## cr18206

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---

### The Reduction in Crime Since 2013
- Since 2013 Honduras achieved an impressive reduction in violence; the homicide rate remains above the LAC average.
- Security improvements since 2013 contributed to macroeconomic recovery and confidence.

- Measures implemented:
  - Tactical police operations and crime prevention programs targeted to the highest crime areas.
  - Police force improvements by:
    - (i) capturing and extraditing to the U.S. many leaders of criminal organizations;
    - (ii) focusing on reducing extorsions, which often lead to murders;
    - (iii) implementing real-time monitoring initiatives (new 911 centers, security cameras, street lights and panic buttons in public buses);
    - (iv) establishing a civilian committee to purge corrupt officers;
    - (v) enlisting new police officers;
    - (v) improving equipment, training, raised education requirements and increased salary of police officers.
- Resource allocation:
  - Since 2012 as a percentage of GDP: the budget of Ministry of Security increased 20 percent, and of the Defense Ministry by more than 60 percent.
- Context:
  - Reduction in violence helped improve confidence but institutional weaknesses remain exposed by high-profile corruption cases.
  - Continued institutional strengthening and anti-corruption measures are implied as necessary to sustain security gains.

### Authorities' Outlook and Key Macroeconomic Figures
- Authorities' views:
  - Shared staff’s assessment of downside risks, emphasized external vulnerability to changes in U.S. immigration policies and tighter external financial conditions.
  - Authorities foresaw real GDP growth of about 4 percent, driven by expected expansion of construction (housing) and tourism sectors.
  - Committed to curbing spending as needed to maintain the NFPS deficit unchanged from last year.
  - Supportive of reducing tax expenditures, strengthening transparency of public spending, improving public wage policies, assessing electricity sector reforms for ENEE, and enhancing tax and customs revenue administration with Fund TA.
  - Requested follow-up TA for monetary policy modernization.

- Key macroeconomic figures (Act. / Projections series as reported):
  - GDP at constant prices: 3.8 3.8 4.8 3.7 3.7 3.7 3.7 3.8 3.8
  - Consumer prices (eop): 2.4 3.3 4.7 5.0 4.5 4.0 4.0 4.0 4.0
  - Net lending (+) / Net borrowing (-) (Nonfinancial Public Sector): -0.9 -0.5 -0.8 -0.8 -0.8 -0.8 -0.7 -0.7 -0.7
  - Primary balance (in percent of GDP): 0.1 0.3 0.1 0.3 0.5 0.7 0.7 0.7 0.5
  - Gross debt (in percent of GDP): 39.0 40.0 40.7 41.4 42.1 42.7 43.5 43.9 43.6
  - Current account balance (in percent of GDP): -4.7 -2.7 -1.7 -3.9 -4.0 -4.1 -4.0 -3.9 -3.9
  - GIR (in months of non maquila imports): 4.8 4.7 5.2 5.2 5.1 5.1 5.1 5.1 5.1

### A. Near-Term Policy Mix to Safeguard Macroeconomic Stability
- Fiscal policy recommendations:
  - Staff proposed reduction in the deficit by ½ percentage point of GDP (countering a 2018 budget fiscal impulse of about ½ percent of GDP relative to 2017).
  - ENEE’s deteriorating finances identified as the primary fiscal challenge.
  - Strengthen revenue mobilization by reducing inequitable and unsustainable tax exemptions; ensure adequate funding for social programs.
- Monetary policy recommendations:
  - BCH policy rate has been at 5½ percent since mid-2016.
  - Staff recommended reversing the supportive stance to rein in emerging inflation pressures and anchor expectations near the midpoint of the recently reduced target band.
  - Reversal should offset monetary expansion implicit in the new housing lending program.
  - Lower import growth and net capital outflows could result in accumulation of international reserves by US$50 million.
  - A more cautious stance would slow real growth only modestly in 2018, with growth then bouncing back at about 4 percent.

- Neutral Interest Rate estimates (reported averages and methods):
  - Average: 4.80 5.50
  - Uncovered Interest Parity: 0.65 .4 10
  - Expected-Inflation Augmented Taylor Rule: 1.36 .1 -57
  - General Equilibrium Model: 1.9 6.7 -120

### B. Resolving Long-Standing Fiscal Issues
- Tax expenditures:
  - Tax expenditures are close to 7 percent of GDP.
  - Staff recommended phasing out tax exemptions yielding at least 1½ percent of GDP over the next three years.
  - Additional revenues to expand poverty-reducing expenditure as per the social protection framework law.
  - Publish beneficiaries and revenue-forgone estimates; cost-benefit analysis for new exemptions in line with the FRL.
- Wage bill:
  - During 2014-2017 authorities retrenched the wage bill by about 3 points of GDP using mainly stopgap measures.
  - Staff estimates around ½ percent of GDP could be saved over the medium term if reforms are implemented.
  - Authorities developing a general wage policy targeted for approval in the first half of 2019.
- ENEE financial sustainability:
  - Electricity losses at end-2017 stood at 31 percent.
  - Large unpaid bills from public sector entities amount to about ½ percent of GDP.
  - Recommendations: comprehensive plan, adjust electricity tariffs, faster reduction in non-technical losses.
- Contingent liabilities and PFM reforms:
  - Authorities to quantify municipal debt, natural disaster risks, and public enterprise risks in 2018; first report of contingent liabilities expected to accompany the 2019 budget bundle.
  - Conduct a Fiscal Transparency Evaluation (FTE) led by FAD; phase out extra-budgetary trust funds or implement independent ex-post expenditure audits; incorporate performance-based indicators into medium-term fiscal framework.

- Revenue administration priorities (Box 3 selected):
  - Update taxpayer registry for the ten-thousand most important taxpayers.
  - Redesign the taxpayers single account.
  - Ensure 100 percent electronic filing, payment and reporting through a suitable IT platform covering Customs Administration, Tax Administration, and the Ministry of Finance.
  - Establish a Compliance Management Committee; improve information access and audit processes for large taxpayers.

### C. Monetary Policy Modernization and Inflation Targeting
- Central bank law reform recommended principles:
  - Clear mandate to control inflation.
  - Greater institutional, financial and operational autonomy.
  - Solid institutional governance with transparent appointment of the central bank board and separation of responsibilities.
  - Robust accountability mechanisms, including adoption of IFRS.
- Market infrastructure and FX policy:
  - Implemented: fully collateralized securities in the interbank market; reduced surrender requirements for FX operations by 20 percent; strengthened technical capacity of central bank staff.
  - Staff recommended accelerating reduction in FX surrender requirements to create a more vibrant FX market and increase exchange rate flexibility to support de-dollarization.
  - Further steps: develop secondary securities market supported by a new securities market law; adopt more transparent and forward-looking communication strategy.
- Authorities requested follow-up TA to assist with transition and monetary policy modernization.

### D. Ensuring Financial Stability
- Completed and ongoing supervisory measures:
  - New supervisory manual with methodologies for risk-based supervision (RBS); improved training programs for inspectors; new AML/CFT rules; additional information sharing agreements with regional supervisors.
- Risks highlighted:
  - Rising household debt; concentration of personal loans in public pension funds’ portfolio; expansion of consumer lending by pension funds and public banks; growth in public bank operations including first-tier banking.
- Stress test outcomes (staff):
  - Banking sector broadly resilient to most standardized shocks.
  - Capital adequacy falls below regulatory minimum only in combined shock scenario; abrupt increase in NPLs could put capital adequacy ratios close to statutory minimum.
  - Recommended close monitoring of NPL developments and cautious expansion of lending by BANHPROVI and pension funds.
- Stress test specifics (selected):
  - Proportional increase in NPLs: NPLs (gross)/ total loans: 6.9 7.5 6.1; Post-shock CAR (Percent): 10.3 10.0 10.6.
  - Interest rate risk shock assumes 3.25 percenteage points increase in nominal interest rate; Overall change in CAR (NII and Repricing): -2.4 -2.8 -1.9.
  - FX shock assumes a 14 percent depreciation leading to 60 percent of FX koans becoming NPLs; Overall change in CAR (Direct and Indirect): -0.6 -0.6 -0.6.
  - Liquidity shock assumes 10 and 8 percent withdrawal of demand deposits (domestic and foreign), and 5 and 3 percent/day withdrawal of time deposits; (# of liquid banks after 5 days): 15 6 9.

### External Sector Assessment — Key Findings
- Current account and remittances:
  - CA deficit narrowed to 1¾ percent of GDP in 2017 mostly due to temporary factors.
  - Remittances surged 12 percent in 2017; stable annual average remittances growth since 2010 ~6½ percent.
- Exchange rates and reserves:
  - REER depreciation in 2017 slowed to ¾ percent (2¼ percent in 2016).
  - Headline inflation in 2017 reached 4¾ percent eop.
  - Nominal depreciation in 2017 slowed to 3 percent (3¾ percent in 2016).
  - International reserves increased by almost US$900 million in 2017, boosted by a US$700 million external bond issuance and stronger remittances.
  - Stock of reserves reached 5.3 months of non-maquila imports at end-2017.
- External position and sustainability:
  - Net IIP negative at more than 65 percent of GDP.
  - FDI comprises more than 60 percent of total liabilities and is well diversified.
  - Staff’s bottom-line: Honduras’s external position in 2017 broadly in line with fundamentals and desirable policy settings.
- EBA-lite and model outcomes:
  - CA model: cyclically adjusted 2017 CA of -3.0 percent of GDP; CA norm of -4.7 percent of GDP; CA gap of 1.7 percent of GDP; REER undervaluation of 4.6 percent.
  - REER Index model: about 3 percent undervaluation.
  - External sustainability (ES) approach: finds overvaluation of 3 percent.
  - Overall assessment: CA and REER gaps near zero in 2017 when combining approaches.

### Debt Sustainability and Public Debt Dynamics
- Risk of external debt distress: Moderate.
- Public debt and projections (selected):
  - Gross public debt stood at 40¾ percent of GDP in 2017.
  - Sovereign placed international bonds for US$700 million at a rate of 6¼ percent.
  - External debt increased from 35½ percent of GDP in 2016 to 37½ percent of GDP in 2017.
- Public debt composition:
  - Share of public debt that is external rose from 72 percent in 2016 to about 77 percent in 2017 due mainly to external bond issuance.
  - PPG external debt projected to peak at about 33 percent of GDP in 2022, from about 31 percent of GDP in 2017.
- Baseline and customized scenario parameters (selected):
  - Baseline real GDP growth: 2018 3.7, 2019 3.7, 2020 3.7, Long term 3.8 (percent).
  - Customized real GDP growth: 2018 2.6, 2019 2.5, 2020 2.8, Long term 3.5 (percent).
  - Average interest rate on new external debt: Baseline 3.4 (percent); Customized 4.4 (percent).
  - Fiscal balance (percent of GDP): Baseline -0.8, -0.8, -0.7, -0.7; Customized -2.8, -2.5, -2.2, -1.9.
- Policy implications:
  - Continue to fulfill the FRL and pursue structural fiscal reforms to secure sustainability.
  - Prioritize revenue mobilization and ensure sustainability of state-owned enterprises.
  - Monitor external financing conditions, export performance, remittances, and grant-equivalent financing.

