Bank of Honduras, Honduran authorities, National Commission of Banking and Insurance, and Fund staff estimates and projections.* ### Annex I. Linkages with the U.S. Economy ### Annex I. Linkages with the U.S. Economy ### Migration and remittances - More than 550 thousand Hondurans (6 percent of total population) resided in the U.S. as of 2013. - Remittances from the U.S. currently stand at around 18 percent of GDP. - According to the Central Bank of Honduras, remittances serve as a main source of income for more than 45 percent of those who receive them. - Remittances growth: - 13.5 percent (y/y) in the first half of 2017. - 5.4 percent in 2016. - Economic sensitivity: - Remittances often react to changes in U.S. labor market conditions for Latino workers. - The direct annual impact on remittances of non-extension of the Temporary Protection Status (TPS) for Honduras stands at about US$300 million (1.5 percent of GDP). ### Trade and FDI linkages - Market exposure: - About one-third of Honduras’ goods exports excluding maquila are sold to the U.S. - Two-thirds of total exports are sold to the U.S. - Export composition: - Honduras’ export base is slightly more diversified compared with peers in Central America; most coffee exports (12 percent of total exports) are sold to Europe. - Direct exports to the U.S. are mainly maquila products (textiles and auto parts). - Indirect linkages: - Exposure to the U.S. through trade is likely larger when accounting for trade integration through CAFTA-DR and Mexico. - FDI: - FDI stock from the U.S. stands at around 12 percent of GDP. ### Macroeconomic spillovers and transmission channels - Exchange rate and monetary transmission: - Honduras has a crawling-like exchange rate arrangement and is susceptible to changes in monetary conditions in the U.S., with inflation and credit conditions partly dependent on the U.S. monetary policy stance. - Real economy linkages: - Honduras’ exports and FDI depend on U.S. demand. - Staff estimates that a one-percentage-point growth increase in the U.S. leads to about 0.9 percentage points higher growth in Honduras, 0.4 percentage points above a simple average for the CAPDR countries. - Potential policy-change spillovers: - Reverting from CAFTA-DR tariffs to most-favored nation treatment could lead to a permanent loss in the level of annual GDP of 0.6 – 1.0 percent. - Changes in U.S. immigration policies would affect Honduras comparatively more than regional peers, with negative impacts on consumption and investment (in both human and physical capital) in the short- to medium-term. ### Key quantitative linkages and vulnerability points - Migration: 550 thousand Hondurans in U.S. (6 percent of population) as of 2013. - Remittances: around 18 percent of GDP; main income source for >45 percent of recipients. - Remittance growth: 13.5 percent (y/y) in H1 2017; 5.4 percent in 2016. - Trade exposure: ~33 percent of goods exports excluding maquila to U.S.; ~66 percent of total exports to U.S. - Coffee exports: 12 percent of total exports (mainly to Europe). - FDI from U.S.: ~12 percent of GDP. - Growth spillover: +0.9 percentage points Honduran growth per +1 percentage point U.S. growth (0.4 percentage points above CAPDR simple average). - TPS non-extension impact: US$300 million (1.5 percent of GDP). - CAFTA-DR reversion impact: permanent GDP loss of 0.6 – 1.0 percent. *Source: IMF staff, Annex I. Linkages with the U.S. Economy.* ### 14. Despite marked improvements on public and external debt indicators, including a ### 14. Despite marked improvements on public and external debt indicators, including a ### Overview and risk assessment - Despite marked improvements on public and external debt indicators, including a satisfactory Fund-supported program implementation, the risk of external debt distress remains moderate. - Stronger than expected fiscal consolidation, and a reduced current account deficit strengthen the resilience of Honduras external position. - The FRL passed in 2016 is highlighted as a great achievement and sets the roadmap for continued structural fiscal reforms over the coming years. - On the monetary front, the reform of the monetary policy framework has shown some progress but much more needs to be done. - Proper implementation of such reforms over the next years are critical to generate a solid track record of commitment to sound macroeconomic policies, therefore, inclining future risk assessments towards a low distress rating. ### External Debt Sustainability — Baseline indicators (selected) - External debt (nominal) 2014–2022 and projections: - 2014: 37.2 - 2015: 36.5 - 2016: 35.9 - 2017: 38.2 - 2018: 37.9 - 2019: 38.4 - 2020: 38.6 - 2021: 37.9 - 2022: 37.2 - 2017-22 Average: 31.0 - 2027 Average: 19.2 - Public and publicly guaranteed (PPG) external debt (selected years): - 2014: 29.0 - 2015: 29.1 - 2016: 29.4 - 2017: 32.2 - 2018: 32.3 - 2019: 33.1 - 2020: 33.3 - 2021: 32.7 - 2022: 32.0 - 2017-22 Average: 25.9 - 2027 Average: 14.3 - Change in external debt (selected): - 2014: 0.8 - 2015: -0.7 - 2016: -0.6 - 2017: 2.3 - 2018: -0.3 - 2019: 0.5 - 2020: 0.2 - 2021: -0.7 - 2022: -0.7 - 2017-22 Average: -1.3 - 2027 Average: -1.0 - Identified net debt-creating flows (selected): - 2014: -2.0 - 2015: -1.7 - 2016: -1.0 - 2017: -2.1 - 2018: -1.8 - 2019: -2.3 - 2020: -2.4 - 2021: -2.5 - 2022: -2.4 - 2017-22 Average: -2.5 - 2027-37 Average: -2.5 - Non-interest current account deficit (percent of GDP, selected): - 2014: 6.4 - 2015: 4.4 - 2016: 2.5 - 2017: 6.8 - 2018: 3.6 - 2019: 2.7 - 2020: 2.7 - 2021: 2.4 - 2022: 2.3 - 2017-22 Average: 2.5 - 2027-37 Average: 2.7 - PV of external debt (selected): - 2017-22 Average: 31.8, 34.6, 34.1, 34.2, 34.3, 33.5, 32.6, 26.6, 16.1 (table entries across years) - In percent of exports (selected): 75.3, 79.2, 78.1, 77.5, 77.2, 75.6, 73.8, 60.4, 36.6 - PV of PPG external debt (selected): - 2017-22 Average figures around: 25.3, 28.6, 28.5, 28.9, 29.0, 28.2, 27.3, 21.6, 11.3 - In percent of exports (selected): 59.9, 65.5, 65.2, 65.4, 65.3, 63.7, 62.0, 48.9, 25.6 - Debt service-to-exports ratio (in percent, selected): - 2014: 21.1 - 2015: 22.7 - 2016: 26.6 - 2017: 16.1 - 2018: 16.0 - 2019: 15.4 - 2020: 19.8 - 2021: 15.1 - 2022: 16.6 - 2017-22 Average: 19.1 - 