## IMF staff report: Honduras (1hndea2024001-print-pdf) ## Source details **Canonical URL:** [IMF staff report: Honduras (1hndea2024001-print-pdf)](https://www.imf.org/-/media/files/publications/cr/2024/english/1hndea2024001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2024/english/1hndea2024001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2024/english/1hndea2024001-print-pdf.pdf.json) --- ### Executive summary — context, macro outcomes, and program stance - Context and program: - Executive Board approved 36-month, US$822 million arrangements under the Extended Fund Facility (EFF) and the Extended Credit Facility (ECF) for Honduras in September 2023. - Program aims: strengthen macroeconomic stability, create fiscal space for productive investment and social spending, and improve governance and transparency. - Authorities requested waivers of missed performance criteria and rephasing of access; staff supports completion of first and second reviews and rephasing. - An SDR 150 million purchase would be available upon completion of the combined review. - Recent macroeconomic developments: - Real GDP growth: 3.6 percent in 2023; growth continued at a similar pace in 2024:H1. - Inflation: 5.2 percent at end-2023; 4.1 percent in October 2024; core inflation around 5 percent. - Fiscal: 2023 headline deficit 1.3 percent of GDP (versus programmed 2.0 percent of GDP); public investment 4.2 percent of GDP; NFPS recorded a surplus of 2.0 percent of GDP as of September 2024. - Public debt: declined to 47.6 percent of GDP in 2023 (below programmed 52 percent of GDP). - Current account: deficit 3.9 percent of GDP in 2023 (from 6.7 percent in 2022). - Remittances growth through September 2024: 5.0 percent y/y cumulative annual growth. - Key exports cumulatively down 5.3 percent through August 2024; energy imports up 1.6 percent. - Shocks and disasters: - Early estimates: Tropical Storm Sara damages around 0.05 percent of GDP. - Staff will consider issuing a Supplement with additional information on the impact of Tropical Storm Sara as information becomes available. - Program performance highlights: - All end-December 2023 Performance Criteria (PC) met. - Missed end-June PCs: FX reserves (NIR), central bank net domestic assets (NDA), and stock of domestic arrears at ENEE; authorities request waivers based on corrective actions. - Structural reform agenda: started strongly but tax reform failed to secure Congressional approval; capacity constraints delayed some SBs. - Staff position: - Staff supports waivers for missed PCs based on corrective actions, supports rephasing of access, and notes an SDR 150 million purchase available upon completion of the combined review. ### International reserves dynamics (Box 1) — quantitative drivers and implications - Overall projection change: - At program approval: projected increase in NIR in 2024 of $73 million. - Updated projection: NIR projected to decline by more than $1 billion in 2024. - Quantitative breakdown of drivers (exact figures): - Official sector loan and grant disbursements shortfall: around $480 million in 2024 versus earlier expectations. - Additional oil imports due to drought: $275 million more than projected at program approval. - Lower exports: around $150 million lower than prior projections. - Of the projected $1 billion decline in NIR: - $408 million linked to net external official sector debt payments. - $645 million represents BCH’s FX market transactions with the private sector, of which: - $275 million to finance additional oil imports, - $150 million to lower export inflows, - Residual around $220 million attributed to monetary and exchange rate policies that did not support a balanced external position. - Balance of foreign exchange flows (lines as presented in source): - Net purchases from banks and FX sales to oil importers: -314105-645 - Net official sector disbursements: -552-32-408 - Loan and grant disbursements: 4301220740 - Debt service: -982-1252-1148 - Change in net international reserves: -86673-1053 - Policy implications: - Need to stabilize international reserves through: - monetary policy rate increases and an accelerated rate of crawl of the Lempira, - prudent fiscal stance to create space for capital and social spending, - energy sector reform and strengthened governance. ### Monetary and exchange rate policy — recent actions, stance, and roadmap - Recent policy moves and current stance: - TPM increases: - TPM increased by 100 bps to 4.0 percent in August 2024. - October TPM increase by 175 bps (prior action) bringing TPM to 5.75 percent. - Cumulative policy rate increases since August: 275 basis points in the staff appraisal. - Reserve requirements and liquidity: - Increase by 100 bps in reserve requirements in local currency to 10 percent (November 2023). - Change in maintenance period for reserve requirements from two-week to one day (then eased to 14 days with daily minimum 90 percent). - FX market measures: - 100 percent FX surrender requirement imposed; BCH FX auction reinstated in April 2023; interbank FX market suspended. - From mid-September 2024: daily annualized depreciation of the Lempira averaged 6 percent through mid-October; in mid-October crawl averaged nearly 10 percent annualized. - Policy guidance and path: - BCH committed to a rate of crawl in line with macroeconomic fundamentals and supporting REER adjustment. - BCH will remain data driven, aim to maintain a positive real policy rate, and be guided by domestic and global information including international interest rates. - Authorities to prepare a diagnostic study, in collaboration with Fund staff, to outline options and recommendations to strengthen FX allocation (proposed April 2025, SB). - BCH will not provide any new financing to the financial public sector (including BANHPROVI and BANADESA) — continuous performance criterion. - Exchange restriction and Fund approval: - BCH limits FX allocation in auctions (hard caps of $1.2 million per entity and $100,000 per individual per day) and prioritizes fuel importers; measures constitute an exchange restriction subject to Fund approval under Article VIII Section 2(a). - Authorities request Board approval to retain the exchange restriction on grounds it is for BOP reasons, temporary, and non-discriminatory, and committed to phasing out measures as balance of payments stability strengthens. ### External position and REER assessment - External position assessment: - Honduras’ external position in 2023 assessed as moderately weaker than level implied by fundamentals (External Sector Assessment, Annex IV). - REER overvaluation estimated about 5-10 percent; REER currently about 9 p.p. stronger than the 2012-19 average (Text Figure 4). - Counterfactual suggests Lempira would be nearly 9 percent weaker against USD at end-September 2024 had the exchange rate followed only the inflation differential and the NEER since 2020. - Reserve outlook: - Reserves declined significantly in 2024 but projected to stabilize and increase modestly in 2025, remaining above 100 percent of the ARA metric during the program. - Reserve levels remain adequate at around 4.3 months of imports coverage (as of mid-November 2024 gross international reserves $6.9 billion, 4.3 months). ### Financial sector and central bank governance - Financial sector health: - Banks well capitalized, liquid, and profitable. - Capital adequacy (Sept 2024): 13.6. - Nonperforming loans (Sept 2024): 2.2 percent. - Interbank rates increased to around 6.25 percent after the October 175 bps TPM increase. - Central bank safeguards and reforms: - BCH progressing on IFRS adoption, internal audit strengthening, and risk management improvements. - BCH to develop medium-term strategy to unwind quasi-fiscal operations, including transfer of the Investment Fund to the state and wind down of the Guarantee Fund by 2029. - BCH to begin technical engagement with Fund staff on safeguards and institutional strengthening. ### Energy sector (ENEE) — vulnerabilities, arrears, and reform plan - Vulnerabilities and recent developments: - Electricity losses elevated: technical losses reduced by 2½ percentage points since September 2023 but remained at 34.8 percent at end-October 2024. - ENEE cash flow deficits improving from over 1 percent of GDP in 2021 to expected 0.5 percent of GDP in 2024. - ENEE overdue invoices to generators: 9.8 billion Lempiras end-2023; grew to 17.5 billion Lempiras by end-September 2024. - Arrears reduction plan and prior actions: - Committee established by Council of Ministers decree composed of BCH, CNBS, ENEE, SEFIN, Ministry of Energy, and Secretariat of the Presidency to coordinate electricity sector financial policies (prior action). - Authorities issued 0.9 billion Lempiras in ENEE domestic debt by November 15 compared to goal of 5 billion Lempiras; SEFIN to transfer shortfall of 4.1 billion Lempiras (prior action) to ensure end-December PC. - SEFIN to absorb ENEE’s debt service of 2 billion Lempiras in each 2024 and 2025 and ensure smaller subsidies (0.5 billion Lempiras per annum) are paid timely. - Plan aims to reduce ENEE arrears to 11.5 billion Lempiras by end-2024 and further quarterly reductions of 1 billion Lempiras during 2025. - Structural reforms and governance: - Merge operative processes of three distribution entities (proposed end-August 2025, SB). - ENEE to implement IFRS with consultant (proposed end-March 2025, SB); publish IFRS-based audited financial statements for 2025 by mid-2026. - Comprehensive audit of ENEE by Superior Court of Accounts starting early 2025 with IDB support. - Renegotiated contracts with private power suppliers submitted to Congress; first set of 18 renegotiated contracts would reduce tariffs by about 5 percent and reduce ENEE’s arrears with one private generator by about 2 billion Lempiras if approved. ### Droughts and Tropical Storm Sara — Annex I findings on economic impact - Drought impacts (2023-24 El Niño): - Economic losses from droughts average approximately 0.5 percentage points of GDP per event; Honduras losses higher than regional peers. - Rainfall Jan 1–May 15, 2024: 15 percent lower vs same period in 2023. - Agricultural output declines through July 2024 (YoY): - Coffee harvests: around 9 percent decline. - Banana production: around 13 percent decline. - Palm oil production: around 8 percent decline. - Exports through July 2024: - Coffee exports fell 11.5 percent (Y/Y). - Palm oil exports declined around 18 percent (Y/Y). - Banana exports declined around 24 percent (Y/Y). - Lower agricultural exports reduced FX inflows in 2024 (through July) by approximately $272 million vs same period 2023 and $321 million vs 2022. - Energy impacts and fuel imports: - Lower hydroelectric generation forced increased fuel imports (bunker and diesel); additional energy imports of around $600 million in 2023 and 2024 through July compared to non-El Niño years. - Private firms generate 78 percent of power; ENEE generates mainly hydroelectric dams. - Counterfactual SVAR analysis (less-severe El Niño, one standard deviation lower): - 2023 counterfactual: fuel imports would have been around $355 million lower; agricultural exports around $209 million higher. - 2024 H1 counterfactual: fuel imports $268 million lower; agricultural exports around $93 million higher. - Under counterfactual, trade balance could have been 1.6 and 1.0 percent of GDP better in 2023 and 2024, respectively. - ENEE sector background: - Demand above 1,900 MW in 2024 vs peak production 1,698 MW, leading to scheduled outages. - Energy matrix end-2023: 37 percent fossil fuels, 63 percent renewable technologies. - Electricity losses: about 35 percent of energy produced or purchased is not billed; a one percentage point reduction in losses increases revenues by $22 million annually. - Investments and contingency capacity: - ENEE contracted 300 MW new generation capacity in 2024 and plans another 450 MW in 2025-26. - International tender planned to add 1,500 MW in 2027-29; Indicative Generation Expansion Plan 2024–2033 envisages total investment $2.6 billion focused on renewable energy. - Transmission Network Expansion Plan 2024-33 investments worth $770 million; Five-Year Business Plan 2024-2028 includes $1.7 billion distribution investment. ### Fiscal and debt outlook — projections and debt sustainability - Key macro projections (selected, as presented): - Real GDP growth: 2024 3.8; 2025 3.6; 2026 3.6; 2027 3.8; 2028 3.8; 2029 3.8. - CPI inflation (eop): 2024 4.8; 2025 5.0; 2026 4.1; 2027 4.0; 2028 4.0; 2029 4.0. - Fiscal balances and debt: - NFPS overall balance (percent of GDP): 2023 -2.0; 2024 -1.3; 2025 -1.7; 2026 -1.5; 2027 -1.4; 2028 -1.5; 2029 -1.0. - NFPS gross debt (percent of GDP): 2023 47.6; 2024 46.7; 2025 46.3; 2026 45.4; 2027 44.5; 2028 43.2; 2029 42.0. - Public debt: end-2023 48 percent of GDP (noted in Letter of Intent), DSA uses 47.6 percent of GDP as end-2023 in tables; issuance of a ten-year external bond (US$700 million) increased projected end-2024 gross public debt by around 2 percent of GDP to about 48.6 percent of GDP. - External financing and reserves: - Gross international reserves (GIR, US$ millions): 2023 7,840; 2024 projection 6,826; 2025 7,094; 2026 8,373. - GIR (In months of imports, excluding maquila): 2023 5.2; 2024 5.0; 2025 5.0; 2026 4.3. - Gross external financing requirement (US$ millions): 2024 4,369; 2025 4,408; 2026 4,133. - Financing gap (US$ millions): 2024 747; 2025 1,314; 2026 1,873. - Fund exposure and quota metrics: - Stock of existing and prospective Fund credit (SDR million): 2024 466.75; 2025 559.46; 2026 684.26. - In percent of quota (quota SDR 249.8 million): 2024 186.8; 2025 223.9; 2026 273.9; peaks at 274 percent of quota by end-2026 then declines to 115 percent of quota by 2032. - Repayments to the Fund projected to peak at 1.8 percent of exports and 3.2 percent of gross reserves in 2024, declining to 0.5 percent and 1.0 percent respectively by 2028. - Debt-carrying capacity and DSA conclusions: - CI score 3.12; CI rating: Strong. - Risk of external debt distress: Low; risk of overall public debt distress: Moderate. - Baseline: all PPG external debt burden indicators remain below prescribed thresholds through the DSA horizon. - Stress tests: extreme combined shocks could raise PV of PPG external debt-to-GDP to 41.5 percent in 2026 in the most extreme standardized stress test. ### Program implementation, monitoring, and structural benchmarks - Performance criteria and targets (selected outcomes and status): - NFPS net lending/borrowing: End-Dec 2023 Actual -11,222 (PC met); End-June 2024 Actual 8,302 (PC met by wide margin). - ENEE stock of domestic arrears (ceiling): End-Dec 2023 Actual 9,787 (Target 10,500, Met); End-Sept 2024 Actual 17,527 (Target 9,148, Not met). - Stock of non-borrowed net international reserves (floor, US$ millions): End-Dec 2023 Actual 5,126 (Target 5,465); End-June 2024 Actual 4,955 (Target 5,329, Not met); End-Sept 2024 Actual 5,268 (Target 5,500, Not met). - Tax revenue (central government, cumulative, Lempiras): End-Dec 2023 Actual 148,863 (Target 145,070, Met). - Structural benchmarks and resets: - Four of eleven SBs through September 2024 met; many SBs reset due to Congressional delays and capacity constraints. - Selected SB resets/new SBs and dates: - Approve Law on Tax Justice — End-May 2025 (reset). - Launch Digital Portal for Investment and digitize at least 50 processes — End-April 2025 (modified SB). - Adopt and publish “Manual for the programming of budget execution” — End-February 2025 (new SB). - ENEE to hire consultant to implement IFRS and establish separate divisions — End-March 2025 (new SB). - Integrate ENEE distribution units — End-August 2025 (new SB). - Operation of Beneficial Ownership registry — End-December 2025 (reset SB). - Prior actions completed for reviews: - TPM increased by 175 bps — Prior Action; met on October 24, 2024. - SEFIN transfer/payment to ENEE to fill shortfall of 4,101.6 