## 1hndea2019001

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### EXECUTIVE SUMMARY — Context and Outlook
- Since 2014, supported by a Fund program that expired in December 2017, Honduras reduced macroeconomic imbalances and institutionalized fiscal prudence.
- Authorities requested a new Fund program to be treated as precautionary to anchor reforms for higher-quality fiscal policy, governance, and the business environment.
- Key recent macro outcomes:
  - Real GDP growth: 3¾ percent in 2018.
  - Inflation (eop): 4¼ percent in 2018; April 2019 inflation rebounded to 4.9 percent y/y.
  - Unemployment: 5¾ percent in 2018 (from 6¾ percent in 2017); underemployment: 48½ percent in 2018 (from 44¼ percent in 2017).
  - NFPS deficit: 0.9 percent of GDP in 2018 (below FRL ceiling of 1.2 percent of GDP).
  - Current account deficit: 4¼ percent of GDP in 2018.
  - Remittances: grew 11 percent in 2018; 10½ percent y/y in Q1 2019.
  - Gross reserves coverage: slightly more than 5 months of non-maquila imports in 2018; reserve adequacy ~110 percent of the Fund's ARA in 2018.
- Staff baseline: GDP growth converging toward potential; current account deficit around 4 percent of GDP over the medium term; reserves projected to remain within 100-150 percent of ARA.

### FISCAL POSITION AND ENEE
- NFPS and ENEE outturns and impacts:
  - NFPS net lending (2018): -0.9 percent of GDP.
  - ENEE deficit (net of government subsidies) in 2018: 1.2 percent of GDP; ENEE arrears with private generators as of March 2019: 1¾ percent of GDP.
  - ENEE losses: about 35 percent in 2018.
  - ENEE debt increased to almost 10 percent of GDP (text notes nearly 11 percent in some sections).
  - ENEE deterioration forced a contraction in public investment, dragging domestic demand and growth.
- ENEE program targets and assumptions:
  - ENEE overall deficit target (excl. govt subsidies): 1.0 percent of GDP in 2019; 0.8 percent of GDP in 2020.
  - Assumes reduction in electricity losses by 4 percent during 2019-2020.
  - Temporary treasury transfers to compensate pass-through differences will be reflected in the budget.
- ENEE reform measures (selected):
  - New tariff scheme reflecting generation, distribution, transmission, and other costs; CREE to implement quarterly tariff adjustments.
  - Unbundle ENEE into subsidiaries for distribution, transmission, and generation.
  - Review and renegotiate onerous PPAs; concessional financing and market-friendly refinancing; multilateral guarantees for new payment mechanism.
  - Loss reduction: revise EEH contract, law enforcement taskforce against theft/fraud, upgrade metering and networks.
  - Social protection: maintain electricity subsidy for consumers using less than 75kwh per month; transitory transfers for low-consumption households.
- Fiscal strategy:
  - Maintain NFPS deficit slightly below FRL ceiling; FRL sets NFPS deficit limit of 1 percent of GDP from 2019 onwards (program consistently aims to stay slightly below ceiling).
  - Authorities aim to sustain revenue mobilization and protect investment and priority social spending.

### REVENUE MOBILIZATION (Box 1)
- Progress and composition:
  - Tax revenue to GDP ratio rose from 15.0 percent in 2013 to 18½ percent in 2018 (increase of 3½ percentage points).
  - Revenue composition: ~60 percent taxes on goods and services; ~30 percent corporate income tax.
- Tax policy and recent changes:
  - Corporate income tax rate: 25 percent, plus a 5 percent surtax for most profitable companies.
  - 2017 and 2018 tax code changes estimated to imply a permanent reduction in tax collection of ¾ percent of GDP (phase out of minimum corporate income tax and weakened enforcement features).
- Tax expenditures:
  - Total tax expenditures: 6.8 percent of GDP (breakdown in percent of GDP):
    - Income tax 2.2 (o/w special regimes 1.1; teachers 0.2; energy sector 0.2)
    - VAT 4.1 (o/w food basket 1.2; agriculture 0.2; special regimes 0.2; credit cards 0.1)
    - Excise tax 0.4 (o/w thermal generators 0.4; ZOLITUR 0.1)
    - Custom duties 0.1
    - Total 6.8
- Authorities’ program objectives and measures:
  - Objective: maintain central government tax collection at 18½ percent of GDP by 2021 after a projected decline in 2019.
  - Measures: remove some income tax exemptions while preserving VAT exemptions for food staples; strengthen controls to eliminate abuse of exemptions; no new tax amnesties; electronic notifications; customs administration reform; replace exempted purchase orders with refunds-based framework.
- Fiscal scenario (selected central government indicators, percent of GDP):
  - Tax Collection — No Adjustment: 2019 18.0, 2020 17.8, 2021 17.7.
  - Measures to Broaden the Tax Base: 2019 0.1, 2020 0.8, 2021 0.9.
  - Authorities Program (Tax Collection): 2019 18.1, 2020 18.5, 2021 18.5.
  - Government Consumption — Authorities Program: 2019 10.4, 2020 10.3, 2021 10.2.
  - Social Spending — Authorities Program: 2019 2.0, 2020 2.2, 2021 2.3.
  - Investment — Authorities Program: 2019 2.0, 2020 2.2, 2021 2.3.

### EXTERNAL SECTOR, REMITTANCES, AND RESERVES
- Current account and terms of trade:
  - CA deficit: -4.2 percent of GDP in 2018 (noted also as 4¼ percent of GDP).
  - EBA-lite CA norm for 2018: -5.4 percent of GDP; cyclically adjusted CA -4.7 percent of GDP; CA gap 0.7 percent of GDP (external position broadly consistent with fundamentals).
  - Terms of trade deterioration driven by record-low coffee prices and higher oil prices.
- Remittances and financing:
  - Remittances: 20 percent of GDP in 2018; grew by 11 percent in 2018; staff baseline projects remittances decline by about 1½ percent of GDP by 2024.
  - CA primarily financed by FDI; FDI reached 4.8 percent of GDP in 2018.
- Reserves and adequacy:
  - Gross international reserves increased by US$67 million in 2018 (other excerpt notes US$50 million); coverage ~5.1–5.2 months of non-maquila imports in 2018.
  - Reserve adequacy: about 110–111 percent of the IMF reserve adequacy metric in 2018.
- External debt and IIP:
  - External debt: total external debt 38.6 percent of GDP in 2018; public and publicly guaranteed external debt 31 percent of GDP in 2018.
  - Net IIP: deteriorated to -69.5 percent of GDP in 2018 (from -65 percent in 2017).

### FINANCIAL SECTOR, DOLLARIZATION, AND CREDIT
- Banking system health:
  - System described as stable, liquid, well capitalized; bank capital above regulatory requirements.
  - NPLs at record-low levels (NPL ratio cited 2.8 percent in 2018; later 2.3 percent projected for 2019).
  - CNBS mandated additional capital conservation buffer of 2½ percent: ½ percent implemented; remaining 2 percent phased in by end-2022 at ¼ percentage point semiannually.
  - CNBS prepared methodology to identify systemic banks for potential additional capital charges.
- Dollarization and credit dynamics:
  - Dollarization remains high at about 30 percent (deposit and credit dollarization similar).
  - Around 2/3 of foreign currency credit to the nonfinancial private sector is allocated to unhedged borrowers.
  - Credit growth (overall): 13½ percent in 2018; FX credit growth: 18 percent in 2018; FX credit growth to corporations: 18½ percent in 2018; household FX credit fell slightly.
  - FX credit concentrated in industry, agriculture, and retail.
  - Drivers: regulatory changes promoting national strategic projects (mainly energy) and ENEE accumulation of unpaid bills to private generators; FX rates lower than domestic rates and energy prices indexed to USD increased demand for USD credit.
  - Basel gap turned positive in 2018, indicating potential credit excess.
- Stress tests and resilience:
  - Stress tests on 15 banks (6 domestically owned, 9 foreign owned) show resilience; capital adequacy would fall below 10 percent only under severe combined shocks.
  - Stress test shocks include System-Wide Credit Risk Shock (4.7 percent of outstanding performing loans become non-performing), Sectoral Shock (sectoral NPL increases specified), Interest Rate Shock (3.3 percentage points), FX Shock (10 percent depreciation → 5 percent of FX loans become NPL), Liquidity Shock (specified deposit withdrawals).
- BANADESA and public financial entities:
  - BANADESA CAR negative; NPLs 70 percent; assets ~1 percent of GDP; CNBS seized administrative and operational control in January 2019; CNBS to submit report to Congress with proposal to address BANADESA by September 2019.
- Pension funds and investment policy:
  - High liquidity in public pension funds; regulatory ceiling on consumer loans reduced from 50 to 40 percent of portfolio; share remains close to 30 percent.
  - Authorities intend to move investment policy toward international best practices gradually.

### MONETARY POLICY, EXCHANGE RATE, AND STATISTICS
- Monetary policy framework:
  - BCH hiked policy rate in January 2019 (first hike since 2012) due to inflation expectations near upper bound.
  - Program envisages steps toward full-fledged inflation targeting; BCH to submit new charter to Congress (draft submission December 2019 structural benchmark).
  - Monetary operational improvements: collateralized securities, reduced FX surrender requirements by 30 percent (commitment to phase out the remaining 70 percent), electronic interbank platform, reduced FX surrender requirement gap.
  - Program performance criteria include a ceiling on BCH net domestic assets and a floor on change in BCH non-borrowed reserves.
- Exchange rate regime and transition:
  - Current arrangement classified as crawling-peg; gradual transition toward more flexible exchange rate recommended to buffer shocks.
  - As of May 2019, 30 percent of the foreign exchange market liberalized.
  - Structural benchmark: present plan to phase out remaining 70 percent FX surrender requirements (December 2019).
- Data and statistics:
  - NHIES projected completion by end-2021 (other excerpts show September 2020 for NHIES completion — source contains both dates; preserve both as they appear).
  - National accounts rebased to 2016 to be published by December 2021.
  - Data dissemination: quarterly BOP and IIP; monthly DT on reserves; e-GDDS participant.

### POLICY PRIORITIES AND RECOMMENDATIONS (Article IV priorities)
- Overall objective: foster inclusive growth through reforms and better governance.
- Main policy priorities (selected):
  - Fiscal: sustain revenue mobilization, protect investment and social spending, strengthen fiscal transparency and public expenditure management, adhere to the FRL.
  - Electricity sector: comprehensive reform of ENEE to secure sustainability, reduce losses, clear arrears, adopt cost-reflective tariffs, unbundle operations.
  - Monetary: modernize operational framework, transition toward inflation targeting, phase out FX surrender requirements, strengthen BCH governance and accountability (new charter).
  - Financial sector: implement FSSR and Basel III recommendations, phase in liquidity coverage ratio and capital conservation buffer, strengthen stress testing and supervision, contingency plans for BANADESA.
  - Governance and AML/CFT: strengthen anti-corruption initiatives, implement GAFILAT recommendations, expand DNFBP supervision, identify beneficial owners, governance diagnostic with IMF support.
  - Social: protect priority social spending, expand conditional cash transfers to cover extreme poverty by end-2021, prioritize early childhood and reduce gender gap (female labor participation 46 percent in 2018 vs. 76 percent for males).
  - Business environment: simplify administrative procedures, streamline permits, implement electronic signature, improve procurement and public investment selection.
- Specific fiscal/administrative structural benchmarks (selected exact-dated items):
  - Enact decree creating new customs administration and appoint managerial team (September 2019).
  - Include annex on trust fund spending in 2020 budget bundle (September 2019).
  - Amend Article 89 Tax Code to allow electronic notification by SAR (December 2019).
  - Transfer verification procedures for exemptions from treasury to SAR (December 2019).
  - Submit new BCH charter to Congress (December 2019).
  - Present plan to phase out FX surrender requirements (December 2019).
  - Establish centralized wage bargaining mechanism (December 2019).
  - Present plan to execute trust-fund spending under full PFM for 2021 budget (March 2020).
  - Submit legislation requiring regulatory agencies to streamline permit requirements (March 2020).

### PROGRAM MODALITIES, ACCESS, AND MONITORING
- Proposed program:
  - 24-month SBA/SCF arrangement with access of SDR 224.82 million (90 percent of quota): SCF SDR 74.94 million (30 percent of quota) and SBA SDR 149.88 million (60 percent of quota).
  - Intended to be treated as precautionary (no immediate BOP needs).
  - Semiannual reviews (first review expected December 2019; second review April 2020).
- Quantitative Performance Criteria (selected):
  - Floor on NFPS net lending.
  - Floor on ENEE net lending.
  - Ceiling on lending minus repayments from state-owned pension funds.
  - Non-accumulation of external payments arrears by public sector.
  - Ceiling on accumulation of domestic arrears by ENEE.
  - Floor on change in stock of central bank’s non-borrowed reserves.
  - Ceiling on BCH net domestic assets (NDA).
- Indicative Targets (selected):
  - Floor on tax revenues collected by budgetary central government.
  - Ceiling on budgetary central government wage bill.
  - Floor on priority social spending.
  - Floor on reduction of ENEE losses.
  - Floor on ENEE operational ratio.
- Prior actions to be completed five business days before Board meeting:
  - Approve new tariff scheme that secures recovery of electricity generation and ENEE operational costs.
  - Prepare plan to secure ENEE financial sustainability, including debt profile and energy purchase policies consistent with new tariff scheme.
  - Present plan to secure reduction in electricity losses starting in 2019.

### RISKS, DSA FINDINGS, AND VULNERABILITIES
- Principal external risks:
  - Rising protectionism and retreat from multilateralism (Relative likelihood: High).
  - Weaker global growth (Medium); large swings in energy prices (Medium); sharp tightening of global financial conditions (Low).
- Domestic risks:
  - Complex electricity sector reforms with implementation risks.
  - Weakening social conditions could reduce reform consensus; migration pressures.
  - Fiscal risk from 2017 tax code changes and phase-out of minimum income tax estimated permanent revenue loss of ¾ percent of GDP in medium term.
- DSA and sustainability:
  - Risk of external debt distress: Low.
  - Overall risk of debt distress: Low (upgrade from previous moderate rating).
  - Public debt (NFPS gross debt): 41.8 percent of GDP in 2018; projected to peak at 42.1 percent in 2019 then decline (selected series preserved).
  - PV of PPG external debt-to-GDP ratio peak 27.8 percent in 2019 (below 55 percent threshold).
  - Stress tests: under severe shocks ratios remain below indicative thresholds; accessing SBA/SCF would keep solvency/liquidity indicators below thresholds.
  - Contingent liabilities: cost of clearing ENEE pending liabilities estimated ~1.1 percent of GDP at end-December 2018 included in baseline; larger-than-expected cost would pose downside risk.
  - Market-financing risk: maximum gross financing needs over 3-year period around 7 percent of GDP (below benchmark 14 percent); EMBI spreads 283 bps (below 570 bps benchmark).
- Realism tools:
  - Baseline assumes primary balance improvement of 0.5 percentage points of GDP over next three years; classified in third quartile for LICs; debt-carrying capacity reclassified to Strong.

### STAFF APPRAISAL, RECOMMENDATION, AND FOLLOW-UP
- Staff appraisal:
  - Recent program (2014–2017) achieved stabilization and institutionalized fiscal prudence; groundwork laid for modern monetary framework.
  - Remaining challenges: high poverty (~60 percent for >20 years), high informality, strong dependence on agriculture, violence, ENEE imbalances.
- Staff recommendation:
  - Support for SBA/SCF arrangements for SDR 224.8 million on precautionary basis.
  - Support request for temporary approval of multiple currency practices under Article VIII, Section 3.
- Monitoring and safeguards:
  - Safeguards assessment of BCH to be conducted before first program review (April 2015 assessment highlighted need to revise BCH institutional framework, establish financial autonomy, strengthen governance, align financial reporting with IFRS).
  - Program includes structural reforms to strengthen BCH governance and accountability.