2027 Average: 14.3 - Total gross financing need (Billions of U.S. dollars, selected): - 2014: 2.2 - 2015: 2.3 - 2016: 2.5 - 2017: 1.4 - 2018: 1.5 - 2019: 1.3 - 2020: 1.8 - 2021: 1.3 - 2022: 1.6 - 2017-22 Average: 2.4 - 2027 Average: 2.8 ### Key macroeconomic assumptions (selected) - Real GDP growth (in percent, selected): - 2014: 3.1 - 2015: 3.6 - 2016: 3.6 - 2017: 3.3 - 2018: 2.2 - 2019: 4.0 - 2020: 3.6 - 2021: 3.8 - 2022: 3.8 - 2017-22 Average: 3.8 - 2027-37 Average: 3.4 and 3.8 entries appear across the table - GDP deflator in US dollar terms (change in percent, selected): - 2014: 3.6 - 2015: 1.6 - 2016: -0.5 - 2017: 3.7 - 2018: 3.9 - 2019: 2.0 - 2020: 0.3 - 2021: -1.0 - 2022: -1.0 - 2017-22 Average: -0.5, 0.2, 0.0 entries are present - Effective interest rate (percent, selected): - 2014: 1.7 - 2015: 3.2 - 2016: 3.7 - 2017: 2.6 - 2018: 0.6 - 2019: 4.2 - 2020: 4.3 - 2021: 4.4 - 2022: 4.5 - 2017-22 Average: 4.2 - 2027-37 Average: 3.5 and 3.8 entries appear ### Remittances, aid, and financing terms (selected) - Net FDI (negative = inflow, percent of GDP, selected): - 2014: -6.7 - 2015: -5.4 - 2016: -3.7 - 2017: -5.6 - 2018: -4.9 - 2019: -4.8 - 2020: -4.9 - 2021: -5.0 - 2022: -5.1 - 2017-22 Average: -5.2 - 2027-37 Average: -5.2 - Net current transfers (negative = inflow, percent of GDP): - 2014: -18.5 - 2015: -18.5 - 2016: -18.7 - 2017: -19.0 - 2018: -19.0 - 2019: -18.7 - 2020: -18.7 - 2021: -18.7 - 2022: -18.7 - 2017-22 Average: -18.7 - Gross workers' remittances (Billions of US dollars, selected): - 2014: 3.4 - 2015: 3.6 - 2016: 3.8 - 2017: 4.2 - 2018: 4.2 - 2019: 4.4 - 2020: 4.5 - 2021: 4.6 - 2022: 4.8 - 2027: 6.2 - 2037: 10.5 - Aid flows (in Billions of US dollars, selected): - 2014–2016: 0.3 each year - 2017: 0.3 - 2018: 0.2 - 2019: 0.2 - 2020: 0.2 - 2021: 0.2 - 2022: 0.2 - 2027: 0.3 - 2037: 0.5 - Of which: Grants (selected): 0.2 series; 2037: 0.4 - Of which: Concessional loans (selected): 0.2, 0.1, 0.1, 0.2, 0.0, 0.0, 0.1, 0.0, 0.1, 0.0, 0.1 ### Sensitivity analysis and stress tests — Key findings (selected) - Table AII.2 shows sensitivity analysis for PV of debt-to-GDP+remittances, PV of debt-to-exports+remittances, PV of debt-to-revenue, debt service-to-revenue, and debt service-to-exports+remittances under alternative scenarios and bound tests for 2017-37. - Baseline and scenario results (selected highlights): - Baseline PV of debt-to-GDP+remittances ratio (percent) in 2017: 24; 2018: 24; 2019: 24; 2020: 25; 2021: 24; 2022: 23; 2027: 18; 2037: 10. - A1 (Key variables at their historical averages 2017-2037) drives the ratio higher: 2017: 24; 2018: 26; 2019: 28; 2020: 30; 2021: 31; 2022: 32; 2027: 37; 2037: 39. - B2 (Export value growth shock) yields large adverse outcomes in several indicators, e.g., PV of debt-to-exports+remittances ratio shows a spike in some years (table entries indicate high values such as 77, 79, 79 in certain projections). - The most extreme stress tests vary by indicator; for many indicators the most extreme shock corresponds to an Exports shock, while for debt service-to-revenue the most extreme corresponds to a One-time depreciation shock. - Figure annotations: - The most extreme stress test is defined as the test that yields the highest ratio on or before 2027. - In figure panels, the most extreme shocks for panels b.–e. correspond to an Exports shock; for panel f. to a One-time depreciation shock. - Customized scenario (footnote/definition): - Real GDP growth is 2.6 percent in 2016 and 2.5 in 2017, rising on average 0.25 percentage points per year to reach 3.5 percent in 2021 and staying at this level thereafter. - Financing conditions from external capital markets deteriorate permanently, raising the average interest rate on new external debt by 100 basis points. - The overall deficit of the CPS increases by 2 percent of GDP in 2015 compared to the baseline and then fades out partially at a constant rate of 15 percent during the DSA period. ### Public Sector Debt Sustainability — Baseline (selected) - Public sector debt (percent of GDP, selected): - 2014: 42.3 - 2015: 42.3 - 2016: 43.5 - 2017: 43.5 - 2018: 44.3 - 2019: 45.0 - 2020: 42.8 - 2021: 40.5 - 2022: 39.8 - 2017-22 Average: 33.3 - 2027: 13.4 - Public sector debt denominated in foreign currency (selected): - 2014: 28.2 - 2015: 28.6 - 2016: 29.2 - 2017: 32.2 - 2018: 32.3 - 2019: 33.1 - 2020: 33.3 - 2021: 32.7 - 2022: 32.0 - 2017-22 Average: 25.9 - 2027 Average: 14.3 - Change in public sector debt (selected): - 2014: 1.8 - 2015: 0.0 - 2016: 1.2 - 2017: 0.0 - 2018: 0.8 - 2019: 0.7 - 2020: -2.2 - 2021: -2.3 - 2022: -0.7 - 2017-22 Average: -1.6 - Identified debt-creating flows (selected): - 2014: 3.3 - 2015: 0.2 - 2016: 1.8 - 2017: -0.5 - 2018: 1.4 - 2019: 0.8 - 2020: 0.7 - 2021: 0.4 - 2022: 0.3 - 2017-22 Average: -0.4 - 2027-37 Average: -1.2 - Primary deficit (percent of GDP, selected): - 2014: 3.6 - 2015: 0.3 - 2016: 0.3 - 2017: 3.2 - 2018: 2.1 - 2019: 0.1 - 2020: 0.2 - 2021: -0.4 - 2022: -0.3 - 2017-22 Average: -0.2 - 2027: -0.2 - Revenue and grants (percent of GDP, selected): - 2014: 29.4 - 2015: 29.9 - 2016: 30.7 - 2017: 30.3 - 2018: 30.7 - 2019: 30.9 - 2020: 31.1 - 2021: 31.2 - 2022: 31.3 - 2017-22 Average: 31.0 - 2027-37 Average: 31.0 ### Public-debt sensitivity analysis (selected) - Table AII.4 and Figure AII.3 present sensitivity analysis for public debt indicators under alternative scenarios and bound tests for 2017-37. - Selected baseline and scenario outcomes: - Baseline PV of Debt-to-GDP Ratio (percent) in 2017: 40; 2018: 40; 2019: 41; 2020: 38; 2021: 36; 2022: 35; 2027: 29; 2037: 10. - A1 (Real GDP growth and primary balance at historical averages) drives PV of Debt-to-GDP higher: 2017: 40; 2018: 43; 2019: 47; 2020: 49; 2021: 50; 2022: 53; 2027: 66; 2037: 92. - Debt service-to-revenue ratio baseline and stress outcomes (selected): baseline 2017: 125; 2018: 125; 2019: 126; 2020: 118; 2021: 111; 2022: 108; 2027: 89; 2037: 32. - Bound test B4 (One-time 30 percent real depreciation in 2018) produces heightened debt ratios and debt service outcomes across several indicators (table entries show elevated values in 2018–2020). ### Other sustainability indicators and fiscal dynamics (selected) - PV of public sector debt (selected): - Values around 39.4, 39.9, 40.5, 