## 1hndea2023001 - EXECUTIVE SUMMARY

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### Context and overarching assessment
- Honduran economy showed resilience to domestic and external shocks over 2020-22; real GDP is now around 6 percent above pre-pandemic levels.
- Under the previous Fund-supported program (expired January 2022) Honduras enhanced fiscal policy quality and implemented institutional reforms.
- Authorities requested a new Fund arrangement to anchor an economic and institutional reform agenda while maintaining prudent macroeconomic policies and fostering inclusive growth.

### Recent developments and near-term outlook
- Growth:
  - Real GDP contracted by 9 percent in 2020.
  - Real GDP grew by 12.5 percent in 2021 and 4.0 percent in 2022.
  - Growth moderated in 2023:Q1 to 1.9 percent year-on-year; high-frequency indicators through June up 2.9 percent year-to-date.
  - Projection: Real GDP growth projected to decelerate to around 3 percent in 2023 and converge toward potential (close to 4 percent).
  - Selected medium-term projections (percent): 2022 = 4.0; 2023 = 2.9; 2024 = 3.2; 2025 = 3.5; 2026 = 3.7; 2027 = 3.8; 2028 = 3.8.
- Inflation:
  - Peaked at almost 11 percent (y/y) in July 2022 (from 5.3 percent at end-2021).
  - Headline inflation eased to 5.2 percent in July 2023.
  - Core inflation declined to 5.8 percent (from a peak of 9 percent).
  - Inflation expectations: 5.6 percent and 5.2 percent 12 and 24 months ahead (July BCH survey); long-term Consensus at 4.1 percent.
  - Projection (end-of-period, percent): Actual 2022 = 9.8; 2023 = 5.3; 2024 = 4.2; 2025 = 4.0; 2026 = 4.0; 2027 = 4.0; 2028 = 4.0.
- Labor and social indicators:
  - Unemployment rate declined to 8.9 percent in 2022 from 10.9 percent in 2020 (other table cites 8.7 percent for 2022).
  - Informal employment about 80 percent (ILO estimate for 2017).
  - Honduras: GDP per capita of US$2,500 and poverty rates over 70 percent, with extreme poverty at over 50 percent (INE data for 2021).

### Fiscal developments, public debt, and fiscal outlook
- 2022 fiscal outturns:
  - NFPS deficit narrowed to 0.2 percent of GDP in 2022 from an average of 4½ percent of GDP in 2020-21.
  - Primary balance (percent of GDP): Actual 2022 = 1.2.
  - Overall balance (percent of GDP): Actual 2022 = -0.2.
  - Gross public debt increased to 52.3 percent of GDP at end-2022 due to recognition of previously unaccounted domestic debt.
- 2023:H1 fiscal flow:
  - NFPS registered a lower surplus of 1.2 percent of GDP in 2023:H1 compared to 2.6 percent of GDP in the same period in 2022.
- Medium-term fiscal path:
  - NFPS deficit expected to widen to 2 percent of GDP in 2023 as spending normalizes, with planned gradual fiscal consolidation returning the NFPS deficit to 1 percent of GDP by 2026.
  - Selected medium-term projections (percent of GDP): Primary balance 2023 = -0.7; 2024 = -0.2; 2025 = 0.0; 2026 = 0.4; Gross debt 2022 = 52.3; 2023 = 51.9; 2024 = 51.3; 2025 = 50.4; 2026 = 49.1; 2028 = 46.6.
- Revenue and expenditure (selected):
  - NFPS revenue (Percent of GDP): 2022 = 29.6; 2023 = 28.3.
  - NFPS expenditure (Percent of GDP): 2022 = 29.8; 2023 = 30.3.
- Fiscal management and reform actions:
  - Legislation passed in 2022 to close trust funds; complete integration of trust funds’ assets and liabilities into the public sector balance sheet by end-December 2024 (SB).
  - Recommended revision to the Fiscal Responsibility Law (FRL) to strengthen medium-term anchor and include flexible escape clauses and corrective mechanisms.
  - Tax reform (Ley de Justicia Tributaria, LJT) under Congressional discussion with an end-December 2023 structural benchmark; staff estimates yields at upwards of 1 percent of GDP (subject to uncertainty and gradual accrual).

### External sector, remittances, and reserves
- Remittances and current account:
  - Remittances close to 27 percent of GDP in 2022; remittance inflows up 18 percent in 2022.
  - Current account deficit narrowed to 3.2 percent of GDP in 2022 from 4.6 percent in 2021.
  - Projection: Current account deficit projected to widen to around 5 percent of GDP in 2023; selected medium-term projections for current account balance (percent of GDP): 2022 = -3.2; 2023 = -5.2; 2024 = -4.9; 2025 = -4.7; 2026 = -4.3; 2028 = -3.9.
- International reserves and FX operations:
  - Gross international reserves declined by about US$120 million in 2022 to US$8.7 billion (US$8.4 billion in net terms); at end-2022 reserves provided 5.9 months of import cover and were 137 percent of the IMF’s Assessing Reserve Adequacy (ARA) metric.
  - BCH sold US$336 million (net) in 2022.
  - Reserves declined by a further US$730 million as of August 2023, mainly due to net external repayments by the public sector (around $460 million) and increased FX sales to energy importers related to the drought.
  - April 2023: BCH reintroduced its FX auction mechanism alongside 100 percent surrender requirements for foreign exchange agents, effectively shutting down the interbank FX market.

### Monetary policy, FX regime, and financial sector soundness
- Monetary policy actions:
  - BCH increased open market operations to absorb liquidity; interbank rate rose from around 1 percent in March 2022 to 3.5 percent in October 2022; BCH maintained the TPM at 3 percent since November 2020.
  - On August 24, 2023, BCH increased the Permanent Credit Facility (FPC) rate by 50 bps to 4.0 percent (prior action).
  - BCH liquidity absorption reduced excess reserves by 5 percent of GDP between June 2021 and September 2022; another estimate cites reduction of more than 25 billion lempiras, or 3.3 percent of GDP, compared to end-2021.
- FX market measures:
  - February 2023: banks required to sell 25 percent of FX receipts in the interbank market.
  - April 2023: reintroduced 100 percent surrender requirement and BCH FX auctions; under the mechanism banks and FX bureaus must surrender essentially all FX receipts, of which at least 80 percent are returned the next business day through BCH’s FX auction.
  - Authorities committed to working with Fund staff to evaluate and strengthen the crawling band regime and to diagnose measures to improve FX allocation efficiency, aiming for a gradual transition to a balanced, competitive FX allocation system.
- Financial sector soundness (July 2023 and end-2022 metrics):
  - Capital adequacy ratio at 13.8 percent in July 2023 (above the 10 percent requirement).
  - Credit to the private sector in local currency has grown to around 20 percent while FX lending has markedly decelerated.
  - Credit as a share of GDP: end-2022 = 67 percent.
  - Non-performing loans (NPLs): 2.3 percent of total loans.
  - Provisioning: 137 percent of NPLs.
  - Total assets (millions of Lempiras): 2022 = 871,520; July 2023 = 927,070.
  - Dollarization: deposits in foreign currency as percent of total deposits 2022 = 23.0 percent; July 2023 = 22.2 percent.

### Energy sector reforms and ENEE financial viability
- Fiscal and economic rationale:
  - Energy sector reforms essential to entrench fiscal sustainability and improve the business environment by reducing sector losses through higher investment, improved enforcement and collection, and better management of electricity distribution.
- ENEE status and losses:
  - Operational financial losses reduced in 2022 but remained equivalent to 0.8 percent of GDP.
  - ENEE’s liabilities exceeded 12 percent of GDP at end-2022.
  - Loss composition: Technical losses 15 percent; Non-technical losses 23 percent (total 38 percent).
- National Loss Reduction Plan (NLRP):
  - Launched in 2022; target to reduce total losses to under 20 percent (from 38 percent) over four years starting in 2023.
  - Implementation: upgrade distribution network, install advanced metering systems, deploy crews for real-time theft monitoring; program monitors percentage of energy lost by ENEE in distribution through an IT.
- Contract renegotiations and bond strategy:
  - Agreement reached on 23 of 32 contracts (¾ of contracts); expected annual savings ~0.2 percent of GDP.
  - First government-guaranteed ENEE bond issuance in December 2022 equal to 0.8 percent of GDP; further issuances planned for remainder of 2023.
  - ENEE’s domestic arrears definition and monitoring specified; ENEE accounts payable amounted to 16.5 billion lempiras at end-2022, of which 9.8 billion lempiras were arrears.
- Investment and climate resilience:
  - Authorities plan to implement US$5.5 billion (16 percent of GDP) in priority investments in generation, transmission, and distribution in the next years.
  - Climate-related annual average losses equivalent to 6.3 percent of GDP during 1960-2022; Tropical Storms Eta and Iota in 2020 caused substantial damage.

### Social protection, poverty, and food security
- Poverty and food insecurity:
  - Poverty estimates for 2021: over 70 percent (around 50 percent for extreme poverty).
  - Close to a quarter of the population in food crisis or emergency (WFP phases 3 and 4).
  - Corn production growth: 1 percent; Beans production growth: 1.5 percent.
  - Crop acreage losses in 2020 from Tropical Storms Eta and Iota: approximately 2 percent for corn and 7 percent for beans.
- Social programs and delivery:
  - Free electricity provided since May 2022 to poor households consuming less than 150 kWh/month (annual cost around 0.3 percent of GDP); targeting improved to around 900,000 beneficiary households (down from slightly above 1 million).
  - Subsidies for public transport and LPG gas continue (around 0.2 percent of GDP).
  - Red Solidaria expansion expected to provide direct assistance to 350,000 of the poorest households in rural areas by end-2023.
  - Urban extreme poverty census to identify approximately 100,000 beneficiary households by end-September 2024 (SB).
  - Single Social Sector Information System (SUISS) envisaged to be established by end-June 2024 (SB).

### Program design, financing request, and use of Fund resources
- Authorities requested a 36-month EFF/ECF arrangement with access of SDR 624.5 million, 250 percent of quota, split as follows:
  - ECF arrangement: SDR 208.2 million, 83.3 percent of quota.
  - EFF arrangement: SDR 416.3 million, 166.7 percent of quota.
  - Financing phased equally across semi-annual reviews.
- Purpose and intended use:
  - Address actual, prospective, and protracted balance of payments needs and catalyze additional official multilateral and bilateral external financing.
  - Authorities intend to utilize resources as indirect budget support to facilitate social spending and fill urgent infrastructure gaps exacerbated by the pandemic and climate shocks, enable a more gradual fiscal adjustment, and safeguard international reserves.
  - Authorities expressed interest in potential RSF financing to be considered in subsequent program reviews.
- Program coverage and repayment capacity:
  - Program expected to fill 18 percent of the external financing gap over 2023-26.
  - Existing and prospective Fund credit outstanding expected to reach 273.9 percent of quota by end-2026, before declining to 155.6 percent of quota by 2031.
  - Repayments to the Fund increase during 2024-25 and projected to peak at 1.7 percent of exports and 2.9 percent of gross reserves in 2024.

### Key program conditionality, benchmarks, and monitoring
- Quantitative and structural benchmarks (selected):
  - Continuous PC: zero limit on the use of central bank financing of the budget.
  - Prior action met: Increase interest rate on BCH’s overnight lending facility (FPC) by 50 basis points — Met on August 24, 2023.
  - Structural benchmarks include: Approve Public Debt Policy (end-September 2023, SB); Approve Medium-Term Debt Strategy (end-December 2023, SB); Approve Law on Tax Justice (end-December 2023, SB); Publish schedule for 2024 Treasury bond auctions (end-January 2024, SB); Operationalize TSA law by December 2025 (SB); Create SUISS by end-June 2024 (SB); Liquidate and integrate trust funds into balance sheet by end-December 2024 (SB).
- Monitoring and reporting:
  - Program monitored through semi-annual reviews with QPCs, ITs, and SBs; detailed reporting specified in the Technical Memorandum of Understanding (TMU).
  - Specific performance criteria and definitions provided for NIR, NDA, monetary financing (ceiling zero), ENEE domestic arrears, tax revenue floor, ceiling on current primary spending excluding priority social spending, and floor on priority social spending.

### Risks, safeguards, and contingency planning
- Main risks:
  - External: challenging global backdrop, weaker-than-expected growth in key trading partners, intensification of Russia’s war in Ukraine, abrupt slowdown in trading partners (notably the U.S.), commodity price volatility, and extreme climate events (including “El Niño”).
  - Domestic: complex political environment (including lack of a majority in Congress), limited implementation capacity, policy slippages, delays in public investment execution, and energy sector reform shortfalls.
- Mitigating factors:
  - Strength of program conditionality, authorities’ ownership of reforms, adequate international reserves, prudent phasing of purchases, and strong international support.
- Safeguards:
  - An updated safeguards assessment of the BCH to be completed prior to the first program review; progress made since 2019 on financial reporting and internal audit, limited progress on legal governance reforms.

### Staff appraisal and policy priorities
- Staff recommendation: Full support for the EFF/ECF arrangement for SDR 624.5 million given strength of authorities’ program.
- Policy priorities emphasized:
  - Reduce poverty and social inequality through greater public investment and social spending.
  - Secure financial sustainability of the electricity sector and implement the NLRP.
  - Strengthen monetary and exchange rate policy frameworks and improve monetary policy transmission.
  - Improve governance and transparency, strengthen AML/CFT framework, and tackle corruption (including beneficial ownership registry and electronic asset declarations).
  - Enhance resilience to climate change and mobilize financing for adaptation and resilient infrastructure.
  - Develop domestic debt market and publish Public Borrowing Policy and Medium-Term Debt Strategy.

*International Monetary Fund — Executive Summary and selected chapters (1hndea2023001).*

### EXECUTIVE SUMMARY

### 1hndea2023001 - EXECUTIVE SUMMARY

### Context and overarching assessment
- The Honduran economy demonstrated resilience to domestic and external shocks over 2020-22; real GDP is now around 6 percent above pre-pandemic levels, supported by the authorities’ prudent policies.
- Under the previous Fund-supported program (expired January 2022) Honduras enhanced fiscal policy quality and implemented institutional reforms.
- The authorities request a new Fund arrangement to anchor an economic and institutional reform agenda while maintaining prudent macroeconomic policies and fostering inclusive growth.

### Recent developments and near-term outlook
- Growth:
  - Real GDP contracted by 9 percent in 2020.
  - Real GDP grew by 12.5 percent in 2021 and 4.0 percent in 2022.
  - Growth moderated in 2023:Q1 to 1.9 percent year-on-year; high-frequency indicators through June up 2.9 percent year-to-date.
- Inflation:
  - Peaked at almost 11 percent (y/y) in July 2022 (from 5.3 percent at end-2021).
  - Headline inflation eased to 5.2 percent in July 2023.
  - Core inflation declined to 5.8 percent (from a peak of 9 percent).
  - Inflation expectations: 5.6 percent and 5.2 percent 12 and 24 months ahead in the July BCH survey; long-term Consensus at 4.1 percent.
- External sector:
  - Remittances close to 27 percent of GDP in 2022; remittance inflows up 18 percent in 2022.
  - Current account deficit narrowed in 2022 but expected to widen in 2023 due to a less supportive external environment.
  - International reserves remain at adequate levels.
- Labor and social indicators:
  - Unemployment rate declined to 8.9 percent in 2022 from 10.9 percent in 2020.
  - Informal employment about 80 percent (ILO estimate for 2017).
  - Honduras: GDP per capita of US$2,500 and poverty rates over 70 percent, with extreme poverty at over 50 percent (INE data for 2021).
- Energy and climate:
  - Recent droughts impacted agricultural output and energy supply, producing temporary rolling blackouts in June 2023.
  - Large public investment and reconstruction projects remain largely unexecuted due to capacity limits and financing constraints.
- Policy response and social protection:
  - Free electricity provided since May 2022 to poor households consuming less than 150 kWh/month (annual cost around 0.3 percent of GDP); targeting improved to around 900,000 beneficiary households (down from slightly above 1 million).
  - Subsidies for public transport and LPG gas continue (around 0.2 percent of GDP).
- Monetary policy:
  - BCH increased open market operations to absorb liquidity; interbank rate rose from around 1 percent in March 2022 to 3.5 percent in October 2022.

### Article IV discussions and policy priorities
- Broad agreement on the need to strengthen resilience and address structural bottlenecks to boost inclusive growth.
- Policy priorities identified:
  - Reducing poverty and social inequality, including through greater public investment and social spending.
  - Securing the financial sustainability of the electricity sector.
  - Strengthening monetary and exchange rate policy frameworks.
  - Improving governance and transparency and tackling corruption.
  - Enhancing resilience to climate change.
- Decisive implementation of policies and structural reforms is essential to reduce poverty, promote investment, and raise potential growth.

### Program objectives, design, and risks
- Program objectives:
  - Entrench economic stability and begin tackling impediments to sustainable growth.
  - Anchor the program on:
    - A gradual fiscal adjustment path and supportive fiscal structural policies to create space for capital and social spending while preserving debt sustainability.
    - Consistent monetary and exchange rate policies to support disinflation, strengthen external resilience (including by safeguarding reserves), and preserve macroeconomic stability.
    - Structural reforms to strengthen governance and combat corruption while bolstering the energy sector and climate resilience.
- Program risks:
  - External: challenging global backdrop, weaker-than-expected growth in key trading partners, and adverse weather events.
  - Domestic: complex political environment and policy implementation slippages.
  - Mitigation: program design and contingency planning.