*Source: IMF staff report excerpts and annexes (1hndea2019001), June 21, 2019.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- Since 2014—supported by a Fund program that expired in December 2017—Honduras has reduced macroeconomic imbalances, institutionalized fiscal prudence, and laid the groundwork for a modern monetary policy framework.
- The authorities have requested a new Fund program—to be treated as precautionary—as an anchor to support economic and institutional reforms aimed at increasing the quality of fiscal policy and improving governance and the business environment.
- June 21, 2019

### Recent developments and outlook
- GDP growth reached 3¾ percent in 2018—supported by private consumption amid strong remittances—and inflation remained within the target band.
- The NFPS deficit was 0.9 percent of GDP, overperforming the ceiling in the Fiscal Responsibility Law.
- The current account deteriorated due to declining terms of trade, but it remains close to the historical average.
- The financial system is stable and well capitalized.
- Staff projects GDP growth converging toward potential in the medium term and continued macroeconomic stability.
- Specific recent observations:
  - The economy performed well in 2018 despite worsening terms of trade; growth of 3¾ percent was a deceleration from 2017 largely explained by declining terms of trade and an adjustment in public investment to compensate for a large slippage in ENEE.
  - Agriculture—about 15 percent of GDP—experienced sharply decelerated growth, mainly due to decreasing coffee prices.
  - The output gap is estimated to be slightly negative.
  - Unemployment fell to 5¾ percent in 2018 from 6¾ percent in 2017, while underemployment increased to 48½ percent in 2018 from 44¼ percent in 2017.
  - Inflation: 4¼ percent at year-end 2018. Inflation expectations hovered near the upper bound of the target band, prompting the central bank (BCH) to hike the policy rate (the first hike since 2012).
  - Inflation rebounded in April to 4.9 percent y/y amid an 11 percent increase in the electricity tariff announced by CREE in March; core inflation remained stable.
  - The lempira depreciated by 3¼ percent against the U.S. dollar in 2018; and an additional ¼ percent during January-April 2019. The real effective exchange rate appreciated slightly.

### Article IV priorities and policy recommendations
- Overall objective: foster inclusive growth through reforms and better governance.
- Policy priorities include:
  - Reforms to increase the quality of fiscal policy, sustaining revenue mobilization efforts, protecting investment and social spending, and securing financial sustainability of the public electricity company (ENEE).
  - Reforms to enhance transparency and governance in the budget.
  - Continued progress to modernize the monetary policy framework.
  - Efforts to strengthen governance and AML/CFT, bolster anti-corruption initiatives, and improve the business climate.
- Further emphasis:
  - Uphold previous revenue mobilization efforts and implement structural reforms—especially in the electricity sector—to create fiscal space for reducing the infrastructure gap and increasing targeted pro-poor spending while maintaining the prudent fiscal position embedded in the Fiscal Responsibility Law (FRL).
  - Strengthen institutions through reforms to improve governance and anti-corruption initiatives.
  - Protect early childhood and reduce the gender gap by strengthening the social safety net.

### Program modalities
- The proposed program is a 24-month SBA/SCF with access of SDR 224.8 million, 90 percent of quota (about US$311 million).
- The program has semiannual reviews and the authorities intend to treat it as precautionary.

### Cross-cutting risks and structural challenges
- Persistent high poverty: the poverty ratio has been around 60 percent for more than twenty years.
- Structural impediments to medium-term growth include high informality, strong dependence on agriculture, and gang-related violence.
- Despite recent reductions, the incidence of violent crime remains above the Latin-American average.
- Political context: the government controls 61 out of 128 seats in Congress and there has been political agreement on electoral reforms to make elections more transparent; authorities intend to advance economic and institutional reforms with support from civil society and other stakeholders.

### Operational and analytical annexes and tools (listed in the source)
- The mission and staff composition, contents, figures, tables, annexes, and appendix (including a Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding) are documented in the source material.

*Source: EXECUTIVE SUMMARY (1hndea2019001), June 21, 2019.*

### 8.      The nonfinancial public sector deficit was below the FRL ceiling in 2018, but the

### 8.      The nonfinancial public sector deficit was below the FRL ceiling in 2018, but the

### Fiscal position and ENEE's impact
- NFPS deficit reached 0.9 percent of GDP in 2018—against the FRL ceiling of 1.2 percent of GDP.
- ENEE recorded a 1.2 percent of GDP deficit (net of government subsidies) in 2018, attributed to electricity losses and higher oil prices.
- ENEE’s deficit forced a contraction in public investment, which dragged domestic demand and growth.
- Hondutel recorded a small deficit in 2018—less than 0.01 percent of GDP.
- The authorities aim to keep the NFPS deficit slightly below the FRL ceiling going forward to secure a sustainable path for public debt.

### External sector, remittances, and reserves
- The current account (CA) deficit widened to 4¼ percent of GDP in 2018.
- Drivers: large decline in the terms of trade associated with lower coffee prices and higher oil prices; the price of coffee reached its lowest level in more than a decade.
- Remittances grew by 11 percent in 2018 and continued to grow at 10½ percent y/y in Q1 2019; remittances are critical to prevent further deterioration of the CA deficit.
- Net international reserves increased by US$67 million in 2018.
- Gross reserves coverage ratio: slightly more than 5 months of non-maquila imports of goods and services in 2018.
- Reserve adequacy: about 110 percent of the Fund's Reserve Adequacy Metric (ARA) in 2018.
- EBA-lite model CA norm for 2018: -5.4 percent of GDP; the gap between the 2018 CA (adjusted) and the CA norm led to a gap of 0.7 percent of GDP, implying the external position is broadly consistent with fundamentals.

### Banking system, dollarization, and credit dynamics
- Banking system: stable, liquid, and well capitalized; bank capital is above regulatory requirements; NPLs at record-low levels; liquidity is ample.
- CNBS has mandated an additional 2½ percent capital conservation buffer; ½ percent implemented; remaining 2 percent to be phased in by end-2022 at a pace of ¼ percentage point semiannually.
- CNBS prepared a methodology to identify systemic banks for potential further capital requirements.
- Dollarization remains high at about 30 percent; around ⅔ of foreign currency credit to the nonfinancial private sector is allocated to unhedged borrowers.
- Credit increased by 13½ percent in 2018 overall and by 18 percent in foreign currency; FX credit growth for corporations in 2018 reached 18½ percent, while it fell slightly for households.
- FX credit concentration: industry, agriculture, and retail sectors.
- Drivers of FX credit growth: regulatory changes promoting national strategic projects (mainly energy) and ENEE’s accumulation of unpaid bills to private generators forcing reliance on bank credit.
- As prices for energy corporations are indexed to the U.S. dollar and FX interest rates are lower than those in domestic currency, demand for U.S. dollar credit increased.
- The Basel gap turned positive in 2018, indicating potential credit excess.
- Despite credit acceleration, deposit and credit dollarization remain similar at about 30 percent of the total.

### Outlook and projections
- Growth projected to slow to slightly less than 3½ percent in 2019, owing to weak terms of trade and sluggish public investment due to ENEE consolidation efforts.
- Over the medium term, reforms in the electricity sector, improved governance, and strengthening macroeconomic policy framework expected to support investment recovery and GDP growth.
- Inflation and inflation expectations expected to converge toward the midpoint of the BCH’s target band.
- Current account deficit expected to hover around 4 percent of GDP.
- Reserve adequacy projected to remain within the recommended 100-150 percent range of the ARA metric.
- Macroeconomic baseline projections (selected series):
  - GDP at constant prices: 3.8 (2016), 4.9 (2017), 3.7 (2018), 3.4 (2019), 3.5 (2020), 3.6 (2021), 3.7 (2022), 3.9 (2023), 3.9 (2024)
  - Consumer prices (eop): 3.3 (2016), 4.7 (2017), 4.2 (2018), 4.4 (2019), 4.2 (2020), 4.0 (2021), 4.0 (2022), 4.0 (2023), 4.0 (2024)
  - NFPS net lending (+) / net borrowing (-): -0.5 (2016), -0.8 (2017), -0.9 (2018), -0.9 (2019), -0.8 (2020), -0.8 (2021), -0.8 (2022), -0.8 (2023), -0.8 (2024)
  - Primary balance: 0.3 (2016), 0.1 (2017), 0.0 (2018), 0.6 (2019), 0.7 (2020), 0.8 (2021), 1.0 (2022), 0.9 (2023), 0.9 (2024)
  - Gross debt: 39.9 (2016), 39.9 (2017), 41.8 (2018), 42.1 (2019), 42.0 (2020), 41.9 (2021), 41.4 (2022), 40.9 (2023), 39.9 (2024)
  - Public investment: 3.2 (2016), 4.3 (2017), 4.2 (2018), 3.8 (2019), 4.1 (2020), 4.5 (2021), 4.4 (2022), 4.6 (2023), 4.7 (2024)
  - Current account balance: -2.6 (2016), -1.8 (2017), -4.2 (2018), -4.2 (2019), -4.3 (2020), -4.2 (2021), -4.1 (2022), -3.9 (2023), -3.9 (2024)
  - Oil price (U.S. dollars): 42.8 (2016), 52.8 (2017), 68.3 (2018), 54.1 (2019), 55.2 (2020), 59.9 (2021), 56.6 (2022), 57.4 (2023), 58.1 (2024)
  - GIR (months of non-maquila imports): 5.0 (2016), 5.3 (2017), 5.1 (2018), 5.0 (2019), 5.0 (2020), 5.0 (2021), 5.0 (2022), 5.1 (2023), 5.1 (2024)

### Risks to the outlook
- External risks:
  - Downside risks from global growth and policy uncertainties associated with trade tensions and changes in U.S. migration policies.
  - Swings in energy prices may affect external and fiscal positions.
  - Lower global growth—particularly in the United States—or tighter migration policies would weaken remittances and domestic consumption.
  - Tightening global financial conditions could trigger capital outflows.
- Domestic risks:
  - Reforms in the electricity sector are complex and involve significant institutional, operational, and financial challenges, creating implementation risks.
  - A weakening of social conditions could reduce consensus for reforms.
- Specific fiscal risk: Tax policy changes introduced in the 2017 tax code and the phasing out of the minimum income tax will reduce tax collection in 2019 and 2020, with an estimated medium-term loss of ¾ percent of GDP.
- Authorities expect to reduce tax exemptions to compensate the shortfall and pursue revenue mobilization and electricity-sector reforms to keep fiscal stance slightly below the FRL target.

### Policy discussions and recommendations
- Maintain macroeconomic stability:
  - Authorities reiterated commitment to the FRL as the fiscal anchor; adherence since 2016 has helped put public debt on a sustainable path and reduce credit spreads.
  - Aim to maintain NFPS deficit slightly below the FRL ceiling.
- Monetary and financial policy:
  - After a recent policy rate increase, authorities will remain vigilant; tightening is consistent with U.S. policy and inflation expectations near the upper bound of the central bank’s target band.
  - Macroprudential policies should be the first line of defense to address rapid credit growth if deceleration does not materialize.
- Fiscal policy while protecting investment and social spending:
  - No new taxes or increases in statutory rates planned; program focuses on broadening the tax base and reducing tax exemptions.
  - Deep reforms in the electricity sector are needed and will require stakeholder compromise to put ENEE on a sustainable financial path.
- Authorities’ views:
  - Authorities agreed with staff on outlook and risks; stressed the challenge of low coffee prices for producers and potential migration pressures.
  - Authorities view the acceleration in private credit as deserving careful monitoring but expect credit growth to wind down as strategic projects conclude; committed to act with macroprudential measures if needed.

*International Monetary Fund — Honduras: Selected findings, projections, and policy discussions from the cited chapter.*

### Box 1. Revenue Mobilization in Honduras

### Box 1. Revenue Mobilization in Honduras

### Progress in revenue mobilization
- Between 2013 and 2018, the tax revenue to GDP ratio rose by 3½ percentage points, from 15.0 percent to 18½ percent.
- Revenue composition: almost 60 percent explained by taxes on goods and services and 30 percent by the corporate income tax.
- GDP growth remained strong over the period, consistent with evidence of relatively low tax multipliers and positive effects of fiscal consolidation when it stabilizes public debt.

### Tax policy, rates, and efficiency
- Corporate income tax rate: 25 percent, complemented by a 5 percent surtax that applies only to the most profitable companies.
- Value added and personal income tax rates are slightly higher than regional averages.
- Efficiency analysis: an efficiency frontier estimated for a large sample of emerging and developing countries suggests closing Honduras’s efficiency gap could raise tax collection by 4 percent of GDP (seen as a long-term target).

### Recent tax policy developments and impact
- The 2017 tax code weakened some coercive powers of the tax authority: modified criminal sanction processes for tax fraud, weakened framework to control exemptions, made noncompliance notification procedures less efficient, and introduced a large tax amnesty (extended periodically).
- A 2018 modification of the corporate income tax resulted in a gradual phase out of the minimum corporate income tax.
- These measures are estimated to imply a permanent reduction in tax collection of ¾ percent of GDP.

### Tax expenditures (fiscal cost and composition)
- Tax expenditures are large—almost 7 percent of GDP; about 60 percent of which is explained by exemptions associated with the VAT, and the rest by both income taxes and excises.
- Tax expenditures breakdown (In percent of GDP):
  - Income tax 2.2
    - o/w special regimes 1.1
    - o/w teachers 0.2
    - o/w energy sector 0.2
  - VAT 4.1
    - o/w food basket 1.2
    - o/w agriculture 0.2
    - o/w special regimes 0.2
    - o/w credit cards 0.1
  - Excise tax 0.4
    - o/w thermal generators 0.4
    - o/w ZOLITUR 0.1
  - Custom duties 0.1
  - Total 6.8

### Authorities’ program: measures to maintain and strengthen revenue mobilization
- Objective: maintain central government tax collection at 18½ percent of GDP by 2021 after a projected decline in 2019.
- Key elements:
  - Tax expenditures: remove some income tax exemptions while preserving VAT exemptions for food staples; strengthen controls to eliminate abuse of exemptions (notably exemptions for companies in export-processing zones that sell locally).
  - Tax and customs administration: no new tax amnesties or wider rescheduling of tax liabilities; (i) modify the tax code to allow electronic notification of tax noncompliance; (ii) finalize customs office intervention by creating a new customs administration agency; (iii) transfer verification procedures for exemptions from the treasury to the tax authority.
  - Modernization of tax procedures: replace exempted purchase orders with a refunds-based framework to strengthen VAT exemption control and reduce bureaucracy.
- Selected fiscal scenario numbers (Central Government: Revenue and Expenditure, Percent of GDP):
  - Tax Collection — No Adjustment: 2019 18.0, 2020 17.8, 2021 17.7
  - Measures to Broaden the Tax Base: 2019 0.1, 2020 0.8, 2021 0.9
  - Authorities Program (Tax Collection): 2019 18.1, 2020 18.5, 2021 18.5
  - Government Consumption — No Adjustment: 2019 11.1, 2020 11.2, 2021 11.2
  - Expenditure Control: 2019 -0.8, 2020 -0.9, 2021 -1.0
  - Authorities Program (Government Consumption): 2019 10.4, 2020 10.3, 2021 10.2
  - Social Spending — No Adjustment: 2019 1.6, 2020 1.6, 2021 1.6
  - Authorities Program (Social Spending): 2019 2.0, 2020 2.2, 2021 2.3
  - Investment — No Adjustment: 2019 1.4, 2020 1.6, 2021 1.7
  - Authorities Program (Investment): 2019 2.0, 2020 2.2, 2021 2.3

### Public expenditure management and governance measures
- FRL (Fiscal Responsibility Law) complements revenue measures by strengthening public expenditure management:
  - Ceiling on current expenditure growth maintained.
  - Introduce centralized wage bargaining mechanism to guide nominal wage decisions.
  - Limit spending in goods and services by prioritizing travel and rationalizing temporary contracts and consultancy services.
  - Medium-term plan to upgrade the general directorate of the civil service to create a public administration national authority to establish a modern civil service career based on merit and nonpartisan principles.
- Transparency and budget operation improvements:
  - Treasury introduced a module in SIAFI to allot monthly operational ceilings in line with the FRL and an inventory of trust funds on the treasury webpage.
  - A unit of norms and processes established in the budget directorate to serve as an embryo of an expenditure quality unit and to pilot performance budget indicators.

### Fiscal transparency and governance action plan
- Sequential measures to improve transparency and governance:
  - Trust Funds: include an annex on trust fund spending in the 2020 budget bundle; fully incorporate all social trust funds into the 2021 budget; introduce a mandatory treasury assessment as a pre-condition to contract debt for trust funds.
  - Fiscal Risks: strengthen the fiscal contingency unit and publish an annual fiscal risks statement including policies to address high-probability risks; expand coverage to risks from SOEs.
  - Other: request further IMF technical assistance on procurement and selection of public investment projects and assess recommendations for a program plan during the first program review.