40.8, 38.5, 36.0, 35.1, 28.9, 10.3 across projection periods. - Gross financing need (percent of GDP, selected): - 2014: 3.4 - 2015: 4.6 - 2016: 3.2 - 2017: 7.4 - 2018: 3.7 - 2019: 4.3 - 2020: 6.6 - 2021: 4.4 - 2022: 5.1 - 2017-22 Average: 5.7 - 2027: 0.2 - Debt service-to-revenue and grants ratio (in percent, selected): - 2014: 7.6 - 2015: 17.8 - 2016: 14.5 - 2017: 27.9 - 2018: 16.4 - 2019: 19.1 - 2020: 25.6 - 2021: 18.4 - 2022: 20.1 - 2017-22 Average: 23.3 ### Policy-relevant implications (drawn from narrative and DSA results) - Continued fiscal consolidation and reduced current account deficit have materially improved external resilience but risk remains moderate — sustained policy implementation is necessary to shift risk assessments lower. - The FRL passed in 2016 provides a multi-year roadmap for structural fiscal reforms; adherence to the FRL is important for continued improvement in debt indicators. - Monetary policy framework reforms have begun but require further implementation to build a track record of sound macroeconomic policy and to help lower future debt-distress risk. - Stress tests indicate vulnerability to export shocks and one-time depreciation shocks; policies to diversify export base, strengthen foreign exchange buffers, and preserve concessional financing terms would reduce downside risks. *Source: IMF staff estimates and projections (tables and figures as provided in the chapter).* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### Overview: program purpose and outcomes - Purpose: Final reviews under the Stand-By Arrangement (SBA) to take stock of progress in restoring macroeconomic stability and improving conditions for sustainable and inclusive growth over the past 3½ years. - Context at inheritance (January 2014): - Poverty: 65 percent. - Real GDP growth in 2013: 2.8 percent. - Combined public sector (CPS) deficit (2013): 7.5 percent of GDP (from 2.8 percent of GDP in 2011). - External current account deficit (2013): 9.5 percent of GDP (from 8 percent in 2011). - Reserve coverage: below 4 months of imports. - Program objectives (2014–17): implement strong, front-loaded fiscal consolidation; structural reforms to strengthen macroeconomic framework and promote growth; strengthen the social safety net. - Key achievements after 3½ years: - Stabilized the economy and institutionalized fiscal prudence. - Reduced homicide rate from 75 per 100.000 in 2013 to 40 per 100.000 to date. - Created a special anti-corruption unit within the public prosecutors’ office, supported by international experts under the OAS cooperation agreement. - Poverty declined by 4 percentage points. - Request: Completion of the fifth and sixth reviews under the SBA; arrangement to be treated as precautionary with no intended drawings. ### Program performance and structural measures - Quantitative performance (end-June 2017): All quantitative performance criteria met. - Fiscal deficit ceilings met by large margins amid strong tax revenue growth, restraint in current expenditure, and under-execution of infrastructure spending. - ENEE non-technical losses reduced by 3.8 percentage points through August 2017. - Net lending of the CPS: missed at end-December 2016 but met after drastic tightening in the concession of loans in June. - Present value of new external debt contracted remained below program ceilings. - Monetary targets on Net International Reserves (NIR) and Net Domestic Assets (NDA) met. - Indicative targets: - Wage bill of central government (ceiling) and social spending (floor) met. - ENEE operating revenue-to-spending ratio (floor) missed by a small margin due to hiring of a non-technical-loss-reduction concessionaire. - Structural benchmark achievements: - Fiscal: - Fiscal Responsibility Law (FRL) enacted March 2016; required by-laws approved. - National registry of trust funds published; most trust fund operations incorporated into the budget. - Audit of public sector unpaid claims completed; 20 percent of them void. - New tax administration authority made operational; new customs administration created; medium-term strategic plan for customs adopted under FAD guidance. - ENEE concessionaire to reduce non-technical losses by 17 percentage points in 7 years began operations in August 2016. - Monetary and exchange rate: - BCH approved in October 2016 a strategic plan to modernize monetary policy toward an inflation-forecast targeting framework. - Issued new regulations for interbank money market; reduced FX surrender requirements by 10 percent; issued FX market operation regulations to transition to a more flexible exchange rate system. - Preparing a new central bank law consistent with envisaged monetary policy framework. - BCH approved plan to adopt IFRS as of January 1, 2018. - Financial sector: - New bank resolution framework enacted. - Financial System Stability Committee made operational. - New regulation for investments of public pension funds adopted to foster diversification. ### A. Macroeconomic Outlook - 2017 framework based on prudent assumptions to minimize downside revision risk. - Key projections and expectations: - Real GDP growth in 2017: expected to accelerate to 4 percent (driven by rising exports and investment, stable private consumption supported by remittances). - Headline inflation: expected to stay within the new 4±1 percent target range, aided by some exchange rate appreciation. - Current account deficit: expected to widen marginally to 4 percent of GDP. - Reserve coverage: expected to increase to about 5 months of imports, supported by sustained FDI flows and government Eurobond issuance of US$700 in January 2017. - External financing conditions: improved, supported by S&P one-notch sovereign rating upgrade to BB-; spreads on external debt reached record lows. ### B. Fiscal Policy - First half 2017 performance: - Non-Financial Public Sector (NFPS): fiscal surplus of ¾ percent of GDP. - Central Government (CG): deficit of ¼ percent of GDP. - End-2017 self-set targets: deficits of 1.4 and 3.2 percent of GDP for the NFPS and CG, respectively (both lower than FRL ceilings). - Revenue: - New tax code enactment led to income tax collection decline in Q1, followed by recovery due to ad hoc enhanced monitoring and enforcement