### Program modalities and financing request
- Authorities requested a 36-month EFF/ECF arrangement with access of SDR 624.5 million, 250 percent of quota, split as follows:
  - ECF arrangement: SDR 208.2 million, 83.3 percent of quota.
  - EFF arrangement: SDR 416.3 million, 166.7 percent of quota.
  - Financing phased equally across semi-annual reviews.
- Purpose and intended use:
  - Address actual, prospective, and protracted BOP needs and catalyze additional official multilateral and bilateral external financing.
  - Authorities intend to utilize resources as indirect budget support to facilitate social spending and fill urgent infrastructure gaps exacerbated by the pandemic and climate shocks, enable a more gradual fiscal adjustment, and safeguard international reserves.
  - Authorities expressed interest in Fund financing under the Resilience and Sustainability Facility (RSF), potentially considered in subsequent program reviews.

### Governance, technical engagement, and mission details
- Authorities have advanced reforms to bolster governance and transparency, including:
  - Eliminating trust funds to enhance budgetary discipline and spending controls.
  - Strengthening the anti-money laundering framework by repealing legislation that had previously weakened it.
- IMF staff engagements:
  - Discussions held in Tegucigalpa during June 5-16, 2023, and continued remotely thereafter.
  - Staff team included Ricardo Llaudes (head), Carlos Chaverri, William Lindquist (all WHD), Michal Andrle (ICD, formerly WHD), Hassan Adan (FAD), and Martha Woldemichael (SPR); Christian Henn (Resident Representative) and Mr. Guerra (Executive Director) also participated.
  - Meetings with senior officials including Finance Minister Rixi Moncada and Central Bank President Rebeca Santos, labor unions, private sector, civil society, and the international community.

*International Monetary Fund — EXECUTIVE SUMMARY (1hndea2023001)*

### 9.      Fiscal policy has remained prudent, with the deficit declining to near balance in 2022.

### 9.      Fiscal policy has remained prudent, with the deficit declining to near balance in 2022.

### Fiscal developments and public debt
- The non-financial public sector (NFPS) deficit narrowed to 0.2 percent of GDP in 2022 from an average of 4½ percent of GDP in 2020-21.
- Deficit reduction drivers:
  - Strong revenues, buoyed by the robust recovery and higher prices.
  - Constrained expenditure execution capacity, including due to the closure of trust funds and restructuring of ministries.
- In 2023:H1, the NFPS registered a lower surplus of 1.2 percent of GDP—compared to a surplus of 2.6 percent of GDP in the same period in 2022—driven by somewhat lower tax revenues and greater capital expenditure execution.
- Despite the smaller fiscal deficit in 2022, gross public debt increased to 52.3   percent of GDP at end-2022 due to the recognition of previously unaccounted domestic debt (DSA Annex).

### External position and international reserves
- The external position in 2022 is assessed to be broadly in line with the level implied by fundamentals and desirable policies.
- Current account and external flows:
  - The current account deficit narrowed to 3.2   percent of GDP in 2022 from 4.6 percent of GDP in 2021, driven by strong remittances, favorable prices for coffee, bananas, and palm oil, and a dynamic maquila sector.
  - Net FDI inflows were 2.2 percent of GDP in 2022.
  - The current account reached a small surplus (US$70 million) in 2023:Q1.
  - Goods exports through May declined by 4.3 percent (y/y); maquila-sector exports (mainly textiles) down 11.2 percent; non-maquila imports increased by 0.2 percent (y/y).
- Reserves and central bank actions:
  - Gross international reserves declined by about US$120 million in 2022 to US$8.7 billion (US$8.4   billion in net terms).
  - The BCH sold US$336 million (net) in 2022.
  - At end-2022, reserves provided 5.9   months of import cover and were 137 percent of the IMF’s Assessing Reserve Adequacy metric.
  - Reserves declined by a further US$730 million as of August 2023, mainly due to net external repayments by the public sector (around $460 million) and increased FX sales to energy importers related to the drought.
  - In April 2023 the BCH reintroduced its own FX auction mechanism alongside 100 percent surrender requirements for foreign exchange agents, effectively shutting down the interbank FX market.

### Financial sector soundness
- Banking system metrics (July 2023 and end-2022):
  - Capital adequacy ratio at 13.8 percent in July 2023 (above the 10 percent requirement).
  - Credit to the private sector in local currency has grown to around 20 percent while FX lending has markedly decelerated.
  - Credit as a share of GDP stood at 67 percent at end-2022, compared to 64 percent in 2021.
  - Non-performing loans (NPLs) remain low at 2.3   percent of total loans.
  - Provisioning remains strong at 137 percent of NPLs.

### Outlook and key projections
- Growth and inflation:
  - Real GDP growth is projected to decelerate to around 3 percent in 2023 and to gradually converge toward potential (close to 4 percent).
  - Inflation is projected to return to the BCH reference range (of 3-5 percent) by early 2024 and remain within that range thereafter.
- External balance and reserves:
  - The current account deficit is projected to widen to around 5   percent of GDP in 2023.
  - Reserve adequacy is expected to remain within the recommended 100-150 percent range of the ARA metric and close to 5 months of import cover over the medium term.
- Fiscal path:
  - The fiscal deficit of the NFPS is expected to widen to 2 percent of GDP in 2023 as spending, including capital expenditure, begins to normalize following the restructuring of ministries and elimination of trust funds.
  - Planned gradual fiscal consolidation would return the NFPS deficit to 1 percent of GDP by 2026.
- Debt sustainability:
  - Baseline projects a gradually declining public debt path—reaching 46.6 percent of GDP by 2028—underpinned by fiscal reforms in the program; risk assessment: low risk of external debt distress and moderate risk of overall debt distress.

- Selected medium-term projections (Text Table 2; percent of GDP unless noted):
  - Real GDP growth, percent: Actual 2022 = 4.0; 2023 = 2.9; 2024 = 3.2; 2025 = 3.5; 2026 = 3.7; 2027 = 3.8; 2028 = 3.8
  - Inflation (end of period, percent): Actual 2022 = 9.8; 2023 = 5.3; 2024 = 4.2; 2025 = 4.0; 2026 = 4.0; 2027 = 4.0; 2028 = 4.0
  - Primary balance: Actual 2022 = 1.2; 2023 = -0.7; 2024 = -0.2; 2025 = 0.0; 2026 = 0.4; 2027 = 0.4; 2028 = 0.5
  - Overall balance: Actual 2022 = -0.2; 2023 = -2.0; 2024 = -1.7; 2025 = -1.4; 2026 = -1.0; 2027 = -0.9; 2028 = -0.9
  - Public capital investment: Actual 2022 = 2.8; 2023 = 3.0; 2024 = 3.8; 2025 = 4.0; 2026 = 4.0; 2027 = 4.0; 2028 = 4.0
  - Gross debt 1/: Actual 2022 = 52.3; 2023 = 51.9; 2024 = 51.3; 2025 = 50.4; 2026 = 49.1; 2027 = 47.8; 2028 = 46.6
  - Current account balance: Actual 2022 = -3.2; 2023 = -5.2; 2024 = -4.9; 2025 = -4.7; 2026 = -4.3; 2027 = -4.1; 2028 = -3.9
  - Gross international reserves (percent of ARA): Actual 2022 = 137; 2023 = 120; 2024 = 116; 2025 = 112; 2026 = 117; 2027 = 109; 2028 = 109
  - 1/ Debt projections use the defintion from the DSA.

### Risks to the outlook and contingency planning
- Downside global risks include:
  - Intensification of Russia’s protracted war in Ukraine, abrupt slowdown in trading partners (notably the U.S.), monetary policy miscalibration, and commodity price volatility.
- Domestic risks:
  - Limited implementation capacity, complex political environment (including lack of a majority in Congress), program implementation slippages, and severe weather events (including “El Niño”).
- Policy implication: Given significant downside risks, contingency planning, including for the event external financing does not materialize, is essential to preserve macroeconomic stability and ensure achievement of program objectives.

### Policy discussions and fiscal strategy
- Authorities’ program objectives:
  - Safeguard macroeconomic stability while tackling investment and social needs.
  - Focus areas: (i) maintain fiscal discipline while opening fiscal space for investment and social spending; (ii) strengthen monetary and exchange rate policies; (iii) energy sector reform and climate resilience; (iv) improve governance and transparency.
- Fiscal policy targets and tools:
  - Program targets a gradual reduction of the overall NFPS deficit from 2 percent of GDP in 2023 to around 1 percent by end of the program, monitored through a quantitative performance criterion (QPC), with a gross operating surplus of over 3 percent of GDP.
  - The program monitors central government tax revenues through an indicative target (IT) and includes a ceiling on current primary spending (excluding priority social spending) as an IT.
  - Capital investment planned to scale up from 3 to over 4   percent of GDP by 2026; an adjustor allows public investment in 2024 to be up to 1.3 percent of GDP higher than baseline if additional external financing materializes.
  - Authorities committed to evaluating how additional capital spending would impact debt levels in consultation with Fund staff.
- Fiscal framework and FRL:
  - A revision to the Fiscal Responsibility Law (FRL) is recommended to strengthen its role as a medium-term anchor while incorporating flexible escape clauses and corrective mechanisms.
- Revenue mobilization and tax reforms:
  - Reverse reductions to gasoline and diesel taxes introduced in 2022 (annual cost of 0.4 percent of GDP) should be considered once social safety nets are further strengthened.
  - A new tax reform bill (Ley de Justicia Tributaria, LJT) under Congressional discussion, designed with IMF assistance, aims to reduce exemptions to the corporate income tax (CIT) by replacing numerous special CIT regimes with two new ones (end-December 2023, structural benchmark (SB)); staff estimates yields at upwards of 1 percent of GDP (subject to uncertainty and gradual accrual).
  - Tax administration reforms include: proportional penalties for delinquent taxpayers, strengthening management of tax arrears, developing a VAT refund system to replace ex-ante VAT exemption orders, approving the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters (end-December 2023, SB), and comprehensive customs reform with IDB assistance.

*Source: IMF staff report (HONDURAS).*

### 21.      Enhanced expenditure policies are essential to underpin consolidation and the

### 21.      Enhanced expenditure policies are essential to underpin consolidation and the

### Social protection
- Social support in reaction to global commodity price shocks has been provided through fiscal measures (¶6) and programs such as aid to small farmers (bonos tecnológicos) and subsidized loans.
- Expansion of the flagship social assistance program Red Solidaria is expected to provide direct assistance to 350,000 of the poorest households in rural areas by end-2023, including through conditional cash transfers.
- An analogue census of urban extreme poverty is currently underway to identify approximately 100,000 beneficiary households in marginalized urban areas and expected to be concluded by September 2024 (SB).
- A comprehensive social sector information system, including a social registry, is envisaged to be established by end-June 2024 (SB) as a repository to inform the country’s social assistance strategy.
- Companion program PROASOL focuses on other groups at risk, including indigenous groups and the disabled.
- Beneficiary selection for social programs has relied on a consistent methodology implemented with IFI assistance.
- Program priorities:
  - Priority social spending would be expanded (IT) and its quality should be subsequently evaluated in coordination with international partners.
  - The authorities plan to update their poverty reduction and growth strategy by the second review, and a new Social Protection Law would be submitted to Congress by end-June 2024.

### Capital spending and public investment management
- As public investment is scaled up, strengthening planning, selection, and monitoring of infrastructure projects is essential.
- A Public Investment Management Assessment (PIMA), including a climate module, will be conducted in late 2023, with resulting recommendations to guide reforms and program conditionality.

### Strengthening budget credibility and transparency
- Considerable progress has been made in budget credibility and transparency.
- Elimination of trust funds:
  - Legislation passed in 2022 to close trust funds in line with a longstanding Fund recommendation.
  - Trust funds’ current transactions have been largely integrated into the budget process.
  - The authorities aim to complete full integration of trust funds’ assets and liabilities into the public sector balance sheet by end-December 2024 (SB), with Fund assistance.
- Treasury Single Account (TSA) and cash management:
  - Implementation of the TSA should be strengthened to improve liquidity, including enhancing its fungibility, and debt management.
  - A new Law on the TSA will be submitted to Congress by March 2024 (SB), developed with technical assistance from the IMF and other IFIs, and operationalized by December 2025 (SB).
  - Work is underway, with Fund assistance, to improve liquidity projections and link them to a debt issuance strategy to improve domestic debt markets (¶24).
- Procurement law:
  - A new Procurement Law is being prepared to address lags in procurement, strengthen contracting processes, competitive bidding, and powers for fraud detection.
  - Congressional approval of the new law is expected by end-2023.

### Diversifying financing and fiscal discipline
- In 2022, the authorities resorted to $1.3 billion (4 percent of GDP) in monetary financing largely to address liquidity strains.
- To develop new financing sources:
  - The authorities will resume regular issuance of Treasury bonds at market rates after halting issuance since beginning of 2022.
  - Financing needs are expected to be covered by net positive IFI financing and a return to issuance in international capital markets, supported by the catalytic effect of the Fund arrangement ahead of the 2027 Eurobond repayment.
  - The program is underpinned by a zero limit on the use of central bank financing of the budget (continuous PC) to support disinflation, develop the domestic market, and reduce fiscal dominance.
- Note on 2022 monetary financing: While $300 million were repaid within the year, the remaining $1 billion—a 30-year loan with 5-year grace period at the overnight policy rate (TPM) plus a 100bps spread—became Treasury deposits, with about ⅓ of these used in 2022, mainly for servicing debt payments, and the remainder to be used for investment financing in 2023.

### Developing the local debt market and strengthening debt management
- Initial steps:
  - Public utility ENEE placed government-guaranteed domestic bonds in December 2022 (0.8 percent of GDP).
- Planned measures:
  - Publish a schedule for 2024 Treasury bond auctions (end-January 2024, SB).
  - Approve a Public Debt Policy (end-September 2023, SB) and a Medium-Term Debt Strategy (end-December 2023, SB), to be published as part of the 2024 budget framework.
- Commitment:
  - Authorities committed to meeting debt service obligations in a timely manner and not accumulate any external arrears (continuous QPC).

### Authorities’ views on fiscal policy
- Authorities stressed commitment to maintaining budgetary discipline and transparency while increasing spending on investment and social programs.
- They share staff’s view on prudent fiscal policies to maintain debt sustainability.
- Authorities aim to mobilize external support for productive investment and climate adaptation, improve implementation capacity through strengthened budget transparency and public investment management, protect and strengthen social spending while reforming the social safety net, make the tax system more equitable via the tax reform bill, develop the domestic debt market, diversify financing sources and forms, and advance reform of the FRL when political consensus allows.

### Monetary, exchange rate, and financial sector policies: preserving macroeconomic stability
- Exchange rate regime and nominal anchor:
  - Sound management of the crawling band exchange rate regime remains essential to safeguard economic stability.
  - Authorities used the exchange rate to limit pass-through of global inflationary pressures; the Lempira remained broadly unchanged against the USD since 2020 despite Honduran inflation outpacing that of trading partners.
- Monetary policy actions and transmission:
  - BCH conducted policy through OMOs and the interbank rate amid weak transmission and limited informational content of the TPM.
  - BCH liquidity absorption reduced excess reserves by 5 percent of GDP between June 2021 and September 2022.
  - On August 24, 2023, BCH increased the Permanent Credit Facility (FPC) rate by 50 bps to 4.0 percent (prior action).
  - BCH has maintained the TPM at 3 percent since November 2020.
  - Authorities agreed to continuously reevaluate the policy stance and maintain a proactive, data-driven monetary policy.
- Potential improvements to the monetary policy operational framework (to be evaluated with possible Fund TA):
  - Strengthen the role of the TPM in signaling and transmission to other interest rates, including the interbank rate.
  - Review and enhance liquidity management practices, including use of structural (medium-term) instruments and one-day bills through OMOs to allow the interbank rate to more closely reflect the TPM.
  - Remove the cap on the size of daily OMOs while reducing the amount and frequency of structural OMOs, with issuances at fixed pre-announced amounts to enable price discovery.
  - Reduce the maturity profile for structural OMOs to facilitate government issuance earlier in the yield curve and support the development of the local government bond market; improve coordination between the Ministry of Finance and the BCH.
  - Lengthen the maintenance period for reserve requirements to enhance BCH’s ability to forecast and manage liquidity.
  - Implement forthcoming recommendations from the Fund's Safeguards Assessment of the BCH (to be completed by the first program reviews).
- FX market measures and allocation:
  - Declining FX market turnover from late 2021 prompted actions. In February 2023, BCH required banks to sell 25 percent of their FX receipts in the interbank market. In April 2023, BCH reintroduced its own FX auction mechanism, effectively shutting down the interbank FX market.
  - Under the reintroduced mechanism, banks and FX bureaus must surrender essentially all their FX receipts, of which at least 80 percent are returned to economic agents the next business day through the BCH’s FX auction.
  - The authorities committed to working with Fund staff, supported by TA, to (i) evaluate and strengthen the crawling band regime; and (ii) diagnose measures to improve the efficiency of FX allocation, with the aim of a gradual transition to a balanced, competitive, and efficient FX allocation system that allows price discovery and reflects supply and demand, enabling an eventual unwinding of the FX surrender requirement.
- Reserves and projections:
  - The program monitors net international reserves and net domestic assets of the BCH through QPCs.
  - Reserve accumulation is projected to resume in 2024 supported by: (i) the expected reduction in FX sales to oil importers; (ii) an increase in net disbursements to the public sector, mainly by official sources including the Fund; and (iii) net private capital inflows supported by strengthened market sentiment.
- Multiple currency practices and exchange restriction:
  - Honduras maintains two longstanding MCPs and one exchange restriction subject to Fund jurisdiction; authorities requested temporary approval of the two MCPs maintained for non-balance of payment reasons.
  - One exchange restriction arises from a law requiring the BCH to reject participation in FX auctions by exporters who have not duly repatriated export proceeds from two or more export transactions within required timeframes.
- Financial sector monitoring and macroprudential policy:
  - Credit growth has been robust during the recovery and the banking sector remains stable.
  - Recent stress tests by the National Banking and Insurance Commission (CNBS) confirm sector resilience.
  - CNBS has streamlined documentation requirements to foster access to credit for small entrepreneurs and farmers.
  - Authorities should proactively use macroprudential instruments as necessary given high credit growth, a credit gap that has turned positive, and high household debt; carefully monitor risks of expanding credit to underserved sectors.
- Authorities’ views on monetary and exchange rate policy:
  - Authorities reiterated commitment to the crawling band regime, attributing declines in inflation pressures to dissipating external supply shocks and the effectiveness of measures such as energy subsidies and liquidity absorption.
  - They view the Lempira as fairly valued and consider exchange rate stability helpful in containing inflationary pressures.
  - Authorities view the reinstatement of BCH FX auctions and surrender requirements as having stabilized the FX market, reduced speculative pressures, and improved equitable access to FX.
  - They emphasized balancing bolstering financial inclusion with safeguarding banking sector stability.