### Electricity sector (ENEE): financial situation and reform program
- ENEE deterioration and causes:
  - Electricity losses soared to about 35 percent in 2018 (about twice the regional average excluding Honduras).
  - Installed capacity grew by 45.7 percent between 2013 and 2018, while demand expanded by 20 percent.
  - Higher oil prices, below-cost tariff setting, exemptions (e.g., chapels, churches, nursing homes, soccer fields), lack of strategic planning, onerous PPAs, and bank financing led to mounting arrears and debt.
  - Debt increased to almost 10 percent of GDP.
- Program targets and assumptions:
  - Target overall deficit of ENEE—excluding government subsidies—of 1.0 and 0.8 percent of GDP in 2019 and 2020 respectively.
  - Program factors in higher revenues mostly from a reduction in electricity losses, estimated at 4 percent during 2019-2020.
  - Temporary transfers from the treasury to compensate ENEE for the pass-through difference between current losses and billable amounts will be reflected in the budget.
  - As of March 2019, arrears with private generators amount to 1¾ percent of GDP; authorities aim to clear them gradually.
- Main reform elements:
  - Institutional reforms: (i) a new tariff scheme to update generation, distribution, transmission, and other costs; (ii) stronger operational and budgetary autonomy of the regulatory body (CREE) with quarterly tariff adjustments; (iii) creation of a system operator (dispatch center) to ensure reliable delivery of electricity.
  - Unbundling ENEE into subsidiaries for distribution, transmission, and generation to increase transparency and efficiency.
  - Operational and financial measures: review approved-but-not-operated contracts, bilateral discussions to reduce energy purchase costs, concessional financing and market-friendly refinancing agreements to reduce financing costs and regain cash flow control, and multilateral guarantees to implement a new payment mechanism to prevent arrears.
  - Reduction of losses: revise contract with EEH to revamp the losses reduction plan, deploy a law enforcement taskforce against theft and fraud, and upgrade transmission and distribution infrastructure.
- Social protection measures: maintain electricity subsidy for consumers using less than 75kwh per month and introduce transitory budgetary transfers for low-consumption households.
- Tariff actions to date: CREE updated tariffs since Q3 2018; household tariffs increased by about 19 percent in October 2018 and 11 percent in April this year, with temporary subsidies to phase-in higher tariffs.

### Fiscal financing and banking sector measures
- Fiscal program financing:
  - Most financing expected from external sources—IDB, CABEI, and WB.
  - Multilateral development banks expected to disburse about US$1.2 billion during 2019-2021.
  - Bilateral sources and international markets complement financing needs.
- BCH (Central Bank of Honduras) and monetary policy:
  - BCH recapitalization agreement with the treasury compensated operational losses of about US$125 million incurred during 2008-2011 through injection of interest-bearing securities.
  - A stock of US$450 million zero-coupon bonds (covering prior losses) was swapped for new interest-bearing 5-year securities; the swap concluded in December 2018.
  - The agreement states the treasury will compensate operational losses incurred after 2012 starting in 2019 and authorized use of treasury securities for open market operations.
  - BCH measures toward inflation-targeting: introduced collateralized securities in the interbank market, reduced FX surrender requirements by 30 percent, strengthened technical capacity for FPAS, introduced an electronic platform for interbank operations, and reduced the gap between the policy rate and interbank rate.
  - Program envisages a zero limit on financing to the public sector and no new financing to BANHPROVI beyond the 2008 trust fund authorization.
  - Authorities will assess the benefits of an agreement to give the BCH unrestricted access to a pool of government securities to implement monetary policy.

*Source: Box 1. Revenue Mobilization in Honduras (from the supplied IMF content).*

### 40.      The authorities aim at improving the monetary policy operational framework through

### 1hndea2019001 - 40.      The authorities aim at improving the monetary policy operational framework through

### Monetary policy operational framework and central bank governance
- Authorities plan to submit to Congress a new BCH charter, supported by continued technical assistance from the Fund.
- The charter will aim at: stating price stability as the policy mandate of the BCH; safeguarding operational autonomy; increasing transparency and accountability through international financial reporting standards; and securing a sound governance structure by clarifying operational, oversight, and decision-making responsibilities.
- Work to modernize the monetary policy regime is intended to strengthen the central bank's capacity required to implement these reforms.

### Exchange rate regime and transition to flexibility
- A gradual transition toward a more flexible exchange rate regime is recommended to buffer external shocks.
- Authorities have reduced FX surrender requirements by 30 percent and are committed to phase out the remaining 70 percent.
- Risks cited that warrant a gradual approach: balance sheet vulnerabilities and a high exchange rate pass through.
- Box 3 evidence: exchange rate flexibility can reduce reserve losses and mild compressions in domestic demand after negative terms of trade shocks via expenditure switching (export recovery and import substitution).
- Empirical note: CAPDR countries show high sensitivity of exports to the real exchange rate (REER), suggesting Honduras could benefit from flexibility, but benefits must be weighed against balance sheet and pass-through risks.

### Statistics, data, and transition to inflation-targeting
- Continued work to improve prices and economic activity statistics is critical to assess monetary stance.
- Authorities project completion of the National Household Income and Expenditure Survey (NHIES) by end-2021.
- Authorities are rebasing the national accounts to 2016, aiming at publishing the new series by December 2021.

### Multiple currency practices (MCP) and FX market liberalization
- Honduras eliminated one MCP by amending foreign exchange auction rules to remove the possibility of a spread of more than two percent between bids at which FX is sold within the auction.
- An additional MCP remains from the use of previous days’ official exchange rates (TCR) in certain FX transactions, which may differ by more than two percent from the TCR in force and the interbank market rate on a given day.
- Authorities requested temporary Fund approval of these measures; staff supports the request and notes planned FX market liberalization should ultimately eliminate these measures.
- Authorities noted spreads higher than 2 percent between different exchange rates prevailing in the FX market never materialized since the peg was introduced in 2011.

### Financial sector resilience and stress tests
- Stress tests show the banking system is broadly resilient to most standardized shocks; capital adequacy would fall below the regulatory minimum of 10 percent only under a severe tail-risk combined shock.
- Banking system observations:
  - Around 2/3 of FX credit is allocated to unhedged borrowers.
  - FX credit growth remained high in early 2019, albeit lower than in 2018.
  - Authorities expect private FX credit growth to slow, notably due to conclusion of strategic projects using dollar funding, but stand ready to revisit macroprudential framework if needed.
- Stress test sample: total of 15 banks (6 domestically owned and 9 foreign owned).
- Stress test assumptions and shocks:
  - System-Wide Credit Risk Shock: 4.7 percent (3 s.d. over average NPLs during the last decade, or about 1/3 of the impact of Hurricane Mitch in 1998) of outstanding performing loans become non-performing.
  - Sectoral Shock: increases in banks’ NPLs in housing, trade, services, consumption, industries, and agriculture sectors by 6.8, 4.7, 3.4, 6.1, 1.9, and 11.7 percent respectively (3 s.d. over average sectoral NPLs during the last 10 years).
  - Interest Rate Shock: 3.3 percentage points nominal interest rate increase.
  - FX Shock: 10 percent depreciation of the FX rate, leading to 5 percent of FX loans becoming NPL.
  - Liquidity Shock: 10 and 8 percent per day 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.

### BANADESA and public financial entities
- BANADESA (agricultural development bank) is under severe financial stress:
  - Capital adequacy ratio (CAR) is negative.
  - Non-performing loans (NPLs) reached 70 percent.
  - Assets represent about one percent of GDP and BANADESA has very modest relationships with the rest of the banking system; it does not pose a systemic risk.
- In January 2019, the Banking Commission (CNBS) issued orders to seize administrative and operational control to protect depositors and operations.
- Because measures on financial entities created by law cannot be taken through administrative decisions, authorities will follow the financial sector law procedure requiring the CNBS to send a report to Congress, including a proposal to address BANADESA’s financial situation by September 2019.

### Public pension funds and investment policy
- Due to Honduras’ demographic profile and recent increases in contribution rates, liquidity in public pension funds is high and investment opportunities are scarce.
- Pension funds are granting consumer loans to affiliates with a high return.
- Regulatory change: CNBS reduced the regulatory ceiling on the share of these loans from 50 to 40 percent of the portfolio; the share remains high at close to 30 percent.
- Authorities intend to move the investment policy framework towards international best practices gradually and assess whether lending policies create proper incentives to secure accumulated rights net of outstanding loans at retirement.

### Implementation of FSSR recommendations and Basel III
- Authorities have made significant progress implementing FSSR recommendations and adopting Basel III standards, including: developing the supervisory manual, starting a pilot program for risk-based supervision, and developing a methodology to identify systemically important banks (implementation pending).
- Planned actions in line with FSSR and Basel III:
  - Strengthen capacity for risk-based supervision.
  - Continue developing stress testing capacities.
  - Establish a timeframe for introduction of an additional capital charge for systemic banks.
  - Introduce regulations for market risks and develop new methodologies to assess operational risks.
- CNBS will continue strengthening the AML/CFT framework in line with GAFILAT recommendations and build capacity of CONSUCOOP to reinforce AML/CFT compliance in the cooperatives sector.

### Inclusive growth, social spending, and governance reforms
- Authorities view institutional reforms to improve governance and social spending as key to fostering inclusive growth and reducing political polarization.
- Doing Business indicators suggest scope to improve contract enforcement, protection of minority investors, reduce red tape, and lower compliance costs that increase corruption vulnerabilities.
- Business climate reform measures include:
  - Legislation requiring regulatory agencies to streamline and publish requirements for obtaining permits; mapping procedures into a central repository as part of the open government initiative.
  - Encouragement for agencies to develop forward-looking regulatory plans and public consultation on proposed regulations.
  - Use of information technology to reduce transaction costs across public procurement, budget and personnel management, and automation of administrative procedures; implementation of the electronic signature is planned.
- Anti-corruption and AML/CFT progress and commitments:
  - Implemented GAFILAT recommendations: developed national AML/CFT strategy; strengthened Financial Intelligence Unit and implemented a new electronic suspicious transaction reporting system; created a special unit for supervision of DNFBPs; proposed legislation and regional cooperation for identification of beneficial owners.
  - Authorities committed to continue strengthening AML/CFT framework, incorporate DNFBPs under supervision, and progress on beneficial ownership identification.
  - Authorities are working with IMF staff on an assessment of governance challenges to develop an action plan to strengthen governance and bolster anti-corruption initiatives for discussion at the first review.
- Priority social spending and safety net:
  - Program defines protected priority social spending to alleviate poverty short-run and encourage human capital investment.
  - Initiatives are articulated around conditional cash transfer programs (CCTs) with evidence of benefits.
  - Target: cover all population in extreme poverty by end-2021.
  - Ongoing/expanded programs: Ciudad Mujer; teen pregnancy prevention; opportunities for young mothers; Criando con Amor; Mejores Familias.
- Gender equality measures:
  - Female labor participation rate was 46 percent in 2018, compared to 76 percent for males.
  - Strategy includes: supporting childcare services; facilitating credit for women; supporting women with young children; promoting entrepreneurship through Ciudad Mujer.

### Migration assistance
- It is estimated that about 7 percent of the Honduran population lives in the United States.
- Authorities have appointed a task force within the state department, the social development ministry, and the human rights ministry to articulate a comprehensive effort to assist potential and returning migrants; this complements FOSMIH, an existing fund to support Honduran migrants.

### Program modalities, duration, and monitoring
- Proposed program duration: 24-month Fund-supported program to support implementation of measures including structural reforms.
- Program monitoring: semi-annual reviews.
- Prior actions include approval or preparation of:
  - A new tariff scheme that secures recovery of electricity generation and ENEE’s operational costs.
  - A plan to secure financial sustainability in ENEE, including a debt profile and policies for energy purchase consistent with the new tariff scheme.
  - A plan to secure a reduction in electricity losses, starting in 2019.
- Quantitative Performance Criteria include:
  - A floor on the NFPS net lending.
  - A floor on ENEE net lending.
  - A ceiling on lending minus repayments from state-owned pension funds.
  - Non-accumulation of external payments arrears by the public sector.
  - A ceiling on the accumulation of domestic arrears by ENEE.
  - A floor on the change in the stock of central bank’s non-borrowed reserves.
  - A ceiling on the stock of net domestic assets of the central bank (QPC).
- Indicative Targets include:
  - A floor on tax revenues collected by the budgetary central government.
  - A ceiling on the budgetary central government wage bill.
  - A floor on priority social spending of the budgetary central government.
  - A floor on the reduction of losses by ENEE.
  - A floor on ENEE’s operational ratio.

*Source: IMF staff report excerpt (HONDURAS).*

### 56.      Access and phasing. With no immediate BOP needs, the authorities plan to treat the

### Access and phasing

### Access proposal and justification
- Staff proposes an access level of 90 percent of quota, or SDR 224.82 million, split between the SCF arrangement (SDR 74.94 million, 30 percent of quota) and the SBA arrangement (SDR 149.88, 60 percent of quota).
- Arrangement to be treated as precautionary because there are no immediate BOP needs.
- Justification: external risks faced by the economy, including Honduras’s status as an energy importer and vulnerability to large swings in energy prices (Annex III) that could deteriorate terms of trade and raise current account vulnerabilities (Annex VI).

### Capacity to repay
- Authorities intend to treat the program as precautionary.
- Honduras currently has no outstanding liabilities with the Fund.
- The proposed access would not affect significantly the level of external debt.
- The DSA indicates that the risk of debt distress is low (Appendix II).

### Risks to program implementation
- Principal risks:
  - Global risks (trade tensions, migration policies, volatile terms of trade, tightening financial conditions) that could affect the outlook.
  - Slippages in implementation of reforms.
- Sector-specific implementation risks:
  - Electricity sector reform requires coordinated and sequential actions and stakeholder collaboration.
  - Some measures require complex legal procedures, such as the unbundling of ENEE.
  - Financial operations to improve ENEE’s debt profile are complex.
  - Revenue-side tax code reforms require legislative approval.

### Safeguards assessment
- A safeguards assessment of the BCH will be conducted before the first program review.
- The most recent assessment (April 2015) highlighted the need to:
  - Revise BCH’s institutional framework to protect the bank from political interference.
  - Establish BCH’s financial autonomy.
  - Strengthen BCH’s governance arrangements.
  - Align BCH’s financial reporting practices with international standards.
- The program includes structural reforms to strengthen BCH’s governance and accountability.

### Staff appraisal — macroeconomic performance and program objectives
- Recent achievements:
  - Completion in December 2017 of a three-year IMF-supported program that stabilized the economy and paved the way for sustainable medium-term growth.
  - Institutionalized fiscal prudence and introduced elements of a modern monetary policy framework aimed at transitioning to inflation targeting.
  - Improved confidence: declining debt spreads and better financing terms for private and public investment.
  - External position broadly in line with fundamentals and desirable policies.
- Remaining challenges:
  - Honduras remains one of the poorest countries in the Western Hemisphere.
  - Structural poverty related to large informality, strong dependence on agriculture, and violence.
  - Weak productive capacity; poverty and inequality impede medium-term growth.
  - Violent crime declined but remains above the Latin-American average.
  - External risks may affect the macroeconomic outlook.

### Program strategies and policy priorities
- Maintain macroeconomic stability while enacting economic and institutional reforms to foster inclusive growth.
- Key reform priorities:
  - Adherence to the FRL.
  - Resolve structural challenges in the electricity sector and place ENEE finances on a sustainable path.
  - Maintain revenue mobilization achievements to create space for infrastructure and social spending.
  - Continue strengthening monetary policy and financial institutions; develop money and foreign exchange markets to transition towards inflation targeting.
- Governance and anti-corruption:
  - Strengthen governance and transparency in public finance management, monetary policy operations, and the electricity sector.
  - Implement reforms to enhance the rule of law, prevent misuse of public funds, improve the business climate, simplify procedures in public administration, reduce red tape and discretion.
  - Goal: foster private investment and employment creation.
- Social priorities:
  - Protect the poor and bolster gender equality.
  - Fiscal program defines priority spending to be protected.
  - High-impact interventions to alleviate poverty and invest in human capital.
  - Prioritize early childhood and reducing the gender gap; support women entrepreneurship and participation in labor markets.

### Staff recommendation and support
- Given the strength of the authorities’ economic program, staff fully supports the request for SBA/SCF arrangements for SDR 224.8 million.
- Staff supports the authorities’ request for temporary approval of multiple currency practices subject to Fund jurisdiction under Article VIII, Section 3.