measures. - Short-term reliance on ad hoc measures while working toward a robust, predictable, user-friendly tax framework. - Spending: - Current spending containment targeted to keep nominal increase below the 7.4 percent stated in the FRL. - Special module in SIAFI introduced to provide monthly budget ceilings for spending units and enforce the spending rule. - Projected public investment increase: around 1 percent of GDP at NFPS level (including electricity company investments in hydropower and PPPs). - Financing: - January 2017 placement of a 10-year external bond for US$700 million at a yield of 6¼ percent. - Continued domestic debt program for institutional investors with standardized long-maturity securities. - Audit of unpaid claims validated around one-third of claims; these incorporated as accrued spending to be paid based on budget availability. - 2018 Budget (submitted to the legislature): - NFPS deficit target: 1.2 percent of GDP. - CG target: 3.4 percent of GDP. - Revenue priorities: strengthen tax compliance and use risk-based audits to address noncompliance gaps. - Spending priorities: social spending, infrastructure, and security. - Per FRL spending rule: budget prepared with a nominal increase in current spending of 7.4 percent. - Allocation: additional resources for flagship social program “Vida Mejor” to expand coverage as envisaged in the 2014-2018 government plan. - Wage bill planned nominal increase: around 8 percent (6 percent nominal growth net of increase in police force). - Commitment to contain the wage bill and discuss reform options with World Bank and Fund assistance aimed at a modern, performance-based civil service. - ENEE-specific: - Continue reform strategy to ensure financial sustainability, including tariff scheme based on cost-recovery. - Reduction of 3.8 percentage points in electricity losses through August 2017 (0.2 percent of GDP in additional revenues). - Commitment to achieve a reduction of 4 percentage points in losses by November 2017. - Fiscal transparency: - Extra-budgetary vehicles used to facilitate timely service provision but weaken expenditure control chain. - Plan to seek technical assistance from the Fund for a fiscal transparency evaluation. ### C. Monetary Policy - 2017 monetary policy stance and actions: - Continued efforts to absorb liquidity from remittances and capital inflows through open market operations. - Nominal bilateral USD exchange rate appreciation: 0.5 percent through August; helped maintain inflation control. - Healthy bank deposit growth supported credit extension to the private sector without significant changes in lending rates. - Policy focus: - Maintain price stability and protect the external position. - Use monetary policy rate to signal stance; manage liquidity through open market operations to keep inflation within 4±1 percent target band in 2017–18. - Advance transition to full inflation targeting. - Operational and legal enhancements: - Strengthening macroeconomic modeling capacity with Fund technical assistance. - Updating organizational structure to support inflation targeting. - Short-run issuance of regulations for repos and reverse repos. - Continued upgrading of legal framework to support capital market development and strengthen interest rate transmission. - Reduced FX surrender requirement by 10 percent to promote development of FX interbank market. ### D. Financial Sector Policies - Risk reduction measures: - Higher capital requirements for foreign currency borrowing by unhedged agents adopted last year contributed to reduced credit dollarization. - Strengthened legal framework for bank resolution via substantive legislative reform. - Financial System Stability Committee made operational. - New regulations for pension funds’ investment policies issued to foster diversification and protect financial integrity. ### E. Structural Reforms and Medium-term growth - Honduras 2020 development strategy (launched 2016) aims for inclusive export-led growth targeting tourism, textiles, intermediate-goods, back office support, and agro-industrial sectors. - Crime reduction achievements and improvements in internal and regional connectivity intended to spur tourism development. - New tourism law introduced tax exemptions to attract foreign investment to the sector. - Commitment: not to renew any tax benefit scheduled to expire during the remainder of the program. *Letter of Intent, Tegucigalpa, October 10, 2017.* ### 15. Trade facilitation. With the reform of customs, the government sought to reduce ### 15. Trade facilitation. With the reform of customs, the government sought to reduce ### Trade facilitation: findings and developments - The new customs administration succeeded in reducing the cargo backlog while sustaining adequate revenue growth. - The Honduras-Guatemala custom union signed in June 2017 should also enhance trade and boost growth in the region. - The construction of a new airport with greater capacity is expected to facilitate tourism and promote trade in general. ### Quantitative performance criteria and key fiscal/monetary outcomes (selected figures from Table 1) - Overall balance of the public sector (ceiling): - End-Dec 2015 Prog. -3,000; Adjusted -1,824; Actual 4,043 - End-Jun 2016 Prog. -9,600; Adjusted -6,887; Actual -6,302 (Status: Met) - End-Dec 2016 Prog. -4,000; Adjusted -1,417; Actual 4,472 (Status: Met) - Overall balance of the central government (ceiling): - End-Dec 2015 Prog. -6,500; Adjusted -5,234; Actual -811 - End-Jun 2016 Prog. -16,300; Adjusted -13,587; Actual -13,455 (Status: Met) - End-Dec 2016 Prog. -8,000; Adjusted -5,417; Actual -1,493 (Status: Met) - Overall balance of ENEE (ceiling): - End-Dec 2015 Prog. -750; Adjusted -404; Actual -1,000 - End-Jun 2016 Prog. -1,581 (Status: Not met) - End-Dec 2016 Prog. -600; Adjusted -527 (Status: Met) - Net lending of the Combined Public Sector (ceiling): - End-Dec 2015 Prog. 200; Adjusted 2,420; Actual 1,700 - End-Jun 2016 Prog. 2,893 (Status: Not met) - End-Dec 2016 Prog. 500; Adjusted 440 (Status: Met) - Present value of new external debt contracted (continuous ceiling, in millions US$): - 2016: Prog. 520; Adjusted 182; Actual 401 (Status: Met) - End-Jun 2016: Prog. 73; Adjusted 260; Actual 260 - End-Dec 