### Structural Reforms, Competitiveness, and Social Outcomes
- Anti-corruption and rule of law:
  - Sustained anti-corruption efforts crucial; recent legislative setback noted regarding investigative powers.
  - Progress: AML/CFT legislation aligned with GAFILAT recommendations; creation of special anti-corruption unit; prosecution of high-profile cases.
  - Mission recommendations: continue GAFILAT implementation; enhance asset declaration system; use all legal tools including criminal prosecution.
- Product and labor market competitiveness:
  - Doing Business indicators show room for improvement in contract enforcement, trade facilitation, and protecting minority investors.
  - Key priorities: speed business licenses, ease procurement, implement electronic signature, consolidate paperwork, publish procedural information online.
  - Education plan needed consistent with employment objectives.
- Labor market:
  - Large and widening wedge between minimum and average wage since 2010; recommendations to reform minimum wage-setting framework and increase productivity via public interventions in health and education.
- Social spending and outcomes:
  - Social spending increased from ½ percent of GDP in 2009 to close to 2 percent of GDP in 2017.
  - Footnote: Social spending reduced to 1¾ percent of GDP in 2017 from 2¼ percent of GDP in 2016 due to under execution of trust funds.
  - Coverage gap: number of families in extreme poverty around 800,000.
  - CCT program (bono Vida Mejor) presented evidence of effectiveness; structural reduction in child malnutrition documented.
  - Anemia in children <5 years reduced from 33¼ percent in 2008 to 31½ percent in 2016 (WHO).

### Statistics and Data Modernization Needs
- National Accounts and CPI:
  - Current reference year for NA and CPI based on 1998-99 survey and outdated.
  - Authorities agreed to start a new household survey in June 2019 to publish new CPI in beginning of 2021.
  - Plan to update NA compilation methodology first to publish new GDP series in beginning of 2021 and later incorporate new household survey.
- Data adequacy and GFS, MFS, external statistics issues flagged and planned improvements noted (projects to rebase NA to 2016; inclusion of pension funds in OFCs coverage; migration to BPM6).

### World Bank/IDA Portfolio — Active Projects and Financing (selected)
- Active portfolio: 5 projects totaling US$193.95 million (US$163.95 million in IDA commitments, plus US$30 million from GAFSP); approximately US$67 million undisbursed.
- IFC current portfolio: US$505.5 million.
- MIGA gross exposure: US$327.01 million across three projects.
- Selected project details:
  - Honduras Rural Competitive Project: Additional Financing US$25.0 million; Closing date: November 30, 2020.
  - PROSASUR (Corredor Seco Food Security Project): US$30 million GAFSP; Closing date: October 30, 2021.
  - Social Protection operations: multiple IDs and closing dates (one cited: December 31, 2018).
  - Safer Municipalities: Closing date: August 31, 2018.
  - Disaster Risk Management Project: Closing date: April 30, 2019.
- Financial relations (selected project undisbursed balances and percent disbursed reported in source tables).

### Risk Assessment Matrix — Selected Risks and Policy Responses
- Tighter global financial conditions:
  - Relative Likelihood: High; Impact if Realized: Medium/High.
  - Policy responses: create fiscal and international reserves buffers; pre-finance FX obligations; monetary tightening and increase exchange rate flexibility.
- Structurally weak growth in key advanced economies:
  - Relative Likelihood: Medium/High; Impact if Realized: High.
  - Policy responses: ease monetary policy with anchored inflation expectations; increase exchange rate flexibility; consider targeted fiscal stimulus.
- Retreat from cross border integration:
  - Relative Likelihood: Medium; Impact if Realized: High.
  - Policy responses: increase exchange rate flexibility; foster competitiveness via structural reforms.
- Further social unrest:
  - Relative Likelihood: High; Impact if Realized: High.
  - Policy responses: introduce accountability frameworks; strengthen political consensus; build adequate buffers.

- Consultation cycle proposed: next Article IV on the 12-month consultation cycle.
- Multiple currency practices (MCPs): staff supports temporary approval for retention for one year or until the next Article IV consultation.

*Source: cr18206 (IMF staff report content provided in the supplied excerpt).*

### 1. The Reduction in Crime Since 2013 ______________________________________________________________5

### 1. The Reduction in Crime Since 2013

### Summary of outcomes
- Since 2013 Honduras has achieved an impressive reduction in violence, although the homicide rate remains above the LAC average.
- The security situation improved considerably since 2013 (referenced elsewhere in the chapter), contributing to overall macroeconomic recovery and confidence.

### Measures implemented to reduce homicides and drug trafficking
- Tactical police operations and crime prevention programs targeted to the highest crime areas.
- Improved the quantity and the quality of the police force by:
  - (i) capturing and extraditing to the U.S. many leaders of criminal organizations;
  - (ii) focusing on reducing extorsions, which often lead to murders;
  - (iii) implementing several real-time monitoring initiatives (new 911 centers, security cameras, street lights and panic buttons in public buses);
  - (iv) establishing a civilian committee to purge corrupt officers;
  - (v) enlisting new police officers;
  - (v) improving equipment, training, raised education requirements and increased salary of police officers.

### Resource allocation and fiscal support
- To support these operations, the resources devoted to security increased substantially.
- Since 2012 as a percentage of GDP:
  - the budget of Ministry of Security increased 20 percent,
  - and of the Defense Ministry by more than 60 percent.

### Context and implications
- The reduction in violence helped improve confidence but institutional weaknesses remain exposed by high-profile corruption cases.
- Continued institutional strengthening and anti-corruption measures are implied as necessary to sustain security gains and broader reform momentum.

*cr18206 - 1. The Reduction in Crime Since 2013*

### 14.      The authorities broadly concurred with the risks highlighted by staff but were more

### 14.      The authorities broadly concurred with the risks highlighted by staff but were more positive about the outlook

### Authorities' outlook and consensus with staff
- Authorities shared staff’s assessment of downside risks, emphasizing the country’s external vulnerability to changes in U.S. immigration policies and tighter external financial conditions.
- Authorities downplayed the adverse effect of political uncertainty on the growth of private investment projected by staff.
- Authorities foresaw real GDP growth of about 4 percent, driven by expected expansion of construction (housing) and tourism sectors.
- On inflation, authorities saw merit in enhancing credibility by adopting a more cautious monetary stance and more gradual implementation of the new housing credit policy.
- Authorities committed to curbing spending as needed to maintain the NFPS deficit unchanged from last year and to monitor liquidity and inflation, standing ready to take policy actions if needed to maintain inflation within the central bank’s tolerance band.
- Authorities concurred on the importance of reducing tax expenditures, strengthening transparency of public spending, improving public wage policies, assessing comprehensive electricity sector reforms for ENEE, and continuing to enhance tax and customs revenue administration with Fund technical assistance.
- Authorities expressed continuing commitment to monetary policy modernization and requested follow-up TA to aid the transition.

### Key macroeconomic figures (Act. / Projections)
- GDP at constant prices: 3.8 3.8 4.8 3.7 3.7 3.7 3.7 3.8 3.8
- Consumer prices (eop): 2.4 3.3 4.7 5.0 4.5 4.0 4.0 4.0 4.0
- Net lending (+) / Net borrowing (-) (Nonfinancial Public Sector): -0.9 -0.5 -0.8 -0.8 -0.8 -0.8 -0.7 -0.7 -0.7
- Primary balance (in percent of GDP): 0.1 0.3 0.1 0.3 0.5 0.7 0.7 0.7 0.5
- Gross debt (in percent of GDP): 39.0 40.0 40.7 41.4 42.1 42.7 43.5 43.9 43.6
- Current account balance (in percent of GDP): -4.7 -2.7 -1.7 -3.9 -4.0 -4.1 -4.0 -3.9 -3.9
- GIR (in months of non maquila imports): 4.8 4.7 5.2 5.2 5.1 5.1 5.1 5.1 5.1
- Sources cited: Central Bank of Honduras, Ministry of Finance, and Fund staff estimates and projections.

### A. Near-Term Policy Mix to Safeguard Macroeconomic Stability
- Staff recommended a cautious, coordinated policy response to mild overheating and confidence risks:
  - Maintain a prudent fiscal stance:
    - 2018 budget envisaged a fiscal impulse — about ½ percent of GDP relative to 2017.
    - Staff proposed a reduction in the deficit by ½ percentage point of GDP.
    - ENEE’s deteriorating finances remain the primary fiscal challenge.
    - Staff recommended strengthening revenue mobilization by reducing inequitable and unsustainable tax exemptions, and ensure adequate funding for social programs.
  - Gradually reverse the supportive monetary policy stance:
    - BCH’s policy rate has been at 5½ percent since mid-2016.
    - Staff recommended reversing the supportive stance to rein in emerging inflation pressures and anchor expectations near the midpoint of the recently reduced target band.
    - The reversal should offset the monetary expansion implicit in the new housing lending program.
    - Lower import growth and net capital outflows could result in accumulation of international reserves by US$50 million.
    - A more cautious stance would slow real growth only modestly in 2018, with growth then bouncing back at about 4 percent.

### Neutral Interest Rate estimates (as reported)
- Average: 4.80 5.50
- Methods and results (all units expressed as percent points unless otherwise stated; (bps): Basis points):
  - Uncovered Interest Parity: 0.65 .4 10
  - Expected-Inflation Augmented Taylor Rule: 1.36 .1 -57
  - General Equilibrium Model: 1.9 6.7 -120
  - Expected Inflation Dec-2018 / Actual Monetary Policy Rate / Neutral Real Interest Rate (NRIR) / Neutral Nominal Interest Rate (NNIR) / Nominal Monetary Policy GAP (bps) 2/ — table entries provided in source (method labels preserved).

### B. Resolving Long-Standing Fiscal Issues
- Rationalize tax expenditures:
  - Tax expenditures are close to 7 percent of GDP.
  - Staff recommended phasing out tax exemptions yielding at least 1½ percent of GDP over the next three years.
  - Additional revenues should be used to expand poverty-reducing expenditure as stated in the social protection framework law.
  - Publish information on beneficiaries and estimates of revenue forgone; cost-benefit analysis of any new tax exemption should be published in line with the FRL.
- Rightsize the wage bill:
  - During 2014-2017 authorities retrenched the wage bill by about 3 points of GDP using mainly stopgap measures.
  - Staff estimates around ½ percent of GDP could be saved over the medium term if reforms are implemented.
  - Authorities developing a general wage policy for civil servants targeted for approval in the first half of 2019.
- Ensure financial sustainability of ENEE:
  - Electricity losses at end-2017 stood at 31 percent.
  - Large unpaid bills from public sector entities amount to about ½ percent of GDP.
  - Existing energy-purchase contracts restrict ENEE’s operational autonomy.
  - Ancillary services are provided at zero cost.
  - Recommended: comprehensive plan, adjust electricity tariffs, faster reduction in non-technical electricity losses.
- Continue to strengthen the risk management framework and build buffers:
  - Authorities have quantified implicit guarantees to other NFPS entities, PPP contracts, and lawsuits; plan to further quantify municipal debt, natural disaster risks, and public enterprise risks in 2018.
  - First report of contingent liabilities expected to accompany the 2019 budget bundle.
- Continue PFM reforms:
  - Conduct a Fiscal Transparency Evaluation (FTE) led by FAD.
  - Phase out extra-budgetary trust funds or implement independent ex-post expenditure audits.
  - Incorporate performance-based indicators into the medium-term fiscal framework.
  - Enhance budget transparency standards (see Box 2 initiatives in source).
- Accelerate operational and strategic plan for revenue administration:
  - Strengthen collection and enforcement powers, including re-instating criminality of tax fraud without enabling absolutory excuse in cases of payment of dues before legal action.
  - Improve information exchange among SAR, SEFIN and the central bank.
  - Box 3 recommendations on Tax Administration (selected):
    - Update taxpayer registry for the ten-thousand most important taxpayers.
    - Redesign the taxpayers single account.
    - Ensure 100 percent electronic filing, payment and reporting through a suitable IT platform covering Customs Administration, Tax Administration, and the Ministry of Finance.
    - Establish a Compliance Management Committee; improve access and exploitation of information for tax purposes; redesign audit processes for large taxpayers.