*IMF staff assessment and program summary as presented in the source document.*

### 67.      It is recommended that the next Article IV consultation takes place on a 24-month

### 1hndea2019001 - 67.      It is recommended that the next Article IV consultation takes place on a 24-month

### Recommendation
- It is recommended that the next Article IV consultation takes place on a 24-month cycle.

### Real Sector Developments
- Economic activity softened in 2018, driven by adverse shocks in the primary sector and lower public investment and exports.
- A slightly negative output gap contributed to keep inflation stable despite a moderate depreciation of the Lempira.
- Key indicators and projections:
  - Real GDP growth: 3.8 (2015), 3.8 (2016), 4.9 (2017), 3.7 (2018), 3.4 (2019), 3.5 (2020), 3.6 (2021), 3.7 (2022), 3.9 (2023), 3.9 (2024).
  - Domestic demand (contributions to growth): 7.7 (2015), 2.8 (2016), 5.0 (2017), 4.8 (2018), 4.2 (2019), 4.6 (2020), 4.6 (2021), 4.8 (2022), 5.0 (2023), 5.2 (2024).
  - Investment (percent of GDP): Gross domestic investment 26.4 (2015), 23.4 (2016), 24.3 (2017), 25.7 (2018), 25.7 (2019), 26.9 (2020), 27.5 (2021), 27.7 (2022), 28.3 (2023), 29.0 (2024).
  - GDP deflator and CPI inflation:
    - GDP deflator: 6.9 (2015), 3.8 (2016), 4.3 (2017), 1.8 (2018), 3.2 (2019), 3.4 (2020), 3.2 (2021), 3.5 (2022), 3.6 (2023), 3.7 (2024).
    - CPI inflation (eop): 2.4 (2015), 3.3 (2016), 4.7 (2017), 4.2 (2018), 4.4 (2019), 4.2 (2020), 4.0 (2021), 4.0 (2022), 4.0 (2023), 4.0 (2024).

### External Sector Developments
- Weaker terms of trade in 2018, led by record-low coffee prices, caused a deterioration in the current account, partially offset by higher remittances.
- The current account was primarily financed by FDI with a stable reserve coverage ratio.
- Key figures:
  - Terms of Trade (annual percent change): 11.1 (2015), 5.5 (2016), -2.3 (2017), -6.3 (2018), 1.0 (2019), 0.5 (2020), 1.0 (2021), 0.0 (2022), -0.2 (2023), -0.2 (2024).
  - Current account (percent of GDP): -2.6 (2016), -1.8 (2017), -4.2 (2018), -4.2 (2019), -4.3 (2020), -4.2 (2021), -4.1 (2022), -3.9 (2023), -3.9 (2024).
  - Remittances (percent of GDP): 17.4 (2015), 17.7 (2016), 18.6 (2017), 20.0 (2018), 20.9 (2019), 20.7 (2020), 20.4 (2021), 20.2 (2022), 19.8 (2023), 19.4 (2024).
  - Gross international reserves (millions of U.S. dollars): 4,488 (2016), 5,088 (2017), 5,147 (2018), 5,288 (2019), 5,456 (2020), 5,672 (2021), 5,979 (2022), 6,335 (2023), 6,727 (2024).
  - Net international reserves (millions of U.S. dollars): 3,075 (2016), 3,503 (2017), 3,718 (2018), 3,858 (2019), 4,025 (2020), 4,241 (2021), 4,548 (2022), 4,904 (2023), 5,296 (2024).
  - Current account (US$ millions): -567 (2016), -409 (2017), -1,004 (2018), -1,030 (2019), -1,086 (2020), -1,108 (2021), -1,142 (2022), -1,113 (2023), -1,179 (2024).
  - Exports f.o.b. (US$ millions): 5,576 (2016), 6,117 (2017), 5,961 (2018), 5,988 (2019), 6,224 (2020), 6,517 (2021), 6,864 (2022), 7,200 (2023), 7,551 (2024).
  - Imports f.o.b. (US$ millions): -8,175 (2016), -8,794 (2017), -9,492 (2018), -9,897 (2019), -10,357 (2020), -10,773 (2021), -11,216 (2022), -11,799 (2023), -12,339 (2024).
  - Capital and Financial account (US$ millions): 787 (2016), 1,400 (2017), 1,423 (2018), 1,171 (2019), 1,254 (2020), 1,324 (2021), 1,449 (2022), 1,469 (2023), 1,571 (2024).
  - Direct investment (net, US$ millions): 900 (2016), 1,013 (2017), 1,146 (2018), 1,188 (2019), 1,230 (2020), 1,281 (2021), 1,339 (2022), 1,403 (2023), 1,473 (2024).

### Financial Sector Developments
- Credit growth increased sharply, particularly in foreign currency; FX credit was mainly for industry, retail, and agriculture.
- The credit gap has turned positive. Nominal lending rates have stabilized. Interbank rate has remained stable amid higher central bank credit to the banking sector.
- Key banking and monetary indicators:
  - Credit to private sector growth (percentage change): 12.9 (2016), 9.4 (2017), 13.4 (2018), 11.6 (2019), 9.0 (2020), 8.1 (2021), 7.9 (2022), 7.8 (2023), 7.2 (2024).
  - Credit to the private sector (percent of GDP): 54.0 (2016), 56.6 (2017), 56.6 (2018), 60.7 (2019), 63.5 (2020), 64.7 (2021), 65.4 (2022), 65.7 (2023), 65.8 (2024).
  - Non-Performing Loans to total loans (ratio): 3.0 (2017), 2.8 (2018), 2.3 (2019).
  - Capital adequacy (Regulatory capital to RWA): 14.0 (2016), 13.8 (2017), 13.7 (2018), 13.4 (2019).
  - Broad money (percentage change): 9.0 (2016), 15.6 (2017), 12.8 (2018), 8.3 (2019), 9.0 (2020), 11.0 (2021), 11.2 (2022), 13.4 (2023), 11.2 (2024), 12.2 (2024 in Table 4).
  - Banks' net position with BCH and stock of BCH paper increased in context of higher central bank credit (figures shown in original figures).

### Public Finances
- The NFPS deficit remained below the FRL ceiling despite a large increase in the deficit of ENEE.
- Tax collection remained robust and primary spending stable. Since 2014, public debt has stabilized, contributing to reduce debt spreads.
- Central government and NFPS operations (percent of GDP):
  - Central government revenue: 20.0 (2016), 20.3 (2017), 20.4 (2018), 20.2 (2019), 20.5 (2020), 20.5 (2021), 20.6 (2022), 20.6 (2023), 20.6 (2024).
  - Central government expenditure: 22.8 (2016), 23.0 (2017), 22.4 (2018), 22.6 (2019), 23.1 (2020), 23.4 (2021), 23.5 (2022), 23.6 (2023), 23.5 (2024).
  - Central government net lending/borrowing: -2.7 (2016), -2.7 (2017), -2.0 (2018), -2.4 (2019), -2.6 (2020), -2.9 (2021), -2.9 (2022), -2.9 (2023), -2.9 (2024).
  - NFPS revenue: 32.3 (2016), 31.9 (2017), 31.7 (2018), 32.6 (2019), 32.8 (2020), 33.0 (2021), 33.0 (2022), 33.1 (2023), 33.3 (2024).
  - NFPS expenditure: 32.8 (2016), 32.7 (2017), 32.7 (2018), 33.5 (2019), 33.7 (2020), 33.8 (2021), 33.8 (2022), 33.9 (2023), 34.1 (2024).
  - NFPS net lending/borrowing: -0.5 (2016), -0.8 (2017), -0.9 (2018), -0.9 (2019), -0.8 (2020), -0.8 (2021), -0.8 (2022), -0.8 (2023), -0.8 (2024).
  - Gross debt (Nonfinancial public sector): 39.9 (2016), 39.9 (2017), 41.8 (2018), 42.1 (2019), 42.0 (2020), 41.9 (2021), 41.4 (2022), 40.9 (2023), 39.9 (2024).
  - Gross total debt (central government table): 48.0 (2016), 50.1 (2017), 52.0 (2018), 54.2 (2019), 55.8 (2020), 56.5 (2021), 57.0 (2022), 57.1 (2023), 57.2 (2024).

### Labor Market Developments
- Unemployment rates have declined; labor force participation rates have been rising steadily and the gender gap has fallen, but female labor participation remains one of the lowest in the region and below the LAC average.
- Informality is one of the largest in LAC, dragging on productivity and competitiveness, partly explained by relatively high minimum wages that are not in line with labor market conditions.
- Key indicators:
  - National unemployment rate series shown in figures: Total, Male, Female, Youth (15-24) (figures in original figures).
  - Labor force participation by gender and country, 2018Q3: Honduras (HND) data shown relative to LAC averages in original figures.
  - Central America: Average Minimum Salary, 2018 (US Dollars) — HND and regional comparisons shown in original figures.
  - Nominal Minimum Salary per Nominal Private Sector Average Salary (percent) series for 2012 and 2017 shown in figures.

### Social Conditions
- The income measure of poverty has been stable at about 60 percent of households for more than 20 years; the poverty rate (households, in percent) series shows around 60 percent levels.
- Income inequality has increased; Gini of disposable income (2017 or latest) shows HND among higher values in regional comparisons.
- Transfers are an important component of poor households’ income; composition of income sources for the bottom 20 percent includes Salary, Self-Generated Income, Remittances, Family Assistance, Transfers, Others.
- Illiteracy rates are high, particularly in rural areas.
- Rural incomes remain largely below urban incomes; average monthly household income per capita (in Lempiras) series shown for National and Rural (2013–2018).
- Key social numeric highlights:
  - Percent of population below national poverty line: 61.9 (2018).
  - Gini index (2018): 53.
  - Proportion of population below international poverty line (%) series: 19.6 (2012), 17.3 (2013), 15.9 (2014), 16.2 (2015), 16.0 (2016).
  - Other SDG indicators presented across multiple goals with series by year in Table 12 (e.g., remittance costs 4.3, 4.2; prevalence of undernourishment 15.3–15.6; infant mortality 18.6–15.6).

### Key Macroeconomic Projections and Vulnerabilities
- External vulnerabilities and financing:
  - Current account deficit (US$ millions): 567 (2016), 409 (2017), 1,004 (2018), 1,030 (2019), 1,086 (2020), 1,108 (2021), 1,142 (2022), 1,113 (2023), 1,179 (2024).
  - Debt amortizations (public and private, US$ millions): 1,242 (2016), 2,001 (2017), 1,797 (2018), 2,130 (2019), 1,443 (2020), 1,489 (2021), 1,971 (2022), 1,442 (2023), 1,398 (2024).
  - Subtotal external financing requirements (US$ millions): 1,809 (2016), 2,410 (2017), 2,801 (2018), 3,160 (2019), 2,530 (2020), 2,596 (2021), 3,113 (2022), 2,555 (2023), 2,577 (2024).
  - Subtotal external financing sources (US$ millions): equal to requirements in projections (financing gap 0 each year in presented table).
  - External public debt (percent of GDP): 28.4 (2016), 30.5 (2017), 31.0 (2018), 32.9 (2019), 32.6 (2020), 32.0 (2021), 31.3 (2022), 30.6 (2023), 29.3 (2024).
  - Total external debt to GDP ratio: 35.5 (2016), 37.3 (2017), 38.6 (2018), 39.9 (2019), 39.5 (2020), 38.8 (2021), 38.1 (2022), 37.4 (2023), 36.1 (2024).
- Balance of payments and reserves:
  - Overall balance (US$ millions): 50 (2016), 885 (2017), 46 (2018), 141 (2019), 168 (2020), 216 (2021), 307 (2022), 356 (2023), 392 (2024).
  - Change in central bank reserves (- increase): -66 (2016), -884 (2017), -50 (2018), -141 (2019), -168 (2020), -216 (2021), -307 (2022), -356 (2023), -392 (2024).
  - Financing indicators in Table 11 show proposed SCF and SBA drawings/stocks in millions of SDRs and related obligations and memoranda.

### Tables and Data Coverage (selected)
- Table 1: Selected Economic Indicators — numerous series including Real GDP, investment, prices, saving and investment, nonfinancial public sector balances, external current account, remittances, net international reserves, terms of trade, money and financial indicators, and projections (2015–2024).
- Table 2 & Table 3: Statement of Operations of the Central Government and Nonfinancial Public Sector — detailed revenue, expenditure, interest, primary balance, net lending/borrowing, net incurrence of liabilities, and gross debt projections (2016–2024).
- Table 4: Summary Accounts of the Financial System — Net International Reserves, Net Domestic Assets, Credit to public and private sectors, Broad Money (M4), and growth rates (2016–2024).
- Table 5–8: Balance of Payments, External Financing Needs and Sources, External Vulnerability Indicators, Medium-term Macroeconomic Framework — detailed annual US$ and percent-of-GDP series and projections through 2024.
- Table 9–12: Banking sector structure and performance, financing and Fund credit schedules, and Sustainable Development Goals indicators with multi-year series.

*Source: Central Bank of Honduras, Ministry of Finance, Honduran authorities, UN SDG Indicators Global Database, and IMF staff estimates and projections.*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### Overview
- The 2018 external position in Honduras is broadly in line with medium-term fundamentals and desirable policies.
- Risks to external stability are mitigated by stable FDI inflows and a projected declining trend for external debt.
- Reserve coverage is adequate and is expected to continue to be over the medium-term.

### Current account, trade, remittances, and reserves
- The CA deficit increased to 4¼ percent of GDP in 2018, from 1¾ percent of GDP in 2017.
- Drivers of the CA deterioration:
  - Worsening terms of trade.
  - Trade balance deterioration driven by underperforming coffee and maquila exports and a higher oil imports bill.
  - Tourism receipts remained stable.
  - High oil prices impacted freights and negatively affected the services balance.
- Strong remittance growth partially offset the decline in other CA flows:
  - Remittances increased by about 1.5 percent of GDP in 2018.
  - Remittances flows in 2018 reached 20 percent of GDP.
  - Staff baseline projects remittances will decline by about 1½ percent of GDP by 2024, converging to historical trends.
- International reserves:
  - International reserves increased by US$50 million in 2018.
  - The stock of reserves reached 5.1 months of non-maquila imports of goods and services in 2018.
  - Reserve coverage stood at 111 percent of the IMF reserve adequacy metric in 2018.
  - Expected to remain in the recommended 100-150 percent range over the medium-term.

### Exchange rate, REER, and external financing
- Exchange rate and REER:
  - The nominal exchange rate depreciated by 2 percent in 2018.
  - The REER remained stable in 2018 due to the higher domestic price level relative to trading partners.
  - Honduras’s exchange rate arrangement is classified as a crawling-peg.
  - Since 2015, modest REER depreciation reflects gradual nominal exchange rate adjustment, in line with global financial conditions and moderate inflation differential with peers (about 2 percent per year in the last 5 years, on average).
- Current account financing and FDI:
  - The CA deficit was primarily financed by FDI inflows, which reached 4.8 percent of GDP in 2018.
  - Over the medium-term, FDI flows are projected to be stable.
  - Public external financing is projected to be stable—mostly concessional borrowing and the rollover of existing Eurobonds (2013, 2017).
  - Selected current account financing shares: public external financing and FDI together finance the current account deficit (figures shown in source charts).

### External balance sheet and competitiveness
- External balance sheet:
  - Net international investment position deteriorated from 65 percent of GDP in 2017 to 69.5 percent of GDP in 2018.
  - Increase driven mostly by an increase in foreign direct investment which constitutes most of IIP liabilities (60 percent).
  - External debt reached 39.4 percent of GDP in 2018, up from 37.4 percent in 2017.
  - External debt composition: mostly public (80 percent of total); the financial sector accounts for close to 90 percent of private external debt.
  - Over the medium-term, external debt is projected to decline and to be sustainable under various shocks.
- Non-price competitiveness:
  - Honduras made marginal improvements in non-price external competitiveness indicators but remains less competitive compared to peers.
  - According to the 2018 Global Competitiveness Index, Honduras lags CAPDR peers in health and institutions.
  - Doing Business indicators suggest non-price competitiveness could improve by addressing electricity sector challenges.