*Source: IMF staff chapter on expenditure, fiscal transparency, financing, and macroeconomic policy for Honduras (content unit: 1hndea2023001).*

### 34.      Energy sector reforms to ensure the financial viability of the sector and guarantee the

### 34.      Energy sector reforms to ensure the financial viability of the sector and guarantee the reliable provision of electricity

### Fiscal implications and economic rationale
- Energy sector reforms are essential to entrench fiscal sustainability and improve the business environment by reducing sector losses through higher investment, improved enforcement and collection, and better management of electricity distribution.
- Expected fiscal benefits include greater government revenues through the sale of electricity and reduced fiscal outlays to cover losses, increasing resources for energy sector investment and other infrastructure and social spending.
- More reliable electricity supply would reduce economic uncertainty and improve the business environment.

### Status of ENEE and loss structure
- ENEE is the main player and remains a fiscal drain despite some improvement:
  - Operational financial losses were reduced in 2022 but remained equivalent to 0.8 percent of GDP.
  - ENEE’s liabilities exceeded 12 percent of GDP at end-2022.
- Loss composition of total electricity output:
  - Technical losses (largely due to poor network infrastructure): 15 percent.
  - Non-technical losses (weak management, low debt collection, fraud, billing errors): 23 percent.

### Legal and institutional framework
- A new energy law approved in May 2022 maintains ENEE as an integrated monopoly, reversing much of the 2014 General Electricity Law that had envisaged unbundling and opening to private competition.
- The new law:
  - Defines access to electricity as a human right and outlines free provision to poor households.
  - Removed the independence of the energy sector regulator and the system operator.
  - Increased uptake thresholds so only very large firms can directly purchase electricity from private generators.
- Authorities plan to implement strong administrative separation of ENEE’s three functions and improve IT infrastructure; transformation requires independent management and professional board oversight.
- Reintegration of distribution activities (previously outsourced to Empresa Energia Honduras, EEH) must be smooth; the EEH contract (outsourced in 2016) was set to expire in August 2023 and has been under intervention since 2019.

### National Loss Reduction Plan (NLRP)
- Launched in 2022, the NLRP seeks to minimize losses via:
  - Upgrading the aging electricity distribution network.
  - Installing advanced metering systems.
  - Preventing theft by deploying crews for real-time theft monitoring.
- Targets and timeline:
  - Reduce total losses to under 20 percent (from 38 percent) over four years starting in 2023.
- Implementation measures:
  - Ramp up deployment of task forces to regularize consumers, reduce fraud, and install new meters starting with circuits with highest losses and larger consumers.
  - Staff encouraged authorities to work with international partners to strengthen the NLRP.
  - Program monitors the NLRP through an IT on the percentage of energy lost by ENEE in energy distribution.
- Early indicators:
  - Tentative signs of improving ENEE financial position and consumers’ payment discipline, though lasting change depends on steadfast NLRP implementation.

### Other reforms and financial measures to restore viability
- Contract renegotiations with private generators:
  - Agreement reached on 23 of 32 contracts (¾ of contracts).
  - Expected annual savings for consumers of around 0.2 percent of GDP.
- Bond issuance strategy to repay arrears:
  - First issuance in December 2022 of government-guaranteed ENEE bonds equal to 0.8 percent of GDP, substantially reducing the arrears stock to 1.2 percent of GDP.
  - Further issuances for a similar amount are planned for the remainder of 2023 to finance most of ENEE’s operational deficit for the ongoing year and forestall renewed arrears accumulation.
  - Program will monitor the stock of ENEE’s domestic arrears (QPC) to ensure continued gradual decumulation.
- Domestic debt restructuring efforts:
  - Authorities working with banks to reduce the cost of servicing ENEE’s domestic debt of 6.3 percent of GDP, largely in the form of long-term bonds indexed to inflation.
- Tariff and distribution pricing:
  - Updating the value added in distribution (VAD) will ensure tariffs better reflect the actual cost of distribution.
  - Note: the tariff in Honduras already fully supports cost recovery, with the only limitation being that only 15 percent of technical and non-technical losses can be passed on to consumers via tariffs.

### Private investment, investor confidence, and sector outlook
- Authorities express interest in private investment, but the new energy law has been interpreted by some investors as allowing nationalization of plants and as ruling out private investments in subsectors with public ownership under 50 percent.
- Removal of regulator and system operator independence and higher uptake thresholds may hinder private investment and growth while electricity supply from ENEE remains prone to outages.
- Swift finalization of contract renegotiations with private generators and establishment of independent management at ENEE would boost private investor confidence.

### Climate vulnerability, resilience, and public investment
- Extreme climate events have generated annual average losses equivalent to 6.3 percent of GDP during 1960-2022.
- Climate change negatively affects agricultural and energy production and raises food insecurity risks.
- Planned assessments and plans:
  - Climate Public Investment Management Assessment (C-PIMA) planned for late 2023 to help establish a climate and disaster resilience strategy.
  - National Adaptation Plan (NAP) approved in 2018; Nationally Determined Contribution (NDC) updated in 2021 with 13 objectives.
- NDC targets:
  - Reduce emissions by 16 percent relative to the business-as-usual (BAU) level by 2030.
  - Restore 1.3 million forest hectares (300,000 more than the previous target).
  - Mitigation targets need mapping onto a detailed mitigation plan that can be quantified and evaluated periodically.
  - Adaptation focus on institution building and social inclusion in key sectors.
- Authorities plan to implement US$5.5 billion (16 percent of GDP) in priority investments in generation, transmission, and distribution in the next years.

### Authorities’ views on energy sector and governance
- Authorities concurred on the need to strengthen climate-related policies, enhance resilience of the energy sector, and develop resilient infrastructure.
- They view prior privatization pushes as contributing to ENEE’s deterioration, citing governance weaknesses, an unfavorable EEH distribution contract, and generation contracts with irregularities and above-market prices.
- Authorities emphasized the need to renegotiate contracts to lower electricity prices and improve governance and expressed determination to finalize negotiations quickly.
- They seek additional Fund financing under the Resilience and Sustainability Fund (RSF) at a future program review.

### Program financing context and related program metrics
- Proposed IMF blended Fund support under 36-month EFF and 36-month ECF arrangements:
  - Access level of 250 percent of quota, or SDR 624.5 million.
  - Split between the ECF arrangement (SDR 208.2 million, 83.3 percent of quota) and the EFF (SDR 416.3 million, 166.7 percent of quota), equally phased across semi-annual reviews.
- Financing rationale and coverage:
  - Fund financing used for indirect budget support.
  - Program expected to fill 18 percent of the external financing gap over 2023-26.
  - Program fully financed for the first 12 months with good prospects for full financing for the remainder.
- Honduras’ capacity to repay the Fund:
  - Existing and prospective Fund credit outstanding expected to reach 273.9 percent of quota by end-2026, before declining to 155.6 percent of quota by 2031.
  - Repayments to the Fund increase during 2024-25 and are projected to peak at 1.7 percent of exports and 2.9 percent of gross reserves in 2024.

*Source: IMF staff report excerpt (Energy sector reforms and related program discussion).*

### 0.6 percent and 1.1 percent respectively by 2028.

### 1hndea2023001 - 0.6 percent and 1.1 percent respectively by 2028.

### Risks to the program
- Program implementation challenges are significant, largely stemming from the identified risks to the baseline (¶13).
- Specific risk factors:
  - Policy slippages and the complex domestic political environment, including potential difficulties in shoring up sufficient support in Congress, could impact the adoption of important legislation, such as the LJT (¶20).
  - Still limited budget execution capacity could lead to delays in the authorities’ ambitious public investment plans and to the emergence of domestic arrears.
  - Strengthening the monetary and foreign exchange policy frameworks may take longer than anticipated, delaying the expected further enhancements of the country’s resilience to shocks.
  - Energy sector reforms, including the loss reduction plan, could fall short of the anticipated outcomes.
- Mitigating factors:
  - Strength of program conditionality.
  - The authorities’ strong ownership of reforms.
  - An adequate level of international reserves.
  - Prudent phasing of purchases.
  - Strong support from the international community.
  - The country’s track record under previous arrangements.

### Safeguards assessment
- An updated safeguards assessment will need to be completed prior to the first review of the program.
- Progress since 2019:
  - Considerable progress in implementing the 2019 safeguards recommendations, including to strengthen the BCH’s financial reporting and internal audit mechanism.
  - Limited progress in legal reforms to strengthen the BCH governance framework.
- Staff will follow up on the limited progress in legal/governance reforms in the updated assessment.

### Staff appraisal — macroeconomic resilience and policy stance
- Recent performance and resilience:
  - Honduras has shown resilience to a series of external and domestic shocks.
  - Following the pandemic and tropical storms in 2020, the economy has rebounded strongly, supported by domestic demand, remittances, and a resilient export sector.
  - Elevated inflation, driven in large part by external shocks, is now abating.
  - The authorities’ prudent policies, including the maintenance of public debt on a downward path and efforts to contain inflation, have underpinned Honduras’ macroeconomic stability.
  - Authorities have taken important steps to improve the AML/CFT, governance, and transparency frameworks, including through the elimination of trust funds and amending relevant AML/CFT legislation.

- Social and structural challenges:
  - Honduras remains one of the poorest countries in the Western Hemisphere.
  - Constraints include limited investment, a narrow export base, structural bottlenecks in the energy sector, and weak governance and institutions.
  - Poverty remains pervasive.
  - Vulnerability to extreme climate events further exacerbates these challenges.

### Fiscal policy, revenue mobilization, and social spending
- Policy priorities:
  - Strengthened revenue mobilization and continued prudent spending policies are necessary to create space for additional social and infrastructure investment, while preserving debt sustainability.
  - The program aims to maintain public debt on a downward path and gradually reduce the fiscal deficit, creating additional fiscal space for increased social spending and investment.
- Specific measures:
  - An ambitious tax reform has been prepared to support revenue mobilization and reduce distortive tax exemptions.
  - A wide-ranging agenda to strengthen tax administration will continue to be implemented.
  - A planned social registry will be essential to expand social assistance in a targeted manner.
  - To increase the efficiency of public investment, the authorities aim to improve the planning, selection, and monitoring of public investment projects.

### Monetary and exchange rate policy
- Objectives:
  - Enhancements to monetary and exchange rate policies will support price stability, maintain external competitiveness, and bolster resilience to shocks.
  - Consistent monetary and exchange rate policies are necessary to support the crawling band exchange rate regime.
- Authority commitments and recommended actions:
  - Authorities are committed to maintaining a proactive and data-driven monetary policy and to monitoring developments in international interest rates.
  - Steps should be taken to enhance monetary policy transmission.
  - The implementation of the crawling band regime should be enhanced, and the efficiency of FX market allocation should be improved.
  - The authorities plan to work with staff to identify such measures.
  - The authorities’ program will also help maintain an adequate international reserve position.

### Energy sector reforms
- Importance:
  - Accelerating energy sector reforms is essential to preserve macroeconomic stability, limit fiscal risks, and improve the business environment.
- Challenges and policy steps:
  - Difficulties in reliable electricity provision impede investment and economic growth.
  - Financial losses in the state-owned electricity company are a fiscal drain.
  - Authorities are working to reduce losses in the provision of electricity and reduce ENEE’s debt service costs and arrears.
  - Authorities should clarify the role of private investment in the energy sector, including through renegotiations of contracts with private generators.
  - Authorities should further efforts to increase preparedness and build resilience to the effects of climate change.

### Governance, AML/CFT, and transparency
- Continued improvements needed to reduce corruption risks.
- Progress and planned actions:
  - Progress in establishing the anti-corruption commission CICIH has been slow, but authorities remain committed to strengthening governance and transparency and combatting corruption.
  - Steps taken include elimination of fiscal trust funds, realignment of the AML/CFT framework with international standards, improved access to public documents, and increased financial transparency among public officials.
  - Authorities plan to further increase transparency on the assets of public officials while creating a comprehensive beneficial ownership registry.
  - Plans to simplify administrative procedures and increase digitalization to improve governance.

### Fund financing and policy support
- Staff recommendation:
  - Given the strength of the authorities’ program, staff fully supports the request for an arrangement under the EFF and ECF for SDR 624.5 million.
  - The program will support critical social spending and infrastructure investment needs, while underlying fiscal reforms will reinforce prudent fiscal policies that maintain public debt on a downward path.
  - The authorities’ structural agenda will also make significant progress on improving governance and transparency.
  - Policy implementation risks exist, but authorities have already made significant progress on their fiscal and structural reform agenda.

### Multiple currency practices (MCPs)
- Staff supports the authorities’ request for temporary approval of multiple currency practices subject to Fund jurisdiction under Article VIII, Section 3.
- Rationale and conditions:
  - The authorities requested temporary Fund approval of the two existing MCPs.
  - Staff supports the request as the measures are imposed for non-BoP reasons and do not materially impede BoP adjustments, harm the interest of other members, or discriminate between Fund members.
  - The authorities have committed to removing the exchange restriction during the course of the program within the ambit of their planned reforms to the FX system.

*International Monetary Fund — Honduras staff report content.*

### 64.      It is recommended that the next Article IV consultation take place in accordance with

### It is recommended that the next Article IV consultation take place in accordance with the Decision on Article IV Consultation Cycles (Decision No. 14747(10/96), as amended).

### Long-term macroeconomic trends (2010–2022)
- Income growth has lagged peers; GDP per Capita, PPP index (2010 = 100) shows Honduras below comparator CAPDR throughout 2010–2022.
- Foreign Direct Investment (Percent of GDP) trended downward in 2010–2022, with yearly plotted values from 0 to 10 (chart scale).
- Export Volumes (Index, 2010 =100) rebounded sharply by 2022 relative to 2010 baseline.
- Current Account Balance (Percent of GDP) remained persistently negative across 2010–2022, with remittances an important offset to trade deficits.
- External Debt (Percent of GDP) increased over the period, with public and private components depicted.

### Social indicators and labor market
- Poverty and inequality:
  - Percent of population under moderate poverty (2019): 48.0.
  - Gini index (2019): 48.
  - Honduras remains among the poorest in LAC by several indicators.
- Poverty headcount and distribution:
  - Poverty Headcount Ratio at $6.85 a Day (2017 PPP) and income distribution charts show a low income share for those living in poverty and a large vulnerable and lower-middle segment.
- Informality and migration:
  - Proportion of Informal Employment in Total Employment (national series): high and above many peers.
  - Total Number of Emigrants at mid-year increased markedly between 2000 and 2020 (thousands; charted).
- Labor market:
  - Unemployment rate (2022): 8.7 (table).
  - Female unemployment remains elevated relative to male unemployment (series through 2022).

### Key recent developments (2019–2023)
- Growth and activity:
  - After a sharp post-COVID rebound, growth moderated through 2023 (Real GDP growth series).
- Inflation and monetary policy:
  - Inflation surged following global commodity price shocks and began to abate; end-of-period inflation (eop) 2022: 9.8 percent (Table 1).
  - Monetary policy tightened primarily via interbank rates; gap versus U.S. tightening was smaller than peers.
- Exchange rate and FX market:
  - Stable nominal exchange rate limited pass-through to consumer prices but produced FX market strains.
- Remittances and external balance:
  - Remittances supported domestic incomes strongly; remittances growth (YoY percent change) peaked post-pandemic.
  - Strong remittance-driven domestic demand contributed to a wider trade deficit.