### C. Providing a Robust Anchor for Inflation Targeting
- Reform central bank law to strengthen IT framework; recommended principles:
  - Clear mandate to control inflation.
  - Greater institutional, financial and operational autonomy.
  - Solid institutional governance with transparent appointment of the central bank board and clear separation of daily management, policy setting and oversight responsibilities.
  - Robust accountability mechanisms, including adoption of IFRS.
- Accelerate development of money and FX market infrastructure:
  - Measures already implemented: fully collateralized securities in the interbank market; reduced surrender requirements for FX operations by 20 percent; strengthened technical capacity of central bank staff.
  - Staff recommended accelerating reduction in FX surrender requirements to create a more vibrant FX market and increase exchange rate flexibility to support de-dollarization.
  - Further steps: development of the secondary securities market supported by a new securities market law, and adopting a more transparent and forward-looking communication strategy by the central bank.
- Authorities requested follow-up TA to assist with transition and monetary policy modernization.

### D. Ensuring Financial Stability
- Continue implementing FSSR recommendations; completed measures include:
  - New supervisory manual with methodologies for risk-based supervision (RBS).
  - Improved training programs for inspectors.
  - New AML/CFT rules.
  - Additional information sharing agreements with regional supervisors.
- Risks and prudential monitoring:
  - Mission emphasized need to enhance monitoring of household debt and mitigate risks from large concentration of personal loans in public pension funds’ portfolio.
  - Credit card law enacted in 2017 appears to have reduced average rates with some moderate reduction in number of cards issued.
- Bank stress tests (staff):
  - Banking sector broadly resilient to most standardized shocks.
  - Capital adequacy falls below the regulatory minimum only in the combined shock scenario.
  - An abrupt increase in NPLs could put capital adequacy ratios close to the statutory minimum; recommended close monitoring of NPL developments.
  - Increasing credit from commercial companies is a potential risk that needs assessment.
- Expansion of lending by BANHPROVI and pension funds should be gradual:
  - Central bank should avoid direct financing of development projects.
  - BANHPROVI should proceed cautiously with first-tier lending to projects not covered by traditional banks.
  - Pension funds’ hasty expansion of consumer lending without adequate provisions and underwriting standards could add fiscal risks.

*Source: IMF staff report content provided in the supplied excerpt.*

### 35.      The authorities broadly agreed with staff’s assessment of vulnerabilities and risks. The

### cr18206 - 35. The authorities broadly agreed with staff’s assessment of vulnerabilities and risks. The

### Financial-sector vulnerabilities and authorities’ views
- Authorities broadly agreed with staff’s assessment of vulnerabilities and risks.
- Household debt
  - Authorities did not view rising household debt as a macro-financial risk but as a problem limited to specific groups (e.g., teachers and low-wage public sector workers).
- Pension funds and consumer lending
  - Authorities view the provision of consumer loans to affiliates as the consequence of minimum profit requirements and limited investment opportunities.
  - Prudential regulations limit to 35 percent the share of consumer loans, but funds can increase this share by 5 percent if the NPL rate for personal loans remains under 3 percent. As these loans are full-recourse, the limit is 40 percent.
- Public banking and BANHPROVI
  - Authorities committed to prevent any further expansion of the central bank financing to BANHPROVI and underscored that direct financing from the central bank is within its 2008 legal mandate.
  - Authorities viewed first-tier lending to SMEs and agriculture as important to support employment and growth because these sectors are not attractive to private banks.

### Stress testing and financial stability concerns
- Box 4. Stress Test Results: Sources: Country Authorities and IMF staff calculations.
- Staff noted the banking sector remains resilient to standardized shocks but highlighted emerging stability concerns that require monitoring:
  - Rising household debt.
  - Expansion of consumer lending by public pension funds and commercial companies.
  - Growth in public bank operations, including first-tier banking.
- Over the next years, implementation of the Basel III standard would require:
  - Further strengthening capacity development in the Banks’ superintendence.
  - Better coordination with the central bank.

### Structural reforms to bolster medium-term growth
- Anti-corruption and rule of law
  - Sustained anti-corruption efforts are crucial to enhance the rule of law.
  - A recent setback: Congress approved a law that gives investigative powers to the court of accounts and potentially prevents the criminal prosecution of embezzlement cases.
  - Progress: advances in AML/CFT legislation in line with GAFILAT recommendations; creation of a special anti-corruption unit in the public prosecutor’s office and prosecution of some high-profile cases.
  - Mission recommendations:
    - Continue progress on implementing GAFILAT recommendations.
    - Prosecutors should use all legal tools at their disposal; reliance on civil asset forfeiture results in a low percentage of criminal prosecution.
    - Enhance the asset declaration system for public officials by including assets legally owned and assets which are beneficially owned, with mechanisms for verification and public access.
- Product and labor market competitiveness
  - World Bank Doing Business Indicators show room for improvement in contract enforcement, trade facilitation, and protecting minority investors.
  - Key priorities: speeding up business licenses, easing the procurement process, implementing electronic signature, consolidating paperwork procedures across public entities, and publishing procedural information online.
  - Education plan needed consistent with employment objectives in the country’s development plan.
- Labor market institutions
  - Large and widening wedge between the minimum and average wage since 2010 shows the non-binding nature of the minimum wage, reflecting large costs of labor formalization.
  - Recommendations:
    - Reform the framework for setting minimum wages to simplify and align with current labor market conditions.
    - Public interventions in health and education to increase labor productivity, reduce informality, and narrow the gender gap in labor force participation.
- Social outcomes and social spending
  - Social spending composition: primarily social benefits such as conditional cash transfers (CCT) and other cash/in-kind transfers.
  - Social spending trends:
    - Increased from ½ percent of GDP in 2009 to close to 2 percent of GDP in 2017.
    - Footnote: Social spending was reduced to 1¾ percent of GDP in 2017 from 2¼ percent of GDP in 2016 due to the persistent under execution of trust funds.
  - Coverage gap: number of families living under extreme poverty is around 800,000.
  - Authorities presented evidence of effectiveness of their CCT program (bono Vida Mejor) and documented a structural reduction in child malnutrition.
  - Health outcome: prevalence of anemia in children below 5 years reduced from 33¼ percent in 2008 to 31½ percent in 2016 (World Health Organization).

### Climate vulnerability and long-term risks
- Honduras requires comprehensive structural reforms to increase resilience to climate change.
- Staff estimate: by 2100, in the absence of a structural policy change, the increase in global temperature could eliminate economic growth.
- Policy implications:
  - Promote production of goods higher in the value chain to reduce agricultural vulnerability.
  - Fiscal initiatives to quantify fiscal contingencies stemming from climate change are welcome.

### Authorities’ reform coordination and statistical needs
- Institutional coordination
  - Authorities are working to reduce red tape and increase ease of doing business.
  - Newly created National Economic Council to identify reforms and coordinate implementation across government agencies.
- Statistics modernization
  - Honduras urgently needs to update both the base year and methodology of National Accounts (NA) and the CPI.
  - Current reference year for NA and CPI is based on the 1998-99 survey and is significantly outdated.
  - Authorities agreed to start a new household survey in June 2019 to publish the new CPI in the beginning of 2021.
  - As a second best, authorities plan to first update the NA compilation methodology to publish new GDP series in the beginning of 2021 and only later incorporate the new household survey to avoid further delays.

### Staff appraisal and policy recommendations
- Macro outlook and near-term risks
  - The economy continues to expand in 2018; medium-term outlook broadly positive, supported by the successful reduction in macroeconomic imbalances achieved during 2014-17.
  - Near-term downside risks prevail after high and unexpected GDP growth in 2017 translated into mild overheating conditions in 2018.
  - Staff welcomes authorities’ decision to adopt a more prudent fiscal stance and to unwind, if necessary, the supportive monetary policy stance to rein in potential inflationary bouts.
  - Proposed fiscal tightening is especially relevant given recent revenue-weakening measures and the need to signal commitment to macroeconomic stability amid risks (worsening terms of trade, faster tightening in global financial conditions, higher uncertainty about U.S. immigration policy, and difficult political situation).
- Fiscal policy priorities
  - Resolve long-standing fiscal issues: rationalize untargeted tax expenditures; rightsize and streamline the public-sector wage bill; restore ENEE’s financials; enhance fiscal transparency; improve efficiency of social spending.
- Monetary policy and FX liberalization
  - Central bank progress to modernize monetary policy is important; priority actions for a credible inflation-targeting regime:
    - Enact a central bank law with a clear mandate to control inflation and robust institutional accountability mechanisms, including the adoption of IFRS.
    - Accelerate pace of reduction in FX surrender requirements to create a more vibrant FX market and increase exchange rate flexibility.
- Financial stability
  - Implementation of FSSR recommendations to contain financial risks is welcome, but further efforts may be needed given emerging concerns listed above.
  - Strengthen Banks’ superintendence capacity and coordination with the central bank ahead of Basel III implementation.
- Structural reform priorities to bolster inclusive growth and competitiveness
  - Enhance rule of law by continuing the fight against corruption.
  - Resolve ENEE’s financial situation.
  - Improve social and education outcomes.
  - Enable private-sector entrepreneurship by easing business procedures.
  - National Economic Council seen as a welcome step to coordinate and sequence the reform agenda.
- Statistics and inflation-targeting credibility
  - Updating GDP and price statistics and conducting a household survey will improve authorities’ grasp of the economy and foster credibility of the inflation-targeting regime.
- Multiple currency practices (MCPs)
  - Staff supports authorities’ request for temporary approval of two MCPs subject to Fund jurisdiction under Article VIII, Section 3.
  - Rationale: MCPs arise from operation of the foreign exchange auction; maintained for non-balance of payments reasons.
  - Staff assessment: MCPs do not materially impede the member’s balance of payments adjustment, harm the interests of other members, or discriminate among members; they are temporary; authorities unable to replace them at present.
  - Staff notes ongoing FX liberalization should ultimately eliminate these measures.
  - Recommendation: Executive Board approval for retention for one year or until conclusion of the next Article IV consultation, whichever is earlier.
- Consultation cycle
  - It is proposed that the next Article IV consultation with Honduras takes place on the 12-month consultation cycle.

*Source: cr18206 - 35. The authorities broadly agreed with staff’s assessment of vulnerabilities and risks.*

### 5.75 percent .

### cr18206 - 5.75 percent .

### Monetary and Financial Conditions
- Lending Rates (3 month moving average)
  - Chart labels: Nominal; Real (no additional numeric series provided beyond chart title).
- Yield on Central Bank Paper (Percent)
  - Series labels: 1 day CB paper; (1-30) day CB paper; (31-360) day CB paper; Interbank rate.
- Banks' Net Position with BCH (Billions of Lempiras)
  - Series labels: Bank's net position with BCH; Stock of BCH paper (rhs).
- Net International Reserves (selected values)
  - 2015: 2,211 (millions of dollars) shown in Table 1 net international reserves series.
  - Table 4: Net International Reserves (Lempiras): 85,495 (2015); 91,370 (2016); 112,883 (2017); 120,662 (2018); 131,339 (2019); 143,905 (2020); 158,318 (2021); 174,824 (2022); 188,158 (2023).
  - Table 4: Net International Reserves (millions of US$): 3,809 (2015); 3,868 (2016); 4,758 (2017); 4,872 (2018); 5,050 (2019); 5,270 (2020); 5,575 (2021); 5,948 (2022); 6,215 (2023).
- Broad Money and Credit (selected indicators)
  - Broad money (percentage change): 8.4; 13.3; 8.4; 13.9; 12.4; 9.5; 9.1; 9.1; 9.7; 10.2; 9.1 (series from Table 1 / Table 4 across years).
  - Private sector credit (percentage change): 11.2; 10.7; 10.4; 10.6; 9.4; 10.8; 10.6; 9.1; 9.0; 8.8; 8.8.
  - Lending rate (eop, in percent): 16.9; 15.9; 14.0; 14.3; 13.2 (Table 8).
  - Deposit rate (eop, in percent): 11.0; 10.4; 8.8; 8.2; 8.4 (Table 8).