### External Balance Assessment (EBA) results
- EBA overall conclusion: external position is broadly consistent with fundamentals and desirable policies.
- EBA methodologies and key outcomes:
  - CA model:
    - Staff adjusted the 2018 CA outturn for cyclical factors and the surge in remittances (remittances reduced the actual CA deficit by 1.5 percent of GDP), yielding a cyclically adjusted CA of -4.7 percent of GDP.
    - EBA-lite calculates a cyclically adjusted CA norm of -5.4 percent of GDP.
    - The CA gap is 0.7 percent of GDP, consistent with a REER undervaluation of 1.9 percent.
    - Of the CA gap, -0.7 percent of GDP corresponds to a policy gap, mainly reflecting Honduras’ relatively closed capital account.
    - Table summary: CA-Actual -4.2%; Cyclical Contributions -1.0%; additional temporary factors 1.5%; Cyclically adjusted CA -4.7%; CA-Norm -7.0%; Cyclically adjusted CA Norm -5.9%; Multilaterally Consistent Cyclically adjusted CA Norm -5.4%; CA-Gap 0.7%; Policy gap -0.7%; Elasticity -0.36; REER Gap -1.9%; CA-Fitted -7.7%; Residual 0.03; Natural Disasters and Conflicts 0.0%.
  - REER index model:
    - Shows an overvaluation of about 6 percent (REER Gap 5.7% in source table).
    - Fitted value driven by Honduras not being a reserve currency holder and exhibiting a negative oil balance.
    - Staff judgement: the REER is not overvalued considering multilateral exchange rate depreciation and modest inflation differentials.
    - Table summary: Ln(REER) Actual 4.65; Ln(REER) Fitted 4.64; Ln(REER) Norm 4.59; Residual 0.00; REER Gap 5.7%; Policy Gap 5%; Natural Disasters and Conflicts 0.4%.
  - External sustainability (inter-temporal budget constraint):
    - Suggests REER is in line with fundamentals.
    - Stabilizing the IIP at the 2018 level of -69.5 percent of GDP would not require a REER adjustment (estimated gap within the 1 percent range).
    - Model parameters: foreign currency share of assets in the IIP calibrated at 99.7 percent; foreign currency share of foreign liabilities calibrated at 40 percent.

### Debt Sustainability Analysis (DSA) and public debt outlook
- Risk ratings:
  - Risk of external debt distress: Low.
  - Overall risk of debt distress: Low.
  - This represents an upgrade from the 2018 DSA, where risk was assessed as moderate.
  - Honduras’s debt carrying capacity was upgraded from medium to strong under the revised LIC DSF.
- Public debt levels and composition:
  - Gross public debt stood at 41.8 percent of GDP at end-2018, up by almost 2 percentage points of GDP since 2017 (domestic debt comprising 1.4 percentage points of the increase).
  - Of gross public debt, 31 percentage points corresponded to external public and publicly guaranteed (PPG) debt and 10.8 percentage points to domestic debt (Text Table II.1).
  - PPG external debt increased slightly since 2016; following a US$700 million international bond issuance in 2017, PPG external debt-to-GDP increased to 31 percent in 2018.
  - Total external debt reached 38.6 percent of GDP in 2018, up from 37.3 percent in 2017—mainly driven by an increase in private external debt of 0.8 percent of GDP.
  - Private external debt has declined from 9 percent of GDP in 2014 to 7.5 percent at end-2018.
  - The share of PPG external debt was 74.2 percent of total public debt as of end-2018.
  - Main creditors: international bondholders, IDB, CABEI, and the World Bank.
  - Public domestic debt is mainly held by commercial banks, has a rising maturity (over 4 years), and carries a higher real interest rate.
  - In March 2018, the government placed a 15-year local bond at a fixed interest rate of 11 percent raising 154 million Lempiras.
- DSA coverage and contingent liability calibration:
  - DSA covers the nonfinancial public sector (NFPS), including general government and non-financial SOEs (guaranteed and non-guaranteed), extrabudgetary funds (trust funds), decentralized agencies, public pension funds, and central bank debt borrowed on behalf of the government.
  - Contingent liability test includes:
    - Lawsuits related to labor and administrative disputes: 4 percent of GDP (disputed amounts reach 9 percent of GDP but contingent liabilities are 4 percent after probabilities).
    - PPPs: 4 percent of GDP.
    - Financial market default shock: 5 percent of GDP.
    - Since public banks are not included in DSA coverage, an additional 2 percent of GDP is added to the contingent liability test.
  - The DSA uses a currency-based definition of external debt; lempiras-denominated debt is public domestic debt, foreign currency-denominated debt is public external debt.
- Drivers of recent public debt changes:
  - The 2018 increase in total public debt attributable mainly to higher domestic borrowing and financial imbalances faced by state-owned electricity company (ENEE).
  - Observed higher domestic real interest rates and real exchange rate depreciation partially offset by real economic growth.

### Macroeconomic and policy assumptions underpinning the DSA
- Baseline assumptions reflect authorities’ policy targets and staff projections, assuming compliance with the Fiscal Responsibility Law (FRL) and implementation of program structural reforms.
- Real sector:
  - GDP growth projections (Current DSA): 2016 3.8; 2017 4.9; 2018 3.7; 2019 3.4; 2020 3.5; 2021 3.6; 2022 3.7; 2023 3.9; 2024 3.9; 2028 3.9; 2038 3.9 (percent change).
  - GDP deflator projections (Current DSA): 2016 3.8; 2017 4.3; 2018 1.8; 2019 3.2; 2020 3.4; 2021 3.2; 2022 3.5; 2023 3.6; 2024 3.7; 2028 4.0; 2038 4.0 (percent change).
  - FDI (percent of GDP) (Current DSA): 2016 4.1; 2017 4.4; 2018 4.8; 2019 4.9; 2020 4.9; 2021 4.9; 2022 4.9; 2023 4.9; 2024 4.9; 2028 4.9; 2038 4.9.
- Fiscal variables:
  - Fiscal projections assume compliance with the FRL, which sets a NFPS deficit limit of 1 percent of GDP from 2019 onwards and a limit to the increase for current spending at the budgetary central government level.
  - Primary balance (percent of GDP) (Current DSA): 2016 0.3; 2017 0.1; 2018 0.0; 2019 0.6; 2020 0.7; 2021 0.8; 2022 1.0; 2023 0.9; 2024 0.9; 2028 0.8; 2038 1.1.
  - NFPS debt is expected to decrease over the medium-term due to FRL compliance and increased intra-public sector financing.
- Debt issuance and financing structure:
  - Share of external borrowing from multilateral and bilateral institutions expected to remain broadly constant over the medium-term.
  - Projections assume existing Eurobonds will be rolled over; grant-element of overall financing expected to be lower in Eurobond issuance years (reaching about 20 percent).
  - External financing share in total financing expected to remain around 75 percent in the medium-term and decline to about 60 percent in the long-run.
  - Authorities aim to deepen the domestic debt market, increase maturities, and issue predominantly at fixed rates.
- External sector projections:
  - Current account deficit projected to hover around 4 percent of GDP over the medium term; reach 3½ percent of GDP in the longer term.
  - Decline in external public sector interest payments as external debt stock decreases explains lower CA deficits toward the end of the projection period.
  - In outer years, CA deficit expected to be financed primarily by FDI.
  - International reserves expected to remain above 5 months of non-maquila imports throughout the projection period.
  - FDI expected to increase in critical sectors such as electricity.

*Source: Annex I. External Sector Assessment.*

### 6.      The realism tools suggest that the projections are reasonable (Figures II.3 and II.4).

### 6.      The realism tools suggest that the projections are reasonable (Figures II.3 and II.4).

### Realism tools and baseline assumptions
- Realism tools examine: (i) drivers of debt dynamics, (ii) realism of planned fiscal adjustment, (iii) fiscal adjustment-growth relationship, and (iv) public investment-growth relationship.
- Baseline assumes an improvement of the primary balance of 0.5 percentage points of GDP over the next three years.
- The primary balance improvement falls in the third quartile of the distribution for LICs.
- Improvement is warranted by compliance with the FRL, which serves as an anchor to guide fiscal sustainability.
- Compared to the previous DSA, growth projections and the evolution of investment are similar.
- Projected contribution of the government’s capital stock to growth remains in line with historical levels and the growth path assumes reasonable levels for the fiscal multiplier.
- Note: Weaknesses in private net foreign assets data could explain in part historical residuals.

### Country classification
- Honduras debt carrying capacity is classified as strong under the revised LIC DSF.
- Debt carrying capacity (CI) includes: CPIA score, world economic growth, Honduras’s real growth rate, import coverage of reserves, and remittances.
- Two consecutive signals are needed to modify the classification; Honduras had strong CI classification in April and October 2018 and the April 2019 vintage also yields strong.
- CI Score and components (Text Table II.4):
  - CPIA: coefficient 0.385; 10-year average value 3.482; CI Score component 1.34; contribution 42%
  - Real growth rate (in percent): coefficient 2.719; 10-year average value 3.676; CI component 0.10; contribution 3%
  - Import coverage of reserves (in percent): coefficient 4.052; 10-year average value 40.340; CI component 1.63; contribution 51%
  - Import coverage of reserves^2 (in percent): coefficient -3.990; 10-year average value 16.273; CI component -0.65; contribution -20%
  - Remittances (in percent): coefficient 2.022; 10-year average value 15.494; CI component 0.31; contribution 10%
  - World economic growth (in percent): coefficient 13.520; 10-year average value 3.559; CI component 0.48; contribution 15%
  - CI Score: 3.22; CI rating: Strong
- Under previous methodology (CPIA-based), Honduras was classified as medium.

### Indicative thresholds for strong debt-carrying capacity
- For countries with strong capacity (applicable to Honduras), indicative thresholds are:
  - PV of PPG external debt-to-GDP ratio: 55 percent
  - PV of PPG external debt-to-exports ratio: 240 percent
  - PPG external debt service-to-exports ratio: 21 percent
  - PPG debt service-to-revenue ratio: 23 percent
  - Benchmark for total public debt (PV of total public debt-to-GDP ratio): 70 percent

### External DSA findings
- Honduras’s risk of external debt distress is assessed to be low.
- PV of PPG external debt-to-GDP ratio is projected to peak at 27.8 percent in 2019, below the 55 percent threshold.
- PPG external debt service-to-exports and PPG external debt service-to-revenue peak in 2019, both well under their thresholds of 21 percent and 23 percent, respectively.
- Peaks on debt service indicators are explained by Eurobond repayments in 2019, 2022, 2026, 2029 and the CABEI bullet repayment in 2025.
- Sensitivity to shocks:
  - A negative shock to exports (one standard deviation decline in nominal growth of exports in the second and third years of projection and a decline in real GDP growth) generates the largest increase in PV of PPG external debt-to-GDP ratio, leading to a peak of 44.5 percent in 2021.
  - Under the same shock, PPG external debt-to-exports ratio would peak at 135.4 percent in 2021 (below the 240 percent threshold).
  - Under the same shock, PPG external debt-service-to-exports ratio would reach 17.1 percent in 2026.
  - Under the same shock, PPG external debt-service-to-revenue ratio would peak at 17.7 in 2026.
- Accessing the SBA/SCF arrangements:
  - PV of PPG external debt-to-GDP ratio would peak at 28.4 percent in 2020 (still below 55 percent).
  - PPG external debt service-to-exports and PPG external debt service-to-revenue would peak in 2026 at 11.6 and 14.9, respectively (both below thresholds).
  - All solvency and liquidity indicators remain below thresholds under all stress tests.

### Public DSA findings
- Public debt ratios expected to peak in 2019 and then decline over the medium term.
  - Public debt projected to peak at 42.1 percent of GDP in 2019 and decline to 36.1 percent of GDP by 2029.
  - In present value terms, debt-to-GDP ratio expected to peak at 37.5 percent of GDP in 2019 and fall to 31.6 percent of GDP by 2029.
- Decline supported by stable primary surpluses of around 1 percent of GDP and declining interest payments.
- FRL is the critical difference between baseline projections and the historical scenario, providing an anchor for a sound fiscal position.
- Public debt dynamics remain somewhat vulnerable to policy-related and exogenous shocks, especially those related to fiscal policy and exports.
- No scenario breaches indicators or thresholds; thresholds would not be breached if the SBA/SCF arrangements were accessed.

### Contingent liabilities and SOEs
- Exposure to contingent liabilities seems limited, except for materialization of downside risks facing SOEs.
- Upgraded PPP accounting rules to international standards enable PPP operations to be included in regular public-sector spending and financing recording.
- New contingency unit at the Ministry of Finance (SEFIN) is taking stock of and limiting fiscal exposure from PPPs.
- Cost of clearing ENEE’s growing pending liabilities estimated at around 1.1 percent of GDP at end-December 2018 is included in the baseline macroeconomic projections through a comprehensive reform program (debt refinancing and operational gains).
- If clearing ENEE’s liabilities is more onerous than anticipated, it could translate into a negative shock to the PV of public debt.

### Market-financing risk
- Maximum gross financing needs over a 3-year period under the baseline projection expected to be around 7 percent of GDP (below benchmark value of 14 percent).
- Current EMBI spreads of 283 basis points are substantially below the benchmark level of 570 basis points.
- PV of debt relative to GDP and to exports, and ratios of debt service to exports and to revenue, expected to remain below thresholds under baseline and market financing scenario.
- Given uncertainty in global financial conditions, a cautious debt management approach is warranted.

### Conclusion and policy implications
- DSA indicates Honduras’s risks of external debt and public total debt distress are low, supported by strict observance of the FRL.
- Updated risk rating improves on the previous moderate risk rating from the 2018 DSA and reflects upgrade in debt carrying capacity to strong under the revised DSF methodology.
- PPG external debt burden indicators remain below thresholds under baseline and stress tests.
- Vulnerabilities remain to shocks affecting exports or economic growth, implying adherence to the FRL is key to ensuring debt sustainability.
- Results highlight importance of:
  - Raising domestic revenue
  - Addressing structural vulnerabilities in SOEs
  - Leveraging concessional sources of financing when available

*IMF (excerpt).*

### 16.      Authorities agreed with the change in the risk rating following the application of

### 16.      Authorities agreed with the change in the risk rating following the application of

### Authorities' commitments and fiscal risk management
- Authorities noted commitment to adhere to the FRL, preserving the revenue mobilization efforts while implementing reforms in SOEs to resolve their imbalances, and to the further development of the domestic debt market.
- The contingency unit at SEFIN will continue addressing data limitations with the goal of improving the management of fiscal risks.

### External Debt Sustainability — Baseline scenario (selected indicators)
- External debt (nominal) 1/: 
  - 2016: 35.4
  - 2017: 37.2
  - 2018: 38.5
  - 2019: 38.0
  - 2020: 37.8
  - 2021: 37.8
  - 2022: 37.1
  - 2023: 36.5
  - 2024: 35.8
  - 2029: 28.9
  - 2039: 19.4
  - Historical average: 31.7
  - Projections average: 35.0
- Of which: public and publicly guaranteed (PPG):
  - 2016: 28.9; 2017: 31.1; 2018: 31.6; 2019: 31.7; 2024: 29.5; 2029: 22.7; 2039: 13.1; historical: 25.0; projections: 28.7
- Change in external debt (annual): -0.7 (2016), 1.9 (2017), 1.2 (2018), -0.5 (2019), -0.2 (2020), 0.0 (2021), -0.6 (2022), -0.7 (2023), -0.7 (2024), -2.2 (2029), -0.6 (2039)
- Identified net debt-creating flows (selected years):
  - 2016: -2.7; 2017: -4.7; 2018: -1.6; 2019: -2.1; 2024: -2.0; 2029: -2.0; 2039: -2.1; historical average: -1.1; projections average: -2.0
- Non-interest current account deficit:
  - 2016: 2.1; 2017: 1.2; 2018: 3.2; 2019: 2.7; 2024: 2.8; 2029: 2.7; 2039: 2.8; historical average: 4.9; projections average: 2.8
- Net FDI (negative = inflow):
  - 2016: -4.1; 2017: -4.4; 2018: -4.8; 2019: -4.7; projections: consistently -4.7; historical average: -5.0
- Residual 3/:
  - 2016: 1.9; 2017: 6.6; 2018: 2.9; 2019: 1.6; 2024: 1.4; 2029: -0.2; 2039: 1.5; historical average: 2.4; projections average: 1.1
- Sustainability indicators (selected):
  - PV of PPG external debt-to-GDP ratio (selected projection years): 22.2, 22.3, 22.5, 22.9, 22.6, 22.3, 21.9, 16.7, 9.0
  - PV of PPG external debt-to-exports ratio (selected): 52.8, 53.5, 53.3, 54.0, 53.5, 52.5, 51.7, 39.8, 21.2
  - PPG debt service-to-exports ratio (selected): 8.4, 8.8, 4.8, 9.5, 4.8, 8.8, 4.8, 4.6, 4.4, 7.2, 2.5
  - PPG debt service-to-revenue ratio (selected): 12.0, 12.7, 6.7, 13.4, 6.6, 12.2, 6.5, 6.2, 5.9, 9.5, 3.3
  - Gross external financing need (Billion of U.S. dollars): 1.4 (2016), 1.8 (2017), 2.1 (2018), 2.6 (2019), 1.6 (2020), 2.2 (2021), 1.7 (2022), 1.6 (2023), 1.6 (2024), 2.1 (2029), 2.0 (2039)
- Key macro assumptions (external DSA):
  - Real GDP growth (in percent): 3.8 (2016), 4.9 (2017), 3.7 (2018), 3.5 (2019), 3.6 (2020), 3.6 (2021), 3.7 (2022), 3.8 (2023), 3.9 (2024), 3.9 (2029), 3.9 (2039); historical average: 3.1; projections average: 3.8
  - Effective interest rate (percent) 4/: 1.7 (2016), 1.8 (2017), 3.0 (2018), 3.2 (2019), 3.7 (2020), 3.3 (2021), 3.7 (2022), 3.6 (2023), 3.5 (2024), 3.8 (2029), 3.2 (2039); historical average: 1.9; projections average: 3.6
  - Government revenues (excluding grants, in percent of GDP): 29.6 (2016), 29.7 (2017), 29.7 (2018), 29.5 (2019), 30.3 (2020), 30.7 (2021), 30.9 (2022), 31.3 (2023), 31.3 (2024), 31.5 (2029), 32.0 (2039); historical average: 28.2; projections average: 31.0