million Lempiras — Prior Action; met. - Council of Ministers decree establishing inter-governmental committee for electricity sector coordination — Prior Action; met (published November 28). - Program monitoring: - Semi-annual reviews; monitored through PCs, ITs, and SBs as set out in TMU. - Authorities commit to providing data per TMU timelines (monthly with specified lags). ### Social, governance, AML/CFT, public investment, and climate policies - Social safety nets and spending: - Electricity free for poor households consuming less than 150 kWh/month; 2024 budget includes 4.8 billion Lempira allocation to finance the measure for the remainder of the year; plan to scale down to 3.15 billion Lempiras in 2025. - Red Solidaria target expansion: 120,000 households in 500 marginalized urban neighborhoods. - Priority social spending: multiple ITs not met through Sept 2024 due to capacity constraints. - Governance, transparency, and AML/CFT: - Electronic asset declaration system operational nationwide (met end-February 2024 SB). - National Transparency and Anticorruption Strategy planned by early 2025. - Whistleblower law draft to be submitted to Congress by Q2 2025. - Good progress strengthening AML/CFT after July 2023 congressional decree; national AML/CFT risk evaluation planned. - Request to reset operationalization of Beneficial Ownership registry to end-December 2025. - Public investment and climate: - PIMA/C-PIMA recommendations aim to strengthen public investment management, climate risk integration, and disaster risk management. - Authorities expressed interest in an arrangement under the Resilience and Sustainability Facility (RSF); policy work and TA identify policies to underpin an RSF request. ### Risks, mitigation, and staff appraisal - Key risks (selected): - Global: commodity price volatility (Likelihood H; Impact High), intensification of regional conflicts (Likelihood H; Impact High), climate change (Likelihood M; Impact High), deepening geoeconomic fragmentation (Likelihood H; Impact Medium). - Domestic: implementation risks due to low capacity and divided Congress (Likelihood H; Impact High), political instability (Likelihood M; Impact High), inconsistent macroeconomic policies (Likelihood M; Impact High). - Mitigating measures: - Rephasing of access; SBs that focus on non-legislative measures; timelines aligned with implementation capacity; use of prior actions and front-loading; TA and coordination with development partners. - Staff appraisal highlights: - Honduran economy resilient with growth faster than anticipated and inflation broadly converging to target despite El Niño and complex environment. - Fiscal position and debt levels improved; domestic debt market reactivated. - Critical priorities: address external imbalances, restore ENEE financial position and reduce arrears, advance structural reforms, accelerate climate adaptation and transparency reforms, and maintain monetary/exchange rate normalization. *Source: Executive Summary, Box 1, Annexes, and selected extracts from the IMF staff report for Honduras (1hndea2024001-print-pdf).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - Executive Board approved 36-month, US$822 million arrangements under the Extended Fund Facility (EFF) and the Extended Credit Facility (ECF) for Honduras in September 2023. - Program aims: strengthen macroeconomic stability, create fiscal space for productive investment and social spending, and improve governance and transparency. - Economy resilient despite external and climate shocks and long-standing impediments to growth. - Early estimates indicate the macroeconomic impact of Tropical Storm Sara is expected to be small: damages are currently estimated at around 0.05 percent of GDP. - Achieving internal consensus on recalibration of monetary and exchange rate policies has been protracted, delaying review completions; authorities remain committed and have begun decisive measures to bolster external stability and restore the energy sector’s financial health. ### Recent macroeconomic developments and outlook - Growth and output: - Real GDP growth reached 3.6 percent in 2023. - Growth continued at a similar pace in 2024:H1, supported by consumption, private investment, and a rebound in public investment. - Net exports have been a negative contributor to growth, reflecting a slowdown in the maquila sector and climate shock impacts. - Inflation: - Inflation declined to 5.2 percent at end-2023 and to 4.1 percent in October 2024. - Core inflation remains around 5 percent, driven by persistent service inflation. - Fiscal outcomes: - 2023 headline deficit was 1.3 percent of GDP versus a programmed 2.0 percent of GDP. - Public investment rebounded to 4.2 percent of GDP. - As of September 2024, the Non-Financial Public Sector (NFPS) recorded a surplus of 2.0 percent of GDP. - Public debt declined in 2023 to 47.6 percent of GDP (below the programmed 52 percent of GDP). - External sector and reserves: - Current account deficit: 3.9 percent of GDP in 2023 (from 6.7 percent in 2022). - Remittance growth through September 2024: 5.0 percent y/y cumulative annual growth. - Key exports cumulatively down 5.3 percent through August 2024; energy imports up 1.6 percent. - Projected reduction in net FX inflows in 2024 of about $425 million due to El Niño-related developments. - Sizeable net external debt payments of about $400 million related to lower-than-expected official disbursements. - These factors explain around $825 million of the projected $1.05 billion decline in net international reserves (NIR) in 2024; residual decline attributed to delays in monetary and exchange rate policy adjustments. - Reserve levels remain adequate at around 4.3 months of imports coverage. - Financial markets and policy rates: - Domestic debt market reactivated, reducing need for monetary financing. - Sovereign spreads narrowed by around 145 basis points since announcement of the review mission on September 11. - Monetary policy and regulatory measures implemented in late 2023 included: - Increase by 50 bps in the cut-off rate of BCH bills. - Increase by 100 bps in reserve requirements in local currency to 10 percent. - Change in the maintenance period for reserve requirements from two-week to one day. - Monetary policy rate (TPM) changes: - TPM increased by 100 bps to 4.0 percent in August 2024 (first adjustment since 2020). - October TPM increase by 175 bps (expected to further raise market rates). ### Program performance and implementation - Overall performance: - Some key program objectives met; macroeconomic outcomes generally better than programmed (higher growth, lower fiscal deficits and debt). - All end-December 2023 Performance Criteria (PC) were met. - End-June PC on the NFPS deficit met by a wide margin. - Missed end-June PCs: FX reserves (NIR), central bank net domestic assets (NDA), and stock of domestic arrears at ENEE—misses attributed to the severe El Niño shock, delays in external-sector and ENEE policies, and capacity constraints. - Authorities request waivers of missed PCs on the basis of corrective actions. - Structural reforms: - Structural reform agenda started strongly but faced delays: - Failure to secure Congressional approval for tax reform. - Capacity constraints have delayed some structural benchmarks and will require revisions to their timeline. - Energy sector: - Authorities committed to continued reforms to underpin power company ENEE’s financial health, with near-term measures to reduce ENEE’s payment arrears to generators and enhance coordination to tackle ENEE’s challenges. ### Policy discussions and recommendations - Fiscal policy: - Authorities concurred on preserving budgetary discipline, including during the upcoming election year, to preserve debt sustainability. - Further enhance budget execution and transparency, and strengthen the Treasury Single Account—seen as essential to sustainably scale up public investment and expand social spending to protect the most vulnerable. - Plan to manage additional emergency spending from Tropical Storm Sara through reallocations in the 2024 budget. - Monetary and exchange rate policy: - Build on ongoing normalization—including a higher rate of crawl of the Lempira and significant upfront moves in the TPM—and stand ready to further adjust policies as needed to keep inflation low and safeguard international reserves. - Governance and anti-corruption: - Authorities reemphasized their steadfast commitment to fight corruption. - Energy sector policy: - Near-term measures to reduce ENEE arrears and improve coordination; continued reforms to restore ENEE’s financial position are committed. - Climate and resilience: - Given Honduras’ vulnerabilities to climate shocks, authorities expressed interest in an arrangement under the Resilience and Sustainability Facility (RSF); policy work and technical assistance have helped identify policies that could underpin an RSF request. Board consideration may occur in a future review of the EFF/ECF. ### Staff position and program modalities - Staff supports completion of the first and second reviews, the authorities’ requests for waivers of the missed performance criteria, and the rephasing of access. - An SDR 150 million purchase would be available upon completion of the combined review. - Staff will consider issuing a Supplement to the Staff Report with additional information on the impact of Tropical Storm Sara as information becomes available. *Source: Executive Summary of the IMF staff report for Honduras (1hndea2024001-print-pdf).* ### Box 1. International Reserves Dynamics in 2024 ### Box 1. International Reserves Dynamics in 2024 ### Summary of reserve dynamics - Contrary to projections at program approval for an increase in net international reserves (NIR) in 2024 of $73 million, NIR are projected to decline by more than $1 billion. - Much of this decline is traced to external factors: shortfalls in official disbursements, higher-than-expected oil imports due to drought, and lower export inflows linked to the drought and market access issues. ### Quantitative breakdown of drivers (exact figures) - Disbursements: Official sector loan and grant disbursements are projected to fall short by around $480 million in 2024, compared to earlier expectations. - Oil imports: Drought conditions necessitated additional energy imports, $275 million more than projected at the time of program approval. - Exports: Around $150 million in lower exports compared to prior projections (lower volumes partially compensated by higher prices for coffee, palm oil, and shrimp). - Of the projected $1 billion decline in NIR: - $408 million can be linked to net external official sector debt payments. - $645 million represents the BCH’s FX market transactions with the private sector. - Of this $645 million, approximately $425 million is attributable to: - $275 million to finance additional oil imports, and - $150 million to lower export inflows. - The residual, around $220 million, is attributed to monetary and exchange rate policies that did not support a balanced external position. ### Balance of foreign exchange flows (lines as presented in source) - 2023 Sept 2023 SR Current Proj. - Net purchases from banks and FX sales to oil importers-314105-645 - N et official sector disbursments-552-32-408 - Loan and grant disbursements4301220740 - Debt service-982-1252-1148 - Change in net international reserves-86673-1053 ### Implications and policy context - The reserve decline highlights vulnerability to external shocks (delayed MDB budget support, project execution delays, drought-driven energy needs, export disruptions). - Monetary and exchange rate policy stance played a measurable role (residual ~ $220 million) in not fully supporting a balanced external position. - The text underscores the need to stabilize international reserves through: - monetary policy rate increases and an accelerated rate of crawl of the Lempira, - prudent fiscal stance to create space for capital and social spending, - energy sector reform and strengthened governance, which remain complementary to monetary and exchange rate adjustments in bolstering external stability. *Source: Box 1. International Reserves Dynamics in 2024 (1hndea2024001-print-pdf).* ### 21. The authorities are committed to implementing the necessary policy adjustments to ### 1hndea2024001-print-pdf - 21. The authorities are committed to implementing the necessary policy adjustments to ### Monetary and exchange rate policy stance - Authorities committed to implementing necessary policy adjustments to the policy rate and the rate of crawl of the Lempira to maintain low inflation and safeguard international reserves. - During the global shocks of 2020-23, the authorities maintained the TPM unchanged and sold foreign exchange to limit passthrough of external shocks to domestic prices. - After a period of inaction, authorities began recalibration of monetary and exchange rate policies to strengthen external stability and safeguard reserves (¶23, ¶24). - Effective communication will be essential to explain goals of these policy adjustments and guide expectations. ### External position and REER assessment - Honduras’ external position in 2023 is assessed to be moderately weaker than the level implied by fundamentals (External Sector Assessment, Annex IV). - The EBA current account approach does not suggest overvaluation; the REER approach points to a REER overvaluation of about 5-10 percent. - The REER is currently about 9 p.p. stronger than the 2012-19 average (Text Figure 4). - Steady losses of FX reserves since 2022 and FX market dynamics characterized by excess demand also point to some REER overvaluation. - A counterfactual exercise suggests that had the exchange rate followed only the inflation differential and the NEER since 2020, the Lempira would be nearly 9 percent weaker against the USD than its level at end-September 2024. ### Nominal exchange rate crawl and reserve outlook - The BCH accelerated the crawl of the nominal exchange rate to improve competitiveness and preserve international reserves. - Lempira virtually unchanged at end-2023 versus end-2019; depreciated 0.7 percent over January to mid-September 2024. - From mid-September, daily annualized depreciation averaged 6 percent through mid-October. - In mid-October, crawl averaged nearly 10 percent at an annualized rate (Text Figure 5). - BCH committed to a rate of crawl in line with macroeconomic fundamentals and supporting REER adjustment to a sustainable external position. - Staff and authorities concur that a gradual approach to nominal exchange rate adjustment can be effective given limited overvaluation and adequate reserves. - Reserves declined significantly in 2024 but are projected to stabilize and increase modestly in 2025, remaining above 100 percent of the ARA metric during the program. ### Monetary policy recalibration and interest rates - TPM increased by 100 bps in August and an additional 175 bps (prior action) in October, bringing the rate to 5.75 percent. - The October hike moved the TPM broadly in line with the neutral rate, re-established a positive differential with the U.S. policy rate, and moved the real rate into positive territory. - BCH will remain data driven and adopt necessary measures—mainly adjustments in the TPM—to contain second-round effects and keep inflation expectations anchored. - In setting interest rates, BCH will be guided by domestic and global information, including international interest rates, and intends to maintain a positive real policy rate. - Interbank rates increased to around 6.25 percent following the additional 175 bps increase. ### FX allocation and related reforms - BCH imposed a 100 percent FX surrender requirement and reinstated the BCH FX auction in April 2023; the interbank FX market was suspended. - Authorities recognize need to define and implement a roadmap to strengthen efficiency of FX allocation, transitioning gradually