### Public Finances and Fiscal Outcomes
- Key summary statements (text in figures)
  - "In 2017 the fiscal position remained below the FRL deficit ceiling of 1.5 percent of GDP... on the back of central government effort."
  - "Fiscal discipline was sustained on stable tax revenues... and a continuous control of primary spending."
  - "The stronger fiscal position helped contain debt growth, ... and improve conditions to access global markets."
- Nonfinancial Public Sector balances (Percent of GDP; Table 1 / Table 8)
  - Primary balance: -7.0 (2013); -3.4 (2014); 0.1 (2015); 0.3 (2016); 0.1 (2017); 0.3 (2018); 0.1 (2019); 0.3 (2020); 0.5 (2021); 0.6 (2022); 0.5 (2023).
  - Overall balance: -7.5 (2013); -3.9 (2014); -0.9 (2015); -0.5 (2016); -0.8 (2017); -0.8 (2018); -0.8 (2019); -0.7 (2020); -0.7 (2021); -0.7 (2022); -0.7 (2023).
- Central government (Table 2)
  - Revenue (percent of GDP): 19.2 (2015); 20.1 (2016); 20.4 (2017); 19.6 (2018); 19.3 (2019); 19.2 (2020); 19.2 (2021); 19.1 (2022); 19.1 (2023).
  - Taxes: 17.3 (2015); 18.4 (2016); 18.4 (2017); 17.9 (2018); 17.6 (2019); 17.6 (2020); 17.5 (2021); 17.5 (2022); 17.5 (2023).
  - Expenditure (percent of GDP): 22.1 (2015); 22.9 (2016); 23.1 (2017); 22.1 (2018); 22.2 (2019); 22.3 (2020); 22.2 (2021); 22.3 (2022); 22.2 (2023).
  - Interest (percent of GDP): 2.6 (2015); 2.6 (2016); 2.8 (2017); 2.9 (2018); 3.2 (2019); 3.2 (2020); 3.0 (2021); 3.0 (2022); 2.8 (2023).
  - Net lending (+)/borrowing (-): -3.0 (2015); -2.8 (2016); -2.7 (2017); -2.6 (2018); -2.9 (2019); -3.1 (2020); -3.1 (2021); -3.2 (2022); -3.1 (2023).
  - Gross debt (percent of GDP): 46.0 (2015); 48.2 (2016); 50.0 (2017); 50.5 (2018); 51.3 (2019); 52.3 (2020); 52.7 (2021); 52.4 (2022); 52.6 (2023).
  - Gross debt excluding BCH recapitalization: 42.6 (2015); 44.4 (2016); 45.6 (2017); 46.4 (2018); 47.0 (2019); 47.9 (2020); 48.6 (2021); 48.2 (2022); 48.7 (2023).

### Real Sector, Growth, Prices, and Labor Market
- Real GDP growth (percent)
  - 2013: 2.8; 2014: 3.1; 2015: 3.8; 2016: 3.8; 2017: 4.8; 2018: 3.7; 2019: 3.7; 2020: 3.7; 2021: 3.7; 2022: 3.8; 2023: 3.8 (Table 1 / Table 8 series).
- Domestic demand and components (selected entries, percent contributions)
  - Domestic demand (selected years): 0.7 (2013); 3.3 (2014); 7.7 (2015); 3.4 (2016); 5.2 (2017); 3.3 (2018); 4.1 (2019); 4.2 (2020); 4.3 (2021); 4.3 (2022); 4.3 (2023).
  - Private consumption: 2.8 (2013); 1.9 (2014); 2.9 (2015); 2.9 (2016); 3.1 (2017); 3.5 (2018); 3.3 (2019); 2.9 (2020); 2.9 (2021); 3.0 (2022); 3.0 (2023).
- Prices (annual percentage change)
  - GDP deflator: 1.4 (2013); 6.8 (2014); 6.9 (2015); 3.5 (2016); 4.2 (2017); 4.2 (2018); 4.3 (2019); 4.1 (2020); 4.1 (2021); 4.0 (2022); 4.0 (2023).
  - Consumer prices (eop): 4.9 (2013); 5.8 (2014); 2.4 (2015); 3.3 (2016); 4.7 (2017); 5.0 (2018); 4.5 (2019); 4.0 (2020); 4.0 (2021); 4.0 (2022); 4.0 (2023).
- Labor market indicators (Figure 5)
  - Visible underemployment and unemployment shown as percent of economically active population (2010–2017 series; explicit numeric values not listed in source excerpt).
  - Unemployment rate (2017): 6.7 (Table 1).
  - Underemployment rate (2012): 54.1 (Table 1).
  - Female labor participation gap and policy emphasis: "Reducing the female labor participation gap is also important to reach higher growth." (text from Figure 5).

### External Sector and Balance of Payments
- Current account (millions of US$ and percent of GDP)
  - Current account (millions of US$): -978 (2015); -587 (2016); -380 (2017); -915 (2018); -962 (2019); -1,011 (2020); -1,021 (2021); -1,058 (2022); -1,100 (2023).
  - Current account (percent of GDP): -4.7 (2015); -2.7 (2016); -1.7 (2017); -3.8 (2018); -3.9 (2019); -4.0 (2020); -3.9 (2021); -3.9 (2022); -3.8 (2023).
- Trade account (millions of US$)
  - Trade Account: -2,949 (2015); -2,619 (2016); -2,649 (2017); -3,093 (2018); -3,229 (2019); -3,331 (2020); -3,488 (2021); -3,675 (2022); -3,872 (2023).
  - Exports f.o.b.: 5,720 (2015); 5,556 (2016); 6,145 (2017); 6,360 (2018); 6,623 (2019); 6,980 (2020); 7,216 (2021); 7,557 (2022); 7,931 (2023).
  - Imports f.o.b.: -8,669 (2015); -8,175 (2016); -8,794 (2017); -9,453 (2018); -9,853 (2019); -10,311 (2020); -10,703 (2021); -11,232 (2022); -11,803 (2023).
- Remittances and transfers (millions of US$; percent of GDP)
  - Transfers (net): 3,842 (2015); 4,003 (2016); 4,493 (2017); 4,628 (2018); 4,789 (2019); 4,933 (2020); 5,129 (2021); 5,384 (2022); 5,653 (2023).
  - Remittances: 3,652 (2015); 3,847 (2016); 4,305 (2017); 4,473 (2018); 4,630 (2019); 4,769 (2020); 4,959 (2021); 5,207 (2022); 5,468 (2023).
- Capital and financial account (millions of US$ and percent of GDP)
  - Capital and Financial account (millions of US$): 1,525 (2015); 788 (2016); 1,753 (2017); 965 (2018); 1,117 (2019); 1,208 (2020); 1,283 (2021); 1,344 (2022); 1,407 (2023).
  - Capital and financial account (percent of GDP): 7.3 (2015); 3.6 (2016); 7.6 (2017); 3.5 (2018); 4.5 (2019); 4.7 (2020); 4.9 (2021); 4.9 (2022); 5.0 (2023).
  - Direct investment (net, millions of US$): 952 (2015); 900 (2016); 1,013 (2017); 1,013 (2018); 1,048 (2019); 1,083 (2020); 1,126 (2021); 1,179 (2022); 1,241 (2023).
- Gross reserves and vulnerability indicators
  - Gross reserves (end of period, millions of US$): 3,992 (2015); 4,177 (2016); 5,086 / 5,060 / 5,137 (multiple series across tables) ; projections: 5,292; 5,488; 5,750; 6,037; 6,344.
  - GIR (In months of imports, excluding maquila): 3.8; 4.3; 4.8; 4.7; 5.3; 5.1; 5.1; 5.1; 5.1 (from Table 1 / Table 5 series).
  - Total external debt to GDP ratio: 35.5 (2015); 34.6 (2016); 37.4 (2017); 36.1 (2018); 36.1 (2019); 36.1 (2020); 36.5 (2021); 36.6 (2022); 34.5 (2023) (Table 5 / Table 8 consistency across tables).

### Institutional Factors, Competitiveness, and Labor Participation
- Main findings (Figure 5 text)
  - "Higher potential growth is needed to create employment... and make greater progress toward poverty reduction."
  - "To reach higher potential growth, institutional reforms are needed ... together with lower transaction costs and better conditions to conduct business ... thereby improving the country’s competitiveness and investment prospects."
  - "Reducing the female labor participation gap is also important to reach higher growth."
- Competitiveness and rule of law (figures)
  - Doing Business ranking and Global Competitiveness Index ranking plotted for LA-5, Honduras, CAPDR excl. HND (no numeric ranks provided in excerpt).
  - Position in ranking of rule of law and sovereign rating categories shown across countries (no numeric rank values provided in excerpt).
- Social outcomes (Table 1 and Figure 5)
  - Poverty and extreme poverty rates (percent of population) charted for 2011–2017 (no numeric series in excerpt).
  - Population (2016): 9.1 million.
  - Life expectancy at birth (2015): 73.
  - Per capita income (PPP, 2016): 4,738 (US$).
  - Percent of population below poverty line (2016): 61.
  - Gini index (2014): 51.

### Financial System Structure and Banking Sector Performance
- Banking sector aggregate (Table 9)
  - Total assets (millions of Lempiras): 236,665 (2010); 270,981 (2011); 302,662 (2012); 341,614 (2013); 393,763 (2014); 432,178 (2015); 473,722 (2016); 521,869 (2017); 528,043 (2018M3).
  - Capital adequacy, regulatory capital to RWA: 14.9; 14.9; 14.9; 14.7; 14.5; 14.6; 14.0; 13.8; 13.7; 13.8 (series across years).
  - Nonperforming loans (NPLs) to total loans: 3.7; 2.9; 3.3; 3.4; 3.3; 3.0; 3.0; 2.9; 2.3; 2.3 (series across years).
  - Return on assets (ROA): 1.3; 1.3; 1.5; 1.4; 1.4; 1.4; 1.3; 1.2; 1.3 (series across years).
  - Return on equity (ROE): 12.5; 13.2; 15.9; 14.5; 13.4; 14.6; 14.6; 12.0; 12.0.
  - Dollarization: deposits in foreign currency as percent of total: 29.5; 29.1; 30.6; 30.6; 32.0; 29.8; 30.2; 29.9; 29.4.
- Financial system summary accounts (Table 4; selected items)
  - Credit to the private sector (Lempiras): 249,894 (2015); 276,298 (2016); 302,188 (2017); 334,708 (2018); 370,060 (2019); 403,884 (2020); 440,063 (2021); 478,787 (2022); 520,727 (2023).
  - Deposits in domestic currency: 156,364 (2015); 176,036 (2016); 198,333 (2017); 216,831 (2018); 238,414 (2019); 262,073 (2020); 289,651 (2021); 319,412 (2022); 348,264 (2023).
  - Deposits in foreign currency: 62,609 (2015); 72,425 (2016); 78,188 (2017); 84,530 (2018); 90,430 (2019); 96,683 (2020); 103,894 (2021); 114,569 (2022); 124,918 (2023).