### Real sector developments
- Real GDP:
  - Real GDP surpassed pre-COVID levels but remains below prior trend.
  - Contributions to growth were dominated by consumption; net exports negative.
- Sectoral performance:
  - Manufacturing (maquila) led activity but slowed since late 2022.
- Labor market and productivity:
  - Labor force participation and unemployment series indicate incomplete recovery.
  - Total Factor Productivity (At current PPPs, USA = 1) series show Honduras lagging regional peers; improving productivity is critical to boost potential growth.

### External sector developments and vulnerabilities
- Current account and trade:
  - Current account balance (percent of GDP): 2020: -4.6; 2022: -3.2; projected 2023: -5.2 (Table 1 and Table 7).
  - Trade balance (Millions US$): widening imports drove deficits; commodity price shocks (oil, food) contributed.
- Reserves and remittances:
  - Gross international reserves (billions of US$): 2022: 8.7 (Table 1/GIR series); months of imports (excl. maquila) 2022: 5.9 (Table 1).
  - U.S. labor market supported remittances; remittances (Workers' Remittances, Millions US$): 2022: 8,465; projected 2023: 8,888; 2028 projection: 11,369 (Table 7).
- External financing needs and gap:
  - Gross external financing requirement (2023): 3,926 (millions of US$); financing gap (2023): 753 (millions of US$) (Table 9).
  - Financing gap projections: 2024: 1,215; 2025: 988; 2026: 1,761 (millions of US$) (Table 9).
  - Official financing and IMF financing components detailed in Tables 9–10 (exact amounts and creditor composition preserved).

### Fiscal developments and projections (2017–2028)
- Fiscal balances:
  - Nonfinancial Public Sector (NFPS) Overall balance (Percent of GDP): 2019: -? (chart shows deficits), Actuals and projections: 2020 overall -6.7 percent of GDP; 2021: -5.0; 2022: -1.4; 2023 (est): -3.0; 2024 proj: -2.9; 2028 proj: -1.5 (Tables 2–3 summary).
  - Primary balance (NFPS): 2022: 1.2 percent of GDP; 2023: -0.7 (Table 1 and Table 13).
- Revenue and expenditure:
  - NFPS revenue (Percent of GDP): 2022: 29.6; 2023: 28.3; projected 2028: 29.2 (Table 13).
  - NFPS expenditure (Percent of GDP): 2022: 29.8; 2023: 30.3; projected 2028: 30.0 (Table 13).
  - Central government tax revenues and composition shown in Table 2 (exact Lempira amounts and subcomponents preserved).
- Public debt dynamics:
  - NFPS gross debt (Percent of GDP): 2022: 52.3; 2023: 51.9; projections 2024: 51.3; 2028: 46.6 (Table 1, Table 13).
  - Gross NFPS debt levels in Lempiras and composition presented in Table 4 (exact figures preserved).

### Monetary and financial sector developments
- Central bank operations:
  - Open market operations increased to absorb excess liquidity; interbank borrowing rate rose (series shown).
- Interest rates and credit:
  - Real interest rates remained below U.S. and peers at end-2023 projection (real rate chart).
  - Lending rate in domestic and foreign currency series indicate reversal of FX-domestic lending rate gap.
  - Private sector credit growth (year-on-year percent): 2022: 18.9 percent; projections moderate thereafter (Table 1).
- Banking sector structure (2015–July 2023):
  - Total assets (millions of Lempiras): 2022: 871,520; July 2023: 927,070 (Table 14).
  - Capital adequacy (Regulatory capital to RWA): 2022: 13.5 percent; July 2023: 13.8 percent (Table 14).
  - Nonperforming loans to total loans: 2022: 2.3 percent; July 2023: 2.3 percent (Table 14).
  - Dollarization: deposits in foreign currency as percent of total deposits 2022: 23.0 percent; July 2023: 22.2 percent (Table 14).

### Balance of payments and external debt details (2020–2028)
- Balance of payments flows (Millions of US$ and percent of GDP):
  - Current account (Millions US$): 2022: -1,015; 2023 est: -1,770; projected 2028: -1,736 (Table 7).
  - Exports f.o.b. (Millions US$): 2022: 8,144; 2023 est: 8,022; projected 2028: 9,763 (Table 7).
  - Imports f.o.b. (Millions US$): 2022: -13,555; 2023 est: -14,565; projected 2028: -17,514 (Table 7).
- External debt indicators:
  - Total external debt (percent of GDP): 2022: 37.2; 2023: 32.5; projected 2028: 33.0 (Table 7 and Table 11).
  - Gross official reserves (end-period, Millions US$): 2022: 8,703; 2023: 7,907; projected 2028: 9,066 (Tables 7, 11).

### Public debt composition and debt service by creditor (2022–2024)
- Total public debt (US$ millions, Percent of GDP):
  - Total debt stock (2022): 16,524.9 (100.0%; 52.1% of GDP).
  - External debt (2022): 9,477.9 (57.4% of total debt; 29.9% of GDP).
  - Multilateral creditors (2022): 6,639.5 (40.2% of total debt; 20.9% of GDP) with detailed creditor breakdown including IMF, World Bank, ADB/AfDB/IADB, CABEI (exact values in Table 12).
  - Domestic debt (2022): 7,047.0 (42.6% of total debt; 22.2% of GDP).
- Debt service (2022–2024) amounts by creditor category provided in Table 12 (exact US$ figures preserved in source).

### IMF-supported financing framework and proposed IMF operations
- Proposed ECF/EFF disbursements and timing (SDR millions; percent of quota):
  - Total Disbursements under ECF/EFF: 624.50 (SDR millions) with calendar of conditional disbursements from Sep. 21, 2023 through Aug. 31, 2026 (Table 15).
  - Honduras' quota: SDR 249.8 million (Table 15 note).
- Indicators of Fund credit (as of August 17, 2023):
  - Stock of existing Fund credit (end-2023): 369.52 (SDR millions); obligations to Fund noted by year (Table 16).
  - Proposed ECF and prospective EFF stocks and disbursement schedules are tabulated (exact SDR units and percent of quota preserved).

### External financing needs, official creditor support, and projected financing gaps
- External financing gap and official support (millions of US$):
  - Financing gap (2023): 753; official financing available 633; IMF financing 120 (Table 9).
  - Financing gap evolution: 2024 gap 1,215 with official financing 975 and IMF financing 240; 2025 gap 988 with official financing 747 and IMF financing 242; 2026 gap 1,761 with official financing 818 and IMF financing 243 (Table 9).
- Official lending composition in Tables 9–10 includes World Bank, CABEI, IADB, and other official creditors with exact amounts preserved.

### Sustainable Development Goals (selected indicators, 2016–2022)
- Poverty:
  - Proportion of population below international poverty line (%): 2016: 16.1; 2019: 14.8 (Table 17).
  - Proportion of population living below national poverty line (%): 2016: 49.7; 2019: 48.0 (Table 17).
- Health and education indicators, environmental and governance indicators (Tables list time series across 2016–2022 for selected SDG targets; exact annual values preserved in Table 17).

*Source: IMF staff report and data tables for Honduras (figures, tables, and projections as presented in the source PDF).*

### Box 1. Honduras: Poverty and Food Insecurity

### Box 1. Honduras: Poverty and Food Insecurity

### Poverty and inequality
- Honduras remains one of the poorest and most unequal countries in the Western Hemisphere, with poverty estimates for 2021 at over 70 percent (around 50 percent for extreme poverty).
- The country faces several challenges in efforts to reduce poverty, including slow and volatile growth, weak governance and institutions, high unemployment and informality, widespread corruption, crime, and political instability.
- Income inequality is high: the top 20 percent hold about 52 percent of the country's income share (as of 2019).

### Food security and agricultural production
- Challenges to food security stem from constrained availability of affordable and nutritious food.
- A surge in food and fuel prices since 2021, coupled with lackluster production of essential crops, have increased food insecurity.
- Corn and beans production grew by 1 percent and 1.5 percent, respectively, due to poor climate conditions and inadequate access to agricultural inputs.
- Close to a quarter of the population is in food crisis or emergency (World Food Program phases 3 and 4).
- Particularly exposed populations include women living in rural areas with high poverty rates and families that rely on subsistence farming.

### Climate change impacts on poverty and food security
- Honduras is considered one of the most vulnerable countries to the impacts of climate change, with extreme weather events disrupting economic activity and forcing relocation, intensifying poverty and food insecurity.
- Climate change has led to a decline in crop yields, loss of biodiversity, and decreased water availability.
- In 2020, Tropical Storms Eta and Iota resulted in the loss of approximately 2 and 7 percent of the cultivated acreage of corn and beans, respectively.

### Government and programmatic responses
- The Honduran government, in partnership with international organizations, has implemented programs and policies aimed at improving food security and reducing poverty, including:
  - Expanding and prioritizing social protection policies, such as cash transfers (a focus of Red Solidaria).
  - Targeted subsidies.
  - Resuming school meal programs to support vulnerable populations and reduce malnutrition.
  - Agricultural programs to promote sustainable farming practices (Bonos Tecnológicos) and increase crop yields, including providing fertilizer and seedlings to farmers, and improving access to markets for small farmers.
  - Recently approved legislation, such as the Ley de Seguridad Alimentaria y Nutricional, to establish a regulatory framework for structuring, harmonizing, and coordinating actions for food and nutritional security.

### Key statistics and indicators (as reported)
- Poverty estimates for 2021: over 70 percent (around 50 percent for extreme poverty).
- Income share held by top 20 percent (as of 2019): about 52 percent.
- Corn production growth: 1 percent.
- Beans production growth: 1.5 percent.
- Population in food crisis or emergency (WFP phases 3 and 4): close to a quarter of the population.
- Crop acreage losses in 2020 from Tropical Storms Eta and Iota: approximately 2 percent for corn and 7 percent for beans.

*Source: Box 1. Honduras: Poverty and Food Insecurity (from the provided IMF content).*

### 6.6 and 4.7 percent y/y, respectively. Remittances recorded a 9.2 percent y/y increase as of 2023Q1. The CA

### 1hndea2023001 - 6.6 and 4.7 percent y/y, respectively. Remittances recorded a 9.2 percent y/y increase as of 2023Q1. The CA

### External Position: Current Account (CA) Assessment
- Cyclically adjusted CA was -3.9 percent of GDP after accounting for the model’s cyclical contributions, COVID-19 adjustor, and natural disasters.
- Cyclically adjusted CA norm stood at -5.1 percent of GDP.
- Positive CA gap of 1.2 percent of GDP implied by CA approach, consistent with a REER undervaluation of 3.7 percent (assuming CA elasticity of -0.31 with respect to REER).
- Contribution of policy gaps estimated at 3.9 percent of GDP, primarily driven by the fiscal spending gap.
- REER index model finds a CA gap of -1 percent of GDP, suggesting a REER overvaluation of 2.9 percent.
- Overall assessment for Honduras is based on the REER model, due to its explicit accounting for real interest rate differentials; contribution of the policy gap in the REER is limited, with the contribution of the real interest rate negligible.
- Projection: The CA deficit is expected to average about 4 percent of GDP going forward.
- REER change: The REER modestly appreciated by 2 percent in 2022.

### Capital and Financial Accounts: Flows and Policy Measures
- Financial account surplus in 2022: 4.1 percent of GDP.
  - Net FDI inflows: 2.0 percent of GDP.
  - Government borrowing: 1.4 percent of GDP.
- Policy history:
  - Between 2017 and June 2021, the surrender requirement for foreign exchange agents on proceeds from current and capital transactions to the central bank was phased out; daily FX auctions ended.
  - In April 2023, authorities reinstated a 100 percent surrender requirement for exchange agents, reinstated daily FX auctions, and shut down the interbank FX market.
  - Exporters required to sell all export receipts in FX to foreign exchange agents, except exporters authorized by the Central Bank’s Board to retain up to 30 percent for priority purchases or debt service abroad.
- Assessment/projection: Financial account projected to continue recording a surplus, primarily on the back of net FDI inflows.

### FX Intervention and Reserves Level
- Gross international reserves (GIR) at end-2022: US$8,703 million, or 5.9 months of non-maquila imports of goods and services.
- GIR represented 885 percent of short-term debt in 2022.
- GIR as of August 21, 2023: US$7,970.3 million (5.2 months of prospective imports).
- FX interventions in 2022: central bank sold on net a total of US$336 million (mostly late in the year).
- Additional FX sales to oil importers during December 2022-February 2023 and again since June: around US$500 million in total through August 7, 2023.
- De jure exchange rate arrangement: crawling band; de facto exchange rate: stabilized.
- Assessment: GIR stood at 137 percent of the ARA metric in 2022 and are projected to be comfortably within the recommended range of 100-150 percent of the ARA metric during the projection horizon.

### Annex II — Economic Impact of Climate Change and Natural Disasters
- Vulnerability and exposure:
  - Honduras is highly vulnerable to climate change risk, exposed mainly to tropical storms, floods, landslides, droughts, and sea level rise.
  - Global Climate Risk Index (CRI) ranks Honduras 41 out of 180 countries based on average losses as a percentage of GDP between 2000 and 2019.
- Historical losses and frequency:
  - Recorded over 85 climate-related hazards between 1960-2022.
  - Notable events and damages: Hurricane Fifi in 1974 (35 percent of GDP); Hurricane Mitch in 1998 (60 percent of GDP); tropical storms Eta and Iota in 2020 (7½ percent of GDP).
  - Recorded losses of floods and storms average 6.3 percent of GDP per year.
- Macro impact estimates (staff analysis using VARs with climate dummies):
  - Around three to five months after an extreme weather shock, economic activity growth (y/y) contracts by around 0.75 percentage points on average.
  - Implied annual growth impact estimated at -0.6 percentage points of GDP.
  - Remittances show an immediate increase of more than 3 percentage points following shocks.
  - Decrease in economic activity mainly attributable to shrinkage in the agricultural sector.
  - Remittances act as private insurance supporting households’ consumption smoothing.
- Climate projections and sectoral impacts:
  - Under high-emissions scenario (RCP 8.5), Honduras’ annual mean temperature projected to rise by 1.8 °C by 2050 and by 3 to 5.6 °C by 2100.
  - Climate change expected to reduce precipitation, increase droughts, increase heavy rainfall and flooding, and produce more severe hurricanes.
  - Expected significant impacts on agriculture, manufacturing, and energy; historically marginalized groups especially affected.
- Policy recommendations (adaptation and resilience):
  - Broaden the Estrategia Nacional de Cambio Climático to specify actions and investments for structural, financial, and post-disaster resilience and integrate into the multi-year macro-fiscal framework.
  - Deepen access to financing from multilateral creditors for resilience and adaptation initiatives.
  - Undertake urgent investments supporting climate resilient infrastructure.
  - Build physical flood defenses (mainly dams), including for the main Sula Valley manufacturing region.
  - Accelerate adaptation measures to protect social and economic stability, external and fiscal sustainability, and labor and supply chains.

### Annex III — Risk Assessment Matrix (selected risks, likelihood, impact, and policy responses)
- Global risks highlighted (examples):
  - Intensification of regional conflict(s): Likelihood H; Impact High. Policy: diversify supply chains, create/increase buffers for short-term unavailability of key commodities.
  - Abrupt global slowdown or recession: Likelihood M; Impact High. Policy: diversify trade patterns, allow real exchange rate to cushion external shock, continue infrastructure spending, support domestic market and labor markets.
  - Commodity price volatility: Likelihood H; Impact High. Policy: targeted fiscal support to vulnerable, proactive monetary policy, expand productive capacity and diversify trade.
  - Monetary policy miscalibration: Likelihood M; Impact High. Policy: allow real exchange rate to cushion shock, adjust policy interest rates, remain committed to fiscal adjustment.
  - Systemic financial instability: Likelihood M; Impact High. Policy: allow real exchange rate cushion, adjust policy interest rates, safeguard debt sustainability, continue infrastructure spending.
  - Sovereign debt distress: Likelihood M; Impact High. Policy: fiscal adjustment to safeguard debt sustainability; allow real exchange rate to cushion external shock.
  - Extreme climate events: Likelihood M; Impact High. Policy: prioritize expenditure for affected households, guard against second-round inflation effects, accelerate reconstruction and climate-resilient infrastructure, design and implement an adaptation plan.
  - Social discontent: Likelihood M; Impact Medium. Policy: strengthen governance and accountability, foster diversification and job creation, strengthen social safety net.
- Domestic risks:
  - Implementation risks to reform agenda: Likelihood M; Impact Medium. Policy: build institutions, ensure policy continuity, build broader political coalition.
  - Inconsistent macroeconomic policies: Likelihood M; Impact Medium. Policy: monetary policy needs to support the exchange rate crawling band; the center of the crawling band should adjust more for the targeted inflation differential.