to a system that allows price discovery and reflects supply and demand. - First step: authorities will prepare a diagnostic study, in collaboration with Fund staff, outlining options and recommendations to strengthen FX allocation system (proposed April 2025, SB). ### Banking sector liquidity and reserve requirements - BCH tightened reserve requirements in November 2023 as a quantitative instrument of monetary policy. - Alongside the TPM increase in October, BCH eased the maintenance period for reserve requirements from daily to 14 days, with a daily minimum of 90 percent of the requirement. - Change provides banks flexibility in managing daily liquidity and represents a shift toward the TPM as the main policy tool. - Despite increased reserve requirements, banks remain liquid and have maintained a steady level of excess reserve deposits at the BCH. - It is estimated sufficient liquidity exists for banks to purchase government guaranteed ENEE bonds (¶30); to incentivize purchase, BCH made the bonds eligible to meet banks’ 3 percent mandatory investment requirement. ### Central bank safeguards, governance, and quasi-fiscal operations - Update of the safeguards assessment found BCH has made significant progress and broadly maintains strong controls over operations. - Shortfalls remain in the legal framework: lack of an independent oversight body and financial autonomy. - BCH taking steps: finalizing adoption of IFRS accounting standards, strengthening internal audit, and improving risk management. - BCH will begin technical engagement with Fund staff on these issues and develop a medium-term strategy to unwind quasi-fiscal operations, including transfer of the Investment Fund to the state and wind down of the Guarantee Fund by 2029. - BCH will not provide any new financing to the financial public sector (including BANHPROVI and BANADESA) to limit risks to inflation and the BCH’s balance sheet (continuous performance criterion). ### Energy sector challenges and fiscal implications - Energy sector remains a key vulnerability due to high tariffs, uncompetitive contracting, inefficiencies, outdated infrastructure, and incidence of fraud. - Electricity losses placed on a downward trend since September 2023: technical losses reduced by 2½ percentage points but remained elevated at 34.8 percent at end-October 2024, somewhat above initial program targets. - ENEE cash flow deficits improving from over 1 percent of GDP in 2021 to an expected 0.5 percent of GDP in 2024 (MEFP ¶26). ### ENEE arrears and arrears-clearance plan - ENEE overdue invoices to generators reduced to 9.8 billion Lempiras by end-2023, but grew to 17.5 billion Lempiras by end-September 2024, above program objectives (performance criterion). - Authorities’ comprehensive plan to reduce ENEE’s arrears to 11.5 billion Lempiras by end-2024 and ensure further quarterly reductions of 1 billion Lempiras during 2025 includes: - Establishing, by a Council of Ministers decree, a committee composed of BCH, CNBS, ENEE, SEFIN, the Ministry of Energy, and the Secretariat of the Presidency to coordinate on financial policies related to the energy sector (prior action). - Expediting issuance of ENEE domestic debt, supported by BCH approval of ENEE bonds’ eligibility to meet banks’ reserve requirements. Authorities issued 0.9 billion Lempiras by November 15 compared to their goal of 5 billion Lempiras. In addition, SEFIN will make a transfer to ENEE of the shortfall of 4.1 billion Lempiras (prior action) to ensure achievement of the end-December PC. - Absorbing in the state budget ENEE’s debt service of 2 billion Lempiras in each 2024 and 2025 and ensuring smaller subsidies (0.5 billion Lempiras per annum) are paid timely to ENEE. - Approving, by Congress, renegotiated contracts with private power suppliers to reduce generation costs and lower consumer tariffs. ### Structural reforms for ENEE operational efficiency and transparency - Ongoing reforms include merging operative processes of the three entities that manage distribution (proposed end-August 2025, SB) and establishing within ENEE generation, transmission, and distribution divisions with separate management. - ENEE to implement IFRS with a consulting firm (proposed end-March 2025, SB) and continue work on software infrastructure; publication of ENEE’s IFRS-based audited annual financial statements (for 2025) expected by mid-2026. - Authorities plan a comprehensive audit of ENEE by the Superior Court of Accounts starting early 2025 with IDB support. - Authorities will finalize needed studies to facilitate publication of key elements of a possible updated electricity pricing structure and hold public hearings by end-November 2025 (proposed end-November 2025, SB). ### Climate, governance, transparency, and AML/CFT - Authorities advancing agenda to increase resilience to climate change, including: - Investing in resilient infrastructure (roads, dams, etc.). - Strengthening fiscal and financial frameworks to incorporate climate change considerations. - Developing a reference framework for issuance of sustainable bonds. - Adoption of laws on efficient energy use and on carbon transactions related to forests (MEFP ¶50). - Further efforts informed by consultations with development partners and recent IMF technical assistance on Climate Policy Diagnostics and the PIMA/C-PIMA. - Authorities have requested an arrangement under the RSF, which may be discussed during a future review. *Source: 1hndea2024001-print-pdf* ### 33. To improve the business climate, the authorities are prioritizing executive initiatives ### 33. To improve the business climate, the authorities are prioritizing executive initiatives ### Digitalization and administrative simplification - Tax administration launched an IT portal to allow taxpayers to perform administrative processes online. - Authorities are digitizing processes to speed up times required to obtain permissions documents and government services, including related to investment, through a Digital Portal for Investment (DPI) (MEFP ¶44). - Staff supports the authorities’ request to modify the end-June 2024 SB on an administrative simplification law into an end-April 2025 SB to launch the DPI and digitize thereon at least 50 processes. - Note: This DPI project is part of an ongoing initiative, supported by UNDP TA, to bolster administrative simplification efforts. ### Public investment, climate, and PIMA/C-PIMA/CPD findings and recommendations - Fund-provided TA identified key reform areas to strengthen Honduras’ institutional framework and better address climate risks and socioeconomic costs from climate vulnerabilities. - Public Investment Management Assessment (PIMA) recommendations: - Design a strategic framework for public investment that provides guidance on government priorities to bolster resilience to climate change. - Strengthen the formulation of the multi-year budget, with an effective project selection process and improved climate marking. - Improve the identification and preparation of large infrastructure projects, taking climate change into account. - Climate-PIMA (C-PIMA) recommendations: - Develop a disaster risk management strategy analyzing the main climate change-related risks affecting public infrastructure assets and networks. - Improve coordination in decision-making on climate change-related investments across the public sector. - Prepare an investment plan for the Nationally Determined Contribution (NDC) and align sectoral plans with the objectives, goals, and projects of the NDC and its investment plan. - Climate Policy Diagnostics (CPD) recommendations: - Improve Disaster Risk Management (DRM) through better integration of data for decision making. - Expand coverage and improve the targeting of social assistance for those most vulnerable to climate change. - Improve access to financial instruments to facilitate insurance for small farmers. ### AML/CFT progress and upcoming actions - Good progress has been made strengthening the AML/CFT framework following a July 2023 congressional decree which reversed previous dilution of the framework. - Authorities approved frameworks for implementation of AML/CFT regulations for credit cooperatives and non-financial professions. - Authorities are preparing a national AML/CFT risk evaluation and updates to various laws to ensure alignment with updates to Financial Action Task Force (FATF) standards ahead of Honduras’ 2026 evaluation (MEFP ¶47). - Staff notes the need for legal initiatives to update the AML/CFT framework ahead of the 2026 FATF evaluation. ### Transparency, governance, and anticorruption initiatives - Implemented an electronic asset declaration system for public officials (met end-February 2024 SB) and advancing towards making all declarations digital. - Working towards approval of a National Transparency and Anti-Corruption Strategy by early 2025. - Preparing a whistleblower law to facilitate reporting of illicit activities with a view to submitting it to Congress by the second quarter of 2025. - Established a National Transparency and Anticorruption Observatory. - Continuing efforts, in collaboration with the United Nations, to establish an international anti-corruption commission (CICIH), though progress has been slow. - Authorities decided in February to withdraw from the International Centre for Settlement of Investment Disputes (ICSID); staff notes this could adversely impact FDI inflows. - Staff supports request to reset the end-December 2024 SB for operationalizing a beneficial ownership (BO) registry to end-December 2025, while authorities continue to work with Congress towards approval of BO legislation. ### Program modalities, monitoring, and SB/QPC/IT timelines - Letter of Intent (LOI) and Memorandum of Economic and Financial Policies (MEFP) describe progress and future commitments; program performance to be monitored through semi-annual reviews based on QPCs and ITs (Table AI.2), and SBs (Table AI.4). - New targets proposed for QPCs for end-December 2024 and end-June 2025 and ITs for end-March 2025 and end-September 2025. - Deadlines for SBs tied to tax reform reset from end-December 2023 to end-May 2025 due to legislative approval delays. - Deadlines for existing SBs related to the creation of the Single Social Sector Information System, census on urban poverty, and trust funds proposed to be reset (Tables AI.3 and AI.4). - Three existing SBs proposed to be modified, five new SBs proposed, and three prior actions (Tables AI.3 and AI.4). - Scope of the continuous PC related to monetary financing proposed to be modified to cover the public financial sector—in addition to the non-financial public sector—to disallow new central bank transfers to state-owned development banks BANHPROVI and BANADESA. ### Financing, rephasing, and capacity to repay - Rephasing of purchases for indirect budget support is proposed (Table 15b) given uneven program performance, sizeable government FX financing needs, uncertain timing of additional official financing, and corrective measures. - Program is fully financed, with firm commitments for the upcoming 12 months and good prospects of full financing for the remainder of the program. - Authorities have secured access to external resources from IFIs to confront the impact of the tropical storm and meet potential additional external financing needs. - Conclusion of the first and second reviews expected to catalyze additional official financing, especially in 2025, some of which was earlier anticipated in 2024. - IMF financing is projected to fill 19 percent of the external financing gap (compared to 18 percent at program approval). - Existing and prospective Fund credit outstanding expected to reach 274 percent of quota by end-2026, before declining to 115 percent of quota by 2032. - Repayments to the Fund increase during 2024-25 and are projected to peak at 1.8 percent of exports and 3.2 percent of gross reserves in 2024, before declining to 0.5 percent and 1.0 percent respectively by 2028. ### Foreign exchange allocation, exchange restrictions, and Board approval request - Since re-introduction of the auction in April 2023 and implementation of the 100 percent surrender requirement for exporters, the BCH is the only source of FX for market participants requesting more than $10,000. - BCH limits allocation of FX at the auction by: - Not fully meeting demand at the auction and having bidders resubmit bids over time to receive the full amount requested, resulting in undue delays. - Setting a hard cap for daily requests: $1.2 million by an entity and $100,000 by an individual, with no possibility of obtaining more in a given day for bona fide current international transactions. - BCH prioritizes access to FX for fuel importers, who can obtain a top up of FX from the BCH through direct sales after participating in the auction. - These measures limit access to FX for bona fide current international transactions and therefore constitute an exchange restriction subject to Fund approval under Article VIII Section 2(a). - Authorities committed to gradually phase out these measures as balance of payments stability is strengthened, supported by implementation of program policies. - Authorities request Board approval for retention of the exchange restriction on the basis it is maintained for BOP reasons, temporary, and non-discriminatory. - Additional exchange restriction: law requires BCH to reject auction participation by exporters who have not repatriated export proceeds from two or more export transactions within required timeframes; authorities committed to removing this exchange restriction during the program. - Revised Multiple Currency Practices Policy effective February 1, 2024: all MCPs maintained under the previous MCP policy are considered eliminated as of February 1, 2024; relevant exchange rates monitored for impermissible spreads under the revised MCP policy. ### Risks, mitigation, and staff appraisal highlights - Program implementation challenges remain significant and largely stem from identified risks to the baseline. - Mitigating measures include: - Rephasing of access. - SBs that largely focus on measures that can be enacted without legislative approval. - Timelines more in line with implementation capacity. - Use of prior actions and front loading to establish a track record on exchange rate and monetary policy adjustment. - Ongoing technical assistance and close coordination with development partners to mitigate implementation delays related to capacity constraints. - Staff appraisal summary: - Honduran economy remained resilient; growth faster than anticipated and inflation broadly converged to target despite a severe El Niño episode and complex social/political environment. - Fiscal position and debt levels have continued to improve amid prudent fiscal policies and reactivation of the domestic debt market. - Progress made in strengthening transparency and fighting corruption. - Challenges remain in addressing external imbalances, strengthening ENEE’s financial position, advancing structural reforms, and meeting social spending objectives. - Authorities have implemented a cumulative 275 basis point increase in the policy rate since August, moving the real rate into positive territory. - Maintaining higher rate of crawl of the Lempira will improve external competitiveness and external position. - Promptly addressing energy sector challenges and durably reducing ENEE arrears is critical. - Accelerating climate adaptation policies and strengthening climate-related institutional frameworks and public investment practices is important; authorities’ interest in an arrangement under the RSF to support these efforts is welcome. - Continued progress on transparency and governance-related reforms is needed; fast-tracking digitalization initiatives while avoiding policies that adversely impact the business environment is important to attract investment. - Staff supports the authorities’ request