### External Financing Needs and Sources
- External financing requirements and sources (Table 6 / Table 7 excerpts)
  - Current account deficit (millions of US$): 978 (2015); 587 (2016); 380 (2017); 915 (2018); 962 (2019); 1,011 (2020); 1,021 (2021); 1,058 (2022); 1,100 (2023).
  - Debt amortizations (millions of US$): 354 (2015); 388 (2016); 411 (2017); 448 (2018); 453 (2019); 956 (2020); 445 (2021); 626 (2022); 630 (2023).
  - Subtotal (requirements): 1,333 (2015); 975 (2016); 791 (2017); 1,363 (2018); 1,415 (2019); 1,968 (2020); 1,465 (2021); 1,684 (2022); 1,730 (2023).
  - Capital account flows (net): 142 (2015); 130 (2016); 181 (2017); 157 (2018); 163 (2019); 168 (2020); 174 (2021); 181 (2022); 189 (2023).
  - Foreign direct investment (net): 952 (2015); 900 (2016); 1,013 (2017); 1,013 (2018); 1,048 (2019); 1,083 (2020); 1,126 (2021); 1,179 (2022); 1,241 (2023).
  - Public sector borrowing (projects): 580 (2015); 391 (2016); 573 (2017); 522 (2018); 700 (2019); 523 (2020); 646 (2021); 350 (2022); 260 (2023).
  - Change in reserves (+ decrease): -303 (2015); -66 (2016); -884 (2017); -50 (2018); -155 (2019); -197 (2020); -262 (2021); -286 (2022); -307 (2023).
  - Subtotal (sources): 1,156 (2015); 975 (2016); 791 (2017); 1,363 (2018); 1,415 (2019); 1,968 (2020); 1,465 (2021); 1,684 (2022); 1,730 (2023).
  - Financing gap: 177 (2015) shown; subsequent financing gap entries show zeros in the table excerpt.
  - Listed potential multilaterals (table labels): World Bank 500 (2015 row), IADB 100 (2015 row), EU 270 (2015 row) — presented in table as row items under financing (no further numeric detail across years in excerpt).

### Projections and Medium-Term Framework (selected indicators)
- Real GDP growth projections: 3.7 (2018); 3.7 (2019); 3.7 (2020); 3.7 (2021); 3.8 (2022); 3.8 (2023).
- CPI inflation (eop) projections: 4.7 (2017); 5.0 (2018); 4.5 (2019); 4.0 (2020); 4.0 (2021); 4.0 (2022); 4.0 (2023).
- Gross domestic investment (percent of GDP): 22.9; 23.0; 26.4; 23.4; 24.0; 24.9; 25.1; 25.6; 26.0; 26.7; 27.1 (multi-year series in Table 1 / Table 8).
- Nonfinancial public sector debt (total, percent of GDP): 38.6 (2013); 39.3 (2014); 39.0 (2015); 39.9 (2016); 40.3 (2017); 40.8 (2018); 41.3 (2019); 41.4 (2020); 40.8 (2021); 39.9 (2022).
- External debt indicators (Table 8 projections)
  - External debt: 35.9; 36.3; 35.5; 34.6; 37.4; 36.1; 36.1; 36.5; 36.6; 34.5 (series across years).

*Sources: Central Bank of Honduras, Ministry of Finance, INE, World Bank Development Indicators, World Justice Project, Fitch, Moody's, S&P, and IMF staff estimates and projections as presented in the source PDF.*

### 1. Proportional increase in NPLs

### 1. Proportional increase in NPLs

### Baseline metrics and post-shock outcomes
- NPLs (gross)/ total loans: 6.9 7.5 6.1
- Post-shock CAR (Percent): 10.3 10.0 10.6

### Sectoral shocks to NPLs
- NPLs (gross)/ total loans: 5.3 5.8 4.7
- Post-shock CAR (Percent): 11.0 10.8 11.3

### Notes on shock design
- Proportional increase in NPLs assumes 5 percent of outstanding performance loans to become nonperforming (10-year average NPL plus 2 stds).
- Sectoral shocks assumes 9, 6, and 8 percent of outstanding loans in the retail, construiction and credit cards sectors becoming nonperforming.
- The sample includes a total of 15 private banks of which 6 are domestic and 9 foreign.

### Interest Rate Risk Stress Test

### Net interest income impact
- Post-shock CAR (Percent): 13.7 12.9 14.7
- CAR change (Pct Point): 0.0 0.0 0.0

### Repricing impact
- Post-shock CAR (Percent): 11.2 10.1 12.8
- CAR change (Pct Point): -2.4 -2.8 -1.9

### Overall impact (NII and Repricing)
- Overall change in CAR (NII and Repricing): -2.4 -2.8 -1.9

### Shock design note
- The Interest Rate shock assumes 3.25 percenteage points increase in nominal interest rate.

### FX Stress Tests

### Direct Foreign Exchange Risk
- Post-shock CAR (Percent): 13.3 12.5 14.4
- CAR change (Pct Point): -0.3 -0.3 -0.3

### Indirect Foreign Exchange Risk
- Post-shock CAR (Percent): 13.1 12.3 14.2
- CAR change (Pct Point): -0.3 -0.3 -0.2

### Overall FX impact
- Overall change in CAR (Direct and Indirect): -0.6 -0.6 -0.6

### Shock design note
- The FX Shock shock assumes a 14 percent depreciation of the FX rate leading to 60 percent of FX koans becoming NPLs.

### Liquidity Stress Test

### Simple liquidity test (run on all banks, fire-sale of assets)
- (# of liquid banks after 5 days): 15 6 9

### Liquidity Shock assumptions
- The Liquidity Shock assumes a 10 and 8 percent withdrawal of demand deposits in domestic and foreign currency respectively; and a 5 and 3 percent per day withdrawal of time deposits in domestic and foreign currency respectively.

### Annex I. External Sector Assessment — Key findings

### Current account and remittances
- The CA deficit narrowed to 1¾ percent of GDP in 2017 mostly due to temporary factors.
- Remittances surged 12 percent in 2017 relative to stable annual average remittances growth since 2010 of about 6½ percent.
- A slight improvement in the goods balance (½ percent of GDP) was entirely offset by a decline in the services account due to higher transportation costs linked to rising oil prices.

### Real and nominal exchange rates, reserves
- REER depreciation in 2017 slowed to ¾ percent (2¼ percent in 2016).
- Headline inflation in 2017 reached 4¾ percent at the end of 2017.
- Nominal depreciation in 2017 slowed to 3 percent (3¾ percent in 2016).
- International reserves increased by almost US$900 million in 2017, boosted by a US$700 million external bond issuance and stronger remittances inflows.
- Stock of reserves reached 5.3 months of non-maquila imports of goods and services at end-2017.
- As of the end-2017 reserves reached 107 percent of the composite EM ARA metric for non-floating exchange rate regimes.

### External position and sustainability
- Net International Investment Position (IIP) is negative at more than 65 percent of GDP.
- FDI comprises more than 60 percent of total liabilities and is well diversified across countries.
- External debt profile: stable external debt-to-GDP ratio and low share of short-term debt.
- Staff’s bottom-line assessment: Honduras’s external position in 2017 was broadly in line with fundamentals and desirable policy settings.
- Staff views the external sustainability (ES) approach as most relevant given the quite negative IIP.

### EBA-lite and model outcomes (summary)
- CA model: cyclically adjusted 2017 CA of -3.0 percent of GDP; CA norm of -4.7 percent of GDP; CA gap of 1.7 percent of GDP; REER undervaluation of 4.6 percent; of the CA gap, 1.5 percent of GDP reflects a policy gap.
- REER Index model: about 3 percent undervaluation.
- External sustainability (ES) approach: finds overvaluation of 3 percent.
- Overall assessment: CA and REER gaps being near zero in 2017 when combining approaches.

### Competitiveness and survey-based indicators
- WEF Global Competitiveness Index score worsened slightly from 4.0 to 3.9 (scale 1–7).
- Survey improvements: macroeconomic environment score improved from 4.1 to 5.0.
- Worsened pillars: public institutions (3.5 to 2.9), innovation and sophistication (3.8 to 3.3), higher education and training (3.8 to 3.6).
- Doing Business Survey 2018: Honduras broadly maintained its 2016 score; main concerns include high cost of starting a business, getting electricity, paying taxes, weak contract enforcement, insolvency resolution, and poor protection of minority investors.

### Annex II. Risk Assessment Matrix — Selected risks and policy responses

### 1. Tighter global financial conditions
- Relative Likelihood: High
- Impact if Realized: Medium/High
- Key potential effects:
  - Strengthening of the U.S. dollar and the Euro (High).
  - Decline in capital flows to emerging markets could disrupt foreign credit lines and reduce banking sector liquidity (Medium).
  - Appreciation of the Lempira could adversely impact export competitiveness (Medium).
  - Higher interest rates will increase financing costs for the government (High).
- Policy responses:
  - Create fiscal and international reserves buffers.
  - Pre-finance wherever is possible, particularly treasury obligations in FX.
  - Monetary tightening and increase exchange rate flexibility.

### 2. Structurally weak growth in key advanced economies
- Relative Likelihood: Medium/High
- Impact if Realized: High
- Key potential effects:
  - Lower export demand and remittances, significantly weighing on activity and tax revenues (High).
- Policy responses:
  - Ease monetary policy, but ensure inflation expectations remain anchored.
  - Increase nominal exchange rate flexibility.
  - Consider targeted fiscal stimulus through expenditure measures.

### 3. Retreat from cross border integration
- Relative Likelihood: Medium
- Impact if Realized: High
- Key potential effects:
  - Reduced trade, capital and labor flows; restricted remittances and investment flows; REER appreciation impacting competitiveness (High).
- Policy responses:
  - Increase exchange rate flexibility.
  - Foster competitiveness through structural reforms particularly in labor market.

### 4. Further social unrest
- Relative Likelihood: High
- Impact if Realized: High
- Key potential effects:
  - Investment, productivity and potential growth would be negatively impacted.
- Policy responses:
  - Introduce accountability frameworks.
  - Strengthen political consensus.
  - Build adequate buffers.

### Annex III. Financial Sector Stability Review — Main Recommendations

### Bank Regulation and Supervision (Key recommendations and timeframe/status)
- Complete the transition towards RBS, complete the implementation of the Risk Management Unit, and define a clear division of labor relative to the existing superintendencies, including responsibility for consolidated supervision — Near Term/In progress
- Complete the regulatory framework on market and liquidity risk — Near Term/In progress
- Enhance the supervisory capacity building program — Medium Term/Completed
- Intensify efforts to improve AML/CFT, considering the results of the mutual evaluation now underway — Near term/Completed
- Provide effective legal protections to current and former supervisors at all levels — Near term/Completed
- Develop a methodology for identifying systemically important banks and supervise these intensively — Near term/In progress
- Provide the CNBS with the power to compel economic groups to provide information on cross-border activities — Near term/Completed
- Require that the chair of the audit committee of a commercial bank be an independent board member — Near term/Completed
- Build the capacity of CONSUCOOP to supervise cooperatives, paying special attention to large cooperatives — Near term/Completed
- Introduce a capital requirement for operational risks — Medium term/Pending

### Insurance Regulation and Supervision
- Restore resources to the Insurance Superintendency to allow it to complete its RBS program — Near term/In progress
- Develop an insurance supervisory manual, including the methodology for RBS — Near term/Completed
- Amend the Insurance Act to allow the CNBS rather than the BCH to license insurance companies and to devolve rule-making powers from the Congress to the CNBS — Medium term/Completed
- Require firms to complete an Own Risk and Solvency Assessment (ORSA) to allow a forward-looking assessment of risk and capital needs — Near term/In progress
- Develop a framework for assessing market conduct risks — Near term/In progress

### Stress Testing
- Implement a fully-developed stress testing framework encompassing macro scenario building and satellite models to understand financial sector vulnerabilities to severe shocks — Near term/In progress
- Coordinate BCH and CNBS work to ensure the smooth integration of macroeconomic and financial models — Near term/In progress

*Source: cr18206 - 1. Proportional increase in NPLs (PDF).*

### Annex IV. Implementation of the 2016 Article IV

### Annex IV. Implementation of the 2016 Article IV

### Fiscal Policy
- Recommendation: The government should maintain fiscal stability through the electoral cycle. The targeted medium-term reduction in public sector debt should be regarded as a minimum. Trust funds should operate under the budgetary framework.
- Recommendation: Tax exemptions should be streamlined to raise revenues for the implementation of the Social Protection Law. This should include, in addition to planned non-renewal upon expiration, active rationalization of other ineffective exemptions.
- Recommendation: Efficiency of health and education spending should be enhanced, including the revision of the public sector compensation framework.
- Implementation findings:
  - The authorities maintained fiscal discipline in 2017, with only a marginal increase in the deficit of the NFPS to ¾ percent of GDP still well below the FRL ceiling.
  - No progress was made to bring trust funds under the budgetary framework.
  - There have been no revisions of existing exemptions, and new exemptions were introduced for the tourism and agricultural sectors.
  - The authorities are receiving technical assistance from the World Bank and the Fund for the design of civil service reform and performance-based budgeting, respectively.