2016: Prog. 59; Adjusted 380 (Status: Met) - Increase in the stock of arrears of ENEE (continuous ceiling): - 2016: Prog. 0; Adjusted 2,327 (Status: Met) - Net international reserves of the central bank (floor, in million US$): - End-Dec 2015: 2,859; 2,871; 2,935 - End-Jun 2016: 3,005; 2,851; 2,676 (Status: Not Met) - End-Dec 2016: Prog. 3,120; Adjusted 2,869; Actual 3,259 (Status: Met) - Stock of net domestic assets of the central bank (ceiling): - End-Dec 2015: -35,342; -35,588; -35,640 - End-Jun 2016: -31,760; -27,473; -25,120 (Status: Not Met) - End-Dec 2016: Prog. -36,751; Adjusted -31,446; Actual -38,975 (Status: Met) - Indicative targets (selected): - Wage bill of the central government (ceiling): 19,100; 19,096; 39,800; 39,790 (Status: Met) - Social spending (floor): 3,000; 4,934; 9,600; 11,225 (Status: Met) - Operating revenue-to-spending ratio of ENEE (floor): 1.00; 1.07; 1.05; 1.06 (Status: Met); later 1.05; 0.99 (Status: Not Met) ### Structural benchmarks related to trade facilitation, fiscal transparency, and financial governance (selected entries from Table 2) - Adopt customs manuals in Puerto Cortes to enhance collection of import duties in gasoline and bulk freight. - Rationale: Enhance collection of import duties. - Target Date: End-June 2016. - Status: Met. - Eliminate central government subsidies to ENEE. - Rationale: Eliminate fiscal risk stemming from subsidies. Align incentives of the company away from government support and towards higher efficiency and autonomy. - Target Date: Continuous. - Status: Met. - Take actions sufficient to achieve savings in ENEE’s wage bill as indicated in paragraph 11 of the MEFP of the November 2014 MEFP. - Rationale: Eliminate fiscal risks stemming from ENEE by improving its operational margin. - Target Date: March 2015. - Status: Met. - Adopt customs-related and broader reforms aimed at improving revenue collection, fiscal transparency, and monetary policy modernization (multiple measures with dates and statuses recorded, including several "Met" and some "Not Met" items). - Examples of targets not met by target date include: - Approval of the law reforming the IHSS consistent with the fiscal objectives of the program (End-December 2016 — Not Met). - Submit to Congress reforms to the BCH’s law in line with Fund recommendations to support the transition towards inflation-forecast targeting (End March 2017 — Not Met). - National Banking Commission (CNBS) to issue prudential regulations for the investments of public pensions funds in line with IMF recommendations (End March 2017 — Not Met). - Ensure that the trust funds are managed within the general budget as per Art. 26 of the FRL (End-March 2017 — Not Met). - Tax Administration Authority to be fully operational (End-March 2017 — Met). ### Exchange rate and central bank governance notes - De jure exchange rate arrangement: crawling band since July 2011; de facto arrangement: crawling peg. - BCH operational band: bid prices within a range of 7 percent above or below the base price; bids in auctions not to exceed 1 percent of the average base price from auctions during the preceding seven business days. - The base price is revised weekly based on: (1) the differential between the domestic inflation rate and the estimated inflation rates of Honduras’s main trading partners, (2) changes in the exchange rates of these countries’ currencies vis-à-vis the U.S. dollar, and (3) the performance of official reserve assets. - The lempira followed a slow depreciating trend against the U.S. dollar until the end of 2016 and slight appreciation since then. - BCH calculates an official exchange rate (TCR) daily as the weighted average of accepted bids in foreign exchange auctions; the TCR is used the next day for specified FX transactions. - An update safeguards assessment (April 2015) concluded that the BCH Law poses a significant risk to central bank autonomy and noted recurring operating losses weakening the bank’s financial position; a recapitalization plan was initiated with BCH expected to achieve positive equity in 2021. The assessment recommended adopting International Financial Reporting Standards (IFRS). ### Technical assistance and multilateral engagement (selected) - Latest financial arrangements listed include a Stand-By arrangement starting 12/03/2014 with expiration 12/02/2017 (Amount Approved SDR 77.70; Amount Drawn SDR 0.00). - Honduras has received extensive technical assistance from IMF departments (MCM, FAD, STA, LEG) covering areas such as Customs Administration, Tax Administration, Monetary and Foreign Exchange Policy, Bank Supervision & Regulations, Public Financial Management, and statistical work from Nov 2012 through 2017 (detailed missions and topics listed). *Source: cr17331 - 15. Trade facilitation. With the reform of customs, the government sought to reduce* ### 1. On December 2014, the IDB approved its country strategy with Honduras for the ### cr17331 - 1. On December 2014, the IDB approved its country strategy with Honduras for the ### IDB Country Strategy (period 2015-2018) - Focus areas: (i) fiscal consolidation; (ii) sustainability and competitiveness in the energy sector; (iii) road infrastructure for regional integration; (iv) social inclusion; and (v) sustainable development in the Central District. ### IDB Sovereign-Guaranteed Portfolio (as of August 31, 2017) - Total portfolio of approved sovereign-guaranteed loans under execution: USD633.8 million. - Undisbursed balance: USD409 million. - Sector composition (public sector portfolio shares noted in text): - Social protection: 36.3 percent - Transportation: 36.1 percent - Energy: 7.2 percent - Fiscal administration: 4.3 percent - Sustainable development: 2.7 percent - Others: 13.4 percent - Private sector (IIC) projects in execution: five projects amounting USD23 million supporting finance, manufacturing, and retail and services. ### IDB Sovereign-Guaranteed Loan Portfolio — Table (As of August 31, 2017, In millions of U.S. Dollars) - Social protection: Current 229.9 | Approved 155.0 - Transportation: Current 229.0 | Approved 185.0 - Energy: Current 45.9 | Approved 20.7 - Fiscal: Current 27.0 | Approved 23.3 - Sustainable Development: Current 17.2 | Approved 0.0 - Other sectors: Current 