for Board approval for retention of the exchange restriction arising from BCH measures limiting FX allocation. *Source: 1hndea2024001-print-pdf - 33. To improve the business climate, the authorities are prioritizing executive initiatives* ### 51. Given the strength of the authorities’ commitments to reforms, bolstered by prior ### Given the strength of the authorities’ commitments to reforms, bolstered by prior ### Program endorsement and financing arrangements - Staff supports the completion of the first and second reviews under the EFF and ECF arrangements, rephasing of purchases, and requests for waivers of non-observance for the end-June 2024 performance criteria under the EFF/ECF arrangements. - Staff supports the request for the waivers of non-observance based on corrective actions taken by the authorities, supported by prior actions, and the strength of the forward-looking policy commitments. - The Letter of Intent (Appendix I) and Memorandum of Economic and Financial Policies (Attachment I) demonstrate program ownership and appropriate policies to reach the goals of the authorities’ program. - Proposed schedule of purchases (selected): Total Disbursements (SDR) 624.50; ECF total 208.20; EFF total 416.30. ### Real sector: recent developments and outlook - Output: Real GDP rebounded to pre-pandemic levels by 2021 but remains below the prior trend. - Growth drivers: Consumption remains a key driver of growth; services — including financial services — have driven supply-side growth while manufacturing has underperformed. - Labor market: Unemployment (2023) 8.1 percent; labor force participation remains weak; female unemployment remains above male unemployment. - Inflation: Inflation has declined significantly since peaking in 2022 and is within the 1 percent range around the 4 percent objective. - Key macro projections (Table 13, percent of GDP unless otherwise indicated; growth and prices in percent): - Real GDP growth: 2021 12.6; 2022 4.1; 2023 3.6; 2024 3.8; 2025 3.6; 2026 3.6; 2027 3.8; 2028 3.8; 2029 3.8. - CPI inflation (eop): 2021 5.3; 2022 9.8; 2023 5.2; 2024 4.8; 2025 5.0; 2026 4.1; 2027 4.0; 2028 4.0; 2029 4.0. - Output gap (percentage of potential GDP): 2023 -0.2; 2024 0.6; 2025 0.0 (Table 1). - Demographics and social indicators (Table 1): - Population (million, 2023) 10.5. - Per capita income in U.S. dollars (2023) 3,292. - Unemployment rate (2023) 8.1. - Percent of pop. under moderate poverty (2019) 48.0. - Gini index (2019) 48. ### External sector: developments, reserves, and financing needs - Current account and trade: The current account deficit narrowed in 2023 as imports fell more than exports. - Current account balance (percent of GDP): 2021 -5.5; 2022 -6.7; 2023 -3.9; 2024 -5.3; 2025 -4.7; 2026 -4.5; 2027 -4.3; 2028 -4.0; 2029 -3.8. - Trade account (percent of GDP): 2021 -17.2; 2022 -19.2; 2023 -19.2; 2024 -17.3; 2025 -19.2; 2026 -18.1. - Remittances: Worker’s remittances (Table 7, US$ millions) 2021 7,184; 2022 8,465; 2023 8,888; 2024 8,946; projections through 2029 show sustained remittance inflows (e.g., 2029 11,081). - Reserves and REER: - Gross international reserves (GIR, millions of US$): 2021 8,973; 2022 8,703; 2023 7,840; 2024 6,826; projections: 2025 7,094; 2026 8,373; 2027 8,506; 2028 8,956; 2029 9,161. - GIR (In months of imports, excluding maquila): 2021 6.0; 2022 5.9; 2023 5.2; 2024 5.0; 2025 5.0; 2026 4.3. - Real Effective Exchange Rate (REER) has appreciated in the context of broad nominal exchange rate stability and a positive inflation differential. - External financing needs and gap (Table 9): - Gross external financing requirement (US$ millions): 2024 4,369; 2025 4,408; 2026 4,133; 2027 4,724; 2028 3,964; 2029 3,920. - Current account deficit (US$ millions): 2024 1,955; 2025 1,790; 2026 1,823. - Debt amortizations (public and private, US$ millions): 2024 2,414; 2025 2,618; 2026 2,310. - External financing sources (US$ millions): 2024 3,622; 2025 3,094; 2026 2,260. - Financing gap (US$ millions): 2024 747; 2025 1,314; 2026 1,873; 2027 884; 2028 642; 2029 417. - Official financing (US$ millions): 2024 547; 2025 1,036; 2026 933; includes World Bank, CABEI, IADB contributions as detailed in the tables. - Balance of payments (Table 7, US$ millions): Current account (2023) -1,770; trade account -6,543; exports f.o.b. 8,022; imports f.o.b. -14,565. ### Fiscal sector: performance and outlook - Fiscal balance and public debt (Table 1, Table 13): - Nonfinancial public sector (NFPS) overall balance (percent of GDP): 2021 -3.7; 2022 -0.2; 2023 -2.0; 2024 -1.3; 2025 -1.7; 2026 -1.5; 2027 -1.4; 2028 -1.5; 2029 -1.0. - NFPS gross debt (percent of GDP): 2021 51.8; 2022 51.8; 2023 47.6; 2024 46.7; 2025 46.3; 2026 45.4; 2027 44.5; 2028 43.2; 2029 42.0. - Central government (Table 2 & Table 3): - Central government revenue (percent of GDP): 2021 19.3; 2022 19.7; 2023 19.4; 2024 19.4. - Central government expenditure (percent of GDP): 2021 24.4; 2022 21.1; 2023 22.0; 2024 22.4. - Central government net lending/borrowing (percent of GDP): 2021 -5.0; 2022 -1.5; 2023 -3.0; 2024 -3.0; projections improve gradually to -1.8 by 2029. - Revenue composition (selected, Table 2 & 4): Taxes (central government, Lempiras): 2023 146,097; 2024 program request 148,547; taxes on income (2023) 48,883; taxes on goods and services (2023) 85,125. - Public investment and spending execution: The fiscal deficit increased in 2023 driven by expansion of the central government deficit as capacity in spending execution increased; current spending discipline offset an increase in capital expenditures; tax revenues held firm. - Debt composition and creditor breakdown (Table 12): Total public debt (US$ million, 2023) 11,594.6; external debt share (2023) 9,017.4 (percent total debt 56.5); multilateral creditors (2023) 6,524.1. ### Monetary and financial sector - Central bank actions: The central bank stepped up liquidity absorption operations in 2022 and increased the policy rate after several years of stability, turning the policy rate positive in real terms. - Interest rates and credit: Large increases in international interest rates passed through quickly to foreign currency lending rates. Lending interest rates (domestic currency and foreign currency) have risen. - Credit growth: Growth of credit to the private sector (year-on-year, percent): 2021 11.9; 2022 18.8; 2023 15.4; 2024 (recent months) growth is slowing from prior high rates. Private sector credit (percent of GDP, Table 6): 2021 65.7; 2022 68.6; 2023 71.1. - Financial soundness (Table 14, banking sector, Sept 2024): - Total assets (millions of Lempiras, Sept 2024) 1,079,892. - Capital adequacy (regulatory capital to RWA) Sept 2024 13.6. - Nonperforming loans (NPLs) to total loans Sept 2024 2.2. - Return on assets (ROA) Sept 2024 1.2; Return on equity (ROE) Sept 2024 14.3. - Deposits in foreign currency (percent of total) Sept 2024 21.0. ### Balance sheet and Fund exposure - Indicators of Fund credit (Table 16, as of November 7, 2024): - Stock of existing and prospective Fund credit (SDR million): 2024 466.75; 2025 559.46; 2026 684.26; 2027 652.36; 2028 621.15; 2029 575.50. - In percent of quota (quota SDR 249.8 million): 2024 186.8; 2025 223.9; 2026 273.9; 2027 261.1; 2028 248.6; 2029 230.4. - Net use of Fund credit (SDR million): 2024 8.0; 2025 92.7; 2026 124.8; 2027 -31.8; 2028 -36.2; 2029 -50.1. ### Key policy implications and program conditions (as presented) - Staff endorsement is conditional on corrective actions already taken and continuing forward-looking policy commitments embodied in the Letter of Intent and Memorandum of Economic and Financial Policies. - Program implementation features rephasing of purchases, combined first and second reviews (first and second reviews to be combined; amounts associated with first review available March 1, 2024), and requests for waivers of non-observance for end-June 2024 performance criteria. - External financing plans emphasize securing official financing (World Bank, CABEI, IADB, other official creditors) to cover projected financing gaps in 2024–2026. *Source: IMF staff report and supporting tables and figures contained in the provided PDF.* ### Annex I. Economic Impact of Droughts on Honduras’ Economy ### Annex I. Economic Impact of Droughts on Honduras’ Economy ### Key findings on drought impacts - Economic losses caused by droughts average approximately 0.5 percentage points of GDP per event and are higher for Honduras than regional peers and LA5 countries. - The 2023-24 El Niño episode produced intense drought conditions during the dry season (from mid-November to May), intensifying plant diseases in key agricultural exports. - During January 1-May 15, 2024, rainfall was 15 percent lower compared to the same timeframe in 2023. - The drought led to lower agricultural output and exports and significantly lower (hydro) energy production, increasing the need for higher fuel imports for electricity generation. These factors contributed to the weakening of Honduras’ trade balance and international reserve position in 2024. ### Agricultural output and export impacts - Coffee harvests declined around 9 percent through July 2024 (YoY). - Banana production recorded declines of around 13 percent through July 2024 (YoY). - Palm oil production recorded declines of around 8 percent through July 2024 (YoY). - Through July 2024, coffee exports (around 30 percent of total exports) fell 11.5 percent (Y/Y). - Through July 2024, palm oil exports declined around 18 percent (Y/Y). - Through July 2024, banana exports declined around 24 percent (Y/Y). - Lower agricultural exports reduced foreign exchange inflows in 2024 (through July) by approximately $272 million compared to the same period in 2023 and $321 million compared to 2022. - Contributing non-climatic factors: diseases in plantations, reduced yields from lower-quality fertilizers, and labor shortages due to local and external migration. ### Energy sector impacts and fuel import increases - Lower precipitation and heat waves reduced hydroelectric generation, forcing increased fuel imports (especially bunker and diesel) for electricity production. - Increased energy imports largely accumulated during the dry season (the first two quarters of the year). - In 2023 and 2024, a combination of significantly higher energy import volumes and still elevated prices led, through July, to an additional $600 million in energy imports when compared to non-El Niño years. - ENEE acquires private generation output to distribute through its network; private firms generate 78 percent of power while ENEE generates the remainder mainly via hydroelectric dams. ### Counterfactual SVAR analysis and quantitative trade impacts - A counterfactual exercise using a structural vector auto-regression (SVAR) model adjusted El Niño intensity downward by one standard deviation to simulate a less-severe shock (assumes no changes in international prices). - Model estimates for a less adverse scenario: - 2023: fuel imports would have been around $355 million lower; exports of agricultural goods would have been around $209 million higher. - 2024 H1: fuel imports would have been $268 million lower; agricultural exports would have been around $93 million higher. - Under the counterfactual, the trade balance could have been 1.6 and 1.0 percent of GDP better in 2023 and 2024, respectively. - Robustness check applying average imported volumes over 2016-2021 to 2023 and 2024H1 prices: - Potential savings estimated around $300 million for 2023 and $138 million for 2024H1. ### Energy sector background and vulnerabilities (Annex II highlights relevant to drought impacts) - Demand stood above 1,900 MW in 2024 versus peak production of 1,698 MW, leading to scheduled power outages. - Honduras’ energy matrix (end of 2023): 37 percent fossil fuels, 63 percent renewable technologies. - National Dispatch Center projects demand will reach 2,980 MW in 10 years. - Electricity subsidies in 2023 totaled 0.7 percent of GDP, financed largely by government transfers to ENEE: - Free energy for small poor households (benefits over 900,000 households with monthly consumption below 150 kWh): budgetary expenditures finance 60 percent (cost of ¼ percent of GDP), remainder 40 percent financed by higher tariffs for large consumers. - A general tariff subsidy: fiscal cost was 0.4 percent of GDP in 2023 and is expected to increase to 0.5 percent of GDP in 2024. - Several minor subsidies (including to senior citizens) of less than 0.1 percent of GDP; government will start paying them from 2025 as part of ENEE financing plan. - ENEE accounts payable and arrears increased substantially in 2024 to 17.5 billion Lempiras (1.9 percent of GDP) in September. - ENEE’s cash flow deficits have averaged 0.9 percent of GDP over the past decade. - ENEE’s long-term financial debt rose from $600 million in 2015 to $2.6 billion in 2024; the government issued $1.3 billion in sovereign bonds in 2017 and 2020 to address ENEE’s cash flow needs. - Electricity losses: about 35 percent of energy produced or purchased is not billed (about one-third technical, about two-thirds non-technical). - From a 37.4 percent peak in September 2023, electricity losses fell by 2.3 percentage points during the following year, equivalent to an annual revenue gain of $50 million. A one percentage point reduction in electricity losses increases revenues by $22 million annually. ### ENEE reform and policy measures to address drought-related vulnerabilities - Coordinated financing plan to reduce arrears: - Through debt issuance, ENEE arrears would be reduced in 2024 to below 11.5 billion Lempiras. - SEFIN would assume 2 billion Lempiras of debt service for ENEE each year during 2024 and 2025 and, from 2025, start paying around L500 million in smaller subsidies previously unpaid. - An inter-governmental committee composed of the BCH, the CNBS, ENEE, SEFIN, and the Secretariat of the Presidency has been established to coordinate financial policies for the energy sector. - Renegotiation of power-purchasing agreements: - A first set of 18 renegotiated contracts submitted to Congress in May would reduce tariffs for consumers by about 5 percent over the next few years and reduce ENEE’s arrears with one private generator by about 2 billion Lempiras if approved. - Investments and plans to improve supply and reduce losses: - ENEE contracted 300 MW of new generation capacity with the private sector in 2024 (higher costs due to leasing mainly diesel turbines and opportunity market purchases); plans to add another 450 MW in 2025-26 via a short-run contingency plan. - International public tender planned to add permanent capacity for 1,500 MW during 2027-29; auction planned mid-2025; Indicative Generation Expansion Plan 2024–2033 envisages total investment of $2.6 billion focused on renewable energy. Plan envisages new capacity onstream as follows: 800 MW in 2027; 300 MW in 2028; 400 MW in 2029. - Transmission Network Expansion Plan 2024-33 with investments worth $770 million. - Five-Year Business Plan 2024-2028 includes investment in distribution for $1.7 billion. - For 2024, investment in transmission projected at 3.1 billion Lempiras (0.3 percent of GDP) of which 0.5 billion financed by the IDB. - Reduction of electricity losses through the National Loss Reduction Program (NLRP), reintegration of distribution activities into ENEE, installation of more than 300,000 new meters, improved customer review and fraud detection. - Structural reforms to increase efficiency: - Establish functionally and administratively independent divisions in generation, transmission and distribution with their own management and improve ENEE accounting and IT to enable separation and produce audited 2025 financial statements by mid-2026. - Integration of distribution units to eliminate redundancies and improve governance. - Tariff structure update: ENEE and regulator CREE working on updating studies (Value Added in Distribution and Transmission — VAD and VAT) with aim to publish a technical note and hold a public hearing by end-November 2025. *Source: Annex I. Economic Impact of Droughts on Honduras’ Economy (from the provided PDF).