### Monetary and Foreign Exchange Policy
- Recommendation: The BCH should avoid further easing in the near term, while remaining vigilant and ready to tighten if inflation or credit growth accelerate and there are signs of overheating.
- Recommendation: Immediate priorities in transition toward inflation targeting are to develop domestic and foreign exchange interbank markets, while reforming the central bank law to give it a clear mandate to achieve price stability. New regulations are needed to establish an interbank FX rate market, and start relaxing the surrender requirements on foreign exchange earnings.
- Implementation findings:
  - The authorities maintained the policy rate unchanged and sterilized the surge in inflows from sovereign bond issuance and strong remittances growth.
  - The BCH implemented most of the recommendations in the 2016 technical assistance missions related to short-term liquidity management, and to a lesser extent structural liquidity and communications.
  - The BCH began to reduce FX surrender requirements by (so far it reduced twice, 10 percent each time).
  - The BCH took steps to prepare a new central bank law but submission to Congress was delayed to grant the new government ownership of the reform.

### Financial Sector
- Recommendation: While banks have ample liquidity and capital appears adequate, it is important to monitor closely credit concentration and the buildup of household debt. Steadfast implementation of higher capital requirements for foreign currency borrowing by unhedged borrowers will be critical to support the de-dollarization process. AML/CFT supervision needs to be stepped up.
- Implementation findings:
  - The CNBS is making progress toward implementation of risk-based supervision, enhancing AML/CFT, and better monitoring cross-border activities of banks, in line with recommendations of the FSSR.
  - Higher capital requirements for unhedged FX borrowers contributed to the reduction in dollarization rates.
  - The regulatory framework has been strengthened as part of the implementation of the Basel III standard.

### Structural Reforms
- Recommendation: Reforms in the energy sector are required to strengthen ENEE’s finances and foster competition in the electricity market.
- Implementation findings:
  - The targeted 4 percent reduction in nontechnical losses was achieved during the first year of operations of the new losses recovery operator in 2017.
  - Tariff adjustments decided by the regulatory body were only partially implemented.

*Source: Annex IV. Implementation of the 2016 Article IV (cr18206).*

### 3. The active portfolio is made up of 5 projects, totaling US$193.95 million (US$163.95

### cr18206 - 3. The active portfolio is made up of 5 projects, totaling US$193.95 million (US$163.95

### Active portfolio — summary
- The active portfolio is made up of 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).
- Approximately US$67 million are undisbursed.
- Project disbursements (excluding budget support) dropped from US$70.1 million in FY14 to US$40.7 million in FY15 and stabilized around US$30 million in FY16-FY17, consistent with Government’s fiscal consolidation objectives.
- IFC current portfolio stands at US$505.5 million, mostly in financial sector, infrastructure, and commercial real estate.
- MIGA has US$327.01 million in gross exposure through three projects in transport and energy sectors, including guarantees of US$187.9 million for a toll road, US$82.4 million for a 24MW expansion of the 102MW Cerro de Hula wind farm, and US$56.7 million in guarantees in three photovoltaic projects supporting 80 MW solar power.

### A. Projects — active IDA portfolio and project objectives
- Total active IDA portfolio: 5 projects totaling US$193.95 million (US$163.95 million in IDA funding and US$30 million from the GAFSP), of which approximately US$67 million is undisbursed.

- Honduras Rural Competitive Project
  - PDO: contribute to increased productivity and competitiveness among organized rural small-scale producers through their participation in productive alliances.
  - Additional Financing: US$25.0 million approved to expand the model and incorporate new clusters.
  - Closing date: November 30, 2020.

- Corredor Seco Food Security Project (PROSASUR)
  - PDO: enhance food and nutritional security of vulnerable households in Selected Areas of the Corredor Seco; increase household availability of quality food and revenues in 25 municipalities; improve nutrition and nutritional practices especially for children and women.
  - Implemented with US$30 million of GAFSP (trust fund) resources.
  - Closing date: October 30, 2021.

- Social Protection (multiple operations)
  - PDOs: (a) improve institutional capacity to manage the Conditional Cash Transfer (CCT) Program (targeting, monitoring compliance, payments); (b) provide income support to Eligible Beneficiaries; (c) increase use of preventive health services and school attendance in grades 1 to 9 among Program beneficiaries in rural areas; (d) improve capacity to respond promptly and effectively to an Eligible Emergency.
  - Closing dates cited: December 31, 2018 (one operation). Multiple Social Protection IDA credits listed below in Financial Relations.

- Safer Municipalities
  - PDO: (i) improve capacities of national and local actors in violence prevention, (ii) ensure urban municipalities address crime and violence risk factors, (iii) respond promptly and effectively to an eligible emergency.
  - Closing date: August 31, 2018.

- Disaster Risk Management
  - PDO: (a) continue strengthening capacity for integrated disaster risk management at municipal and national level; (b) improve capacity to respond promptly and effectively to an eligible emergency.
  - Closing date: April 30, 2019.

### Recently closed projects
- Honduras Water and Sanitation Sector Modernization Project (PROMOSAS)
  - Closed: December 2016.
  - PDO: improve sustainability, efficiency, and reliability of WSS services in Eligible Municipalities; improve performance of national WSS sector institutions per WSS Sector Framework Law; improve capacity to respond promptly and effectively to an Eligible Emergency.

- Second Land Administration
  - Closed: January 2017.
  - PDO: provide improved, decentralized land administration services, including better access to and more accurate information on property records and transactions.

- First Fiscal Sustainability and Enhanced Competitiveness DPF
  - Closed: March 2017.
  - Objective: support Government efforts in (i) strengthening institutional arrangements to support fiscal sustainability; and (ii) enhancing the regulatory framework to promote competitiveness.

### B. Non-Lending Activities — analytical and advisory work
- Completed economic and sector work (selected):
  - “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 (selected):
  - Support to development of the Education Sector Plan
  - Jobs Diagnostic
  - Regional study Women in Central America: An Overview of Progress and Challenges
  - Study on migration and remittances
  - Technical assistance in public finances, contingent liabilities, energy sector reform, and transparency and accountability through the Global Partnership for Social Accountability grant provided by the USAID.

### C. Financial relations — project-level financing and disbursement status (as presented)
- Disaster Risk Management Project (IDA 51900)
  - Original Amount (USD Eq): 30,000,000.00
  - Percent Disbursed: 51.32%
  - Approval Date: 13-Dec-12
  - Sign Date: 18-Dec-12
  - Closing Date: 30-Apr-19
  - Undisbursed Balance (USD Eq): 11,980,445.98
  - Disbursed Outstanding Balance (USD Eq): 12,628,605.71

- HN Safer Municipalities (IDA 51920)
  - Original Amount (USD Eq): 15,000,000.00
  - Percent Disbursed: 77.26%
  - Approval Date: 13-Dec-12
  - Sign Date: 18-Dec-12
  - Closing Date: 31-Aug-18
  - Undisbursed Balance (USD Eq): 2,700,920.58
  - Disbursed Outstanding Balance (USD Eq): 9,176,562.48

- Social Protection (IDA 56030)
  - Original Amount (USD Eq): 25,000,000.00
  - Percent Disbursed: 86.04%
  - Approval Date: 31-Mar-15
  - Sign Date: 19-May-15
  - Closing Date: 31-Dec-18
  - Undisbursed Balance (USD Eq): 3,488,840.83
  - Disbursed Outstanding Balance (USD Eq): 21,511,159.17

- Social Protection (IDA 52940)
  - Original Amount (USD Eq): 12,300,000.00
  - Percent Disbursed: 99.76%
  - Approval Date: 8-Aug-13
  - Sign Date: 26-Aug-13
  - Closing Date: 30-Jun-18
  - Undisbursed Balance (USD Eq): 28,160.79
  - Disbursed Outstanding Balance (USD Eq): 11,899,723.21

- Social Protection (IDA 47740)
  - Original Amount (USD Eq): 40,000,000.00
  - Percent Disbursed: 99.97%
  - Approval Date: 29-Jun-10
  - Sign Date: 2-Aug-10
  - Closing Date: 30-Jun-18
  - Undisbursed Balance (USD Eq): 10,679.33
  - Disbursed Outstanding Balance (USD Eq): 38,536,750.67

- Honduras Rural Competitiveness Project (IDA 44650)
  - Original Amount (USD Eq): 30,000,000.00
  - Percent Disbursed: 98.83%
  - Approval Date: 17-Jun-08
  - Sign Date: 17-Sep-08
  - Closing Date: 31-Dec-18
  - Undisbursed Balance (USD Eq): 239,190.88
  - Disbursed Outstanding Balance (USD Eq): 20,125,489.12

- Honduras Rural Competitiveness Project Additional Financing (IDA 60460)
  - Original Amount (USD Eq): 25,000,000.00
  - Percent Disbursed: 0.00%
  - Approval Date: 18-May-17
  - Closing Date: 30-Nov-20
  - Undisbursed Balance (USD Eq): 25,000,000.00
  - Disbursed Outstanding Balance (USD Eq): 0.00

- PROSASUR – Corredor Seco Food Security Project (TF 17904)
  - Original Amount (USD Eq): 30,000,000.00
  - Percent Disbursed: 20.80%
  - Approval Date: 24-Sept-15
  - Sign Date: 11-Nov-15
  - Closing Date: 30-Oct-21
  - Undisbursed Balance (USD Eq): 23,761,042.82
  - Disbursed Outstanding Balance (USD Eq): 6,238,957.18

### Disbursement and net flows history (selected annual periods)
- Jul 2006 - Jun 2007: Disb. Amt. 41,624,795.86; Net Amt. 41,624,795.86; Charges 2,424,638.03; Fees 596,191.13
- Jul 2007 - Jun 2008: Disb. Amt. 62,219,851.37; Net Amt. 62,219,851.37; Charges 1,395,496.53; Fees 1,810,261.38
- Jul 2008 - Jun 2009: Disb. Amt. 49,391,574.72; Net Amt. 49,391,574.72; Charges 0.00; Fees 3,313,284.34
- Jul 2009 - Jun 2010: Disb. Amt. 31,696,088.07; Net Amt. 31,696,088.07; Charges 0.00; Fees 3,643,503.66
- 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 2011 - Jun 2012: Disb. Amt. 147,730,043.84; Repay Amt. 2,635,298.73; Net Amt. 145,094,745.11; Charges 0.00; Fees 4,855,712.31
- Jul 2012 - Jun 2013: Disb. Amt. 87,062,015.07; Repay Amt. 3,202,199.84; Net Amt. 83,859,815.23; Charges 1,186,246.38; Fees 5,943,753.48
- Jul 2013 - Jun 2014: Disb. Amt. 68,112,870.03; Repay Amt. 4,390,624.09; Net Amt. 63,722,245.94; Charges 1,098,579.63; Fees 6,554,020.70
- Jul 2014 - Jun 2015: Disb. Amt. 91,206,208.19; Repay Amt. 7,633,158.67; Net Amt. 83,573,049.52; Charges 1,165,256.68; Fees 6,484,201.02
- Jul 2015 - Jun 2016: Disb. Amt. 76,539,217.77; Repay Amt. 21,332,670.75; Net Amt. 55,206,547.02; Charges 2,166,183.33; Fees 6,653,254.21
- 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
- Jul 2017 – Feb 2018: Disb. Amt. 11,525,663,05; Repay Amt. 17,289,263.89; Net Amt. -5,763,600.84; Charges 2,927,110.05; Fees 5,521,288.30
- Total (presented): Disb. Amt. 815,579,511.20; Repay Amt. 84,959,105.33; Net Amt. 730,620,405.87; Charges 15,399,003.63; Fees 58,144,078.82

### STATISTICAL ISSUES — data adequacy, quality, and recommendations (As of March 27, 2018)
- General: Data provided to the Fund are broadly adequate for surveillance and program monitoring purposes. Monitoring will benefit from both better timing of data release and more comprehensive data coverage.
- Outstanding data issues flagged previously not fully addressed:
  - Lack of comprehensive data on the financial operations of public enterprises.
  - Need to enhance reporting of government guarantees and fiscal contingent liabilities.
  - Need for a valid and reliable methodology to estimate private capital flows.