### Public Debt Sustainability — Baseline scenario (selected indicators)
- Public sector debt 1/ (percent of GDP):
  - 2016: 39.9; 2017: 39.9; 2018: 41.8; 2019: 42.1; 2020: 42.0; 2021: 41.9; 2022: 41.4; 2023: 40.9; 2024: 39.9; 2029: 36.1; 2039: 31.3; historical average: 33.9; projections average: 39.7
- Of which: external debt (public):
  - 2016: 28.4; 2017: 30.5; 2018: 31.0; 2019: 32.9; 2029: 27.2; 2039: 18.8; historical average: 24.4; projections average: 29.9
- Change in public sector debt (annual): 0.8 (2016), 0.1 (2017), 1.9 (2018), 0.3 (2019), -0.1 (2020), -0.1 (2021), -0.5 (2022), -0.5 (2023), -1.0 (2024), -0.8 (2029), -0.3 (2039)
- Identified debt-creating flows (selected):
  - Primary deficit: -0.3 (2016), -0.1 (2017), 0.0 (2018), -0.6 (2019), -0.7 (2020), -0.8 (2021), -1.0 (2022), -0.9 (2023), -0.7 (2024), -0.7 (2029), -0.5 (2039)
  - Revenue and grants: 30.4 (2016), 30.3 (2017), 30.1 (2018), 30.9 (2019), 31.3 (2020), 31.7 (2021), 31.8 (2022), 31.9 (2023), 31.9 (2024), 32.4 (2029), 32.9 (2039)
  - Primary (noninterest) expenditure: 30.1 (2016), 30.2 (2017), 30.0 (2018), 30.3 (2019), 30.6 (2020), 30.9 (2021), 30.8 (2022), 31.0 (2023), 31.2 (2024), 31.7 (2029), 32.4 (2039)
- Automatic debt dynamics (contribution):
  - 0.9 (2016), -1.4 (2017), 1.5 (2018), 0.9 (2019), 0.4 (2020), 0.4 (2021), 0.3 (2022), 0.4 (2023), 0.3 (2024), 0.1 (2029), 0.2 (2039)
- Other identified debt-creating flows (selected): debt relief (HIPC and other): -0.4 (2016) through -0.3 (2023) and -0.1 (2029); residuals: 0.7 (2016), 2.0 (2017), 0.8 (2018), 0.8 (2019), 0.5 (2020), 0.3 (2021)
- Sustainability indicators (selected):
  - PV of public debt-to-GDP ratio (selected): 37.3, 37.5, 37.4, 37.2, 36.8, 36.2, 35.2, 31.6, 28.3
  - PV of public debt-to-revenue and grants ratio (selected): 124.1, 121.1, 119.3, 117.7, 115.7, 113.5, 110.4, 97.6, 86.1
  - Debt service-to-revenue and grants ratio 3/: 10.2 (2016), 10.4 (2017), 11.6 (2018), 24.3 (2019), 16.5 (2020), 17.3 (2021), 24.6 (2022), 18.7 (2023), 19.0 (2024), 22.4 (2029), 21.4 (2039)
  - Gross financing need 4/: 2.4 (2016), 2.7 (2017), 3.1 (2018), 6.9 (2019), 4.7 (2020), 5.1 (2021), 7.1 (2022), 5.4 (2023), 5.2 (2024), 6.4 (2029), 6.5 (2039)
- Key macro and fiscal assumptions (public DSA):
  - Real GDP growth (in percent): same series as external DSA (see above)
  - Average nominal interest rate on external debt (in percent): 1.9 (2016), 2.0 (2017), 3.4 (2018), 4.2 (2019), 4.3 (2020), 4.3 (2021), 4.5 (2022), 4.8 (2023), 4.7 (2024), 4.5 (2029), 4.8 (2039); historical average: 2.0; projections average: 4.6
  - Average real interest rate on domestic debt (in percent): 13.4 (2016), 8.4 (2017), 14.5 (2018), 7.1 (2019), 7.1 (2020), 7.7 (2021), 7.2 (2022), 7.6 (2023), 7.7 (2024), 7.1 (2029), 6.1 (2039); historical average: 4.1; projections average: 7.3
  - Inflation rate (GDP deflator, in percent): 3.8 (2016), 4.3 (2017), 1.8 (2018), 3.2 (2019), 3.4 (2020), 3.2 (2021), 3.5 (2022), 3.6 (2023), 3.8 (2024), 4.1 (2029), 4.0 (2039)
  - Primary deficit that stabilizes the debt-to-GDP ratio 5/: -1.2 (2016), -0.2 (2017), -1.9 (2018), -0.9 (2019), -0.6 (2020), -0.7 (2021), -0.5 (2022), -0.4 (2023), 0.4 (2024), 0.1 (2029), -0.2 (2039); historical average: -1.1; projections average: -0.3
  - PV of contingent liabilities (not included in public sector debt): 0.0 across the series shown

### Stress tests, sensitivity analysis, and risk indicators (high-level)
- Stress testing approach: The most extreme stress test is the test that yields the highest ratio in or before 2029. The stress test with a one-off breach is also presented (if any), while the one-off breach is deemed away for mechanical signals.
- Table II.3 and II.4 present sensitivity analysis across alternative scenarios, bound tests (Real GDP growth, Primary balance, Exports, Other flows, Depreciation, Combination), and tailored tests (Combined contingent liabilities, Natural disaster, Market Financing).
- Figure II.5 Market-Financing Risk Indicators highlights:
  - Benchmarks for GFN and EMBI spreads; potential heightened liquidity needs are indicated as "Low" and "No" breach of benchmark in presented charts.
  - Series shown for debt service-to-revenue ratio, PV of debt-to-exports ratio, PV of debt-to-GDP ratio, and debt service-to-exports ratio over 2019–2029.

### Selected memorandum and graphical items
- Nominal GDP (Billion of US dollars): series shows 22, 23, 24, 25, 26, 27, 28, 29, 30, 39, 64 in the table (layout as presented).
- Memorandum items:
  - PV of external debt (selected): 29.1, 28.6, 28.8, 29.2, 28.9, 28.6, 28.2, 22.9, 15.3
  - In percent of exports (PV external debt): 69.2, 68.6, 68.2, 68.9, 68.4, 67.3, 66.5, 54.7, 36.0
  - Total external debt service-to-exports ratio (selected): 20.2, 25.6, 25.3, 30.2, 19.8, 23.5, 18.8, 17.8, 16.9, 17.9, 12.0
  - PV of PPG external debt (in Billion of US dollars): 5.3, 5.5, 5.8, 6.1, 6.3, 6.5, 6.7, 6.4, 5.7

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

### Annex III. Risk Assessment Matrix

### Annex III. Risk Assessment Matrix

### External Risks
- Rising protectionism and retreat from multilateralism  
  - Relative likelihood: High  
  - Expected impact: "Honduras' open economy is vulnerable to changes in trade policies (particularly in the U.S., its main trade partner and foreign investor). A reduction in FDI flows and remittances could trigger an adjustment in the current account with a large impact on economic activity and international reserves."  
  - Policy response: "Increase exchange rate flexibility to buffer the shock and speed up structural reforms to strengthen competitiveness. Tighten monetary policy to protect reserve position."

- Weaker-than-expected global growth  
  - Relative likelihood: Medium  
  - Expected impact: "Weaker-than-expected growth in large economies, particularly in the U.S., could lower exports demand, remittances (and consumption), and foreign investment flows, weakening economic activity."  
  - Policy response: "Ease monetary policy while ensuring that inflation expectations remain anchored. Increase exchange rate flexibility."

- Large swings in energy prices  
  - Relative likelihood: Medium  
  - Expected impact: "Risks to oil prices are balanced due to large and uncertain supply and demand shocks. If oil prices rise, it could impact inflation and the external position; and deteriorate ENEE fragile finances if higher costs are not promptly transferred to tariffs."  
  - Policy response: "Ensure that swings in oil prices are immediately transferred to electricity tariffs. Use monetary policy to moderate inflation expectations."

- Sharp tightening of global financial conditions  
  - Relative likelihood: Low  
  - Expected impact: "Higher interest rates would increase debt service and refinancing risks; possible balance sheet effects in unhedged FX firms and households. Capital flow reversals to trigger pressures on the international reserves position."  
  - Policy response: "Debt management operations (pre-financing if feasible) to minimize exchange rate risks. Increase exchange rate flexibility and monetary tightening."

### Internal Risks
- Large social disruptions  
  - Relative likelihood: Medium  
  - Expected impact: "Weak social conditions and widespread gang violence could accelerate migrant flows. Potential for U.S. aid withdrawal."  
  - Policy response: "Strengthen social and security policies."

### Risk Assessment Matrix notes
- "The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term (ST)” and “medium term (MT)” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively."

*Annex III. Risk Assessment Matrix, 1hndea2019001*

### 4.      Macroeconomic conditions have remained stable over the last year. GDP growth

### 4.      Macroeconomic conditions have remained stable over the last year. GDP growth

### Macroeconomic overview
- GDP growth reached 3¾ percent in 2018.
- Economic activity decelerated compared to 2017 but remained around potential, supported by private consumption boosted by remittances.
- Consumer price inflation is stable around the center of the central bank ́s 4±1 percent target band.
- Driven by lower coffee prices and higher oil prices, the current account deficit widened to 4¼ percent in 2018; remained close to the historical average.
- Coverage ratio of international reserves remained stable at around 5.2 months of non-maquila imports of goods and services, supported by strong foreign direct investment flows.
- Banking system remained stable, liquid and well capitalized—bank capital is above regulatory requirements and NPLs are at record-low levels.

### Recent policy stance and outcomes
- Nonfinancial Public Sector deficit in 2018 reached 0.9 percent of GDP, against a target of 1.2 percent of GDP under the FRL.
- Central bank hiked the policy interest rate last January amid inflation expectations hovering around the upper limit of the target band.
- Inflation expectations fell by about 25 basis points in January—to 4¾ percent—and have been stable afterward.
- Central bank will remain vigilant to inflation developments and to the evolution of credit to the private sector; monetary policy actions will be data dependent.

### Program outlook and targets
- Policies aim to maintain gains from the previous program in revenue mobilization and implement electricity sector reforms.
- Growth is projected to slow in the short term, with recovery in investment and confidence supporting gradual convergence of GDP growth toward potential.
- Inflation and inflation expectations expected to converge toward the midpoint of the target band.
- Current account deficit expected to remain stable at around 4 percent of GDP.

### Fiscal policy — overarching strategy
- Continued fiscal prudence to place public debt on a sustainable path; fiscal policy guided by the FRL.
- Government will abstain from introducing measures that could lower tax collections in the short- or medium-term.
- Revenue mobilization and electricity sector reforms intended to create fiscal space for investment and social spending while keeping fiscal stance within FRL targets.

### A. Revenue — measures and benchmarks
- Tax expenditures are almost 7 percent of GDP; intention to broaden the tax base by streamlining exemptions while protecting the poor (structural benchmark, December 2019).
- Proposal to return control and verification procedures for management of tax exemptions to the tax administration office (SAR) (structural benchmark, December 2019).
- No new tax amnesties, no widening of rescheduling scope for tax liabilities, and no tax relief in any form.
- Terminate COPRISAO and enact decree to create the new customs administration (structural benchmark, September 2019); appoint its new managerial team.
- Introduce electronic notification of SAR procedures to taxpayers (structural benchmark, December 2019) and develop a plan to upgrade obsolete tax systems toward timely tax refunds.
- SAR, the ministry of finance, and the customs administration will sign an agreement to share information on a timely basis.

### B. Spending — containment and priorities
- Rightsizing expenditure to contain current spending growth as mandated by the FRL.
- Wage bill: create and implement a centralized wage bargaining mechanism to guide nominal wage decisions (structural benchmark, December 2019); medium-term plan to upgrade the general directorate of civil service to a public administration authority to right-size labor frameworks and establish a merit- and performance-based civil service career.
- Goods and services: control spending by streamlining unnecessary travels, consultant services, and temporary contracts.
- Public investment: continue prioritizing projects key to enhancing competitiveness.

### C. Financing — program financing and arrears
- Program fully financed with envisaged disbursements during 2019-21:
  - about US$1.2 billion from multilateral development banks;
  - about US$0.5 billion from bilateral loans;
  - about US$0.6 billion from market operations.
- Intend to consider further operations in global markets to reprofiling: replace high-interest, short-maturity domestic debt with cheaper and longer-maturity external debt.
- With program fully financed, confident that resources will not need to be withdrawn from the IMF.
- ENEE domestic arrears estimated at about 1½ percent of GDP as of March 2019; plan to conduct full review and gradually clear them.

### D. Fiscal governance and transparency
- Implementing recommendations of the Fiscal Transparency Evaluation (FTE) and committed to developing a plan to enhance fiscal governance with Fund technical assistance.
- Incorporation of expenditure channeled through trust funds into the budget:
  - include an annex on spending by trust funds in the 2020 budget proposal to be submitted to Congress (structural benchmark, September 2019);
  - present a plan to execute spending currently funneled through social and infrastructure trust funds under full Public Financial Management regulations starting with the 2021 budget (structural benchmark, March 2020);
  - introduce a mandatory assessment from the ministry of finance as a pre-condition for contracting debt by trust funds starting in the 2020 budget.
- Commit to publish annual Fiscal Risk Statements to strengthen assessment of fiscal risks, including contingent policies for high-probability risks.
- Strengthen the Unit of Norms and Processes in the budget office and create an expenditure quality unit to pilot performance budgeting and develop indicators and baselines for priority social and development sectors.

### Electricity sector — governance and sustainability
- Action plan for electricity sector to be shared with Fund staff at least five days before the Board meeting (prior action).
- Implement approved electricity framework law to rehabilitate and upgrade infrastructure and mobilize investment; create a system operator to manage the power grid to ensure reliable delivery and foster private investment.
- Adopt a new tariff scheme (prepared with assistance from the World Bank) that reflects generation, distribution, transmission, and other costs (prior action).
- Ensure budgetary and operational autonomy of the electricity regulatory body (CREE); CREE to enact quarterly tariff adjustments to align prices with operational costs (continuous structural benchmark).
- ENEE’s financial situation in 2018: deficit reached 1 percent of GDP and accumulated debt close to 11 percent of GDP.
- Reform plan elements:
  - Unbundle ENEE into three independent companies for generation, transmission, and distribution, with technical support from the Inter-American Development Bank.
  - Seek market-friendly restructuring agreements with ENEE’s creditors to reduce financing costs and review approved generation contracts not yet in operation.
  - Reduce electricity losses by: (i) revising the contract with Empresa Energía Honduras (EEH) to strengthen a losses reduction plan; (ii) conducting targeted field assessments for irregular connections, tampered/damaged meters, and unmetered consumers; (iii) upgrading metering infrastructure; and (iv) deploying a law enforcement task force.
- Protecting the poor: maintain electricity subsidy for those consuming less than 75kwh per month and introduce transitory budgetary transfers for low-consumption households after tariff adjustment in April.