* ### Annex III. Risk Assessment Matrix ### Annex III. Risk Assessment Matrix ### Global risks - Intensification of regional conflict(s). - Sources: Escalation or spread of the conflict in Gaza and Israel, Russia’s war in Ukraine, and/or other regional conflicts or terrorism disrupt trade (e.g., energy, food, tourism, supply chains), remittances, FDI and financial flows, payment systems, and increase refugee flows. - Likelihood: H - Impact: High. Trade disruption, elevated commodity prices due to lower supply, increased cost of food and basic materials, hurting growth and increasing inflation. - Policy: Diversify supply chains, create or increase buffers for short-term unavailability of key commodities. Provide targeted support to mitigate risks of food insecurity. Use monetary policy to address potential second-round effects on inflation. - Global growth surprises. - Sources: - Slowdown. Growth slowdown in major economies, including due to supply disruptions, tight monetary policy, rising corporate bankruptcies, or a deeper-than-envisaged real estate sector contraction, with adverse spillovers through trade and financial channels, triggering sudden stops in some EMDEs. - Acceleration. Positive supply-side surprises, monetary easing, productivity gains from AI, and/or stronger EMDE performance raise global demand and trade, and ease global financing conditions. - Likelihood: M (Slowdown); L (Acceleration) - Impact: - Slowdown: High. Lower economic activity due to weaker demand for exports, lower remittances, tight financial conditions, spiking risk premia, fiscal pressures. - Acceleration: Medium. Higher economic activity due to stronger demand for exports, stronger remittance growth, looser external borrowing costs. - Policy: - Slowdown: Diversify trade patterns, allow real exchange rate to cushion a portion of external shock, continue executing key infrastructure spending. Support domestic market development and labor markets. - Acceleration: Allow real exchange rate to move in line with fundamentals, continue to execute infrastructure spending to boost productivity growth, maintain competitive business environment to attract investment to diversify exports and increase value added of exports. - Commodity price volatility. - Sources: Supply and demand fluctuations (e.g., due to conflicts, export restrictions, OPEC+ decisions, and green transition) cause recurrent commodity price volatility, external and fiscal pressures and food insecurity in EMDEs, cross-border spillovers, and social and economic instability. - Likelihood: H - Impact: High. Larger import bill and current account deficit, leading to lower FX reserves; higher domestic inflation due to large share of food in CPI basket. - Policy: Provide targeted fiscal support to mitigate risks of food insecurity. Monetary policy to remain proactive to forestall second-round effects. In the long-term, expand productive capacity, diversify trade, and increase value added content of exports. - Monetary policy miscalibration. - Sources: Amid high uncertainty and data surprises, major central banks’ stances turn out to be too loose, hindering disinflation, or too tight for longer than warranted, which stifles growth and triggers increased capital-flow and exchange-rate volatility in EMDEs. - Likelihood: M - Impact: High. Global financial conditions tighten, and emerging market bond yields increase amid outflows from emerging markets. - Policy: Allow real exchange rate to cushion a portion of the external shock while adjusting policy interest rates to support external stability. Remain committed to fiscal adjustment program to bolster market access and safeguard debt sustainability. - Systemic financial instability. - Sources: High interest rates and risk premia and asset repricing amid economic slowdowns and elevated policy uncertainty (including from elections) trigger market dislocations, with cross-border spillovers and an adverse macro-financial feedback loop affecting weak banks and NBFIs. - Likelihood: M - Impact: High. Global financial conditions tighten, and emerging market bond yields increase amid outflows from emerging markets. External demand falters, with spillovers to exports. - Policy: Allow real exchange rate to cushion a portion of the external shock while adjusting policy interest rates to support external stability. Remain committed to fiscal adjustment program to bolster market access and safeguard debt sustainability. Continue executing key infrastructure spending. Support domestic market development and labor markets. - Sovereign debt distress. - Sources: Domino effects from high global interest rates, deteriorating debt sustainability in some AEs, unfunded fiscal spending, and/or disorderly debt events in some EMDEs spillover to other highly indebted countries, amplified by sovereign-bank feedback, resulting in capital outflows, rising risk premia, loss of market access, and contraction of growth and social spending. - Likelihood: M - Impact: High. Capital outflows and pressure on exchange rate prompt higher domestic interest rates. External market access is jeopardized. - Policy: Remain committed to fiscal adjustment program to safeguard debt sustainability; allow real exchange rate to cushion a portion of external shock. - Climate change. - Sources: Extreme climate events driven by rising temperatures cause loss of life, damage to infrastructure, food insecurity, supply disruptions, lower growth, and financial instability. A disorderly transition to net-zero emissions and regulatory uncertainty lead to stranded assets and low investment. - Likelihood: M - Impact: High. Disruptions in economic activity; lower GDP growth; damage to properties and infrastructure, resulting in lower growth potential. - Policy: Prioritize expenditure to support affected households. Guard against second-round effects of inflation. Accelerate reconstruction and building of climate-resilient infrastructure. Design and implement an adaptation plan. - Social discontent. - Sources: High inflation, real income loss, spillovers from conflicts (including migration), and worsening inequality stir social unrest, drive populist policies, and increase resistance to reforms, especially in the context of polarized or disputed elections. - Likelihood: H - Impact: Medium. Disruptions to economic activity, political polarization, and instability. Harms confidence, raising risk premia. - Policy: Strengthen governance and accountability to attract investment and support growth. Foster diversification and job creation. Strengthen social safety net. - Deepening geoeconomic fragmentation. - Sources: Broader conflicts, inward-oriented policies, and weakened international cooperation result in a less efficient configuration of trade and FDI, supply disruptions, protectionism, policy uncertainty, technological and payments systems fragmentation, rising shipping and input costs, financial instability, a fracturing of international monetary system, and lower growth. - Likelihood: H - Impact: Medium. Reconfiguration of global trade patterns leads to disruption of some trade flows in the near term, hurting exports. Over medium term, physical proximity to large markets could present new export opportunities. - Policy: Strengthen business environment and governance and continue to invest in physical infrastructure and human capital to raise productivity and increase competitiveness and value added in exports. - Cyberthreats. - Sources: Cyberattacks on physical or digital infrastructure (including digital currency and crypto assets), technical failures, or misuse of AI technologies trigger financial and economic instability. - Likelihood: H - Impact: Medium. Lower economic activity due to weaker demand for exports, lower remittances, tight financial conditions, and increasing risk premia. - Policy: Diversify trade patterns, allow real exchange rate to cushion a portion of external shock, continue executing key infrastructure spending. Support domestic market development and labor markets. ### Domestic risks - Political instability. - Sources: Allegations of illicit financial activities in political parties leads to domestic political instability, leading to legislative gridlock and hurting governability and confidence in political parties. - Likelihood: M - Impact: High. Needed reforms stall. Domestic and international investor confidence is shaken, leading to lower investment and capital outflows. - Policy: Reinvigorate efforts to combat corruption and strengthen governance, including through building stronger institutions. Maintain consistent monetary and exchange rate policies and remain committed to fiscal program to safeguard debt sustainability and maintain investor confidence. - Implementation risks to reform agenda. - Sources: Low implementation capacity and divided Congress. - Likelihood: H - Impact: High. Needed reforms stall. - Policy: Retain strong commitment to build institutions and ensure policy continuity. Build broader political coalition. - Inconsistent macroeconomic policies. - Sources: Inconsistency may hamper the response in the event of global shocks, with knock-on effects on domestic and external stability. - Likelihood: M - Impact: High. Inconsistent policies can undermine external and internal stability. - Policy: Monetary policy needs to support the exchange rate crawling band, with the center of the crawling band adjusting in line with fundamentals, including the projected inflation differential. ### External Sector Assessment (Annex IV) — Overall assessment and key metrics - Overall Assessment: The external position of Honduras in 2023 was moderately weaker than the level implied by fundamentals and desirable policy settings, and the real effective exchange rate (REER) for 2023 is estimated to be overvalued by 5-10 percent. - Risks: Falling key exports, including maquila, impacted by a weather shock and competitiveness losses increase the risks to external sustainability in the near term. - Mitigants: Path and composition of the net international investment position, with gross external liabilities tilted towards foreign direct investment and a declining trend for external debt. Gross international reserves coverage ratio remains adequate, albeit on a declining trend, and reserve coverage is projected to remain within the recommended range of the ARA metric over the medium term. - Potential Policy Responses: - The REER assessment is consistent with existing imbalances between supply and demand in FX markets. - Ongoing recalibration of monetary and exchange policies, underpinned by: - (i) monetary policy rates that are positive in real terms and above the U.S. Federal Funds rate to provide support to Lempira assets; and - (ii) a decisive ongoing nominal exchange rate adjustment through an accelerated rate of crawl will support a reduction in the estimated REER overvaluation. - Strengthen the crawling band regime and ensure that the exchange rate reflects economic fundamentals, including the inflation differential and movements in trading partners’ exchange rates, to promote a better balance between supply and demand in FX auctions and safeguard level of international reserves. - Strengthen coordination between monetary and exchange rate policies, maintain prudent fiscal and debt policies, and advance the structural reform agenda. - Foreign assets and liabilities: position and trajectory - NIIP: Marginally improved to -54 percent of GDP in 2023, from -55 percent in 2022, driven by a decline in gross FDI liabilities. - Gross assets: 42 percent of GDP in 2023, with reserves accounting for 52 percent of gross assets. - Gross liabilities: 96 percent of GDP in 2023; FDI liabilities accounted for 57 percent of GDP and 60 percent of gross liabilities. - External debt: US$11.9 billion at end-2023 (37.2 percent of GDP), mostly public (81 percent of the total stock), with private external debt driven by the financial sector. - Public external debt: As of June 2024, public external debt stood at US$9,159 million (27 percent of GDP), against US$9,372 million (30 percent of GDP) at end-2023. - Composition: Public external debt was mainly US$-denominated and primarily consisted of loan liabilities to multilateral creditors (72.9 percent of total public external debt as of June 2024 and 12.0 percent to bilateral creditors). - Assessment: Negative NIIP does not present an elevated risk to external sustainability given composition tilted towards FDI. The ES model suggests a small 3.9 percent overvaluation. Stabilizing the NIIP at its 2023 level in the medium term would require a further REER adjustment in the near term. - Current account and real exchange rate - CA balance: Improved to -3.9 percent of GDP in 2023, from -6.7 percent of GDP in 2022. - Drivers: Deceleration of key exports (coffee, banana, and palm oil) and maquila sector was compensated by robust remittances and a strong fall in imports. - 2024 developments: As of 2024H1, goods exports declined by 5.3 percent y/y, while imports increased by 2.4 percent y/y. Remittances increased cumulatively 5 percent for the year through September 2024. - Projections: CA deficit projected at 5.3 percent of GDP in 2024, improving to 4.7 percent of GDP in 2025. - REER: Appreciated by 0.7 percent in 2023 and a further 0.7 percent in the first half of 2024. Trend expected to reverse as the exchange rate has begun to crawl in line with Honduras’ fundamentals. - Model assessments: - Cyclically adjusted CA: -3.9 percent of GDP after accounting for the model’s cyclical contributions and natural disasters. - CA norm: -4.6 percent of GDP. CA gap of 0.7 percent of GDP consistent with a REER undervaluation of 2.0 percent (assuming cross-country CA elasticity of -0.35 with respect to REER). - REER index model: Finds CA gap of -3.5 percent of GDP, suggesting a REER overvaluation of around 10 percent. - ES model: Suggests an overvaluation of 3.9 percent. - Overall external position assessment: Based on REER model and ES model, external position assessed to be moderately weaker than fundamentals; REER estimated to be 5-10 percent overvalued. Expected decrease in overvaluation with recent increase of the monetary policy interest rate of 275 basis points and as the nominal exchange rate continues to crawl. - Developments in the capital and financial accounts - Financial account surplus: 0.5 percent of GDP in 2023, mainly driven by net inflows of FDI (2.5 percent of GDP) explained by firms’ retained earnings; negative net government borrowing (-0.5 percent of GDP) explained by low disbursements (0.9 percent of GDP) and higher amortizations (-1.4 percent of GDP). - Policy changes: Between 2017 and June 2021, surrender requirement for foreign exchange agents was phased out; central bank ended daily FX auctions in favor of interbank FX market. In April 2023, authorities reinstated a 100 percent surrender requirement for FX agents, together with daily FX auctions, and shut down the interbank FX market. Exporters remain required to sell all export receipts in FX to foreign exchange agents, except authorized exporters may retain up to 30 percent for priority purchases or debt service abroad. - Projections: Financial account projected to increase its surplus to 1.6 percent of GDP in 2024, primarily on the back of projected official disbursements and net FDI inflows. - Assessment: Positive net FDI flows projected to continue, while net flows to general government projected to strengthen in line with official sector disbursements and continued market access. Recalibration of monetary and exchange rate policies projected to strengthen other capital flows. - FX intervention and reserves level - Gross international reserves (GIR): US$7,839.6 million or 5.0 months of non-maquila imports of goods and services at end-2023. GIR represented 738 percent of short-term debt in 2023. - As of end-October 2024: GIR stood at US$7,016 million (4.3 months of prospective imports). - Central bank actions: Honduras’s de jure exchange rate arrangement is a crawling band, while de facto the exchange rate is stabilized. In 2023, central bank intervened in the FX market selling on net US$948.5 million. BCH sold FX directly to oil importers outside the FX auction, totaling $1,100 million in 2024 through October. GIR declined $823 million in 2024 through October. - Reserve adequacy: GIR stood at 119 percent of the ARA metric in 2023 and are projected to fall to 104 by the end of 2024. GIR are projected to stabilize in 2025 and remain within the 100-150 percent of the ARA metric during the forecast horizon. *Source: Annex III. Risk Assessment Matrix and Annex IV. External Sector Assessment (excerpts) from the provided IMF content.* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### Overview and commitments - Confirms commitment to policies and objectives of the economic program supported by IMF arrangements under the Extended Fund Facility (EFF) and the Extended Credit Facility (ECF). - Describes progress and further policy steps toward meeting program objectives. - Commits to sharing all information necessary to monitor program performance and authorizes the IMF to publish this Letter of Intent, the MEFP and its annexes, the TMU, and the Staff Report. - Requests completion of the first and second reviews of the arrangements under the EFF and ECF and a rephasing of access. ### Recent developments and program performance (through end-September 2024) - Growth and inflation: - Real GDP growth: economy expanded 3.6 percent in 2023. - Growth continued to be robust in the first half of 2024. - Inflation: peaked at nearly 11 percent in 2022; declined to 5.2 percent by end-2023; through October 2024, inflation was 4.05 percent, close to the 4 percent objective and within the ±1 percent tolerance range. - Current account: - Current account deficit: 3.9 percent of GDP in 2023 (down from 6.5 percent of GDP in 2022). - First half of 2024: current account deficit increased as imports recovered and export receipts continued to decline. - Fiscal and monetary performance: - Met all performance criteria (PCs) and indicative targets (ITs) for the fiscal deficit and tax revenue of the central government through end-September 2024. - Fell short of ITs on priority social spending due to capacity constraints. - Modestly exceeded ceilings on current primary spending (ITs for end-March and end-June 2024) due to unexpectedly large energy purchases. - Met PCs for the stock of net international reserves and net domestic assets of the central bank for end-December 2023; underperformed against end-March ITs and end-June 2024 PCs. - No new external arrears accumulated (continuous PC). - No new flows of monetary financing to the Non-Financial Public Sector (continuous PC). - Energy sector (ENEE): - Met end-December 2023 PC on reduction of ENEE arrears; did not meet end-March IT or end-June 2024 PC as arrears increased. - Did not meet ITs on ENEE energy distribution losses; reforms took more time to place losses on a downward trend. - Implementing a comprehensive ENEE financing plan and forming an inter-governmental committee for electricity sector financial policy analysis and financing coordination. - Structural benchmarks (SBs): - Four of eleven SBs through September 2024 were met; one additional SB implemented with delay. - Three SBs for end-December 2023 related to congressional approval of the tax reform were not met. - Three additional end-June and end-September 2024 SBs were not met due to capacity constraints and needed adaptations. - Proposed rescheduling of missed SBs to reflect implementation capacity. ### Macroeconomic framework and projections - Growth: - Real GDP growth projected to remain within forecast range of 3.5 to 4.5 percent in both 2024 and 2025. - Inflation: - Headline inflation projected to remain at end-2024 within 4% ±1pp. - 2025: inflation expected to stand slightly above this range, peaking in the second half of 2025 as monetary and exchange rate policies normalize. - 2026: inflation projected to return toward the 4 percent objective. - Current account and reserves: - Current account deficit projected to increase to around 5¼ percent of GDP in 2024. - Projected to decline below 5 percent of GDP in 2025. - Liquid international reserves projected to decline $1,255.1 million in 2024 (quantitative performance criterion). - Target for first nine months of 2025: accumulation of $38 million (quantitative performance criterion), supported by projected external disbursements and policy adjustments. ### Risks and contingencies - Identified risks: - Increased geopolitical tensions affecting commodity prices or global growth. - Vulnerability to severe weather events and climate shocks (El Niño, Tropical Storm Sara). - Domestic political environment inhibiting legislative approval of reforms. - Capacity constraints in implementation areas. - Persistence of services inflation that could slow convergence to the inflation objective. - Contingent policy stance: - Stand ready to adapt policies and instruments as needed to ensure macroeconomic stability and social wellbeing while adhering to program objectives. ### Fiscal policy stance and measures - Fiscal outcomes and targets: - Public debt: 48 percent of GDP at end-2023, about 4 percentage points of GDP below program approval projection. - Target to reduce the non-financial public sector (NFPS) fiscal deficit to 1 percent of GDP by end of program. - 2023 NFPS deficit: 1.3 percent of GDP (0.4 percentage points lower than programmed). - 2024 expected NFPS deficit: around 1.5 percent of GDP. - Draft 2025 budget targets a NFPS deficit of 1.5 percent of GDP. - Expenditure and revenue measures: - Approved Council of Ministers decree freezing public sector job creation, cutting unnecessary expenditures, and regularizing temporary employment schemes. - Reallocations expected to redirect up to 1.8 billion Lempiras (about 0.2 percent of GDP) from current spending to capital spending and to finance support for ENEE arrears reduction. - Plans to use further reallocations within the 2024 budget to address emergency spending related to Tropical Storm Sara. - Program allows for additional productive capital expenditures of up to 1 percentage point of GDP in 2025 if external disbursements exceed TMU projections; financing will be identified. - Tax reform: - Law on Tax Justice bill sent to Congress in March 2023 to streamline tax exemptions and reduce high tax expenditures. - Request to postpone December 2023 structural benchmark on its approval until May 2025. - Commit to working on regulations to implement the Law on Tax Justice with IMF support, focusing on objective and transparent processes. ### Monetary, exchange rate, and external policy measures - Monetary and exchange rate normalization: - Begun to normalize monetary and exchange rate policies to contain inflationary pressures and safeguard external stability. - Decisively strengthened implementation of monetary and exchange rate policies to achieve reserve targets (see ¶33, ¶34, ¶36 references in source). - Exchange restrictions: - Request IMF Executive Board approval for retaining the exchange restriction arising from measures implemented by the BCH for allocation of FX for payments and transfers on current international transactions on the ground that measures are maintained for balance of payments purposes, are temporary, and non-discriminatory. - Committed to gradually phasing out these measures as balance of payments stability is strengthened. ### Energy sector strategy (ENEE) - Operational and financial reforms: - ENEE has begun to consistently reduce technical and non-technical losses. - Financial and operational reforms have been slower to bear fruit, contributing to a notable increase in arrears to generators in the current year. - Arrears and financing plan: - Implementing a decisive financing plan to address ENEE’s arrears and improve payment discipline. - Formation of an inter-governmental committee to analyze electricity sector financial policies and coordinate and support speeding up financing for ENEE via different mechanisms. - Reallocations of up to 1.8 billion Lempiras (about 0.2 percent of GDP) will help financially support the ENEE plan. ### Structural benchmarks, program monitoring, and requests to the IMF - Structural benchmarks: - Four of eleven SBs through September 2024 met; one implemented with delay; multiple SBs postponed or rescheduled due to Congressional approval delays and capacity constraints. - Proposed new timeframes and modifications for outstanding SBs (see Table AI.4 in source). - Monitoring: - Program to be monitored through semi-annual reviews, prior actions, quantitative performance criteria, indicative targets, and structural benchmarks as described in the attached MEFP and TMU. - Requests to the IMF: - Completion of first and second reviews of EFF and ECF arrangements and rephasing of access. - Executive Board approval of waivers of non-observance for: - the stock of non-borrowed net international reserves of the central bank, - the stock of net domestic assets of the central bank, - the stock of domestic arrears of ENEE for end-June program performance criteria. - Approval for retaining BCH exchange restriction on allocation of FX for current international transactions (temporary and non-discriminatory, maintained for balance of payments purposes). - Interest in future support under the Resilience and Sustainability Facility (RSF) to be pursued at the next review. _Source: Appendix I. Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding (attachments referenced)._ ### 12. We also remain committed to the approval of the Convention on Mutual ### 12. We also remain committed to the approval of the Convention on Mutual Administrative Assistance in Tax Matters (MAAC) ### Tax cooperation and budget execution - Submitted to Congress a decree to ratify the Convention on Mutual Administrative Assistance in Tax Matters (MAAC) and the Law on Tax Justice; requesting postponement of the December 2023 structural benchmark for its approval to May 2025. - Plan to adopt in the Council of Ministers a decree and publish a “Manual for the Programming of Budget Execution” by February 2025 (structural benchmark). - Manual will define standards and technical guidelines for pre-commitment, commitment, verification, and payment stages. - Guidelines will be binding for the entire central government to enhance accountability and efficiency. ### Social Safety Net - Commitment to scale up social expenditures through flagship programs including Red Solidaria and PROASOL. - Electricity subsidy targeting: - Electricity free for poor households consuming less than 150 kWh per month. - Cost-sharing: 60 percent borne by the state; 40 percent financed by large consumers via cross-subsidy. - 2024 budget includes a 4.8 billion Lempira allocation to finance the measure for the remainder of the year. - Plan to scale the measure down to the 3.15 billion Lempiras allocated in the 2025 budget. - Poverty Reduction and Growth Strategy (PRGS): - Hired an international consultant to assist in formulation; requesting extension until the third review of the program due to preparation delays to meet IMF Poverty Reduction and Growth Trust requirements. - Red Solidaria program challenges and actions: - Capacity constraints in administering conditional cash transfers due to the 2024 population and housing census not being carried out. - Measures to enhance effectiveness and targeting: - (i) Negotiate external credits to finance Cajas Rurales to support transfers. - (ii) Strengthen technical capacity to update social records through Mesas Solidarias. - (iii) Streamline hiring processes for implementation and execution. - Target expansion: Red Solidaria to 120,000 households in 500 marginalized urban neighborhoods. - Working with World Bank on an urban poverty census. - Request to postpone the September 2024 structural benchmark for completion of the census and entering data into SIRBHO to end-March 2025. - Single Social Sector Information System (SUISS): - SUISS to centralize and structure Social Cabinet data to improve policy design and program targeting. - Request to reprogram the June 2024 structural benchmark for SUISS to end-June 2025 due to capacity constraints. ### Quality of Spending and Structural Fiscal Measures - Public investment management: - Completed a public investment management assessment (PIMA) including a climate component (C-PIMA) with Fund TA. - Plan to establish a database of costed future investment projects with completed financing and design studies. - Procurement procedure reform identified as essential to speed up implementation. - Fiscal Contingencies Unit (UCF) within SEFIN continues to enhance fiscal risk analysis methodologies for PPPs and other liabilities. - Trust funds elimination and transparency: - Incorporated 4.4 billion Lempiras in trust fund assets in 2023 and an expected 1 billion Lempiras in 2024. - Seventeen trust funds liquidated; 51 remain open due to tax liabilities. - Plan to have 68 of 82 trust funds closed by end-December 2024 (request to narrow the structural benchmark to these 68). - Request to separate remaining 14 trust funds into a new end-December 2025 structural benchmark because of complexity. - First group of 8: higher difficulty due to holding loan portfolios (belong to BANHPROVI). - Second group of 5: require complex audits (INVEST-H, Tasa de Seguridad, Instituto de la Propiedad (IP-SITEC), and 2 of SENPRENDE); requested Superior Court of Accounts to undertake audits; may engage a private audit company and provide funding. - Final trust fund (Fideicomiso Beca Internacional): delays due to irregularities and judicial complaints. - Treasury Single Account (TSA) strengthening: - Established a SEFIN committee for cash management coordination via ministerial agreement. - Submitted to Congress amendments to the Organic Budget Law in August to strengthen TSA (delay relative to March 2024 structural benchmark). - Retain implementation timeline by December 2025 (structural benchmark) to: - (i) Ensure efficient functioning of the TSA; - (ii) Facilitate recovery of outstanding bank balances to reintegrate into the TSA; - (iii) Define operational details for payment via revolving funds (including type of eligible expenditures, maximum amounts); - (iv) Establish procedures for public sector institutions to submit cash flow projections to the Treasury. ### Financing - Domestic bond market development: - Published a new annual Public Borrowing Policy in September (met structural benchmark) and a Medium-Term Debt Strategy in December (met structural benchmark). - SEFIN resumed domestic bond issuances since late 2023, placing more than 10 billion Lempiras (over 1 percent of GDP) in line with the published schedule (met January 2024 structural benchmark). - Requested Fund technical assistance to strengthen the yield curve. - Commitment: no monetary financing from BCH in normal times (continuous performance criterion); emergency responses will follow legal framework and program objectives. - International financial support: - Ongoing engagement with CABEI, CAF, IDB, World Bank for financing—important for social, energy, and infrastructure investment. - Plans to access international debt markets with a thematic bond issue. ### Energy Sector - ENEE losses and National Loss Reduction Program (NLRP): - NLRP outcomes to date: - About half a million accounts reviewed; anomalies including indications of fraud detected in about a quarter of these. - More than 300,000 new meters installed. - Electricity losses: - Reduced from 37.4 percent peak at September 2023 to 34.8 percent at October this year. - Projected to increase slightly to 35.5 percent