### Annex IV — Implementation of 2019 Article IV Recommendations (selected actions and status)
- Fiscal policies:
  - Recommendation: Strictly adhere to the Fiscal Responsibility Law (FRL) and maintain NFPS deficit slightly below ceiling.
  - Recommendation: Improve mobilization efforts by broadening the tax base.
  - Recommendation: Implement electricity sector reforms to reduce ENEE losses, improve governance, reduce energy purchase costs, introduce new tariff scheme.
  - Actions/status:
    - The escape clauses under the FRL were activated three times due to the pandemic and 2020 tropical storms; FRL reformed to permit two-year fiscal path to address emergency.
    - Various measures to improve tax collection and increase revenue streams implemented, including strengthening tax administration, technology-driven solutions, and enhancing tax compliance and enforcement.
    - Technical and non-technical losses at ENEE not reduced as planned; authorities implementing a national plan to reduce losses, including controlling energy theft, modernizing measurement systems, and improving electrical infrastructure.
- Monetary and exchange rate policies:
  - Recommendation: Remain vigilant on global conditions and inflation; transition towards inflation targeting; reform central bank law to strengthen governance; phase out FX surrender requirements and develop interbank FX transactions and intervention rules.
  - Actions/status:
    - Central bank raised policy rate in 2019, then reduced during the pandemic; authorities have opted not to progress further towards an inflation targeting regime at the current moment.
    - Reform to organic law of central bank was submitted to Congress but not approved; current authorities do not consider reform necessary.
    - Surrender requirements for exchange agents were eliminated by June 2021 and interbank FX market became sole means for banks/FX agents to transact; in April 2023 the 100 percent surrender requirements and BCH FX auction system were reintroduced.
- Financial sector policy:
  - Recommendation: Use macroprudential policies as first line of defense against rapid credit growth; continue adoption of risk-based supervision.
  - Actions/status:
    - CNBS used macroprudential measures during the pandemic, introduced grace periods for debtors, and measures to strengthen financial institutions’ capital.
    - CNBS advanced risk-based supervision: framework to assess market conduct risks, enhanced stress testing, and strengthened regulatory framework in line with Basel III standards—starting gradual introduction of capital conservation buffer and liquidity coverage ratio.
- Governance:
  - Recommendation: Improve registry of legal persons and identification of beneficial ownership.
  - Action/status: This has been completed.
- Structural reforms:
  - Recommendation: Simplify administrative procedures and use information technology to reduce transaction costs.
  - Actions/status:
    - Draft legislation to streamline and publicize requirements for permits submitted to National Congress (Executive Decree PCM-045-2019) was not approved; new authorities are again working on such a reform.
    - Plan developed for adoption of electronic signatures; Regulation for the Use and Operation of the Electronic Signature at the Secretary of Finance approved (Agreement Number 283-2021).

*Source: 1hndea2023001 (IMF PDF chapter/section).*

### Annex V. Implementation of 2016 FSSR Recommendations

### Annex V. Implementation of 2016 FSSR Recommendations

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

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

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

*Source: 1hndea2023001 - Annex V. Implementation of 2016 FSSR Recommendations*

### 11. A more efficient tax administration is also key to making the tax system fairer and

### 11. A more efficient tax administration is also key to making the tax system fairer and curbing tax evasion and fraud.

### Tax administration reforms and immediate actions
- Program includes an indicative target on the tax revenue of the Central Government.
- Reforms strengthened by the passage of the Law on Tax Justice.
- Comprehensive joint action plans for the Revenue Administration Service (SAR), the Customs Administration, and the Ministry of Finance (SEFIN) developed with IMF technical assistance.
- Focus on better control of special regimes and improved coordination among SEFIN, SAR, Customs, and other institutions.
- Inter-institutional cooperation agreement signed in February 2023 among SEFIN, SAR, and Customs to better monitor benefits related to exemptions and implement audits of exempted taxpayers.
- IDB-supported projects:
  - (i) comprehensive reform of the Honduran Customs Administration to strengthen revenue administration efficiency;
  - (ii) development of new information management systems, including a platform for exchange of information among government institutions.
- Preparing a risk-based sales tax refund system to replace ex-ante sales tax exemptions; IMF providing technical assistance.
- SAR strengthening tax and forensic audit capabilities, increasing fiscal transparency, and aligning Honduras with international conventions; approval of the MAAC cited as supportive.

### Social safety net: protection and expansion
- Rapid response in 2022 to higher fuel, food, and fertilizer prices:
  - Reduced the fuel tax by 10 lempiras per gallon.
  - Promoted teleworking in the public sector.
  - Provided electricity free of charge to poor households consuming less than 150 kWh per month, with 60 percent of the cost borne by the state and 40 percent financed by large consumers through cross-subsidy; eligible households reduced to 900,000.
  - Temporarily halted an electricity rate increase in July 2022 that would have led to rate increases in the 10-12 percent range for many households; subsidy eliminated in January 2023.
  - Established subsidies: maximum ceiling for the price of LPG gas cylinders and a subsidy for urban bus fares.
- Commitment to protect and strengthen social spending; program includes an indicative target for priority social spending with a commitment to increase these expenditures over the program.
- Update of the poverty reduction strategy paper by July 2024 (to comply with IMF Poverty Reduction and Growth Trust requirement) prior to the second program review.
- Commitment to optimize targeting of social spending and control other current primary expenditure (indicative target).

### Rural agricultural sector and targeted assistance
- Agricultural sector prioritized to support growth and curb migration and food inflation.
- Delivered 100,000 "bonos tecnológicos" (free seeds and fertilizers) to small producers living in extreme poverty in the Dry Corridor.
- Injected 1 billion lempiras into Banadesa during 2022 and 2.4 billion lempiras in the current year to provide subsidized loans to producers of staple grains.
- Favorable-term loans provided through Banhprovi.

### Red Solidaria and complementary social programs
- Red Solidaria introduced in November 2022: comprehensive social assistance focused on extreme poverty in some 2,000 villages.
- Beneficiaries identified via a census of extreme rural poverty (supported by IDB and World Bank); data for 350,000 households entered into Honduran Beneficiary Information and Registration System (SIRBHO).
- Conditional cash transfers are the largest component; other components: health and education improvements, labor market integration, and rural roads.
- Plan to expand Red Solidaria to 100,000 households in 500 marginalized urban areas; census of extreme poverty with World Bank support to be completed and data entered in SIRBHO by September 2024 (structural benchmark).
- Complementary programs: PROASOL and other social programs such as the National Scholarship Program.

### Social protection reform and information systems
- Pension institutes drafting a social protection law to be submitted to Congress by June 2024; nationwide public discussions underway with ECLAC support.
- Single Social Sector Information System (SUISS) to centralize data from systems including SIRBHO, ROPI, SIAMIR, SIMOP, Migration Observatory, SIMME, Poverty Measurement Panel, Social Intervention Management System for Children, Rural Roads Monitoring System, and Health Sector Intervention Monitoring System.
- SUISS to be operational by June 2024 (structural benchmark).

### Quality of spending and fiscal transparency
- Emphasis on better public investment management and selection of projects with highest social return; updated PIMA requested and expected by end of year.
- Reform of procurement procedures identified as essential to speed project implementation.
- Elimination and integration of opaque trust funds into budget to improve transparency and liquidity management:
  - Decrees approved in 2022 to eliminate trust funds.
  - Liquidating trust funds: INVEST-H, Tasa de Seguridad, Vida Mejor, and Instituto de la Propiedad (IP-SITEC).
  - Audit of transactions outside contracting laws underway; complying with payment of outstanding obligations that are duly verified.
  - Commit to complete liquidation, quantify trust funds’ assets and liabilities, integrate them into government financial statements, and record as part of public debt those debts of trust funds (including those to suppliers) that are in compliance with the law by December 2024 (structural benchmark).
  - 2023 budget already incorporates resources from the liquidation of private trust funds that executed budgetary resources.
- Strengthening the Treasury Single Account (TSA) to improve liquidity and debt management:
  - CAPTAC-DR technical assistance to SEFIN improved liquidity projections and implemented cash management.
  - New Special Law to Strengthen the Single Treasury Account to be submitted to National Congress by March 2024 (structural benchmark); make it operational by December 2025 (structural benchmark).

### Fiscal risks and contingency planning
- Acknowledgement of vulnerability to adverse weather events and other shocks that could trigger additional expenditures.
- Plan to conserve fiscal space by prioritizing expenditures and closely monitor fiscal risks of public companies and public-private partnerships, considering legal issues and complaints of public-private corruption.

### Financing strategy and market development
- In 2022 negotiated an exceptional loan of US$1 billion with the Central Bank of Honduras to meet inherited debt service obligations and finance urgent public investment projects under the State of Fiscal and Financial Emergency.
- Plan to establish a schedule for issuance of public bonds in 2024; no monetary financing from BCH in normal times (quantitative performance criterion).
- Continue development of domestic bond markets:
  - Publish Public Borrowing Policy on Ministry of Finance website by September 2023 (structural benchmark).
  - Prepare and publish Medium-Term Debt Strategy on Ministry of Finance website by December 2023 (structural benchmark).
  - Publish schedule for issuance of public bonds no later than January 2024 (structural benchmark) for execution in 2024.
- Negotiating financing with CABEI, IDB, World Bank; in process of membership with CAF expected to support investment in social, energy, and infrastructure sectors.
- Plan to access international debt markets with a thematic bond issue as conditions normalize.

### Energy sector reform and ENEE recovery
- ENEE faces high contracted energy costs, technical and non-technical transmission and distribution losses amounting to about 35 percent, and lack of network investment; historically deficits in excess of 1 percent of GDP.
- Measures taken reduced deficit to 0.8 percent of GDP in 2022 and initiated National Loss Reduction Program (PNRP).
- Renegotiation of private power supplier contracts:
  - Initiated renegotiations for 28 contracts with irregularities per new Energy Law (April 2022).
  - First phase negotiated 23 contracts (650 MW), yielding improved rates and significant savings.
- Fair pricing measures:
  - System designed to cover generation, transmission, and distribution costs.
  - Value added in transmission (VAT) study concluded and incorporated in rate effective January 2023.
  - Value added in distribution (VAD) study results to be reflected by January 2024.
  - ENEE operating losses close to 6 billion lempiras in 2022; rate calculation can reflect only up to 15 percent of lost electricity.
  - SEFIN to provide transfers to ENEE to cover subsidies.
- National Loss Reduction Program (PNRP) actions and targets:
  - Review circuits with greatest losses, install conventional and smart meters, inspect medium-size and large consumer installations to combat energy theft and reduce losses.
  - By end-2023 expected installations: 180,000 residential meters and 600 telemeters for medium-size and large consumers.
  - Goal to reduce losses to the international average of 15 percent.
  - Plan's goal starting in 2024: reduce technical/non-technical distribution losses by 4 percentage points per year.
  - Publish monthly statistics of ENEE's technical/non-technical distribution losses within 45 days of the end of each month on the websites of ENEE and the Ministry of Finance.
- ENEE arrears and debt resolution:
  - ENEE accounts payable amounted to 16.5 billion lempiras at end-2022, of which 9.8 billion lempiras were arrears (invoices more than 45 days past due).
  - ENEE issued bonds in December 2022 and January 2023 totaling 6.6 billion lempiras via auction; funds used to pay part of the arrears.
  - In 2023, placements totaling 8.2 billion lempiras in authorized bonds will be made to stabilize arrears.
  - Commitment to continue reducing ENEE's stock of overdue invoices and prioritize arrears with electricity suppliers with renegotiated contracts (quantitative performance criterion).

*Source: 1hndea2023001 - 11. A more efficient tax administration is also key to making the tax system fairer and curbting tax evasion and fraud*

### 31. We are working to transform the public company ENEE into an integrated, secure,

### We are working to transform the public company ENEE into an integrated, secure, and efficient entity.

### ENEE reform and operations
- Objective: transform ENEE into an integrated, secure, and efficient entity by separating administrative functions of generation, transmission, and distribution.
- Financial transparency measures:
  - Adapt ENEE's accounting to international financial standards.
  - Work to publish duly audited annual financial statements.
- Recent contracts and interventions:
  - ENEE granted an onerous private contract through a trust fund for meter reading, billing, collection, and reduction of technical and non-technical losses; this contract expired on August 18, 2023 after several years under government intervention.
  - Government intervention succeeded in stemming the upward spiral of losses.
  - ENEE should re-assume the distribution function through an orderly transition that establishes relevant procedures, considering the magnitude of the responsibility.
- Political stance: administration committed to maintaining the state-owned company.

### Monetary and exchange rate policies — recent developments and outlook
- Inflation dynamics and outlook:
  - Year-on-year inflation reached 9.8 percent at the end of 2022.
  - Imported inflation accounted for nearly 5 percentage points (51 percent).
  - Inflation moderated to a year-on-year change of 5.15 percent in July 2023.
  - Inflationary measures reduced year-on-year inflation by 2.85 percentage points at the end of 2022.
  - Inflation is expected to end this year between 5 and 6 percent.
  - Inflation is expected to converge to the BCH's 4.0 percent (± 1.0 percentage point) target range in the first half of 2024.
  - Upside risks: recent increase in oil prices, ongoing drought, and electricity supply difficulties.
- Liquidity and interest rate actions:
  - BCH market operations reduced excess liquidity in the financial system by more than 25 billion lempiras, or 3.3 percent of GDP, compared to the end of 2021.
  - Interbank rate rose from 1 percent to 3.48 percent.
  - On August 24th the BCH modified the interest rate corridor, adjusting the Permanent Credit Facility (FPC) rate to 4.0 percent (prior action).
  - Program includes a quantitative performance criterion on the BCH's stock of domestic assets.
- Policy stance and instruments:
  - BCH will continue measures consistent with the crawling-band exchange rate regime to: (i) ensure inflation continues on a downward path and prevent second-round effects; (ii) keep inflation expectations anchored; and (iii) strengthen use of monetary policy instruments such as the monetary policy rate (TPM), open market operations, and legal reserve requirements.
  - BCH will monitor trends in international interest rates and maintain active communication with market participants.
  - Commitment to improve the operational framework of monetary policy, develop analytical tools on TPM transmission, and revise the operational framework in line with international best practices.
  - Public discussion and consultation underway to modernize the country's digital payment systems.
- Exchange rate policy and allocation mechanisms:
  - Commitment to strengthen the crawling-band regime and maintain the real value of the lempira.
  - BCH to conduct a study, with IMF technical assistance, to evaluate and strengthen the crawling-band regime and responses to external shocks; results will be evaluated for possible incorporation into the program.
  - Net international reserves and reserve coverage:
    - At end-2022, gross international reserves were equal to $8.7 billion — about a coverage of almost six months of imports.
    - Program includes a quantitative performance criterion on net international reserves.
  - Foreign currency market measures:
    - Reactivated foreign currency auction system to improve certainty and fairness.
    - On April 13 of this year, auction mechanism reinstated: foreign exchange dealers must transfer to the BCH 100 percent of foreign currency receipts, which are subsequently auctioned — at least 80 percent of the receipts — to economic agents.
    - Foreign exchange awarded to bidders offering best prices within a band of ±1 percent around the center of the exchange rate band.
    - Objective: stabilize the foreign exchange market, reduce speculative pressures, and ensure equitable distribution among participants.
  - Diagnostic assessment with IMF support to improve efficiency in allocation of foreign currency; results will guide BCH actions and a gradual transition to a balanced, competitive, and efficient allocation system while preventing abuse and arbitrage.

### Financial sector soundness, supervision, and inclusion
- System-wide strengths and vulnerabilities:
  - Financial system described as sound, well capitalized, and liquid.
  - Support measures implemented included: (i) deferment and restructuring of loans; (ii) reduction in contributions to the liquidity fund; (iii) extension of the period for classifying non-performing loans; and (iv) reduction in provisioning requirements.
  - Non-performing loans remain low (around 2-3 percent).
  - Latest CNBS stress tests show banking system resilient to significant shocks.
  - Acknowledged need to expand access to and democratization of credit for micro, small, and medium-sized enterprises, the agricultural sector, and vulnerable groups.
  - Authorities will monitor bank liquidity, solvency scenarios, and stress tests, and stand ready to use macroprudential tools if needed.
- Regulatory and supervisory reforms:
  - Enhance CNBS capacity in risk-based supervision using Toronto Centre methodology and strengthen stress-testing capabilities.
  - CNBS developed a methodology for identifying systemically important financial institutions (SIFIs); plan to formalize SIFI criteria in a regulation to allow introduction of a systemic buffer in line with Basel III standards.
  - Capital buffers and prudential timelines:
    - Capital conservation buffer currently stands at 1.75 percent and will reach 2.5 percent as of January 2025.
  - Planned regulatory developments:
    - Continue gradual introduction of the liquidity coverage ratio and capital conservation buffer requirements.
    - Develop a net stable funding ratio requirement to be implemented in a regulation by the end of 2025.
    - Develop and oversee the gradual implementation of a market risk regulation.
    - Develop new methodologies to assess operational risks.
    - CNBS, with Fund technical assistance, is developing a model for quantifying expected credit losses to improve risk-based supervision.
  - CNBS will ensure necessary resources and personnel are available.
- Financial inclusion and targeted credit programs:
  - Measures to promote financial inclusion while preserving financial stability and consumer protection.
  - Documentation requirements for lending have been completely relaxed to facilitate access to credit for small entrepreneurs and farmers.
  - Strengthen loan facilities funded by Banadesa, Banhprovi, and rural savings banks.
    - Banadesa received some 1 billion lempiras in new loan funds in 2022.
    - This year budgeted 2.4 billion lempiras.
  - Poverty cited at 74 percent, motivating policies to promote access to credit for productive sectors.
  - Government prepared to assist the financial sector in placing credit to develop agriculture, livestock, agroforestry and agroindustry, and MSMEs by developing a collateral policy that minimizes credit risk, considered more efficient than payment of quasi-fiscal losses.
- Insurance sector reform:
  - Working on a new law for the insurance and reinsurance sectors to create a regulatory framework in line with international standards and incorporate risk-based capital requirements.
  - Plan to continue discussion with the Ministry of Finance prior to submission to Congress, envisaged for late 2023.
- Confidentiality and tax access to banking information:
  - Once passed, the Law on Tax Justice will provide for access to bank records by tax authorities.
  - Authorities will protect confidentiality and limit access to what is required for tax purposes.
- Crisis preparedness and financial stability governance:
  - Strengthen financial early warning indicators of the CNBS.
  - Financial Stability Council (CEF) composed of Central Bank, Ministry of Finance, CNBS, and Deposit Guarantee Fund coordinates prevention and monitoring of systemic risks.
  - Contingency plans developed with each bank; regulation on bank recovery plans issued and banks submitting plans to CNBS.
  - Financial Stability Council meets every three months to update monitoring of liquidity and macroeconomic situations.