### Monetary policy
- Central bank (BCH) will seek to keep headline inflation within the 4±1 percent target band.
- Program includes ceilings on the expansion of net domestic assets and floors on the accumulation of non-borrowed net international reserves as performance criteria.
- BCH will keep credit developments under close review and use monetary policy instruments as needed; will not provide additional financing to BANHPROVI beyond the trust fund approved in 2013.
- Aim to implement full-fledged inflation targeting in coming years; submit new central bank charter to Congress in December 2019 (structural benchmark).
  - Charter to state price stability as policy mandate, introduce International Financial Reporting Standards, secure governance structure, and clarify operational, oversight, and policy decision responsibilities.
- Explore an agreement between the central bank and the ministry of finance to give the central bank unrestricted access to a pool of government securities to implement monetary policy, with proceeds deposited in a [sterilized] account at the central bank.
- Exchange rate policy: gradual steps toward a flexible exchange rate regime over the medium term.
  - As of May 2019, 30 percent of the foreign exchange market liberalized.
  - Present plan for gradual removal of the remaining 70 percent foreign exchange surrender requirements (structural benchmark, December 2019).
- Data improvements for inflation-targeting transition:
  - Complete National Household Income and Expenditure Survey (NHIES) by September 2020, aiming to publish a new CPI by December 2021.
  - Rebase national accounts series to 2016 and publish new national accounts series by December 2021.

### Financial sector policies
- Commit to improving regulatory framework and supervisory practices in line with FSSR recommendations and Basel III:
  - further strengthen capacity for risk-based supervision;
  - develop and keep strengthening stress testing capacities;
  - phase in liquidity coverage ratio and capital conservation buffer as scheduled;
  - establish a timeframe for an additional capital charge for systemic banks;
  - introduce regulations for market risks;
  - develop new methodologies to assess operational risks.
- CNBS to complete implementation of the bank resolution framework by creating guidelines for banks' recovery plans and developing manuals for bank resolution mechanisms.
- Vigilant to credit growth—especially in foreign currency—with a view to consider tightening the macro-prudential framework.

*Source: 1hndea2019001*

### 27.      Improving access to credit of small- and medium-size agricultural producers is a key

### 27.      Improving access to credit of small- and medium-size agricultural producers is a key

### Financial sector and capital markets
- Improve access to credit for small- and medium-size agricultural producers; address financial insolvency of the public agricultural development bank (BANADESA) and send Congress a proposal to address its financial situation (structural benchmark, December 2019).
- Assess improvements to the investment policy framework of public pension funds:
  - Aim to align the maturity of assets and liabilities.
  - Gradually move the structure of their investment portfolio towards international best practices.
  - Assess whether lending policies place the incentives to secure the right amount of accumulated rights—net of outstanding loans—at the time of retirement.
- Work with Congress to approve a new securities market law to support development of domestic capital markets; modernize legal framework to broaden financing options and strengthen the interest rate channel of monetary transmission supporting transition to inflation targeting.

### Social policies and poverty reduction
- Reduce the high poverty rate by implementing measures to combat poverty and favor social mobility—focus on women and early-age children.
- Priority social spending:
  - Define a set of social programs to be monitored during periodic reviews (indicative target).
  - Channel priority social spending mainly through well-targeted cash transfers or similar programs, including support for returning migrants.
  - Expand the flagship cash-transfer program “Bono Vida Mejor”, aiming at covering population in extreme poverty by end-2021.
- Electricity subsidy:
  - Continue providing the subsidy for households consuming up to 75KW per month.
  - Provide additional temporary subsidies to buffer the impact of higher energy prices on households.
- Gender equality:
  - Raise female labor participation to boost potential growth.
  - Tailor subsidized lending programs to small and self-employed producers to ensure adequate gender distribution.
  - Include Primera Infancia, Ciudad Mujer, and Empoderamiento Económico de la Mujer as priority social spending.

### Governance, rule of law, and business environment
- Business climate:
  - Continue administrative simplification; implement a one-step window for international trade.
  - Submit to Congress legislation requiring public regulatory agencies to streamline and publicize requirements for obtaining permits, to reduce discretion and accelerate approvals (structural benchmark, March 2020).
  - Develop a plan to implement electronic signature to simplify public administration procedures (structural benchmarks, December 2019).
- Governance diagnostic:
  - Work with Fund staff to conduct a governance diagnostic to improve legal framework, institutional set-up and implementation.
  - Commit to incorporate recommendations according to a plan to be discussed during the first review; areas may include fiscal, bank and market regulations, rule of law, AML/CFT, transparency and corruption.
- AML/CFT:
  - Continue strengthening AML/CFT framework in line with recommendations of the Financial Action Task Force of Latin America (GAFILAT).
  - Expand supervision coverage of Designated Non-Financial Businesses and Professions (DNFBPs).
  - Assess appropriateness of identification of shareholders and beneficial owners of incorporated companies for AML/CFT purposes.
  - CNBS to strengthen cooperation with the superintendency of cooperatives on capacity development.

### Safeguards assessment and program monitoring
- Safeguards:
  - Fund staff will update safeguards assessments of the BCH; the update will be completed before the first program review and the authorities will implement resulting recommendations.
- Program monitoring:
  - Program subject to semi-annual reviews monitored through performance criteria, indicative targets, and structural benchmarks as set out in tables 1 and 2.
  - First review expected in December 2019 and second review in April 2020.
  - Authorities committed to provide detailed information as specified in the technical memorandum of understanding (TMU); relevant definitions and reporting procedures specified in the TMU.
- Program Monitoring Committee (PMC):
  - PMC composition: chief of the economic cabinet, president of the central bank, minister of finance, director of SAR, president of the CNBS, chief economist of the central bank, and director of macro-fiscal policy at the ministry of finance.
  - PMC will meet at least once a month; Fund resident representative will attend as an observer.
  - Central bank will prepare minutes and send them to the Fund resident representative no later than five business days after each meeting.

### Prior actions and structural benchmarks (selected)
- Prior actions (to be completed five business days before the Board meeting):
  - Approve new tariff scheme that secures the recovery of electricity generation and ENEE’s operational costs.
  - Prepare a plan to secure financial sustainability in ENEE, including a debt profile and policies for energy purchase consistent with the new electricity tariff scheme.
  - Present a plan to secure a reduction in electricity losses, starting in 2019, with a floor of 3 percent per year from 2020 onwards.
- Structural benchmarks (selected and exact dates preserved):
  - Ensure that CREE implement periodic tariff adjustments aligned with the evolution of energy generation costs (Continuous).
  - Include an annex on spending by trust funds in the 2020 budget proposal to be submitted to congress (September 2019).
  - Enact the decree that creates the new customs administration and appoint its managerial team (September 2019).
  - Introduce legislation to transfer all verification procedures for the management of tax exemptions from SEFIN to SAR (December 2019).
  - Amend Article 89 of the Tax Code, allowing for electronic notification of SAR procedures to taxpayers (December 2019).
  - Streamline tax exemptions, including those that are not in line with commitments under the benefit and/or lack proof of economic impact (December 2019).
  - Submit to Congress the new draft BCH charter, in line with the recommendations of Fund staff (December 2019).
  - Present a plan to phase out FX surrender requirements (December 2019).
  - Establish a centralized wage bargaining mechanism, in line with the FRL (December 2019).
  - Submit to Congress of a proposal to address the financial situation in BANADESA (December 2019).
  - Prepare a plan to implement electronic signature (December 2019).
  - Submit to congress draft legislation requiring regulatory agencies to streamline and publicize requirements for obtaining permits (March 2020).
  - Present a plan to execute social and infrastructure spending currently funneled by trust funds to be managed within full PFM regulations for the 2021 budget (March 2020).

### Appendix — Main policies and structural reform program (selected measures)
- Public finances — Tax policy:
  - Do not issue additional tax amnesties, regularizations and exemptions.
  - Publish a list of tax exemptions and eliminate those that: (i) are not in line with the commitments of the approved benefit; and (ii) have no proof of economic impact (Article 20.3 of the Tax Code).
- Tax and customs administration:
  - Transfer all operational management of tax exemptions from SEFIN to SAR, including replacing “purchase orders” with tax refunds for VAT exempted taxpayers.
  - Amend Article 89 of the Tax Code to allow electronic notification of tax noncompliance by the SAR (structural benchmark).
  - Sign and implement the exchange of information agreement between DARA, SAR, and SEFIN.
  - Enact decree creating the new customs administration and appoint its executive authority (structural benchmark).
- Expenditure policy and PFM:
  - Upgrade the General Directory of Civil service to a public administration authority to establish pay policy and reduce fragmentation of labor regimes.
  - Substitute wage indexation with a non-automatic and centralized bargaining mechanism consistent with fiscal affordability.
  - Include an annex on spending by trust funds in the 2020 budget proposal (structural benchmark).
  - Present a plan to allow trust funds to be managed within the full PFM legal framework for the 2021 budget proposal (structural benchmark).
  - Publish an annual Fiscal Risk Statement to quantify and mitigate fiscal risks related to trust funds and SOEs.
- Electricity sector:
  - Approve a new tariff scheme securing recovery of electricity generation and ENEE’s operational costs (prior action).
  - Secure budgetary and operational independence in CREE, and automatic implementation of periodic tariff adjustments reflecting evolution of energy generation costs (continuous PC).
  - Present a plan to secure a reduction in electricity losses with a floor of 3 percent per year from 2020 onwards (prior action).
  - Conduct an audit of ENEE financial accounts for the 2019 fiscal year.
- Financial sector:
  - CNBS to issue prudential regulations for the investment of pension funds in line with international best practices, including limits on the share of consumer loans in their portfolios.
  - Amend the budget framework law to allow liability management operations by SEFIN, including debt buybacks.
- Monetary and exchange rate policy:
  - Abstain from central bank financing to BANHPROVI beyond the level envisaged in the trust fund approved in 2013.
  - Present a plan to address the financial situation in BANADESA (structural benchmark).
  - Submit to Congress the new central bank law charter stating the supremacy of inflation target and strengthening institutional, operational, and financial independence (structural benchmark).
  - Sign an agreement between the BCH and SEFIN to guarantee BCH access to a pool of government securities to conduct monetary policy; gradually increase use of these securities to reduce excess liquidity and replace the one-day BCH bills auction with auctions of repo and reverse repos.
  - BCH to adopt the IFRS as the accounting framework to prepare and disseminate its financial statements.
  - Establish a calendar to lift surrender requirements to the BCH while allowing increased interbank foreign exchange transactions (structural benchmark).
  - Present a plan to gradually develop an intervention budget and a set of intervention rules to be approved and published by the BCH.
- Governance and market regulation:
  - Develop and action an anti-corruption, rule of law, and AML/FT plan in line with Fund recommendations.
  - Implement electronic signature as part of the project to upgrade the National Registry of Persons.
  - Approve new policy of ‘simplificación administrativa’ to reduce red tape and enhance governance.
- Social policies:
  - Assess the efficiency of social spending and present a sustainable plan to increase its coverage, including to families in extreme poverty.

### Technical Memorandum of Understanding — monitoring and definitions (selected)
- Program period for monitoring: July 2019–June 2021.
- Program exchange rates (rates that prevailed on March 29, 2019; shown as in the source):
  - Lempira to the U.S. dollar 24.43
  - U.S. dollar to the SDR0.72
  - U.S. dollar to the Yen110.92
  - U.S. dollar to the Euro0.89
  - U.S. dollar to the Canadian dollar1.34
  - U.S. dollar to the Bristish Pound0.76
  - U.S. dollar to the the Renminbi6.72
- Fiscal reporting and monitoring:
  - All fiscal data needed for program monitoring will be provided to the Fund with a lag of no more than 45 calendar days after the end of each month.
- Definitions for program variables (selected):
  - Central government for program purposes consists of the budgetary central government (Administración Central), fiduciary funds, decentralized institutions (desconcetradas), and the Social Investment Fund (FHIS).
  - Nonfinancial public sector (NFPS) consists of the central administration as defined above, the social security institute (IHSS), all state-owned public pension funds, local governments, other decentralized agencies, and nonfinancial public enterprises.
  - NFPS’ net lending is defined as the difference between revenue and expenditure; revenue recorded on a cash basis (except revenue of nonfinancial public enterprises recorded on an accrual basis); NFPS expenditure recorded on an accrual basis and includes expense and net acquisition of nonfinancial assets.
  - ENEE’s net lending defined as the difference between revenue and expenditure, recorded on an accrual basis, excluding subsidies from the central government; ENEE’s Accumulation of Domestic Arrears measured relative to the stock recorded at June 28, 2019.
  - Lending minus Repayments from Public Pension Funds is defined as loans to their affiliates made by public pension funds net of repayments received by them; public pension funds included: INJUPEMP, INPREMA, IMPREUNAH, and IPM.
- Definition of external debt for program ceilings: debt determined according to the residency criterion; “debt” understood as a current liability created under a contractual arrangement requiring future payments; forms include Loans, Suppliers’ credits, and Leases with present value of lease payments at inception.

*IMF staff and Honduran authorities, Memorandum of Economic and Financial Policies, Technical Memorandum of Understanding (selected excerpts).*

### 19.      Definition of external arrears: External debt payments arrears for program monitoring

### 19. Definition of external arrears: External debt payments arrears for program monitoring purposes

### Definition of external arrears
- External debt payments arrears for program monitoring purposes are defined as external debt obligations (principal and interest) falling due after June 30, 2019 that have not been paid, considering the grace periods specified in contractual agreements.
- Under the definition of debt set out above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt.
- Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

### Coverage
- This performance criterion covers the NFPS.
- This performance criterion does not cover:
  - (i) arrears on trade credits,
  - (ii) arrears on debt subject to renegotiation and restructuring; and
  - (iii) arrears resulting from the nonpayment of commercial claims that are the subject of litigation initiated prior to June 28th, 2019.

### Monitoring
- This PC will be monitored on a continuous basis.

### Floor on the Change in Non-Borrowed Net International Reserves (NIR) — definitions and measurement
- Non-Borrowed Net International Reserves (NIR) of the BCH are equal to the balance of payments concept of NIR defined as the U.S. dollar value of gross international reserves of the BCH minus gross official liabilities as defined below.
- Non-U.S. dollar denominated foreign assets and liabilities will be converted into U.S. dollar at the program exchange rates.
- The change in non-borrowed net international reserves will be measured as the change in the stock of non-borrowed NIR at each test date relative to the stock at end-December of the previous year.

### Gross official reserves (per BMP6)
- Defined consistently with the Sixth Edition of the Balance of Payments manual and International Investment position Manual (BMP6) as readily available claims on nonresidents denominated in foreign convertible currencies.
- They include:
  - (i) monetary claims,
  - (ii) free gold,
  - (iii) holdings of SDRs,
  - (iv) the reserve position in the IMF, and
  - (v) holdings of fixed income instruments.
- Excluded from reserve assets are:
  - any assets that are pledged, collateralized or otherwise encumbered,
  - claims on residents,
  - claims in foreign exchange arising from derivatives in foreign currency vis-à-vis domestic currency (such as futures, forwards, swaps and options),
  - precious metals other than gold,
  - assets in nonconvertible currencies and illiquid assets.

### Gross official liabilities in foreign currencies
- Include:
  - (i) all borrowed reserves, including foreign currency swaps, loans, and repo operations with all counterparties (domestic and foreign), regardless of maturity,
  - (ii) other foreign currency liabilities including deposits of financial institutions,
  - (ii) the use of Fund resources for Balance of Payments support extended in the context of the exceptional financing package,
  - (iii) any deliverable forward foreign exchange (FX) liabilities on a net basis—defined as the long position minus the short position payable in foreign currencies.

### Monitoring of FX assets and liabilities
- Foreign exchange asset and liability data will be provided to the Fund at monthly frequency, within 2 weeks of the end of each month.

### Adjustor for multilateral loans (NIR)
- The NIR target will be adjusted upward (downward) by the surplus (shortfall) in program loan disbursements from the IMF and other multilateral institutions, relative to the baseline projection reported in Table AII.2.
- Program loan disbursements are defined as external loan disbursements (excluding project financing disbursements) from official creditors that are usable for the financing of the NFPS.

### Cumulative flows — Budget Support Loans (Million of US$)
- end-September 2019: 0
- end-December 2019: 155
- end-June 2020: 0
- end-December 2020: 192

### Ceiling on the Stock of the BCH’s Net Domestic Assets (NDA)
- Definitions: Net Domestic Assets (NDA) of the BCH are defined as the difference between currency issued and non-borrowed NIR measured at program exchange rates.
- The ceiling applies to the stock of NDA measured at each test date.
- Monitoring: Data will be provided to the Fund monthly with a lag of no more than 2 weeks.
- Adjustor for multilateral loans (NDA): The NDA target will be adjusted downward (upward) by the surplus (shortfall) in program loan disbursements from the IMF and other multilateral institutions and grants, relative to the baseline projection reported in Table AII.2.
  - Program loan disbursements are defined as external loan disbursements (excluding project financing disbursements) from official creditors that are usable for the financing of the NFPS.