84.8 | Approved 25.0 - Total: Current 633.8 | Approved 409.1 ### IDB Non-sovereign Guaranteed Loan Portfolio in Honduras (As of August 31, 2017, In millions of U.S. Dollars) - Financial Intermediaries: Current 15.90 | Approved 0.00 - General Manufacturing: Current 6.79 | Approved 0.00 - Services, Dist., Retail: Current 0.16 | Approved 0.00 - Total: Current 22.85 | Approved 0.00 ### IDB Disbursement of Sovereign Guaranteed Loan Portfolio in Honduras 2010-17 (In millions of U.S. Dollars) - 2010: 162.8 - 2011: 256.1 - 2012: 206.8 - 2013: 224.3 - 2014: 302.0 - 2015: 216.3 - 2016: 135.2 - 2017*: 210.5 - (*) projected ### IDB Annual Net Flows with Sovereign Guarantee in Honduras 2010-16 (In millions of U.S. Dollars) - Repayments by year: 2010 25.3 | 2011 24.3 | 2012 17.1 | 2013 12.0 | 2014 12.7 | 2015 19.5 | 2016 25.4 - Disbursement by year: 2010 162.8 | 2011 256.1 | 2012 206.8 | 2013 224.3 | 2014 302.0 | 2015 216.3 | 2016 135.2 - Net Loan Flow by year: 2010 137.5 | 2011 231.7 | 2012 189.7 | 2013 212.2 | 2014 289.3 | 2015 196.8 | 2016 109.9 - Subscriptions and Contributions by year: 2010 1.3 | 2011 0.0 | 2012 15.9 | 2013 8.7 | 2014 9.3 | 2015 1.7 | 2016 1.7 - Net Capital Flow by year: 2010 136.2 | 2011 231.7 | 2012 173.8 | 2013 203.6 | 2014 280.1 | 2015 195.1 | 2016 108.1 - Interest and Charges by year: 2010 10.2 | 2011 12.7 | 2012 16.5 | 2013 22.1 | 2014 26.1 | 2015 32.7 | 2016 42.3 - Net Cash Flow by year: 2010 125.9 | 2011 219.1 | 2012 157.2 | 2013 181.5 | 2014 254.0 | 2015 162.4 | 2016 65.8 ### IDB Pipeline for Sovereign-Guaranteed Approvals in 2017 - Three operations in the public sector: - Two operations in the energy sector for USD200 million aimed at: (a) the National Power transmission program; and (b) programmatic support for structural reforms in the Electricity Energy National Enterprise (ENEE). - One operation in education for the improvement human capital for USD60 million. - These projects are expected to be approved before the end of the year. ### Relations with the World Bank Group (as of September 21, 2017) - Country Partnership Framework (CPF) endorsed December 2015 covering 2016-2020; supports social inclusion, growth conditions, and resilience; aligned with Honduras’ Country Vision for 2038; cross-cutting themes: strengthening institutions and enhancing governance. - Combined World Bank Group active portfolio in Honduras (IDA, IFC, MIGA plus trust funds): US$1.03 billion. - IDA18 allocation: SDR243.4 million (US$340 million) to be allocated within the next three years. - Active World Bank portfolio: 5 projects totaling US$193.95 million (US$163.95 million in IDA commitments, plus US$30 million from the Global Agriculture and Food Security Program - GAFSP), with approximately US$74 million undisbursed. - Project disbursements (excluding budget support): US$70.1 million in FY14 → US$40.7 million in FY15 → stabilized around US$30 million in FY16-FY17. ### World Bank Group Components - IFC current portfolio: US$509.46 million (mostly in financial sector, infrastructure, and commercial real estate). - MIGA gross exposure: US$327.01 million through three projects in transport and energy. - MIGA guarantees: US$187.9 million for a toll road; US$82.4 million for 24MW expansion of 102MW Cerro de Hula wind farm; US$56.7 million in guarantees for three photovoltaic projects supporting 80 MW solar power. ### World Bank Active Projects (high-level) - Honduras Rural Competitive Project: PDO to increase productivity and competitiveness among organized rural small-scale producers; Additional Financing approved US$25.0 million; closing date November 30, 2020. - Corredor Seco Food Security Project: PDO to enhance food and nutritional security in Selected Areas of the Corredor Seco; implemented with US$30 million of GAFSP; targets 25 municipalities; closing date October 30, 2021. - Social Protection (multiple operations): PDOs include improving institutional capacity for the CCT Program, providing income support, increasing preventive health service use and school attendance in grades 1 to 9 in rural areas, and improving emergency response capacity; closing date December 31, 2018. - Safer Municipalities: PDOs include improving capacities in violence prevention and municipal responses; closing date August 31, 2018. - Disaster Risk Management: PDOs to strengthen integrated disaster risk management and emergency response capacity; closing date April 30, 2019. - Recently closed projects: PROMOSAS (closed December 2016); Second Land Administration (closed January 2017); First Fiscal Sustainability and Enhanced Competitiveness DPF (closed March 2017). ### Non-Lending Activities (Economic and Sector Work) - Recently completed work includes: - “Honduras - Unlocking Economic Potential for Greater Opportunities : Systematic Country Diagnostic” (2015) - “Honduras Economic Diagnostic for National Action (DNA)” (2015) - Guidance for Enhanced Regulatory Capacity for Improved Governance in Extractive Industries (2016) - Regional study on the Fiscal and Welfare Impacts of Electricity Subsidies in Central America (2017) - “Technical and Economic Analysis of the Penetration of Wind and Solar Energy in the Honduran Electricity Grid” (2017) - Ongoing analytical and advisory services include support to development of the Education Sector Plan, Jobs Diagnostic; regional study “Women in Central America: An Overview of Progress and Challenges”; a study on migration and remittances; technical assistance on public finances, contingent liabilities, energy sector reform; transparency and accountability support via Global Partnership for Social Accountability grant from USAID. ### Financial Relations — Selected Project Data (excerpted) - Disaster Risk Management Project (IDA 51900): Original Amount (USD Eq) 30,000,000.00 | Percent Disbursed 36.95% | Approval Date 13-Dec-12 | Signing Date 18-Dec-12 | Closing Date 30-Apr-19 | Undisbursed Balance 12,917,345.62 | Disbursed Outstanding Balance 11,087,231.08 - HN Safer Municipalities (IDA 51920): Original Amount 15,000,000.00 | Percent Disbursed 54.42% | Approval Date 13-Dec-12 | Signing Date 18-Dec-12 | Closing Date 31-Aug-18 | Undisbursed Balance 3,421,961.02 | Disbursed Outstanding Balance 8,163,774.04 - Social Protection (IDA 56030): Original