### Governance, rule of law, and business climate
- Administrative simplification and digitalization:
  - Evaluated 839 procedures at 64 institutions and prioritized 16 for digitization.
  - Plan to prepare and submit to the National Congress a Law on Simplification of Administrative Procedures by June 2024 (structural benchmark).
  - DIGER working on updates to: the Digital Signature Law, a law to regulate telework Regulation, a Cybersecurity Law, a Data Protection Law, and an update of the Open Data Access Law.
  - Consideration of creating a single office for handling administrative procedures related to investment, including international trade.
- Public procurement reforms:
  - Ministry for Transparency and Combating Corruption and Association of Municipalities submitted to Congress a new public procurement law to streamline procedures, strengthen procurement and contracting processes, and include powers to detect fraud.
  - Ministry of Finance to issue its opinion once law is presented to plenary and expert committee.
  - Law expected to be passed by the end of 2023.
  - Working on evaluating alternatives for modernization of procurement portal Honducompras.
- Anti-corruption measures and transparency:
  - Congress repealed the Secrecy Law and the arrangement of the trust funds.
  - Created a Ministry for Transparency and Combating Corruption which prepared a Honduran National Transparency and Anti-Corruption Strategy (ENTAH) awaiting Council of Ministers discussion.
  - Implementing results-based management across government and created the Public Results-Based Management and Transparency System with transparent quarterly institutional evaluations and semi-annual sectoral evaluations; working on a publishable version to improve transparency and accountability.
  - Working to regain access to the Millennium Challenge Account; reactivation contingent on improvement in the corruption control indicator.
- International anti-corruption support:
  - President signed memorandum of understanding with the United Nations and terms of reference for experts to establish the International Commission against Corruption and Impunity in Honduras (CICIH).
  - CICIH to support government in combating high-impact public-private corruption with independent investigations and criminal prosecution.
  - Working with UN to implement phases of memorandum signed in December 2022.
  - In July 2023, a group of United Nations experts arrived in Honduras for implementation of the first phase of the agreement.

*Source: 1hndea2023001 - 31. We are working to transform the public company ENEE into an integrated, secure,*

### 50. We have been taking measures to reduce the risk of corruption within the

### 1hndea2023001 - 50. We have been taking measures to reduce the risk of corruption within the

### Anti‑corruption measures and asset declarations
- Executive decree on Financial Transparency and Combating Illicit Enrichment approved in the Council of Ministers to facilitate investigation of assets of government officials through the National Banking and Insurance Commission; investigations to be confidential and for use by the country's judicial and supervisory bodies.
- Superior Court of Auditors developing an electronic asset declaration system for public officials with high salaries or decision-making power over significant amounts of public funds; a pilot system is already operational for officials of the Superior Court of Auditors.
- Implementation timetable:
  - Implement the electronic system nationwide for the 2024 sworn asset declaration to be processed from January to April 2024 (structural benchmark, February 2024).
  - 2024 cycle described as one of transition with substantial training for civil servants to ease adjustment to the electronic system.
  - Objective to facilitate complete elimination of paper forms starting with the 2025 cycle.

### Anti‑money laundering and countering the financing of terrorism (AML/CFT)
- Legislative and regulatory actions:
  - National Congress approved in July this year the repeal of Decree 57-2020 and modification of Decree 93-2021, reversing prior measures that had weakened the framework.
  - New AML framework revised definitions of money laundering and politically exposed persons (PEPs).
  - Penalties for corruption and money laundering offenses were revised (restoring penalties reduced by Decree 93-2021).
- Sectoral supervisory standards:
  - Technical standards for prevention of money laundering risks already in operation for the banking sector through the CNBS.
  - CONSUCOOP working with the UNODC to develop analogous technical standards for cooperatives; expected to be approved this year by the director of CONSUCOOP.
- Planned legal initiatives to be submitted to National Congress before the end of 2023:
  - Draft Counter‑Terrorist Financing Law.
  - Updates to the Special Law against Money Laundering.
  - Updates to the Law on the Regulation of Designated Non‑Financial Businesses and Professions to align fully with Financial Action Task Force of Latin America (GAFILAT) standards.

### Beneficial ownership, business registry, and company supervision
- Submitted to Congress a Law on Beneficial Ownership together with the Law on Tax Justice to ensure timely access to accurate beneficial ownership information for all types of legal entities in Honduras, including:
  - requiring legal entities to submit updates;
  - centralization of beneficial ownership information; and
  - establishing actions to ensure compliance.
- Expectation and timelines:
  - Expect Congress to pass the Law on Beneficial Ownership by December 2023 (structural benchmark).
  - Will submit a Law on the Superintendence of Commercial Companies soon.
  - Legal basis to establish a single national registry of commercial companies, including beneficial owners; registry to be administered by the Tax Administration.
  - Launch of the new registry with information on commercial companies and their beneficial owners by the end of December 2024 (structural benchmark).
- Data sources: Much required information already exists in scattered databases; additional information will be obtained directly from commercial companies.

### Government finance, public debt, and statistics
- Harmonization and transparency:
  - Improving government finance and public debt statistics by harmonizing definitions with the 2014 Government Finance Statistics Manual.
  - Continue to publish periodic fiscal risk reports, including updated data on any contingent debt.
  - With IMF technical assistance, working to incorporate International Public Sector Accounting Standards (IPSAS) in compilation of fiscal data.
  - Enhance SEFIN's capacity to develop macroeconomic and fiscal projections and conduct debt sustainability analysis.
  - Work on aligning ENEE's accounting with international standards so ENEE regularly publishes duly audited financial statements.
- Price and activity statistics:
  - In April 2023, the BCH and the National Institute of Statistics (INE) launched the National Household Income and Expenditure Survey (ENIGH), postponed due to the pandemic.
  - Survey scope and timing:
    - Conducted over 12 months among 9,000 households in urban and rural areas nationwide.
    - Results expected to be available by the end of 2024.
    - ENIGH will be used to update national accounts and lay groundwork for new national accounts series and consumer and producer price indices.

### Climate change vulnerability, policy, and financing
- Exposure and impacts:
  - Honduras identified as highly exposed and vulnerable to extreme weather events with negative socio‑economic and health consequences.
  - Global Climate Risk Index ranked Honduras as one of the countries most affected by extreme weather events during 2000-2019.
  - Extreme weather events caused average annual losses equivalent to 6.3 percent of GDP during 1960 to 2022, mainly due to floods, tropical storms/hurricanes, and droughts.
  - Current drought has considerable adverse consequences for the agricultural and energy sectors.
- Policy framework:
  - Nationally Determined Contribution of Honduras (NDC-HN) approved in 2019 and ratified in 2021; includes Lake Yojoa recovery and a reforestation program covering 24,000 hectares, water protection, and forest conservation.
  - Climate Change Committee operates with ministers and members representing academia, civil society, and the private sector.
  - Law on Climate Change under review by the Ministry of Natural Resources and Environment.
  - Steps taken to identify budgetary resources earmarked for combating adverse effects of climate change.
- Financing plans:
  - Plan to develop a Climate Change Financing Strategy consistent with the NDC-HN.
  - Considering seeking climate change financing from the IMF through the Sustainability and Resilience Fund.
  - Continuing to explore issuance of green bonds and a debt‑for‑nature swap.

### Safeguards assessment and program monitoring
- Safeguards:
  - Fund staff will update the BCH's safeguards assessments; updating to be completed prior to the first program reviews.
  - Authorities will evaluate recommendations for possible incorporation into the program in consultation with the IMF.
- Program monitoring:
  - Program subject to semi‑annual reviews and monitored through quantitative performance criteria, indicative targets, and structural benchmarks set out in Tables AI.1 and AI.2.
  - Authorities commit to providing detailed information as specified in the Technical Memorandum of Understanding (TMU); relevant definitions and reporting procedures are specified in the TMU.

### Key structural benchmarks, prior actions, and targets (selected)
- Prior Action: Increase interest rate on BCH’s overnight lending facility (Facilidad Permanente de Crédito, FPC) by 50 basis points — Met on August 24, 2023.
- Selected structural benchmarks and deadlines:
  - Prepare and approve an annual Public Borrowing Policy (PEP) and publish it on the Ministry of Finance website — End-September 2023.
  - Prepare a Medium-Term Debt Strategy and publish it on the Ministry of Finance website — End-December 2023.
  - Approve the Law on Tax Justice in the National Congress — End-December 2023.
  - Approve decree to ratify the Convention on Mutual Administrative Assistance in Fiscal Matters (MAAC) in the National Congress — End-December 2023.
  - Approve a law ensuring timely access to beneficial ownership information — End-December 2023.
  - Publish an issuance schedule for treasury bonds on the Ministry of Finance’s website — End-January 2024.
  - Make the electronic asset declaration system for public officials operational nationwide — End-February 2024.
  - Prepare a Special Law to Strengthen the Single Treasury Account and submit to National Congress — End‑March 2024.
  - Create the Single Social Sector Information System (SUISS) and populate it — End‑June 2024.
  - Prepare a draft law on Simplification of Administrative Procedures and submit to National Congress — End‑June 2024.
  - Complete the census of urban households in extreme poverty and register data in SIRBHO — End‑September 2024.
  - Make operational a comprehensive beneficial ownership registry to implement the Law on Beneficial Ownership — End‑December 2024.
  - Conclude liquidation and audit of all trust funds and integrate into budget and central government balance sheet — End‑December 2024.
  - Operationalize the Special Law to Strengthen the Single Treasury Account — End‑December 2025.

*Source: IMF staff report text provided in the content unit.*

### 12.      Definition: ENEE’s domestic arrears are defined as overdue payments of ENEE to all entities

### 12.      Definition: ENEE’s domestic arrears are defined as overdue payments of ENEE to all entities

### ENEE domestic arrears — definition and monitoring
- Definition: ENEE’s domestic arrears are defined as overdue payments of ENEE to all entities that are not part of the Honduran public sector.
- Technical delays exclusion: Technical delays stemming from the payment process will not be considered arrears.
  - Technical delays are defined as unpaid claims still under the maximum period allowed for payment stated in the law on state contracts (Decree 74-2001).
  - Decree 74-2001 states a deadline up to 45 days starting from the submission of appropriate documents for payment.
  - The definition does not preclude payment before the deadline if it is agreed by both parties.
- Reporting/Monitoring: The data on ENEE’s stock of domestic arrears will be provided to the Fund with a lag of no more than 45 calendar days after the end of each month.

### External debt and arrears — definitions and coverage
- Definition of debt (residency criterion): “Debt” means a current, i.e., not contingent, liability created under a contractual arrangement through the provision of value in the form of financial and nonfinancial assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services at some future point(s) in time; payments discharge principal and/or interest liabilities incurred under the contract.
- Primary forms of debt described:
  - Loans: advances of money (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets equivalent to fully collateralized loans (repurchase agreements and official swap arrangements).
  - Suppliers’ credits: contracts where the supplier allows the obligor to defer payments until sometime after delivery/provision of services.
  - Leases: arrangements where the lessee has the right to use property for specified periods; for the program, debt equals the present value (at inception of the lease) of all lease payments expected to be made during the agreement period excluding payments covering operation, repair, or maintenance.
- Definition of external arrears (program monitoring): External debt payments arrears are external debt obligations (principal and interest) falling due after June 30, 2023, that have not been paid, considering contractual grace periods.
  - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are themselves debt.
  - Failure to pay obligations not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.
- Coverage of the performance criterion on external arrears:
  - Applies to the NFPS.
  - Excludes: (i) arrears on trade credits, (ii) arrears on debt subject to renegotiation and restructuring, and (iii) arrears resulting from nonpayment of commercial claims that are the subject of litigation initiated prior to November 30, 2022.
  - Nonpayment of external debt service to Venezuela will not give rise to arrears when the government cannot pay or settle based solely on factors outside the debtor’s control (such as existence of sanctions on Venezuela), provided debt service payments have been paid in full into an escrow account held at the Central Bank of Honduras by the contractual due date, taking into account any contractual grace period.
  - Funds in such escrow accounts will be used only to satisfy the related external debt obligations; their use or withdrawal for other purposes would constitute a breach of the performance criterion.
- Monitoring: This performance criterion will be monitored on a continuous basis.

### Non-Borrowed Net International Reserves (NIR) — definitions, measurement, monitoring, and adjustors
- NIR definition: Non-Borrowed Net International Reserves (NIR) of the BCH equal 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 in the document. Non-U.S. dollar denominated foreign assets and liabilities will be converted into U.S. dollar at the program exchange rates.
- Gross official reserves (BPM6-consistent) 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: 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) all liabilities outstanding to the IMF; (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.
  - SDR allocations are not netted out from gross international reserves for the calculation of net international reserves.
- Monitoring: Foreign exchange asset and liability data will be provided to the Fund at a daily frequency, with a lag of no more than 3 business days.
- Adjustors:
  - The NIR target will be adjusted upward (downward) by the surplus (shortfall) in disbursements (loans and grants) for programs and projects from official multilateral and bilateral institutions, relative to the baseline projection reported in Table AII.2.
  - In case Honduras participates in a new SDR allocation, the floor on NIR will be adjusted upward by the amount of the additional SDR allocation up to the test date.

### Net Domestic Assets (NDA) of the BCH — ceiling, monitoring, adjustors
- Definition: NDA of the BCH are defined as the difference between currency issued and non-borrowed NIR measured at program exchange rates.
- Coverage: 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 after the end of each month.
- Adjustor for multilateral loans: Consistent with the NIR adjustor, the NDA target will be adjusted downward (upward) by the surplus (shortfall) in disbursements (loans and grants) for programs and projects from official multilateral and bilateral institutions, relative to the baseline projection reported in Table AII.2.
  - In case Honduras participates in a new SDR allocation, the ceiling on NDA will be adjusted downward by the amount of the additional SDR allocation up to the test date.

### Monetary financing of the Central Bank to the NFPS — definition, ceiling, monitoring
- Definition: Monetary financing is any disbursement from the BCH to the NFPS after January 1, 2023, under any loan between these entities, whether the loan is repayable or not or interest-bearing or not.
  - Exception: the on-lending loan between BCH and SEFIN under which the BCH will on-lend IMF disbursements received as part of this program to SEFIN.
- Ceiling and monitoring:
  - The program establishes a ceiling of zero on net monetary financing in accordance with Attachment I (Memorandum of Economic and Financial Policies), section E, paragraph 23; this performance criterion will be monitored on a continuous basis.
  - For monitoring, the BCH balance sheet, with detail on the net credit balance to the NFPS, will be provided to the Fund on a daily basis with a lag of no more than one business day.

### Quantitative indicative targets — selected variable definitions and monitoring
- Floor on 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 Governance Finance Statistics Manual (GFSM) 2014.
  - For compliance, the central government is considered equivalent to the budgetary central government (Administración Central).
  - Measurement: Tax revenues measured at each test date as the cumulative value starting from the beginning of each calendar year.
  - Monitoring: Monthly data provided to the Fund no more than 2 weeks after the end of the month.
- Ceiling on current primary spending of the NFPS excluding priority social spending:
  - Definition: Primary current spending excluding priority social spending = total current spending minus interest spending minus priority social spending.
  - Current expenditure defined as total expenditures of the SNPF minus capital expenditures (net acquisition of non-financial assets). All expenditures recorded on an accrual basis.
  - Measurement: Measured at each test date as the cumulative value starting from the beginning of each calendar year.
  - Monitoring: Monthly data provided to the Fund within 45 days of the end of each month.
- Floor on Priority Social Spending:
  - Definition: Interventions by the central government with high impact on poverty reduction and long-term influence on beneficiaries listed in Table AII.3 (including Red Solidaria; Becas SEDESOL; Ciudad Mujer; Merienda Escolar; Bono Tecnológico; Bono Cafetalero; Bono Ganadero; Becas PROASOL; Bonos PROASOL).
  - Measurement: Measured at each test date as the cumulative value starting from the beginning of each calendar year.
  - Monitoring: Monthly data provided to the Fund within 45 days of the end of each month.
- Ceiling on Percentage of Energy Lost by ENEE in Energy Distribution:
  - Definition: Percentage lost = (energy injected into the distribution network minus sales invoices issued to customers) (both in GWh) during the 12 months prior to the test date, divided by energy injected into the distribution network during the same period.
  - Monitoring: Monthly data provided to the Fund within 45 days of the end of each month.