### B. Quantitative Indicative Targets: Definition of Variables — Floor in the Central Government’s Tax Revenues
- Definition: Tax revenue will be measured on a cash basis at the level of the central government. All compulsory and unrequited receivables by the government will be considered taxes as stated in the GFSM 2014.
- For compliance with this IT the central government will be equivalent to the budgetary central government (Administración Central).

*Source: 1hndea2019001 - 19. Definition of external arrears: External debt payments arrears for program monitoring*

### 33.      Monitoring. Monthly data will be provided to the Fund no more than 2 weeks after the

### 1hndea2019001 - 33.      Monitoring. Monthly data will be provided to the Fund no more than 2 weeks after the

### Monitoring (general)
- Monthly data will be provided to the Fund no more than 2 weeks after the end of the month.
- Several program-specific monitoring deadlines are specified as "Quarterly data will be provided to the Fund no more than within 45 days of the end of each month."

### Ceiling on the Central Government’s Wage Bill
- Definition:
  - "The wage bill is defined as all wages and salaries measured on an accrual basis, including all cash and in-kind wage and salaries and severance payments, plus employers’ social benefits."
- Coverage:
  - "For compliance with this IT the central government will be equivalent to the budgetary central government (Administración Central)."
- Monitoring:
  - "Quarterly data will be provided to the Fund no more than within 45 days of the end of each month."

### Floor on Priority Social Spending
- Definition:
  - "Priority social spending is defined as the public interventions with high impact on poverty reduction and long-term influence on beneficiaries. Interventions oriented to increase the participation of women in the labor market are also included."
  - "For program purposes, all interventions listed in Table AII.3 will be considered priority social spending."
- Monitoring:
  - "Quarterly data will be provided to the Fund no more than within 45 days of the end of each month."

### Floor on ENEE’s Operating Revenue-to-Spending Ratio
- Definition:
  - "Operating revenue-to-spending ratio of ENEE is defined as the ratio of operating revenue to operating expenditure."
  - "Operating revenue will be defined as current revenue excluding interest earnings and subsidies from the central government."
  - "Operating expenditure will be defined as total expenditure excluding interest payments and capital spending."
- Monitoring:
  - "Quarterly data will be provided to the Fund no more than within 45 days of the end of each month."

### Table AII.3 — Priority Social Spending (listed interventions)
- Social Safety Net:
  - Better families
  - School lunch
  - Teen pregnancy prevention program
  - Criando con amor
  - Conditional Cash Transfer
  - Other "Vida Mejor" interventions
- Early childhood
- Childcare
- Support for people with disabilities
- Ciudad Mujer
- Strenghtening pre-elementary education
- Maternal and Newborn Health Integration
- Assistance to endangered woman/children
- Opportunities for young mothers
- Assistance to people with special abilities
- Woman empowerment through credit
- Electricity Subsidy for low-income consumers

### Statistical and data adequacy issues (as of June 24, 2019)
- Overall assessment:
  - "Data provided to the Fund are broadly adequate for surveillance and program monitoring purposes."
  - Monitoring would benefit from "better timing of data release and more comprehensive data coverage."
  - Outstanding gaps: "lack of comprehensive data on the financial operations of public enterprises, enhancing reporting of government guarantees and fiscal contingent liabilities, and a valid and reliable methodology to estimate private capital flows."
- National Accounts:
  - BCH compiles national accounts using the System of National Accounts 1993 (1993 SNA); "The base year is 2000."
  - "The BCH has developed a project to rebase the national accounts series to 2016, including the adoption of the main recommendations of the 2008 SNA, with support of CAPTAC-DR, planned to be concluded by 2021."
- Labor statistics:
  - "INE conducts its household survey annually which includes labor market information."
  - Need: "More frequent data on employment and wages are required to better facilitate short-term policy analysis."
- Price statistics:
  - "The BCH prepares and publishes (since April 2000) the consumer price index (CPI), with reference period of December 1999."
  - CPI weights based on NHIES of 1998–99; "A new NHIES for 2019 has been rolled out and is expected to be completed by end-2019."
  - Producer price index: coverage expanded and base updated "to 2010"; currently compiled for internal use and limited to certain activities.
- Government Finance Statistics (GFS):
  - "SEFIN compiles and disseminates government finance statistics (GFS) covering central administration, central government, general government, and nonfinancial public sector."
  - SEFIN and BCH participating in a GFS data enhancement project for Central America, Panama, and Dominican Republic to: (i) compile and disseminate high quality sub-annual and annual data using the GFSM 2014 framework, and (ii) work towards the gradual implementation of GFSM 2014 and the Public Sector Debt Statistics Guide (PSDSG).
  - Identified need: "A mechanism is needed to systematically collect data on arrears and floating debt of public enterprises."
- Monetary and Financial Statistics (MFS):
  - MFS are reported monthly using SRFs for central bank, other depository corporations, and other financial corporations (OFCs).
  - Coverage gap: "pension funds are excluded from the coverage of OFCs."
  - Major issues to address: inclusion of pension funds and "cross-sectoral data consistency between MFS and other data sets."
- Financial sector surveillance:
  - Authorities report "11 out of 12 core financial soundness indicators and five of the encouraged set."
- External sector statistics:
  - "Honduras has achieved significant milestones in the context of the CAPTAC-DR’s Regional Harmonization Project of External Sector Statistics (ESS), which ended in December" (project referenced; further details in the source).

*Source: 1hndea2019001 — STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION AND REQUEST FOR AN STAND-BY ARRANGEMENT AND AN ARRANGEMENT UNDER THE STANDBY CREDIT FACILITY—INFORMATIONAL ANNEX (June 21, 2019)*

### 2015. The BCH disseminates quarterly Balance of Payments and International Investment Position (IIP)

### 1hndea2019001 - 2015. The BCH disseminates quarterly Balance of Payments and International Investment Position (IIP)

### Data dissemination and standards
- The BCH disseminates quarterly Balance of Payments and International Investment Position (IIP) statistics, and monthly the Data Template on International Reserves and Foreign Currency Liquidity.
- Honduras participates in the Coordinated Direct Investment Survey (CDIS) and the Coordinated Portfolio Investment Survey (CPIS).
- Work in progress at the BCH aims at:
  - improving the coverage of nonfinancial private sector transactions and positions included in balance of payments and IIP statistics;
  - ensuring consistency between external debt statistics and IIP statistics;
  - completing the migration to a BPM6 basis of recording and dissemination of ESS.
- Honduras is an e-GDDS participant. In June 2016, it implemented the e-GDDS recommendations—including the launch of a National Summary Data Page to serve as a one-stop portal for essential macroeconomic and financial data.
- The authorities are encouraged to take steps toward SDDS subscription.
- Data ROSC was published on July 29, 2005.

### Table of Common Indicators Required for Surveillance (As of May 3, 2019) — selected timing and frequency
- Exchange Rates: Date of latest observation 03/05/19; Date received 03/05/19; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Date of latest observation 03/05/19; Date received 03/05/19; Frequency of Data D; Frequency of Reporting D; Frequency of Publication D.
- Reserve/Base Money: Date of latest observation 31/03/19; Date received 09/04/19; Frequency of Data D; Frequency of Reporting M; Frequency of Publication D.
- Broad Money: Date of latest observation 31/03/19; Date received 09/04/19; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Central Bank Balance Sheet: Date of latest observation 31/03/19; Date received 13/04/19; Frequency of Data D; Frequency of Reporting M; Frequency of Publication D.
- Consolidated Balance Sheet of the Banking System: Date of latest observation 28/02/19; Date received 30/04/19; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Interest Rates: Date of latest observation 31/03/19; Date received 09/04/19; Frequency of Data W; Frequency of Reporting M; Frequency of Publication M.
- Consumer Price Index: Date of latest observation 30/04/19; Date received 03/05/19; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- Revenue, Expenditure, Balance and Composition of Financing – General Government: Date of latest observation 31/12/18; Date received 30/03/19; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: Date of latest observation 31/12/18; Date received 30/03/19; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- Stocks of Central Government and Central Government-Guaranteed Debt: Date of latest observation 31/12/18; Date received 30/03/19; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- External Current Account Balance: Date of latest observation 31/12/18; Date received 09/03/19; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- Exports and Imports of Goods and Services: Date of latest observation 31/12/18; Date received 09/03/19; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- GDP/GNP: Date of latest observation 31/12/18; Date received 09/03/19; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- Gross External Debt: Date of latest observation 28/02/18; Date received 30/04/19; Frequency of Data M; Frequency of Reporting M; Frequency of Publication M.
- International Investment Position: Date of latest observation 31/12/18; Date received 09/03/19; Frequency of Data Q; Frequency of Reporting Q; Frequency of Publication Q.
- Frequency key: Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

### Statement by Executive Director (July 15, 2019) — Program objectives and context
- Aided by a Fund-supported economic program from 2014 to 2017, Honduras secured macroeconomic stability by implementing a front-loaded fiscal consolidation and laying groundwork for a modern policy framework.
- Fiscal deficit was reduced by 7 percent of GDP in three years.
- The 2016 Fiscal Responsibility Law (FRL) institutionalized fiscal prudence and has overperformed since enactment.
- Authorities requested a new Fund program to be treated as precautionary.
- Main objective of the program: maintain macroeconomic stability while enacting economic and institutional reforms to foster inclusive growth by enhancing the quality of fiscal policy, improving governance and the business environment.
- Main program elements:
  - reforms to increase the quality of fiscal policy—securing financial sustainability of ENEE, sustaining revenue mobilization, protecting investment and social spending;
  - continued progress to modernize the monetary policy framework;
  - efforts to strengthen governance and AML/CFT, bolster anti-corruption initiatives, and improve the business climate.

### Fiscal policy — key measures and electricity sector overhaul
- Government fiscal policy will be guided by the FRL in coming years to maintain confidence and keep Honduras’ risk premium low.
- Moody’s maintained Honduras’ rating at B1 with a stable outlook in June 2019.
- Fiscal challenges: electricity sector, revenue mobilization, fiscal transparency and governance.
- Electricity sector (ENEE) reforms:
  - General framework law of the electricity sector enacted in 2014 (not fully implemented).
  - Implementation aims to rehabilitate and upgrade infrastructure and appoint a system operator to manage the power grid.
  - All prior actions for the proposed program’s electricity sector reform have been met; periodic tariff adjustment aligned with energy reduction cost were being modified before program start; plans to secure ENEE financial sustainability and reduce electricity losses have been drawn out.
  - Reform plan includes:
    - Unbundling ENEE into three independent companies—generation, transmission, and distribution—with technical support from the Inter-American Development Bank.
    - Reaching market-friendly restructuring agreements with ENEE’s creditors to reduce financing costs; seeking more efficient generation and revising approved contracts not yet in operation.
    - Reducing electricity losses via: (i) revising the contract with Empresa Energía Honduras (EEH) to strengthen loss-reduction plan; (ii) deploying a law enforcement task force to prevent theft and fraud; and (iii) continuing to upgrade metering infrastructure.
  - Authorities are conducting a full review of ENEE arrears to private operators and will gradually clear them.

### Revenue mobilization
- Authorities committed to maintain recent revenue mobilization gains with tax policy and administrative measures:
  - Streamline exemptions while protecting the poor.
  - Propose legislative changes to return control and verification procedures for tax exemptions from the Ministry of Finance to the Tax Administration Office (SAR).
  - Enact creation decree for new customs administration (temporarily COPRISAO).
  - Introduce an electronic notification procedure for taxpayers.
  - Upgrade SAR systems to modernize based on timely tax refunds.
  - SAR, the Ministry of Finance, and COPRISAO to sign an agreement at the end of July to share information on a timely basis.

### Fiscal transparency and trust funds
- Authorities will implement recommendations of the Fiscal Transparency Evaluation (FTE).
- Steps on trust funds:
  - Transfer well-established programs to the budget.
  - Include an annex on spending by trust funds in the 2020 budget proposal to Congress.
  - Set up a mandatory assessment by the Ministry of Finance as a pre-condition for contracting debt by trust funds.
  - Starting with the 2021 budget, present a plan to execute spending currently channeled through social and infrastructure trust funds under full public financial management regulations.

### Governance and procurement
- Technical assistance on governance (including procurement and selection of public investment projects) ended in June 2019.
- Authorities will evaluate recommendations and develop a plan to address them to be discussed during the first review of the program.

### Monetary policy
- The Central Bank of Honduras (BCH) stands ready to maintain inflation within the target range and an adequate level of international reserves.
- BCH hiked the policy rate in January 2019—the first time since 2012.
- Authorities will continue to improve the operational framework, seeking implementation of full-fledged inflation targeting in coming years.
- A new central bank charter will be submitted to Congress by December 2019, aiming to:
  - safeguard operational autonomy;
  - increase transparency and accountability by making price stability the policy mandate of the BCH;
  - introduce the International Financial Reporting Standards;
  - secure a sound central bank governance structure;
  - clarify responsibilities for operational, oversight and policy decision.
- As of May 2019, Honduras has liberalized 30 percent of the foreign exchange market.
- Exchange rate policy will include gradual steps towards a flexible exchange rate regime.
- A plan will be presented for the gradual removal of the remainder 70 percent foreign exchange surrender requirements by December 2019.
- Statistics improvements for policy:
  - Complete the National Household Income and Expenditure Survey by September 2020.
  - Publish a new consumer price index by December 2021.
  - Publish a new national accounts series by December 2021, rebasing to 2016.

### Financial sector policies
- Supervisory authority continues to improve regulatory framework and supervisory practices in line with FSSR recommendations and Basel III.
- Planned actions:
  - establish timeframe for introduction of an additional capital charge for systemic banks;
  - assess improvements to the investment policy framework of public pension funds;
  - work with Congress to approve a new securities market law to support domestic capital markets development.
- Vigilance on macro-prudential tightening depending on credit growth evolution, especially in foreign currency.
- Foreign currency credit from the banking system to the private sector: y/y growth of 9.3 percent in May 2019 down from 21.5 percent in August 2018.
- BANADESA (public agricultural development bank):
  - Created by special law that limits supervisory authority actions.
  - Financial deterioration has been brought to Congress.
  - Financial Sector Law reforms in 2017 allowed the supervisory authority to seize BANADESA’s administrative and operational control to protect depositors and operations.
  - CNBS required to submit a report to Congress, including a proposal to address the bank’s financial situation by September 2019.

### Social policies
- Reducing high poverty rate is a government priority.
- Expansion of the flagship cash-transfer program “Bono Vida Mejor” aimed at covering population in extreme poverty by end-2021.
- IDB study found the program successful in reducing intergenerational transmission of poverty.
- Progress in reducing violent crime noted, though violence remains a challenge.
- Authorities assigned a task force within the state department, the Social Development Ministry, and the Human Rights Ministry to assist potential and returning migrants, complementing FOSMIH.
- Strategy to raise female labor participation includes supporting childcare services, facilitating credit for women, and supporting women with young children.

### Business environment and AML/CFT
- Administrative simplification and a one-step window are being implemented for international trade.
- Legislation to require public regulatory agencies to streamline and advertise permit requirements, reduce discretion and speed approvals will be submitted to Congress.
- Electronic signature will be introduced to simplify public administration procedures.
- Supervisory authority has strengthened AML/CFT framework following GAFILAT recommendations.
- Plans to expand coverage of Designated Non-Financial Businesses and Professions (DNFBPs).
- A plan for identification of shareholders and beneficial owners of incorporated companies for AML/CFT purposes is being evaluated.

### Trade policy
- Honduras and Guatemala part of a customs union effective in 2016 allowing free circulation of around 80 percent of goods traded between the two countries; El Salvador joined in August 2018.
- Honduras finalized a free-trade agreement (FTA) with South Korea likely to come into effect by end 2019.

### Final remarks
- Supported since 2014 by a Fund program that expired in 2017, Honduras reduced macroeconomic imbalances, institutionalized fiscal prudence, and strengthened its policy framework.
- Authorities requested a new precautionary Fund program to anchor reforms and address vulnerabilities including:
  - still high level of poverty;
  - deteriorating financial situation of ENEE;
  - continued need to strengthen macroeconomic policy framework, governance, and the business environment.
- Statement closes with thanks from Honduran authorities to staff, Management and the Executive Board for consideration of the program.

*IMF Staff/Document content*

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/1hndea2019001.pdf_