Amount 25,000,000.00 | Percent Disbursed 84.22% | Approval Date 31-Mar-15 | Signing Date 19-May-15 | Closing Date 31-Dec-17 | Undisbursed Balance 3,944,255.63 | Disbursed Outstanding Balance 21,055,744.37 - Social Protection (IDA 52940): Original Amount 12,300,000.00 | Percent Disbursed 94.36% | Approval Date 8-Aug-13 | Signing Date 26-Aug-13 | Closing Date 31-Dec-17 | Undisbursed Balance 27,469.07 | Disbursed Outstanding Balance 11,607,428.93 - Social Protection (IDA 47740): Original Amount 40,000,000.00 | Percent Disbursed 93.97% | Approval Date 29-Jun-10 | Signing Date 2-Aug-10 | Closing Date 31-Dec-17 | Undisbursed Balance 10,417.01 | Disbursed Outstanding Balance 37,590,167.99 - Honduras Rural Competitiveness Project (IDA 44650): Original Amount 30,000,000.00 | Percent Disbursed 47.50% | Approval Date 17-Jun-08 | Signing Date 17-Sep-08 | Closing Date 31-Dec-18 | Undisbursed Balance 164,435.30 | Disbursed Outstanding Balance 14,252,564 - Honduras Rural Competitiveness Project (IDA 60460): Original Amount 25,000,000.00 | Percent Disbursed 0.00% | Approval Date 18-May-17 | Closing Date 30-Nov-20 | Undisbursed Balance 25,000,000.00 | Disbursed Outstanding Balance 0.00 - PROSASUR – Corredor Seco Food Security Project (TF 17904): Original Amount 30,000,000.00 | Percent Disbursed 8.61% | Approval Date 24-Sept-15 | Signing Date 11-Nov-15 | Closing Date 30-Oct-21 | Undisbursed Balance 27,415,877.30 | Disbursed Outstanding Balance 2,584,122.70 ### Selected Aggregate Financial Flows (Period Jul 2006 - Jun 2017) - Total Disbursements: 802,545,664.40 - Total Repayments: 65,060,671.54 - Total Net Amount: 737,484,992.80 - Total Charges: 12,471,893.58 - Total Fees: 51,871,045.63 - Example fiscal year entries: - Jul 2010 - Jun 2011: Disb. Amt. 118,584,340.26 | Repay Amt. 1,105,404.96 | Net Amt. 117,478,935.30 | Charges 0.00 | Fees 4,103,991.95 - Jul 2016 – Jun 2017: Disb. Amt. 28,378,659.17 | Repay Amt. 24,761,314.50 | Net Amt. 3,617,344.67 | Charges 3,035,493.00 | Fees 7,912,871.45 ### Statistical Issues (As of September 20, 2017) - General: Data broadly adequate for surveillance and program monitoring, but improvements needed in timing of data release and coverage. Outstanding issues: lack of comprehensive data on financial operations of public enterprises; enhanced reporting of government guarantees and fiscal contingent liabilities; valid and reliable methodology to estimate private capital flows. - National Accounts: - BCH compiles national accounts following the System of National Accounts 1993 (1993 SNA), rev. 4. Base year is 2000. - BCH is working on updating the base year and adopting main recommendations of the 2008 SNA, with TA from an independent consultant and CAPTAC-DR. - Labor statistics: Need for estimates of average wages and unit labor costs; conducting a comprehensive household survey would help evaluate labor market conditions. - Price Statistics: - BCH prepares CPI (since April 2000) with reference period December 1999 = 100. CPI basket and weights based on NHIES 1998–99. - A new NHIES for 2016-2017 is expected to begin shortly. - Producer price index revised by expanding coverage and updating base and classification; preliminary estimations expected to be released soon. Index includes goods for processing activities (maquila), trade and transport margins; limits its use in compilation of national accounts at constant prices. - Government Finance Statistics: - SEFIN compiles and disseminates GFS covering central administration, central government, general government, and nonfinancial public sector. - SEFIN and BCH participating in GFS harmonization project for Central America, Panama, and Dominican Republic to elaborate and publish comparable GFS using GFSM 2014 and gradually implement GFSM 2014 and PSDSG. - Need for systematic mechanism to collect data on arrears and floating debt of public enterprises. - Monetary and Financial Statistics: - MFS reported to STA monthly using SRFs for central bank, other depository corporations, and other financial corporations (OFCs). - Pension funds are excluded from OFCs coverage; inclusion of pension funds and cross-sectoral data consistency are major issues to address. - Financial sector surveillance: Authorities report nine out of 12 core financial soundness indicators and three of the encouraged set. - External sector statistics: Honduras has achieved significant milestones in the CAPTAC-DR Regional Harmonization Project of External Sector Statistics (ESS), which ended in December. *International Monetary Fund — cr17331 (extracted content unit)* ### 2015. The BCH disseminates quarterly Balance of Payments and International Investment Position (IIP) ### 2015. The BCH disseminates quarterly Balance of Payments and International Investment Position (IIP) ### Data dissemination and ongoing work - The BCH disseminates quarterly Balance of Payments and International Investment Position (IIP) statistics, and monthly the Data Template on International Reserves and Foreign Currency Liquidity. - Honduras participates in the Coordinated Direct Investment Survey (CDIS) and the Coordinated Portfolio Investment Survey (CPIS). - Work in progress at the BCH aims at: - improving the coverage of the surveys on nonfinancial corporations, and, particularly, on direct investment enterprises; - improving the coverage of ESS; - ensuring consistency between external debt statistics and IIP statistics; and, - completing the migration to a BPM6 basis of recording and dissemination of external sector statistics. ### Data standards and quality - Honduras is an e-GDDS participant. - In June 2016, it implemented the e-GDDS recommendations—including the launch of a National Summary Data Page to serve as a one-stop portal for essential macroeconomic and financial data. - Authorities are encouraged to: - start data dissemination according to a publicly available Advance Release Calendar; and - take steps toward SDDS subscription. - Data ROSC was published on July 29, 2005. - Table of Common Indicators Required for Surveillance (selected entries): - Exchange Rates: Date of latest observation 20/09/17; Date received 20/09/17; Frequency: D; Frequency of Reporting: D; Frequency of Publication: D. - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 