- National Accounts
  - BCH compiles national accounts following the System of National Accounts 1993 (1993 SNA). Base year: 2000.
  - Quarterly GDP data consistent with annual series.
  - BCH has a project to rebase national accounts series to 2016 and adopt main recommendations of the 2008 SNA, with support of CAPTAC-DR, planned to be concluded by 2021.

- Labor statistics
  - Estimates of average wages and unit labor costs needed to assess competitiveness.
  - A comprehensive household survey would help evaluate labor market conditions.

- Price statistics
  - BCH publishes CPI since April 2000, reference period December 1999; CPI basket weights based on NHIES of 1998–99.
  - A new NHIES for 2019 is being planned.
  - Producer price index updated base (to 2010) and classification; index currently compiled for internal use and limited to goods for processing (maquila), trade and transport margins.

- Government Finance Statistics (GFS)
  - SEFIN compiles and disseminates GFS covering central administration, central government, general government, and nonfinancial public sector.
  - SEFIN and BCH participating in GFS data enhancement project for Central America, Panama, and Dominican Republic to elaborate and publish comparable GFS using GFSM 2014 and PSDSG components.
  - A mechanism is needed to systematically collect data on arrears and floating debt of public enterprises.

- Monetary and Financial Statistics (MFS)
  - MFS reported 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 should be addressed.

- Financial sector surveillance
  - Authorities report 11 out of 12 core financial soundness indicators and five of the encouraged set.

- External sector statistics
  - BCH disseminates quarterly Balance of Payments and IIP statistics and monthly Data Template on International Reserves and Foreign Currency Liquidity.
  - Honduras participates in CDIS and CPIS.
  - BCH work in progress: improve coverage of nonfinancial private sector transactions and positions, ensure consistency between external debt statistics and IIP, and complete migration to BPM6 basis.

- 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.
  - Authorities encouraged to take steps toward SDDS subscription.
  - Data ROSC was published on July 29, 2005.

### Debt sustainability — key findings (Staff Report for the 2018 Article IV Consultation)
- Risk of external debt distress: Moderate
- Augmented by significant risks stemming from domestic public and/or private external debt? No
- The debt sustainability analysis (DSA) shows some improvement relative to the previous review mainly due to better-than-expected outcomes in year 2017 and the revised profile of PPP operations. Staff still assess the risk of debt distress as moderate.

### Background — public and external debt developments (selected)
- Gross public debt stood at 40¾ percent of GDP in 2017, an increase of about ¼ percentage point of GDP relative to 2016.
- NFPS posted a deficit of ¾ percent of GDP in 2017.
- Sovereign placed international bonds for US$700 million at a rate of 6¼ percent.
- External debt increased from 35½ percent of GDP in 2016 to 37½ percent of GDP in 2017 (increase of 2 percentage points), reflecting the bond placement and payments of liabilities from the public electricity company ENEE, producing a large residual in 2017.

*Prepared by staffs of the International Monetary Fund and the International Development Association (as presented in the source content).*

### 3.     Public debt is mostly with foreign creditors. The share of public debt that is external rose

### 3.     Public debt is mostly with foreign creditors. The share of public debt that is external rose

### Public debt composition and recent developments
- The share of public debt that is external rose from 72 percent in 2016 to about 77 percent in 2017 due mainly to external bond issuance.
- Main external lenders: Inter-American Development Bank (IADB), Central American Bank for Economic Integration (BCIE), World Bank.
- Characteristics:
  - Debt to multilateral institutions carries long maturities.
  - Only the IADB continues to provide loans on concessional terms (i.e., with a grant element of at least 35 percent).
  - Domestic public debt is mainly with commercial banks, has a shorter—though rising—maturity (about 3 years), and carries a higher real interest rate.
- Market development: In March-2018, the authorities placed their first 15-year Lempira-denominated bond in the local market at a fixed interest rate of 11 percent.

### Underlying assumptions: growth, fiscal policy, institutions, and financing
- Economic growth:
  - Baseline assumes growth will decelerate to 3¾ percent in 2018.
  - Over the medium term, growth is expected to converge towards potential (3¾ percent).
- Fiscal policy:
  - Fiscal outlook anchored by the fiscal responsibility law (FRL), which sets a NFPS deficit ceiling of 1 percent of GDP from 2019 onwards and a limit of about 3 percent in the real increase for current spending.
  - Baseline projection: primary balance becomes consistently positive backed by fiscal reforms undertaken in 2013-2017.
  - Contingency management: a newly created contingency unit requires a formal assessment on the size of fiscal liabilities (including contingencies) for all PPP operations; baseline projection assumes that starting in 2021 net flows from PPPs would be negative.
- Fiscal institutions:
  - Main challenge: consolidate the role of the FRL as the cornerstone of macroeconomic policies; implementation requires developing institutions, strengthening commitment, and fostering transparency and accountability across all levels of government.
- Public sector financing:
  - Assumed that public financing will be contracted mainly from external sources.
  - Financing conditions expected to change toward less concessional terms compared to recent years.
  - Authorities target increased Lempira-denominated debt issuance with a longer maturity profile.
  - Domestically, authorities target a minimum of 80 percent of the public debt portfolio be issued at fixed rates.

### External sector assumptions and projections
- 2017 current account deficit declined to 1¾ percent of GDP, its lowest level since 2001, supported by large remittances inflows, favorable terms of trade, and a recovery in coffee production.
- Projections:
  - Current account deficit projected to hover around 4 percent over the medium term, and stabilize at around 3½ percent of GDP over the longer term.
  - Slower remittances growth and less favorable terms of trade explain movement toward higher deficits.
- Financing composition:
  - Current account deficit financed primarily by foreign direct investment and, to a lesser extent, public sector borrowing, with small private sector flows.
  - International reserves expected to remain around 5 months of non-maquila imports throughout the projection period.

### External Debt Sustainability Analysis (PPG external debt)
- PPG external debt trajectory:
  - PPG external debt is projected to peak at about 33 percent of GDP in 2022, from about 31 percent of GDP in 2017.
  - The share of PPG external debt in total public debt rises slowly to about 82 percent by 2022, as total debt decreases substantially due to fiscal consolidation.
- Private external debt is projected to be around 4 percent of GDP through the period.
- External debt ratios:
  - Remittances-adjusted indicative thresholds are used (Honduras remittances about 18 percent of GDP on average in 2015-2017).
  - External debt ratios remain within indicative thresholds in all scenarios.
  - PV of PPG external debt and PPG debt service remain below their indicative thresholds in all scenarios throughout the projection period.
  - PV of external PPG remains initially stable and starts to decline in 2023.

### Scenario analysis and resilience
- Baseline scenario:
  - Debt indicators remain within indicative thresholds under the probability approach.
  - Under the most extreme shock (one-time 30 percent depreciation):
    - The PV of debt-to-GDP plus remittances ratio breaches the threshold in 2020 and returns below the threshold only in late 2026.
    - The ratio of debt service to revenue is breached only in 2020, reflecting bullet payments of the 2013 bond issuance.
- Customized scenario (captures downside risks):
  - Includes negative shocks to GDP growth, tighter external financing conditions, and weaker fiscal position from possible slippages in FRL implementation.
  - In this scenario, the PV of PPG external debt-to-GDP plus remittances ratio rises initially up to 24 percent and starts to decline in 2023.
  - Ratios of debt service-to-exports plus remittances and debt service to revenue remain below their indicative thresholds throughout the projection.
- Parameters reported (selected):
  - Baseline real GDP growth: 2018 3.7, 2019 3.7, 2020 3.7, Long term 3.8 (percent).
  - Customized real GDP growth: 2018 2.6, 2019 2.5, 2020 2.8, Long term 3.5 (percent).
  - Average interest rate on new external debt: Baseline 3.4 (percent); Customized 4.4 (percent).
  - Fiscal balance: Baseline -0.8, -0.8, -0.7, -0.7 (percent of GDP); Customized -2.8, -2.5, -2.2, -1.9 (percent of GDP).
  - Note on customized scenario design:
    - (i) real GDP growth is 2.5 percent in 2018 and 2.8 in 2019, rising on average 0.25 percentage points per year to reach 3.5 percent in 2022;
    - (ii) financing conditions deteriorate permanently, raising the average interest rate on new external debt by 100 basis points;
    - (iii) the overall deficit increases by 2 percent of GDP in 2018 compared to the baseline and then fades out partially at a constant rate of 15 percent during the DSA period.

### Public Debt Sustainability Analysis (total public debt)
- Public debt dynamics:
  - Public debt ratios projected to peak in 2021 and then decline.
  - Projected peak: about 41½ percent of GDP in 2021 (up from 40¾ percent of GDP in 2017).
  - Public debt projected to reach 30 percent of GDP by 2028.
  - In present value terms, debt-to-GDP expected to peak at around 36¼ percent of GDP in 2021 and fall to about 25 percent of GDP by the late 2020s.
  - Under no scenario does the PV of debt-to-GDP ratio breach its benchmark.
- Exposure to contingent liabilities:
  - Exposure is limited due to recent measures:
    - Doubling the contribution rate for the social security institute (IHSS) to improve IHSS actuarial position.
    - Amendment to the PPP framework law to limit provision of government guarantees for PPP operations.
    - Upgrading PPPs accounting rules to international standards so PPP operations are included in regular spending or financing recording.
  - The 2017 bond issuance was used to clear most of ENEE’s liabilities, leaving an estimated 1¼ percent of GDP under dispute (classified as either pending or contingent).

*International Monetary Fund staff estimates.*

### 15. Despite marked improvements on public and external debt indicators the risk of

### 15. Despite marked improvements on public and external debt indicators the risk of external debt distress remains moderate

### Major findings and macroeconomic context
- 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, and its fulfillment is the foundation for continued structural fiscal reforms.
- Further revenue mobilization and actions to ensure the sustainability of state-owned enterprises are essential to guarantee fiscal sustainability.
- On the monetary front, reform of the monetary policy framework has shown some progress but much more work is needed.