### Public debt coverage, domestic debt recognition, and debt sustainability findings
- Public debt coverage:
  - The DSA covers the non-financial public sector (NFPS), including general government and non-financial state-owned enterprises (SOEs). Debt from extrabudgetary trust funds is included following legislative abolition of trust funds in 2022.
  - Debt from decentralized agencies (public universities, public pension funds) and central bank borrowing on behalf of the government is covered.
- Recognition of previously unaccounted domestic debt in 2022:
  - The baseline 2022 debt stock includes 2.6 percent of GDP in domestic debt previously unaccounted for, comprised of:
    - 0.3 percent of GDP relating to central government arrears to domestic suppliers;
    - 1.1 percent of GDP consisting of trust funds’ debt liabilities;
    - 1.2 percent of GDP pertaining to arrears to private electricity generators accumulated by ENEE.
  - Table excerpt (Lempiras and % GDP):
    - Domestic Debt 20,500 2.6
    - Central government 2,165 0.3
    - Trust funds 8,547 1.1
    - ENEE 9,788 1.2
- Contingent liability stress test calibrations:
  - Default shock for other entities of general government: 0 percent of GDP.
  - Default shock for SOE debt and government-guaranteed private debt: 2 percent of GDP (capturing 0.4 percent of GDP linked to a highway concession project and 1.5 percent of GDP linked to the electricity utility).
  - Publicly-guaranteed external debt of a financial SOE: 0.1 percent of GDP.
  - PPP default shock: revised to 5.7 percent of GDP (reflecting PPP project liabilities, including a PPP project worth 1.6 percent of GDP).
  - Financial market shock minimum value: 5 percent of GDP.
- Debt stock and composition (2022):
  - Public and publicly guaranteed (PPG) debt stood at 52.3 percent of GDP in 2022, with external debt accounting for 30 percent of GDP.
  - The 2022 uptick to 52.3 percent of GDP is explained by recognition of the 2.6 percent of GDP in previously unaccounted domestic debt.
- Recent economic context affecting debt:
  - Real GDP growth: 12.5 percent in 2021; 4 percent in 2022.
  - Factors affecting ENEE arrears: COVID-19 lockdowns increased electricity demand; government prohibition on suspension of household electricity services and allowance of deferred payments increased ENEE accounts receivable; tropical storms Eta and Iota caused infrastructure damage and revenue losses.
  - Estimated cost of Eta and Iota: 246 million lempiras (0.1 percent of GDP), of which 109 million lempiras correspond to damages to infrastructure and 146 million lempiras to losses.
- Policy guidance highlighted:
  - Authorities should remain committed to prudent policies, including continuing to strike a sound balance between addressing social and investment needs and preserving fiscal and debt sustainability.
  - Sustained efforts are recommended to develop the domestic debt market, improve debt management practices, enhance monetary and foreign exchange policy frameworks, and strengthen the energy sector as safeguards to debt sustainability.
- Risk assessment summary:
  - Risk of external debt distress: Low.
  - Overall risk of debt distress: Moderate.
  - Honduras maintains a strong debt-carrying capacity; while none of the external debt burden indicators breach thresholds, the PV of public debt-to-GDP ratio breaches its threshold under the most severe stress test scenario.
  - The debt sustainability outlook remains vulnerable to policy slippages and exogenous shocks (adverse weather events and deterioration of the global outlook).

*Prepared by staff of the International Monetary Fund and the International Development Association. September 5, 2023.*

### 4.      Total external debt moderated from 40.7   percent of GDP in 2021 to 37.1   percent of

### 4.      Total external debt moderated from 40.7   percent of GDP in 2021 to 37.1   percent of

### External debt levels and recent movements
- Total external debt: moderated from 40.7 percent of GDP in 2021 to 37.1 percent of GDP in 2022 (Table 1).
- PPG external debt-to-GDP ratio: declined to 30.0 percent of GDP in 2022, from 32.5 percent of GDP in 2021, amid higher GDP growth and inflation.
- Nominal changes in 2022:
  - Total multilateral debt increased by about US$432 million or 6.4 percent y/y, driven by the public sector.
  - Private external debt declined by US$66.7 million or 2.9 percent y/y, owing to a moderation in the stock of debt owed to multilateral and commercial creditors.
- Without the recognition of new domestic debt, the 2022 PPG debt stock would have been 49.7 percent of GDP, i.e., lower than in 2021.

### Debt composition and creditor structure
- PPG external debt creditors (2022):
  - 70.4 percent of PPG external debt is owed to multilateral creditors.
  - 11.6 percent to official bilateral creditors.
  - The remainder is owed to commercial banks or Eurobond holders (Text Figure 2).
- PPG Domestic Debt by borrower (2022):
  - Central government: 79%
  - Local government: 6%
  - Non-financial SOEs: 15%
- Main creditors to Honduras:
  - International bondholders and official multilateral creditors such as the Inter-American Development Bank (IDB), the Central American Bank for Economic Integration (CABEI), and the World Bank.
- Domestic/public debt features:
  - Multilateral institutions provide lending at relatively long maturities.
  - Public domestic debt is mainly held by domestic commercial banks, has a shorter—though rising—maturity (over 4 years) and carries a higher real interest rate.
  - Domestic issuances were replaced by borrowing from the Central Bank in 2022; this change in the Debt Management Strategy negatively impacted domestic debt market development and reduced investment opportunities, including for pension funds.

### Macroeconomic and policy assumptions underpinning projections
- General assumptions: main macroeconomic assumptions based on staff projections and EFF/ECF program targets (Text Table 3 summarizes baseline macroeconomic projections).
- Real GDP growth projections (Current DSA):
  - 2021: 12.5
  - 2022: 4.0
  - 2023: 2.9
  - 2024: 3.2
  - 2025: 3.5
  - 2026: 3.7
  - 2027: 3.8
  - 2028: 3.8
  - 2033: 3.9
  - 2043: 3.9
- Inflation, period average (Current DSA):
  - 2021: 4.5
  - 2022: 9.1
  - 2023: 6.4
  - 2024: 4.7
  - 2025: 4.1
  - 2026: 4.0
  - 2027: 4.0
  - 2028: 4.0
  - 2033: 4.0
  - 2043: 4.0
- Fiscal sector:
  - NFPS deficit expected to widen to 2.0 percent of GDP in 2023.
  - NFPS deficit targeted to return to 1 percent of GDP by 2026 under gradual fiscal consolidation.
  - Projected three-year fiscal adjustment in the primary balance: 1.2 percentage points of GDP between 2023 and 2025.
- External sector:
  - Current account deficit projected to widen to 5.2 percent in 2023.
  - Reserve adequacy expected to remain within the recommended 100-150 percent range of the ARA metric and close to 5 months of import cover over the medium term.
- Financing assumptions:
  - External: baseline assumes net positive financing from IFIs and Eurobond placements of USD 700 million in 2026 and USD 600 million in 2030.
  - Grant element of new external public sector borrowing projected to average 18.5 percent over 2023-27.
  - Domestic: in 2022, authorities resorted to US$1 billion (3.2 percent of GDP) in monetary financing. DSA assumes some drawdowns of treasury deposits and gradual resumption of regular issuance of Treasury bonds at market rates. Authorities committed to preparing an annual borrowing plan and a Medium-term Debt Management Strategy (MTDS) at the time of the 2024 budget.

### Debt sustainability assessment (DSA) findings and stress tests
- Debt-carrying capacity:
  - Honduras classified as "strong" with CI score of 3.13 (threshold for strong: CI>3.05).
  - CI contributions: CPIA (42 percent), international reserves (32 percent), world growth (12 percent), remittances (10 percent), Honduras’ real growth rate (3 percent).
- External DSA:
  - None of the PPG external debt burden indicators breach thresholds under the baseline or the most extreme standardized stress test.
  - PV of PPG external debt ratios to GDP and exports expected to decline gradually from 2026, averaging 21 and 57 percent over 2023-33.
  - PV of PPG external debt-to-GDP ratio projected to increase to 45.7 percent of GDP in 2026 under the most extreme standardized shock before receding.
  - PV of PPG external debt-to-exports projected to peak at 131.9 percent in 2026 under the most extreme standardized shock.
- Public DSA:
  - Under the baseline, PV of public debt-to-GDP ratio projected to decline from 47.4 percent of GDP in 2023 to 42.6 percent of GDP in 2028 and to 29.3 percent of GDP by 2043.
  - Under the most extreme stress test (growth shock), the PV of public debt-to-GDP ratio breaches its benchmark from 2028 onwards.
- Market-financing risk indicators:
  - Maximum gross financing needs over a 3-year period under baseline expected to be around 6 percent of GDP (benchmark: 14 percent).
  - EMBI spreads stood at 376 basis points as of August 18, 2023 (benchmark: 570 basis points).
- Risk classification:
  - Risk of external debt distress: low.
  - Risk of overall public debt distress: moderate (from low in August 2021), because PV of debt-to-GDP ratio breaches its benchmark under the most extreme stress test scenario.

### Policy implications and recommendations highlighted
- Maintain commitment to the ECF/EFF program reform agenda to underpin fiscal consolidation and growth-enhancing investment.
- Gradually return NFPS deficit to below 1 percent of GDP by 2026 through revenue measures (including major reform of tax exemptions) and expenditure reprioritization toward social spending.
- Deepen domestic debt market to mitigate liquidity risks, including issuing domestic debt instruments with increasing maturities and predominantly at fixed rates.
- Prepare and implement an annual borrowing plan and a Medium-term Debt Management Strategy (MTDS) as committed for the 2024 budget, underpinned by IMF/World Bank technical assistance recommendations.
- Strengthen monetary policy transmission, liquidity management, and the crawling band exchange rate regime to support external competitiveness and return inflation to the BCH reference range (3-5 percent) in 2024.
- Implement public investment management reforms (planning, selection, monitoring, procurement) and structural reforms to improve institutions, transparency, governance, and public finance management.
- Gradually reduce ENEE’s stock of domestic arrears and follow ENEE’s bond issuance strategy to repay arrears (around 2 percent of GDP at end-2022) while avoiding new arrears accumulation.

*Source: Country authorities and IMF staff elaboration (excerpts from the Honduras DSA and macroeconomic framework).*

### 14.      The authorities broadly agreed with the assumptions and results of the DSA. They

### 14.      The authorities broadly agreed with the assumptions and results of the DSA. They

### Authorities’ views and policy stance
- The authorities broadly agreed with the assumptions and results of the DSA.
- Acknowledged downside risks to the outlook, including from climate shocks and a deceleration of the maquila sector, given lower external demand.
- Noted that market financing risks have been abating, with EMBI spreads for Honduras gradually declining over the past few months.
- Reiterated commitment to transparency with the regularization of domestic debt that was previously unaccounted.

### External debt sustainability — key indicators and assumptions (selected)
- Gross external financing need (Billion of U.S. dollars): 2.1; 3.7; 3.6; 4.2; 4.4; 4.5; 4.1; 4.7; 4.0; 4.1; 4.9; 4.5; 4.7; 4.9; 6.8
- Real GDP growth (in percent): -9.0; 12.5; 4.0; 2.9; 3.2; 3.5; 3.7; 3.8; 3.8; 3.9; 3.9; 3.9; 3.9; 3.9; 3.2; 3.7
- Government revenues (excluding grants, in percent of GDP): 25.9; 28.0; 28.0; 26.9; 27.5; 27.8; 27.8; 27.8; 27.8; 27.9; 27.9; 27.9; 27.9; 27.9; 28.5; 27.7
- Grant-equivalent financing (in percent of GDP): .........0.9; 1.1; 0.9; 0.8; 0.6; 0.4; 0.4; 0.4; 0.4; 0.4; 0.4; 0.3...0.6
- PV of PPG external debt-to-GDP ratio (selected projection values): 25.4; 23.9; 23.6; 22.7; 24.5; 22.2; 21.6; 21.1; 20.4; 19.5; 18.5; 17.6; 10.2
- PPG debt service-to-exports ratio (selected): 12.7; 5.0; 5.3; 6.6; 7.6; 7.8; 5.2; 9.6; 4.6; 4.3; 7.8; 4.9; 5.1; 5.0; 2.9
- Memorandum — PV of external debt (selected): ......32.5; 31.1; 30.8; 29.8; 31.7; 29.4; 28.8; 28.2; 27.5; 26.7; 25.7; 24.7; 17.4

### Public debt sustainability — key indicators and assumptions (selected)
- Public sector debt (in percent of GDP, selected): 54.1; 51.6; 52.3; 51.9; 51.3; 50.4; 49.1; 47.8; 46.6; 38.5; 30.7; 44.7; 45.4
- PV of public debt-to-GDP ratio (selected): ......47.8; 47.4; 46.5; 45.6; 44.4; 43.4; 42.6; 35.9; 29.3
- Debt service-to-revenue and grants ratio (selected): 16.9; 6.8; 7.9; 20.6; 23.0; 23.1; 18.6; 23.1; 19.0; 18.1; 16.8
- Gross financing need (selected): 8.3; 3.9; 0.7; 6.0; 6.4; 6.3; 4.7; 6.0; 4.7; 4.6; 4.3
- Key fiscal assumption — Primary deficit that stabilizes the debt-to-GDP ratio (selected): 5/-5.3; 4.8; -1.9; 1.1; 0.9; 0.9; 0.8; 0.9; 0.8; 0.5; 0.4; -0.8; 1.0

### Sensitivity analysis — highlights from Table 3 (public and PPG external debt, 2023–33)
- Baseline public and PPG external debt indicator (selected values): 24; 24; 23; 25; 22; 22; 21; 20; 20; 19; 18
- Alternative scenarios and stress tests reported include:
  - A1. Key variables at their historical averages in 2023-2033
  - Bound tests: B1. Real GDP growth; B2. Primary balance; B3. Exports; B4. Other flows; B5. Depreciation; B6. Combination of B1–B5
  - Tailored tests: C1. Combined contingent liabilities; C2. Natural disaster; C4. Market Financing
- Thresholds and baseline comparisons are presented for each test to assess breach risk.

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

### 2. Primary balance788610558666

### 2. Primary balance788610558666

### Sensitivity Analysis for Key Indicators of Public Debt (2023-33)
- Table 4 baseline and scenario values (In percent):
  - Baseline (debt service-to-exports / debt service-to-revenue / PV of debt-to-exports / PV of debt-to-GDP): entries include sequences such as Baseline4747464443433938373736 for 2023–2033.
  - A. Alternative Scenarios
    - A1. Key variables at their historical averages in 2023-2033 2/: 4748484949504849515253 (2023–2033).
  - B. Bound Tests
    - B1. Real GDP growth: 4753616468727276798387 (2023–2033).
    - B2. Primary balance: 4750545352514847464545 (2023–2033).
    - B3. Exports: 4751595856555150494746 (2023–2033).
    - B4. Other flows 3/: 4756656362615756545250 (2023–2033).
    - B5. Depreciation: 4750464340373229272422 (2023–2033).
    - B6. Combination of B1-B5: 474851515151514847474747 (2023–2033).
  - C. Tailored Tests
    - C1. Combined contingent liabilities: 4759585756555150494848 (2023–2033).
    - C2. Natural disaster: 4757575655555151505050 (2023–2033).
    - C3. Commodity price: n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.n.a.
    - C4. Market Financing: 4747464443433938373736 (2023–2033).
- TOTAL public debt benchmark: 7070707070707070707070.
- Projections (selected series shown in table):
  - Baseline PV of Debt-to-Revenue Ratio and related series include sequences such as Baseline174 167 162 158 155 152 138 135 133 130 128.
  - A1. Alternative scenario PV of Debt-to-Revenue Ratio: 174 171 171 173 176 179 172 176 180 183 187.
  - Bound test B1. Real GDP growth shock PV of Debt-to-Revenue Ratio: 174 189 216 228 241 255 255 268 282 295 308.
  - Bound test B5. Depreciation shock PV of Debt-to-Revenue Ratio: 174 178 165 153 143 133 113 104 95 86 77.
  - Baseline debt service-to-revenue ratio series: Baseline21 23 23 19 23 19 18 25 17 18 18.
  - A1. Alternative scenario debt service-to-revenue: 21 23 23 19 24 20 22 30 23 25 26.
  - Bound tests and tailored tests report debt service-to-revenue series (examples): B1: 21 25 28 24 30 26 31 44 36 39 41; C1: 21 23 26 21 26 22 43 29 21 22 22.
- Notes and definitions:
  - 1/ A bold value indicates a breach of the benchmark.
  - 2/ Variables include real GDP growth, GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.
  - 3/ Includes official and private transfers and FDI.
  - Sources: Country authorities; and staff estimates and projections.

### Stress Tests, Shocks, and Assumptions
- Stress test customization and default settings (selected entries preserved):
  - Threshold: 4.2%4.2%
  - Market financing: NoNo
  - Tailored Stress: 5.0% / 5.0% (appears alongside “5” and “22” entries)
  - Combined CL / Natural disaster: Most extreme shock: No
  - Commodity price: n.a.n.a.
  - Note: All the additional financing needs generated by the shocks under the stress tests are assumed to be covered by PPG external MLT debt in the external DSA. Default terms of marginal debt are based on baseline 10-year projections.
- Borrowing assumptions on additional financing needs resulting from the stress tests:
  - External PPG MLT debt, historical scenario, baseline borrowing assumptions shown; Specific shares and terms include entries such as Baseline: 38%30% and 62%70% in figure annotations.
  - Avg. nominal interest rate on new borrowing in USD and other terms noted as defaulted to baseline 10-year projections; explicit numeric averages not provided beyond percentage labels shown above.