14/09/17; Date received 19/09/17; Frequency: D; Frequency of Reporting: D; Frequency of Publication: D. - Reserve/Base Money: Date of latest observation 7/09/17; Date received 19/09/17; Frequency: D; Frequency of Reporting: M; Frequency of Publication: D. - Broad Money: Date of latest observation 31/07/17; Date received 01/09/17; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M. - Consolidated Balance Sheet of the Banking System: Date of latest observation 31/07/17; Date received 01/09/17; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M. - Interest Rates: Date of latest observation 08/09/17; Date received 19/09/17; Frequency: W; Frequency of Reporting: M; Frequency of Publication: M. - Consumer Price Index: Date of latest observation 31/08/17; Date received 09/09/17; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M. - Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of latest observation 30/06/17; Date received 31/08/17; Frequency: Q; Frequency of Reporting: Q; Frequency of Publication: Q. - Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of latest observation 30/06/17; Date received 31/07/17; Frequency: Q; Frequency of Reporting: Q; Frequency of Publication: Q. - Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation 30/06/17; Date received 31/07/17; Frequency: Q; Frequency of Reporting: Q; Frequency of Publication: Q. - External Current Account Balance: Date of latest observation 31/03/17; Date received 15/07/17; Frequency: Q; Frequency of Reporting: Q; Frequency of Publication: Q. - Exports and Imports of Goods and Services: Date of latest observation 31/08/17; Date received 15/09/17; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M. - GDP/GNP: Date of latest observation 31/03/17; Date received 01/07/17; Frequency: Q; Frequency of Reporting: Q; Frequency of Publication: Q. - Gross External Debt: Date of latest observation 31/07/17; Date received 01/09/17; Frequency: M; Frequency of Reporting: M; Frequency of Publication: M. - International Investment Position: Date of latest observation 31/03/17; Date received 01/07/17; Frequency: Q; Frequency of Reporting: Q; Frequency of Publication: Q. ### Macroeconomic outcomes and social indicators (statements by Honduran authorities) - Program achievements and macroeconomic outcomes: - Combined public sector deficit reduced from 7.5 percent to a targeted deficit of 1.4 percent. - GDP growth increased and was maintained (no numeric growth rates provided in source text). - External balance improved; path initiated to adopt a more flexible exchange rate arrangement and an inflation targeting regime. - Historically low country risk premium achieved. - Social indicators: - Poverty rate fell from 65 percent in 2013 to 61 percent in 2016. - Global Multidimensional Poverty Index (MPI) decreased from 74.2 percent in 2013 to 70.7 percent in 2016 (around 170,000 people). - Homicide rate decreased from 75 per 100.000 in 2013 to 40 per 100.000 to date. - The homicide rate fell by 25.4 percent in the first nine months of 2017. - Social program example: “Vida Mejor” conditional cash transfers program (additional benefits included allocation to improve housing and access to solidarity lending, among others). - Anti-corruption measures: A special anti-corruption unit within the public prosecutors’ office, created in October and backed by the Mission to Support the Fight Against Corruption and Impunity in Honduras (MACCIH), recently held their first hearings. ### Fiscal performance - Fiscal discipline supported by the Fiscal Responsibility Law (FRL) enacted in March 2016. - Authorities established end-2017 targets lower than the ceilings implied by the FRL. - The 2018 budget submitted to Congress was fully aligned with the FRL. - Customs administration reforms: Guidance from the Fiscal Affairs Department (FAD) supported the elaboration and implementation of a medium-term strategic plan for customs. - ENEE (Honduran energy company) financial position: - Strengthened and evolving as expected. - Reform strategy includes ongoing adoption of a tariff scheme based on cost-recovery principles. - Rightsizing program in ENEE concluded with a 60 percent reduction in the workforce. ### Financial stability and household indebtedness - Measures taken to protect financial stability included: - Actions to discourage lending to unhedged foreign exchange (FX) borrowers, resulting in a reduction of FX credit. - Enactment of a strengthened bank resolution framework. - Creation and recent operationalization of the Financial Stability Committee. - Enactment of a financial inclusion law. - Regulations to reduce vulnerabilities from consumer loans from public pension funds to their affiliates. - Authorities committed to mitigating risks from lending by public pension funds, strengthening monitoring of pension funds’ investments and household credit, and ready to take additional measures if necessary. - Credit card indebtedness: - Credit card loans account for around 9 percent of the total loan portfolio. - A Credit Card Law enacted in August 2017 expands the macroprudential toolkit by establishing limits to the ratio of loans to income. - Authorities agreed to evaluate the implementation of additional policy measures to contain and reduce household indebtedness. ### Monetary policy framework and institutional reform - Transition toward inflation targeting and a more flexible exchange rate arrangement: - Honduras had maintained a de jure crawling peg for more than twenty years. - FX surrender requirements were decreased by 10 percent to promote a foreign interbank market. - New regulations passed to strengthen the interbank money market to support the monetary transmission mechanism. - Central bank organizational changes made for effective implementation of an inflation targeting monetary scheme. - Actions to date have been well received and understood by the private sector. - Authorities will continue to review the Central Bank Law to grant the central bank more authority and independence as well as the necessary governance structure. *Source: cr17331 - 2015. The BCH disseminates quarterly Balance of Payments and International Investment Position (IIP)* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17331.pdf_