### Key external debt statistics (Baseline Scenario, selected values)
- External debt (nominal) 1/: 36.1; 35.5; 37.6; 36.8; 36.8; 36.8; 37.1; 37.1; 34.9; 32.8; 30.9; 29.3; 27.9; 25.7; 17.3
- of which: public and publicly guaranteed (PPG): 28.8; 29.0; 31.2; 31.5; 32.4; 32.5; 32.8; 32.9; 30.7; 28.6; 26.8; 25.2; 23.8; 21.6; 13.4
- Change in external debt: -1.0; -0.6; 2.1; -0.8; 0.0; 0.1; 0.2; 0.1; -2.3; -2.1; -1.8; -1.6; -1.4; -2.3; 0.3
- Identified net debt-creating flows: -2.0; -2.5; -4.8; -1.7; -1.6; -1.6; -1.7; -1.8; -1.8; -1.9; -1.9; -1.9; -1.9; -1.9; -2.0
- Non-interest current account deficit: 3.6; 1.4; 0.4; 5.8; 4.2; 2.5; 2.6; 2.7; 2.7; 2.7; 2.7; 2.7; 2.7; 2.7; 2.7
- PV of external debt 4/: 31.7; 31.1; 31.4; 31.2; 31.8; 32.0; 30.1; 28.4; 26.8; 25.6; 24.1; 22.3; 13.8
- PV of PPG external debt: 25.4; 25.9; 27.0; 26.9; 27.6; 27.7; 25.9; 24.2; 22.7; 21.5; 20.0; 18.2; 9.9
- PV of PPG external debt in percent of exports: 58.3; 60.8; 63.1; 61.8; 63.2; 63.3; 59.2; 55.4; 51.9; 49.0; 45.8; 41.7; 22.6
- PV of PPG external debt in percent of government revenues: 80.8; 84.1; 89.3; 88.8; 91.1; 92.1; 85.8; 80.2; 75.1; 71.0; 66.3; 60.3; 32.8
- Debt service-to-exports ratio (in percent): 20.5; 30.7; 15.7; 16.2; 14.5; 17.3; 12.3; 13.6; 13.3; 13.1; 13.4; 11.3; 16.1; 11.1; 9.7
- Total gross financing need (Billions of U.S. dollars): 2.1; 2.6; 0.9; 1.6; 1.4; 1.8; 1.2; 1.4; 1.5; 1.5; 1.6; 1.4; 2.2; 1.5; 2.0
- Non-interest current account deficit that stabilizes debt ratio: 4.5; 2.0; -1.7; 3.3; 2.6; 2.6; 2.5; 2.6; 5.0; 4.8; 4.5; 4.3; 4.2; 5.0; 2.5

### Key public sector debt statistics (Baseline Scenario, selected values)
- Public sector debt 1/: 39.6; 40.5; 40.8; 41.3; 41.7; 41.5; 41.5; 39.9; 38.2; 36.5; 34.7; 33.1; 31.5; 30.0; 18.2
- of which: foreign-currency denominated: 28.1; 28.6; 31.0; 31.5; 32.4; 32.5; 32.8; 32.9; 30.7; 28.6; 26.8; 25.2; 23.8; 21.6; 13.4
- Change in public sector debt: 0.7; 0.9; 0.3; 0.5; 0.3; -0.1; 0.0; -1.6; -1.7; -1.7; -1.7; -1.6; -1.6; -1.6; -1.0
- Identified debt-creating flows: 0.6; 2.5; -0.3; 0.8; 0.6; 0.5; 0.1; -0.1; -0.2; -0.3; -0.3; -0.3; -0.3; -0.3; -0.3
- Primary deficit 2/: 0.5; 0.7; 0.4; 3.1; 2.2; -0.2; -0.5; -0.7; -0.6; -0.5; -0.6; -0.6; -0.7; -0.7; -0.7
- Revenue and grants: 29.8; 30.5; 30.5; 29.9; 29.5; 29.5; 29.6; 29.5; 29.7; 29.7; 29.8; 29.8; 29.9; 29.9; 30.4
- Automatic debt dynamics: -0.5; 1.4; -0.9; 0.9; 1.1; 1.2; 0.7; 0.4; 0.4; 0.3; 0.4; 0.5; 0.5; 0.4; 0.5
- PV of public sector debt: 35.0; 35.7; 36.3; 35.9; 36.3; 34.8; 33.5; 32.1; 30.6; 29.3; 27.7; 26.6; 14.7
- PV of public sector debt-to-revenue and grants ratio (in percent): 114.6; 119.3; 122.9; 121.4; 122.7; 117.8; 112.7; 108.1; 102.9; 98.3; 92.8; 88.8; 48.3
- Gross financing need 3/: 3.7; 3.1; 6.9; 3.4; 3.8; 5.9; 3.9; 4.1; 4.2; 4.3; 4.5; 3.6; 5.8; 3.8; 2.5
- Debt service-to-revenue and grants ratio (in percent): 17.2; 13.4; 25.0; 16.1; 18.7; 25.7; 18.8; 19.1; 19.2; 19.6; 20.4; 17.5; 24.2; 17.6; 12.1
- Primary deficit that stabilizes the debt-to-GDP ratio: -0.1; -0.2; 0.1; -0.7; -0.9; -0.5; -0.6; 1.1; 1.1; 1.2; 1.0; 0.9; 0.9; 0.9; 0.3

### Sensitivity analysis and stress tests (high-level)
- Table 2 and Table 4 present alternative scenarios and bound tests for public and PPG external debt and public debt, including:
  - Alternative scenarios (A1, A2, A3) that impose historical-average variables, less favorable loan terms, and customized stress profiles.
  - Bound tests (B1–B6) that include shocks such as: real GDP growth at historical average minus one standard deviation; export value growth shock; US dollar GDP deflator shock; net non-debt creating flows shock; combinations of shocks; and a one-time 30 percent nominal depreciation in 2019.
- Figures show that the most extreme stress tests for various indicators are typically the Exports shock or the One-time depreciation shock (specific correspondences noted in figure footnotes).
- The most extreme stress test in the charts is identified as the test that yields the highest ratio on or before 2028.

### Key policy recommendations and vulnerabilities
- Continue to fulfill the FRL and pursue structural fiscal reforms to secure sustainability.
- Prioritize revenue mobilization efforts.
- Implement actions to ensure sustainability of state-owned enterprises.
- Advance monetary policy framework reforms to strengthen macroeconomic resilience.
- Monitor external financing conditions, export performance, remittances, and grant-equivalent financing, given their material influence on debt indicators (examples in projections: grant-equivalent financing and grant element of new borrowing figures in the tables).

*Sources: Country authorities; and staff estimates and projections.*

### 7.5 percent of GDP and a current account deficit of 9.5 percent) and a very challenging security

### cr18206 - 7.5 percent of GDP and a current account deficit of 9.5 percent) and a very challenging security

### Overview / Economic performance
- Economic growth rate in 2017 of 4.8 percent, the highest in a decade.
- Non-financial public sector (NFPS) deficit of 0.8 percent of GDP, below the Fiscal Responsibility Law (FRL) ceiling of 1.5 percent of GDP and historically low for an election year.
- Current account deficit narrowed to 1.7 percent of GDP.
- International reserves are equivalent to more than 5.3 months of non-maquila imports cover.
- Remarkable decline in violence: a decline of more than 50 points with respect to 2013.
- Historic improvement of Honduras’ international debt credit rating attributed to stabilization and reforms.
- Government seeks a new program with the Fund to continue reforms and address external headwinds.

### Government objectives and strategic priorities
- For the next four years, the government targets ambitious goals on economic growth, employment creation and poverty reduction.
- Seven strategic priorities:
  - boosting innovation,
  - deepening financial inclusion,
  - enhancing the country's role as Central America’s logistics hub,
  - improving education and health (including investing in bilingual English-Spanish public education),
  - strengthening security,
  - preserving macroeconomic stability,
  - reducing corruption.
- National dialogue initiated with all political parties, supported by the U.N.

### Governance and transparency
- Creation of the Inter-Institutional Table for Transparency, comprising heads of the three branches of government, civil society, comptrollers and municipalities.
- Electoral reforms including a new ID (last updated 20 years ago) with modern technology to enhance security and facilitate business.
- Reaffirmed backing of the special anti-corruption entity created with OAS support; special anticorruption unit within the public prosecutor’s office created in October 2017, backed by MACCIH, producing prosecution of high profile cases in 2018.
- Open Budget Index improvement from 12 in 2008 to 54 in 2017.
- Transparency indicator in execution of public infrastructure improved from 74 percent in 2014 to 85 percent in 2017.
- Launch of SISOCS-APP for disclosure of public-private partnership projects; Honduras reported as the first country in the world to implement such a project.
- Government signed an agreement with Transparency International to improve transparency in a pilot project of five ministries.
- Authorities agreed to undergo a Fiscal Transparency Evaluation, led by FAD, to assess compliance with the basic requirements for fiscal risk disclosure under the new IMF Fiscal Transparency Code.

### Monetary and exchange rate policy
- Inflation remained within target, reaching 4.2 percent in April 2018 (4±1 percent tolerance range); similar to 4.1 percent the year before.
- Central bank (BCH) will stand ready to take necessary measures to keep inflation within target.
- BCH strategic plan (approved October 2016) to modernize monetary policy and adopt an inflation-forecast targeting framework.
- New regulations for the interbank money market and FX market approved in 2017, bolstering monetary transmission and supporting de-dollarization.
- Organizational updates and strengthened macroeconomic modeling capacity at the monetary authority with Fund technical assistance.
- In January 2018, an additional 10 percent of FX surrender requirements were decreased (for a total reduction of 20 percent) to create a more dynamic FX market and gradually increase exchange rate flexibility.
- BCH committed to transition to full inflation targeting, including development of a secondary securities market, adoption of a new securities market law, and enacting a central bank law with a clear mandate to control inflation; follow up TA requested.

### Fiscal policy
- Government pledged to maintain the NFPS deficit unchanged from last year (expenditures cut to counteract revision in the minimum income tax reform).
- Prudent fiscal stance with main spending priorities: social spending, infrastructure and security.
- Commitment to containing the wage bill.
- World Bank technical assistance in civil service reform; Fund technical assistance in performance-based budgeting.
- Customs authority improvements: better revenue collection and efficiency in customs clearance, contributing to reduced private sector costs and improved investment environment.
- Transition to a fully independent and functioning customs authority expected by August 2018.

### Statistics
- Current reference year for Honduran National Accounts and CPI is based on the 1998-99 survey.
- BCH and National Institute of Statistics signed an inter-institutional technical cooperation agreement on May 14, 2018 for planning, formulation and execution of a new household survey.
- New survey will update the basket of goods and services and weights for a new CPI database and strengthen household estimates for National Accounts.
- Project planned to be finalized in the first quarter of 2021.

### Energy Company (ENEE)
- Significant progress in solidifying ENEE’s financial position over the last four years.
- Actions include reductions in non-technical losses, a rightsizing program achieving a 60 percent reduction in the workforce, quarterly tariff adjustments based on a cost-recovery formula, and creation of a new Secretary of Energy.
- Authorities committed to ensuring ENEE’s financial sustainability via a holistic plan including faster reduction in non-technical electricity losses and generating income through charges for ancillary services to electricity generators.

### Results of social welfare programs
- Social spending safeguarded and increased even during fiscal consolidation.
- Social spending focused mainly on social benefits such as conditional cash transfers.
- Results indicate these programs have been effective in improving education, health and nutrition indicators, mechanisms to break the intergenerational transmission of poverty.

### Structural reforms and growth prospects
- Medium-term development aims for inclusive export-led growth in tourism, textiles, intermediate-goods, back office support, and agro-industrial sectors.
- Macroeconomic stability and crime reduction, plus efforts to enhance connectivity and ease of doing business, support tourism expansion.
- Customs reduction of cargo backlog increased corporate profitability and incentivizes private investment.
- Customs union signed in June 2017 with Guatemala has enhanced trade; addition of El Salvador later this year expected to further boost regional growth.
- Construction of a bigger airport projected to be finalized at the end of 2019 to enhance trade and tourism.

### Administrative
- Authorities have agreed to the publication of the Staff Report for the 2018 Article IV Consultation.

*Source: cr18206 - 7.5 percent of GDP and a current account deficit of 9.5 percent) and a very challenging security*

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_Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18206.pdf_