### Figures — Public Debt Indicators and Drivers (2023-33)
- Figure highlights (preserve stated most extreme shock labels and outcomes):
  - Figure 1 (External debt indicators): Most extreme shock 1/ notes: “Most extreme shock: Combination” for debt service-to-revenue ratio; “Most extreme shock: Exports” for PV of debt-to-exports and debt service-to-exports ratios; “Most extreme shock: Combination” for PV of debt-to-GDP ratio.
  - Figure 2 (Public debt under alternative scenarios): terms of marginal debt and shares of marginal debt presented; “Most extreme shock: Growth” appears for PV of Debt-to-Revenue Ratio and Debt Service-to-Revenue Ratio.
  - Figure 3 (Drivers of Debt Dynamics—Baseline Scenario): Contributions broken down by Real GDP growth, Nominal interest rate, Price and exchange rate, Current account + FDI, Residual, Other debt-creating flows; labels include “Change in PPG debt 3/” and time series markers 20 18 … 33 across vintages.
  - Figure 4 (Realism Tools): Fiscal Adjustment and Possible Growth Paths 1/ show 3-Year Adjustment in Primary Balance (Percentage points of GDP) with multipliers = 0.2, 0.4, 0.6, 0.8; distribution notes: “3-year PB adjustment greater than 2.5 percentage points of GDP in approx. top quartile.”
  - Figure 5 (Market Financing Risk Indicators): Benchmarks and values noted: Benchmarks14, EMBI 570, Values6376; indicators plotted include GFN, EMBI spreads, Debt service-to-revenue ratio, PV of debt-to-exports ratio, PV of debt-to GDP ratio, Debt service-to-exports ratio.

### Market Financing and Liquidity Risk
- Market financing risk indicators and benchmarks:
  - Potential heightened liquidity needs: Low
  - Breach of benchmark: No
  - GFN Benchmarks: 14
  - EMBI Benchmark: 570
  - EMBI Values: 6376
- Plotted risk series (selected series labels preserved): debt service-to-revenue ratio, PV of debt-to-exports ratio, PV of debt-to-GDP ratio, debt service-to-exports ratio across 2023–2033.

### Fund Relations, Financial Position, and Payments (as of July 31, 2023)
- Membership and quota:
  - Quota: 249.80 (SDR Million) 100.00 (% Quota)
  - Fund holdings of currency (Exchange Rate): 482.55 193.17
  - Reserve Tranche Position: 38.70 15.49
- SDR Department:
  - Net cumulative allocation: 363.27 100.00
  - Holdings: 30.37 8.36
- Outstanding Purchases and Loans (SDR Million; % Allocation):
  - Stand-by Arrangements: 271.45 108.67
  - SCF Arrangements: 143.22 57.33
- Latest Financial Arrangements (type / Date of Arrangement / Expiration Date / Amount Approved / Amount Drawn (SDR Million)):
  - SCF 07/15/2019 01/14/2022 179.02 143.22
  - Stand-By 07/15/2019 01/14/2022 358.05 281.44
  - Stand-By 12/03/2014 12/02/2017 77.70 0.00
- Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - Principal: 2023 45.17; 2024 141.99; 2025 114.14; 2026 53.68; 2027 31.83
  - Charges/Interest: 2023 13.37; 2024 23.35; 2025 17.34; 2026 14.19; 2027 13.43
  - Total: 2023 58.54; 2024 165.34; 2025 131.48; 2026 67.88; 2027 45.26

### Other Institutional and Historical Notes
- Implementation of Enhanced HIPC Initiative:
  - Decision point date June 2000
  - Assistance committed (NPV terms): Total assistance (US$ million) 556.00; Of which: IMF assistance (US$ million) 30.30
  - Completion point date April 2005
  - Disbursement of IMF Assistance (SDR million): Amount disbursed 22.66; Interim assistance 8.80; Completion point balance 13.86; Additional disbursement of interest income 3.70; Total Disbursements 26.36
- Implementation of MDRI Assistance:
  - Total Debt Relieve (SDR million) 107.46; Of which: MDRI 98.24; HIPC 9.21
  - Eligible Debt Delivery Date GRA PRGF Total: January 2006 N/A 107.46 107.46
- Safeguards Assessment summary:
  - 2019 assessment found the Banco Central de Honduras’ (BCH) legal framework and governance arrangements have serious weaknesses.
  - Revised central bank law submitted to Congress in 2021 was not enacted; shortcomings remain.
  - BCH appoints good quality external auditors; transitioned to IFRS; authorities taking steps to align BCH’s internal audit with international leading practices.
- Exchange rate arrangement:
  - De jure: crawling band.
  - De facto: reclassified to “stabilized”, since February 2022.
  - Lempira exchange rate determined in foreign exchange auctions of the BCH.
  - Honduras has accepted obligations under Article VIII, Sections 2, 3, and 4; maintains two multiple currency practices (MCP) subject to approval and one exchange restriction subject to approval.

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

### Section 2(a). This arises from restrictions on the availability of FX for payments and transfers for

### 1hndea2023001 - Section 2(a). This arises from restrictions on the availability of FX for payments and transfers for

### FX restrictions and operational detail
- The BCH applies restrictions on the availability of FX for payments and transfers for current international transactions by rejecting bids to purchase FX in the BCH FX auction made by exchange agents on behalf of customers who have not duly repatriated export proceeds of two export transactions in the defined repatriation timeframe.

### Article IV consultation and past assessments
- Last Article IV Consultation: On July 15, 2019 the Executive Board concluded the 2019 Article IV Consultation.
- Data ROSC published on July 29, 2005.
- Fiscal ROSC conducted on February 26–March 2, 2001 (IMF Country Report No. 02/16) and updated (IMF Country Report No. 05/256).
- Data ROSC conducted on July 8–24, 2003 (IMF Country Report No. 05/230).
- FSAP conducted on October 14–19, 2002 and January 20–February 4, 2003. FSAP Update conducted on September 24 to October 9, 2007.
- FSSR conducted on June 8-9 and July 11-22, 2016.

### Technical assistance provided since January 2019 (departmental highlights)
- LEG
  - Governance Diagnostic — March, June 2019
- MCM
  - CAPTAC: Operational Risk — March-19
  - CAPTAC: Financial Supervision — May-19
  - FPAS review — May-19
  - Modernization of exchange rate policy and operations, and monetary policy implementation — May-19
  - CAPTAC: Monetary and FX Policy and interactions with Domestic Debt Market Development — February-20
  - Developing FX Derivatives Regulatory Framework (Virtual) — October-20
  - CAPTACDR: Expected Credit Loss model (Virtual) — November-20
  - Accounting for FX Revaluations (Virtual) — December-20
  - Nowcasting Tools Development — January-21
  - CAPTACDR: Credit risk ECL model (Virtual) — February-21
  - Honduras Central Bank’s FX Derivatives Regulation Revision — May, June 2021
  - Monetary Operations Scoping Mission (Virtual) — July, August 2021
  - Derivatives Training (Virtual) — November-21
  - Central Bank Liquidity Forecast and Management (Virtual) — January, March 2022
  - Reference Exchange Rate New Methodology (Virtual) — February, March 2022
  - Deciding on Introducing a retail CBDC I (Virtual) — March, April 2022
  - ECL supervisory model phase II — April-22
  - Semi Structural Model Update — November-22
  - Drafting of Discussion Paper on CBDC — November, December 2022
  - MTDS — January-23
  - ECL supervisory model phase II — April-23
- FAD
  - CAPTAC: Treasury - TSA — January-19
  - CAPTAC: Post Clearance Process — March, April 2019
  - CAPTAC: Workshop on Customs Intelligence — April-19
  - CAPTAC: Strategic Planning — April-19
  - Transparency of COVID-19 spending and the management of trust funds and on fiscal risks management — June-20
  - Implementation of the trust funds action plan during COVID-19 — March, October 2020
  - CAPTAC: support on budget preparation — April-20
  - Compliance risk management — June-20
  - Tax information management — July-20
  - CAPTAC: Post clearance audits and risk management — August-20
  - CAPTAC: Internal Controls — December-20
  - SOE’s fiscal risks oversight — November-21
  - Fiscal risks — August-2021
  - Information management — October-21
  - Tax gap estimation — November-21
  - Managing compliance risks relative to tax incentives and construction — November, December 2021
  - CIT incentives — February, 2023
  - Trust funds — March-23
- STA
  - CAPTAC: Quarterly data compilation and OSDS — January-19
  - CAPTAC: National Accounts — March-19
  - CAPTAC: National Accounts-Annual Accounts by Industry: Rebasing Project 2016 (I) — August-19
  - CAPCTAC: National Accounts-Annual Accounts by Industry: Rebasing Project 2016 (II) — October-19
  - CAPTAC: Sectoral Accounts — January-20
  - CAPTAC: Consumer and Producer Price Index — January-20
  - CAPTAC: Sectoral Accounts and Flow of Funds (remote) — November-20
  - CAPTAC: Source Data for National Accounts (remote) — January-21
  - CAPTAC: Balance of Payments (remote) — January-21
  - CAPTAC: Producer Price Index (remote) — March-21
  - CAPTAC: Sectoral Accounts and Flow of Funds (remote) — March-21
  - CAPTAC: Household Income and Expenditure Survey Questionnaires (remote) — April-21
  - CAPTAC: Employment Matrix (remote) — April-21
  - CAPTAC: Supply and Use Tables (remote) — May-21
  - CAPTAC: Quarterly National Accounts (remote) — August-21
  - CAPTAC: Producer Price Index (remote) — October-21
  - CAPTAC: Sectoral Accounts and Flow of Funds (remote) — October-21
  - D4D: Residential Property Price Indices — April-22
  - CAPTAC: Producer Price Index (remote) — May-22
  - CAPTAC: Sectoral Account and Flow of Funds (remote) — June-22
  - CAPTAC: QNA and seasonal adjustment (remote) — July-22
  - CAPTAC: National Accounts: Backasting — February-23
  - CAPTAC: Producer Price Index — March-23

### Relations with other international financial institutions
- Central American Bank of Economic Integration (CABEI) — referenced.
- Inter-American Development Bank — referenced.
- World Bank — referenced.

### Statistical issues, assessment of data adequacy, and modernization plans (As of July 2023)
- General 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.
- Remaining gaps flagged in the previous Article IV include:
  - Lack of comprehensive data on the financial operations of public enterprises.
  - Need to enhance reporting of government guarantees and fiscal contingent liabilities.
  - Need for a valid and reliable methodology to estimate private capital flows.
- National Accounts:
  - BCH compiles national accounts following the System of National Accounts 1993 (1993 SNA). The base year is 2000.
  - BCH developed a project to rebase national accounts series to 2016, including adoption of main recommendations of the 2008 SNA, with CAPTAC-DR support. Project was planned to conclude by 2021 but is being redefined due to COVID-19 and priorities.
  - BCH is conducting a National Household Income and Expenditure Survey (NHIES), which will serve for the GDP and CPI rebasing at a date to be defined.
- Labor statistics: INE conducts its multipurpose household survey annually; more frequent employment and wage data are required for short-term policy analysis.
- Price statistics:
  - BCH prepares and publishes CPI since April 2000, reference period December 1999. CPI basket weights based on NHIES 1998–99.
  - A new NHIES for 2019 was rolled out and expected to be completed by end-2019.
  - BCH expanded coverage of PPI and updated base to 2010; current PPI compiled for internal use includes goods for processing activities (maquila), trade and transport margins, limiting its use for national accounts at constant prices.
- Government Finance Statistics:
  - SEFIN compiles and disseminates GFS covering central administration, central government, general government, and nonfinancial public sector.
  - SEFIN and BCH participate in the GFS data enhancement project for Central America, Panama, and Dominican Republic to compile and publish comparable GFS using GFSM 2014 framework and move toward implementation of GFSM 2014 and PSDSG.
  - A mechanism is needed to systematically collect data on arrears and floating debt of public enterprises.
- Monetary and Financial Statistics:
  - MFS reported to STA monthly using SRFs for central bank, other depository corporations, and OFCs; pension funds are excluded from OFC coverage.
  - Inclusion of pension funds and cross-sectoral data consistency between MFS and other datasets are major issues.
- Financial sector surveillance: Authorities report 11 out of 12 core financial soundness indicators and five of the encouraged set.
- External sector statistics:
  - BCH disseminates quarterly Balance of Payments and IIP statistics, and monthly the Data Template on International Reserves and Foreign Currency Liquidity.
  - Honduras participates in the CDIS and CPIS.
  - Work in progress aims to improve coverage of nonfinancial private sector transactions and positions, ensure consistency between external debt statistics and IIP, and complete migration to BPM6 basis.

### Table of Common Indicators Required for Surveillance (As of August 18, 2023) — selected rows
- Exchange Rates
  - Date of latest observation: August 2023
  - Date received: August 2023
  - 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: August 2023
  - Date received: August 2023
  - Frequency of Data: D
  - Frequency of Reporting: D
  - Frequency of Publication: D
- Reserve/Base Money
  - Date of latest observation: June 2023
  - Date received: August 2023
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Broad Money
  - Date of latest observation: June 2023
  - Date received: August 2023
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- Consumer Price Index
  - Date of latest observation: July 2023
  - Date received: August 2023
  - 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: July 2023
  - Date received: August 2023
  - Frequency of Data: M
  - Frequency of Reporting: M
  - Frequency of Publication: M
- External Current Account Balance
  - Date of latest observation: March 2023
  - Date received: July 2023
  - Frequency of Data: Q
  - Frequency of Reporting: Q
  - Frequency of Publication: Q

### Statement by Mr. Guerra and Ms. Lankester Campos (September 21, 2023) — main developments, commitments, and macroeconomic indicators
- Macroeconomic context and program objectives:
  - Program designed to improve social conditions, support structural reform agenda, strengthen institutions, increase market and investor confidence, and safeguard macroeconomic stability.
  - Program priorities include reducing poverty, protecting the most vulnerable, improving quality of fiscal policy, strengthening monetary policy framework, enhancing financial stability, and improving governance and business environment.
- Recent economic developments and staff/authorities projections:
  - Honduras’ economy expanded 12.5 and 4.0 percent in 2021 and 2022, respectively.
  - Central Bank expects the economy to grow between 3.0 and 3.5 percent in 2023.
  - Growth in 2024 is expected to be 3.5 percent.
  - Staff notes potential upsides from enhanced public budget execution increasing capital expenditure.
- Inflation and monetary policy:
  - By the end of 2022, year-on-year inflation reached 9.8 percent.
  - Inflation declined from 10.4 percent in July 2022 to 5.15 percent in July 2023.
  - Consumer inflation in August 2023 reached 5.71 percent; the monthly variation was 0.5 percent.
  - Central Bank expects inflation to converge to the BCH's 4.0 percent (± 1.0 percentage point) upper limit by the end of 2023 and be within the target range by the first half of 2024.
  - To create more space for the interbank market and contribute to disinflation, on August 24th the BCH modified the interest rate corridor, adjusting the Permanent Credit Facility (FPC) rate to 4.0 percent (prior action).
  - The program includes a quantitative performance criterion for the BCH's stock of domestic assets.
- Fiscal policy and governance:
  - Fiscal policy has remained prudent; deficit declined to near balance in 2022 with a recent slight increase to support social agenda.
  - Legislation to close public expenditure trust funds was approved in Congress.
  - Law on Tax Justice submitted to the National Congress to reduce tax exemptions and strengthen controls.
  - System for asset declaration by public officials was activated; platform to be used by sixty thousand public sector employees.
  - Geo-localization system for all investment projects implemented: "Honduras Inversiones."
  - Millennium Challenge Corporation announced in August that Honduras complies with necessary requisites to receive their subvention support.
  - Authorities committed to improving fiscal and customs administration, lowering smuggling and fiscal evasion, and increasing tax collection.
- Financial sector and supervision:
  - Financial sector remains sound with a well-capitalized banking system.
  - Credit stock reached 67.5 percent of GDP by the end of 2022, compared to 64 percent in 2021.
  - Non-performing loans (NPLs) were 2.3 percent of total loans; provisioning remained adequate at 137 percent of NPLs.
  - Recent stress tests by CNBS confirm resilience of the sector to significant shocks.
  - Authorities committed to strengthen regulatory framework, supervisory practices, and increase financial deepening; CNBS has streamlined documentation requirements for loan applications.
- Structural reforms and climate resilience:
  - Authorities committed to renegotiating contracts to lower electricity prices and improve governance of Empresa Nacional de Energía Eléctrica (EEH).
  - Honduras is highly vulnerable to climate disasters; authorities aim to protect social investment for the most vulnerable, improve food security, and increase sustainable public investment with a climate adaptation focus.
  - Authorities are interested in seeking additional Fund financing under the Resilience and Sustainability Fund (RSF) at a future program review to reduce balance of payments risks related to climate change and pandemics.
- Commitments to IMF engagement and technical assistance:
  - Government recognizes program with the Fund as a financial catalyst to boost private sector investment and reduce lending costs.
  - Authorities committed to maintain close dialogue with the Fund and to further rely on IMF technical assistance in fiscal, monetary, financial, and other areas.
  - Authorities expressed special interest in receiving TA from the Fund for governance improvements and to strengthen legal AML/CFT framework.

*Source: 1hndea2023001 - Section 2(a), IMF.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1hndea2023001.pdf_