by end-December this year due to stronger demand, higher-than-expected temperatures, and a billing cycle change. - Ambition for 2025: achieve a cumulative reduction of about 2½ percentage points. - ENEE financial performance and measures: - Cash flow deficits: surpassed 1 percent of GDP in 2021; narrowed to 0.8 percent of GDP in 2022 and 0.7 percent of GDP in 2023; anticipated deficit of 0.5 percent of GDP for 2024. - Key improvements: - (i) Improved compliance by public institutions in paying obligations to ENEE. - (ii) Expected timely SEFIN transfers of all subsidies, including smaller unpaid amounts (~500 million Lempira per year) to reduce arrears. - (iii) SEFIN payment of ENEE’s upcoming debt service of about 2 billion Lempiras in both 2024 and 2025. - Plan to start, in early 2025 with IDB support, a comprehensive audit of ENEE by the Superior Court of Accounts—the first audit since 2016. - ENEE arrears and financing plan: - End-2023: ENEE invoices more than 45 days past due stood at to 9.8 billion Lempiras (meeting program’s performance criterion). - By September 2024: arrears grew to 17.5 billion Lempiras. - Contributing factors: debt service obligations, higher power purchase costs during dry season (~2 billion Lempiras more than normal), delays in ENEE debt issuances. - Governance and coordination: - Establish a committee (via decree in the Council of Ministers and published in the official gazette) composed of BCH, CNBS, ENEE, SEFIN, the Ministry of Energy, and the Secretariat of the Presidency (prior action) to analyze financial policies and coordinate financing for ENEE. - Arrears reduction actions: - ENEE issued debt for 898.4 million Lempiras in the first half of November; combined with NLRP measures would reduce arrears below 11.5 billion Lempiras by end 2024. - Given issuances by November 15, 2024 totaled less than 5 billion Lempiras, SEFIN will execute a transfer to or a payment towards its accounts payable to ENEE for the shortfall to 5 billion Lempiras, i.e. 4,101.6 million Lempiras (prior action). - For 2025: ensure ENEE issues debt gradually and reduces arrears further by 1 billion Lempiras each quarter. - Contract renegotiations and tariffs: - Submitted renegotiated contracts with private power suppliers to National Congress in May; first set of 18 renegotiated contracts would generate savings of around 5 percent for consumers during the initial years once approved. - ENEE restructuring and accounting: - Commit to maintaining ENEE as state-owned while separating administrative functions of generation, transmission, and distribution into separate business divisions. - Reforms to complete: - i. Merge UTCD, PNRP, ENEE Distribución operative processes by end-August 2025 (structural benchmark). - ii. Implement IFRS accounting standards: hire a consulting firm by end-March 2025 (structural benchmark) and establish adequate IT software infrastructure; aim to publish ENEE’s IFRS-based audited annual financial statements (for the year 2025) by mid-2026. - Capacity expansion: - Preparing an open international tender for 1500 MW capacity to be installed during 2027-29; mid-2025 auction expected. - Tariff reform timeline: - Send updated studies to CREE by April 2025. - CREE to publish preliminary technical note and hold public consultation by end-November 2025 (structural benchmark) in line with resolution CREE-148 of June 24, 2019, laying basis to update tariff structure in 2026. ### Monetary and Exchange Rate Policies - Commitment to monetary and exchange rate policies to maintain low inflation and safeguard international reserves. - Reserve position as of mid-November 2024: gross international reserves at $6.9 billion, equivalent to a coverage of 4.3 months of imports. - Continued priorities: - Preserve internal and external stability of the Lempira. - Bolster international reserves via monetary/exchange rate policies, fiscal discipline, deepening domestic debt markets, and strengthening ENEE’s financial position. - Emphasize strong communication with public and markets to enhance policy effectiveness. *Content unit: 1hndea2024001-print-pdf - 12. We also remain committed to the approval of the Convention on Mutual* ### 33. The BCH is advancing on the normalization process of its monetary policy focused on ### 1hndea2024001-print-pdf - 33. The BCH is advancing on the normalization process of its monetary policy focused on ### Monetary policy normalization and recent measures - Headline inflation declined to 4.05 percent in October 2024. - BCH measures implemented since mid-2023 to tighten liquidity, limit credit growth, and strengthen the monetary policy rate (TPM) include: - An increase by 50 bps in the cut rate of BCH bills throughout maturities. - An increase by 100 bps in reserve requirements in local currency to 10 percent in November 2023 together with a change in the maintenance period for reserve requirements to daily from two-week averages. - An increase in the TPM by 100 bps to 4.0 percent in August 2024, reinforced by a further 175 bps to 5.75 percent in October 2024 (prior action). - Objectives of TPM increases: - Strengthen transmission mechanism and signaling effect of TPM. - Improve efficient management of market liquidity. - Reduce inflationary pressures and safeguard the external position. - Policy guidance: - BCH will continue to implement a combination of monetary and exchange rate measures, mainly adjustments in the TPM and other instruments, 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 TPM. - BCH will be guided by latest domestic and global information, including international interest rates, to maintain a positive real monetary policy rate that supports demand for Lempira assets. ### Exchange rate regime and competitiveness - Past approach: - During 2022-2023 BCH prioritized moderating exchange rate volatility to limit pass-through of external inflation. - Resulted in relative nominal exchange rate stability but, given a positive inflation differential vis-à-vis trading partners and U.S. dollar appreciation (especially in 2022), contributed to a slight appreciation of the real effective exchange rate (REER). - Crawling band implementation: - Measures to strengthen implementation of the crawling band regime to ensure external competitiveness of the Lempira and preserve international reserves. - Initial expected path of the exchange rate to be determined by macroeconomic fundamentals implicit in the crawling band formula to correct REER imbalance and strengthen external position. - Preparedness to strengthen exchange rate measures to be consistent with reserve accumulation targets envisaged in the program. ### Foreign exchange market reforms and roadmap - Objective: improve balance of supply and demand in the foreign exchange market over time and transition to a balanced, competitive, and efficient foreign exchange allocation system that allows for price discovery. - Actions and timeline: - Prepare a diagnostic study, in collaboration with Fund staff, outlining options and recommendations to strengthen foreign exchange allocation (April 2025 structural benchmark). - Based on the study’s recommendations, BCH will take actions it deems necessary while safeguarding against undue short-term exchange rate volatility and protecting equal rights of economic agents to buy and sell foreign currency. - Define and implement a roadmap for reforms to strengthen efficiency of foreign exchange allocation. ### Financial sector health and regulatory reforms - Financial sector conditions: - Banks are well capitalized, liquid, and highly profitable. - Non-performing loans remain low (around 2 percent). - CNBS stress tests show banking system resilient to significant shocks. - Regulatory and supervisory enhancements: - CNBS enhanced capacity in risk-based supervision using Toronto Centre methodology. - CNBS developed criteria to identify systemically important financial institutions (SIFIs). - Plan to fully phase in the capital conservation buffer of 2.5 percent by December 2025. - Plan to implement the net stable funding ratio requirement by early 2025, making Honduras the first country in the region to have two measures of liquidity in line with Basel standards. - Project to implement IFRS-9 financial accounting standards by 2026. - BCH carried out public consultation on modernizing digital payment systems and is considering stakeholder inputs. - Climate-related financial resilience: - CNBS defined an action plan to incorporate climate change vulnerabilities into stress testing and current regulations. - Ongoing projects (with World Bank assistance) include estimation of expected losses related to climate change and geo-referencing of economic activities. - Market development laws: - Draft laws for equity and bond markets and the insurance and reinsurance sectors (with IDB technical assistance) to incorporate risk-based capital requirements; CNBS reviewing comments to submit to National Congress in first half of 2025. - Confidentiality and tax access: - Law on Tax Justice, once passed, will provide for access to bank records by tax authorities in line with international standards while maintaining access limited to tax purposes and protecting data confidentiality. ### Governance, anti-corruption, and business climate reforms - Administrative simplification: - Decision to replace a Law on Simplification of Administrative Procedures (June 2024 structural benchmark) with executive actions to digitize procedures. - Structural benchmark modified and reset to end-April 2025 to launch government’s Digital Investment Portal and digitize at least 50 administrative procedures. - Public procurement: - Finalizing a new public procurement law to enhance transparency and strengthen contracting processes; submission to National Congress planned soon with expected approval in first half of 2025; first phase of new electronic procurement platform planned mid-2025. - Anti-corruption strategy and institutions: - Establishment of an electronic asset declaration system for public officials (met February 2024 structural benchmark); rollout being implemented by the Superior Court of Auditors and expected fully digital by early 2026; enhancements with IDB support include risk markers and extension to municipalities. - Adoption of a Honduran National Transparency and Anti-Corruption Strategy (ENTAH) awaiting Council of Ministers discussion expected by early 2025. - Establishment of the International Commission against Corruption and Impunity in Honduras (CICIH); revised action plan submitted to the United Nations and establishment expected in 2025. - Creation of the National Transparency and Anticorruption Observatory at UNAH in June 2024 to monitor public policies and prepare an Index of Transparency for Honduras. - Adoption of a whistleblower law: draft being prepared with United Nations support and digital portal; planned submission to National Congress in the second quarter of 2025. ### AML/CFT and beneficial ownership - AML/CFT strengthening: - Approved technical standards for prevention of money laundering risks in December 2023 for cooperatives supervised by CONSUCOOP and in May 2024 for DNFBPs. - Expect to finalize national risk evaluation on AML/CFT still in 2024 to guide risk-based supervision resource allocation. - Plan to advance updates to four laws to Congress by early 2025 to align frameworks with GAFILAT standards: Counter-Terrorist Financing Law, Special Law against Money Laundering, Law on Regulation of DNFBPs, and Law on Definitive Deprivation of Ownership of Property of Illicit Origin. - Beneficial ownership registry and company supervision: - Law on Beneficial Ownership remains in Congress; request to reset its congressional approval benchmark from December 2023 to end-May 2025. - Plan to submit Law on the Superintendence of Commercial Companies by early 2025. - Together, these laws will enable a single national registry of commercial companies including beneficial owners, to be administered by SAR. - Request to reset structural benchmark for launching the new registry to end-December 2025 due to congressional delays. ### Statistics and data improvements - ENIGH and CPI rebasing: - BCH and INE completed field work for the National Household Income and Expenditure Survey (ENIGH) in April 2024; evaluation and data preparation ongoing with publication planned in the second half of 2025. - ENIGH data to enable rebasing of the Consumer Price Index by late 2025 and thereafter National Accounts; National Accounts rebasing will require additional time and incorporation of agricultural and fisheries census and population and housing census. - Agricultural and fisheries census: pilot completed with FAO assistance; field work scheduled for last quarter of 2024. - Population and housing census is at planning stage and will be financed by the IDB. ### Climate change agenda and investments - Legislative and regulatory progress: - National Congress approved a Special Law on Forest Carbon Transactions for Climate Justice in October (previous year) establishing norms for forest carbon transactions and sustainable management of forest carbon sinks. - National Congress approved a Law on the Rational and Efficient Use of Energy in July (this year), mandating energy-efficiency labelling of appliances, drafting a national strategy for efficient energy use, and establishing a fund to promote related actions. - Ministry of Energy working on implementing regulations for the energy law and on a new law on bioenergy. - Sustainable finance and projects: - SEFIN, with UNDP technical assistance, developing a reference framework for sustainable bonds and expects ministerial agreement of its approval to be published in the official gazette before year end. - Identified about $2 billion worth of sustainable projects in 2023 and 2024 budgets as the basis for planned sustainable bond issuance. - With CABEI support, significantly advanced feasibility studies for El Tablón and Morolica dams and expect to publish these by early next year; dams are crucial for flood control, irrigation, clean water, and electricity generation. - Plan to scale up disaster response agency capacity to help 30,000 affected families in case of disasters, from 10,000 presently. ### Safeguards assessment and central bank institutional strengthening - Safeguards assessment findings and ongoing steps: - BCH has made significant progress implementing past safeguards recommendations and broadly maintains strong controls over its operations. - Planned actions include: - Finalize full adoption of international accounting standards (IFRS). - Further strengthen internal audit function, including auditor training. - Improve risk management and cybersecurity practices. - Medium-term strategy for quasi-fiscal operations: - Develop a medium-term strategy to unwind BCH’s quasi-fiscal operations, including eventual transfer of the Investment Fund to the state and wind down of the Guarantee Fund by 2029, in line with incorporation agreement. - BCH engaged an external auditor to provide an independent audit opinion of the Investment Fund included in the May presentation of BCH’s 2023 financial statements. - Start independent audits of the Guarantee Fund with accounts for the 2024 fiscal year. - Financing for development banks to be provided by SEFIN as part of the budget and/or through bilateral or multilateral partners; BCH will not provide any new financing to the financial public sector, including BANHPROVI and BANADESA (continuous performance criterion), in accordance with its Organic Law. - Institutional and legal modernization: - Engage with Fund staff to advance other recommendations of the safeguards assessment. - BCH Law has not been amended since 2004; BCH will set up a technical team to begin work in coordination with the Fund to strengthen institutional framework in line with international best practices. - Continuation of interaction under the Financial Innovation Roundtable (established since 2019) with specialized IMF staff to determine best way to proceed. *Source: 1hndea2024001-print-pdf - 33. The BCH is advancing on the normalization process of its monetary policy focused on* ### 52. Program monitoring. The program remains subject to semi-annual reviews and will be ### 52. Program monitoring ### Program monitoring framework - The program remains subject to semi-annual reviews and will be monitored through quantitative performance criteria (PCs), indicative targets (ITs), and structural benchmarks, as set out in Tables AI.2 and AI.4. - Authorities commit to providing detailed information as specified in the Technical Memorandum of Understanding (TMU). - The relevant definitions and reporting procedures are specified in the attached TMU. ### Quantitative performance criteria (selected outcomes and targets) - Fiscal and public debt targets (cumulative flows; millions of Lempiras, unless specified): - Net lending/borrowing of the nonfinancial public sector (- = borrowing, floor): - End-Dec 2023: PCs Adj. -16,970; Actual -11,222; Status Met - End-Mar 2024: ITs Adj. -1,897; Actual 4,409; Status Met - End-June 2024: PCs Adj. -3,843; Actual 8,302; Status Met - End-Sept 2024: ITs Adj. -6,170; Actual 18,088; Status Met - Stock of domestic arrears of ENEE (ceiling): - End-Dec 2023: Target 10,500; Actual 9,787; Status Met - End-Mar 2024: Target 10,500; Actual 13,339; Status Not met - End-June 2024: Target 9,451; Actual 16,113; Status Not met - End-Sept 2024: Target 9,148; Actual 17,527; Status Not met - Accumulation of new external arrears (ceiling, in million US$): 0 / 0 / 0 / 0 (Met across reported dates) - Monetary targets (millions of US$ where specified): - Stock of non-borrowed net international reserves of the Central Bank (floor, in million US$): - End-Dec 2023: Target 5,465; Actual 5,126 - End-Mar 2024: Target 5,437; Actual 5,477; Status Met - End-June 2024: Target 5,329; Actual 4,955; Status Not met - End-Sept 2024: Target 5,500; Actual 5,268; Status Not met - Additional reported rows: Targets 5,371; Actual 4,875; and 4,549 with Status Not met - Stock of net domestic assets of the central bank (ceiling): - Reported values include targets and actuals such as: - Target -62,794; Actual -54,461 - Target -62,820; Actual -62,593; Status Met - Target -58,960; Actual -54,628; Status Not met - Target -61,685; Actual -55,978; Status -53,194 Not met - Target -61,459; Actual -49,278; Actual -47,646; Status Not met - Monetary financing (ceiling): 0 / 0 / 0 / 0 (Met across reported dates) - Central bank transfers to financial public sector (ceiling): 0 / 0 / 0 / 0 (in Table AI.2) - Indicative targets (selected): - Tax revenue of the central government (floor), cumulative from the start of the calendar year: - End-Dec 2023: Target 145,070; Actual 148,863; Status Met - End-Mar 2024: Target 30,500; Actual 30,721; Status Met - End-June 2024: Target 77,000; Actual 77,900; Status Met - End-Sept 2024: Target 116,500; Actual 120,421; Status Met - Table AI.2 targets include End-Dec 160,467 and intermediate targets 29,538; 73,151; 127,393 - Current primary spending of the SNPF excluding priority social spending (ceiling), cumulative: - End-Dec 2023: Target 203,395; Actual 190,451; Status Met - End-Mar 2024: Target 44,685; Actual 46,279; Status Not met - End-June 2024: Target 97,877; Actual 101,240; Status Not met - End-Sept 2024: Target 143,672; Actual 149,392; Status Not met - Table AI.2 End-Dec target 208,345 and intermediate targets 47,515; 109,335; 166,455 - Priority social spending (floor), cumulative: - End-Dec 2023: Target 7,000; Actual 5,907; Status Not met - End-Mar 2024: Target 856; Actual 594; Status Not met - End-June 2024: Target 2,472; Actual 2,341; Status Not met - End-Sept 2024: Target 4,851; Actual 3,643; Status Not met - Table AI.2 End-Dec target 6,000 and intermediate targets 1,250; 2,600; 5,550 - Percentage of energy lost by ENEE in energy distribution (ceiling): - End-Dec 2023: Target 34.5; Actual 36.9; Status Not met - End-Mar 2024: Target 33.8; Actual 36.9; Status Not met - End-June 2024: Target 33.1; Actual 36.0; Status Not met - End-Sept 2024: Target 32.4; Actual 35.1; Status Not met - Table AI.2 quarterly targets: 35.5; 34.9; 34.9; 33.7 (End-Dec, End-Mar, End-June, End-Sep respectively) ### Prior actions and structural benchmarks (selected items, status, and resets) - Prior actions (examples): - Increase interest rate on BCH’s overnight lending facility (Facilidad Permanente de Crédito, FPC) by 50 basis points — Prior Action; Strengthening monetary policy transmission; Status Met at the time of approval of the arrangements. - Prepare and approve in the Public Credit Committee an annual Public Borrowing Policy (PEP) and publish it on the Ministry of Finance website — Test Date End-September 2023; Objective: Deepen domestic debt markets; Status Met. - Prepare a Medium-Term Debt Strategy and publish it on the Ministry of Finance website — Test Date End-December 2023; Status Met. - Approve the Law on Tax Justice (Ley de Justicia Tributaria) in the National Congress — Test Date End-December 2023; Status Not met; propose to reset to end-May 2025 (see Table AI.4, SB #7). - Approve the decree to ratify the Convention on Mutual Administrative Assistance in Fiscal Matters (MAAC) in the National Congress — Test Date End-December 2023; Status Not met; propose to reset to end-May 2025 (SB #8). - Make the electronic asset declaration system for public officials operational nationwide — Test Date End-February 2024; Status Met. - Publish an issuance schedule for treasury bonds on the Ministry of Finance’s website — Test Date End-January 2024; Status Met. - Operationalize the Special Law to Strengthen the Single Treasury Account — Test Date End-March 2024; Status Not met; Implemented on August 16, 2024. - Proposed new or reset structural benchmarks and prior actions (selection from Table AI.4): - Prior Action: Increase Monetary Policy Rate (TPM) by 175 bps — Prior Action; Tightening monetary policy; ¶33; Met on October 24, 2024. - Prior Action: SEFIN to make a transfer or payment towards its accounts payable to ENEE in the amount that ENEE’s 2024 new debt issuances fall short of 5 billion Lempiras as of November 15, 2024 — Prior Action; Objective: Reduce arrears of and improve financial sustainability of SOEs; ¶27. - Prior Action: Establish, through an agreement in the Council of Ministers, a committee composed of BCH, CNBS, ENEE, SEFIN, the Ministry of Energy, and the Secretariat of the Presidency to coordinate financial policies related to the electricity sector — Prior Action; Objective: Improve governance, ensure ENEE arrears reduction; ¶27. - New / Reset structural benchmarks with test dates and objectives (selection): - Conclude liquidation and audit of all trust funds (except the 14 requiring complex audits), integrate into budget processes and central government balance sheet, and share audit documents with IMF staff; quantify and report debts (including accounts payable) as part of public debt stock — End-December 2024; Objective: Improve governance and transparency in public spending; ¶19 (Modification of SB #13 in Table AI.3). - Adopt and publish a “Manual for the programming of budget execution” binding for the entire central government — End-February 2025; Objective: Strengthen public financial management and expenditure control; ¶13 (New SB). - Complete the census of urban households in extreme poverty and register resulting data in SIRBHO — End-March 2025; Objective: Combat poverty and inequality; ¶16 (Reset version of SB #11). - ENEE to hire a consulting firm to help implement IFRS and establish separate business divisions for generation, transmission and distribution — End-March 2025; Objective: Improve transparency, accountability, and governance of SOEs; ¶29 (New SB). - Launch the government’s Digital Portal for Investment and digitize at least 50 processes — End-April 2025; Objective: Improve efficiency in public administration and the business climate; ¶44 (Modification of SB #10). - Approve the Law on Tax Justice in the National Congress — End-May 2025; Objective: Make the tax system more equitable and reduce tax expenditures; ¶11 (Reset SB #3). - Create the Single Social Sector Information System (SUISS) and populate it with data — End-June 2025; Objective: Combat poverty and inequality; ¶17 (Reset SB #9). - Integrate operational processes of ENEE’s three distribution units into a single unit — End-August 2025; Objective: Improve governance and profitability of SOEs and facilitate reductions in electricity losses; ¶29. - Complete liquidation and audits of 14 complex trust funds (INVEST-H, Tasa de Seguridad, IP-SITEC, others), integrate into budgetary processes and balance sheet, share audit documents with IMF staff; quantify and report debts — End-December 2025; Objective: Improve governance and transparency in public spending; ¶19 (Modified SB #13). - Effective implementation of Amendments to the Organic Budget Law to Strengthen the TSA, including establishing regulations and operational definitions for TSA functioning, recovery of outstanding bank balances, revolving funds procedures, and cash flow projection submissions — End-December 2025; Objective: Improve governance and transparency in public spending; ¶20 (Modification of SB #14). - To implement the Law on Beneficial Ownership, make operational a comprehensive beneficial ownership registry — End-December 2025; Objective: Improve transparency and governance and reduce corruption vulnerabilities; ¶48 (Reset SB #12). ### Technical Memorandum of Understanding (TMU) — key elements - Coverage: - The TMU sets out technical understandings between Honduran authorities and Fund staff for monitoring the program for the period September 2023-September 2026. - It defines concepts used to assess observance of quantitative PCs, structural benchmarks, and ITs in Tables AI.1 and AI.2 and specifies the frequency of data to be provided to the Fund. - Program exchange rates (rates that prevailed on May 25, 2023): - Lempira to the U.S dollar 24.56 - SDR to the U.S dollar 0.75 - Yen to the U.S dollar 139 - Euro to the U.S dollar 0.93 - Canadian dollar to the U.S dollar 1.36 - British Pound to the U.S dollar 0.81 - Renminbi to the U.S dollar 7.07 - Note: All foreign currency-related assets, liabilities, and flows are evaluated at “program exchange rates” except for items related to fiscal operations, which will be measured at current exchange rates. - Standard performance criteria monitored continuously (in addition to listed PCs): - No imposition or intensification of restrictions on the making of payments and transfers for current international transactions. - No introduction or modification of multiple currency practices. - No conclusion of bilateral payments agreements inconsistent with Article VIII of the IMF Articles of Agreement. - No imposition or intensification of import restrictions for balance of payments reasons. - Definitions (selected): - Central government consists of the budgetary central government (Administración Central) and decentralized agencies (instituciones desconcentradas). Trust funds are considered part of the central government since 2022. - Nonfinancial public sector (NFPS) consists of the central government as defined above, the social security institute (IHSS), all state-owned public pension funds, local governments, other decentralized agencies, and nonfinancial public enterprises. - Public financial sector includes Banadesa, Banhprovi, and any other financial institutions controlled by the central government or with majority participation by the central government or NFPS entities. - Net lending of the NFPS is computed above-the-line as the difference between revenue and expenditure of the NFPS. - NFPS revenues are recorded on a modified cash basis: taxes, grants and other revenues recorded on a cash basis; income of non-financial public companies and social contributions recorded on an accrual basis. Payments from private users of PPP facilities are considered public revenue. *Source: 1hndea2024001-print-pdf, Attachment II: Technical Memorandum of Understanding, Tables AI.1–AI.4* ### 8. NFPS’ expenditure is recorded on an accrual basis and includes expenses and the net ### 8. NFPS’ expenditure is recorded on an accrual basis and includes expenses and the net ### Measurement and recording of NFPS expenditure - NFPS’ expenditure is recorded on an accrual basis and includes expenses and the net acquisition of nonfinancial assets. - Private investments for PPPs are treated as expenses and measured as part of NFPS net lending as they occur. - NFPS’ net lending will be measured at each test date as the cumulative value starting from the beginning of each calendar year. - Monitoring: All fiscal data referred to above and needed for program monitoring purposes will be provided to the Fund with a lag of no more than 45 calendar days after the end of each month. ### Adjustor for external financing disbursements for productive investment projects - The cumulative floor of NFPS’ net lending/borrowing will be adjusted downward by the excess in external program and project disbursements from official multilateral and bilateral institutions, relative to the baseline projection reported in Table AII.2. - The value of the adjustor would be capped at a cumulative 10 billion Lempiras in 2025 (equivalent to approximately 1 percent of projected 2025 nominal GDP) to be used for the projects in the priority areas indicated in Table AII.3. - Project disbursements are defined as external loan and grant disbursements from official multilateral and bilateral creditors that will be used to finance specific productive investment projects. ### Table AII.2. Honduras: External Program and Project Disbursements (Cumulative flows per year, Millions of US$) - End-Dec 2024: Loans 726.1; Grants 50.7 - End-March 2025: Loans 243.6; Grants 8.8 - End-June 2025: Loans 795.2; Grants 22.8 - End-Sep 2025: Loans 959.4; Grants 34.5 - End-Dec 2025: Loans 1,254.9; Grants 50.5 ### Priority investment projects covered by the adjustor (Table AII.3) - Design, construction, remodeling, and equipment of hospitals and laboratories. - Design, construction, and expansion of the generation, transmission, and distribution infrastructure for the energy sector. - Construction and rehabilitation of national and municipal roads, including productive roads and bridges. - Construction, reconstruction, and expansion of educational infrastructure. - Design, construction, and expansion of infrastructure aimed at climate change adaptation and mitigation. - Investment programs for the improvement of sanitation systems, distribution, and water supply. - Infrastructure projects to enhance resilience and competitiveness in the agricultural, fisheries and livestock sectors. ### Ceiling on ENEE’s stock of domestic arrears - 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 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). This decree states a deadline up to 45 days starting from the submission of appropriate documents for payment. - This definition does not preclude payment before the deadline if it is agreed by both parties. - 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. ### Ceiling on the non-accumulation of external debt payment arrears — Definitions and coverage - Definition of debt: External debt is determined according to the residency criterion. The term “debt” will be understood to mean 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; these payments will discharge the principal and/or interest liabilities incurred under the contract. - Primary forms of debt: - a. Loans, including deposits, bonds, debentures, commercial loans and buyers’ credits, and temporary exchanges equivalent to fully collateralized loans (repurchase agreements and official swap arrangements). - b. Suppliers’ credits, where the supplier allows the obligor to defer payments until after delivery. - c. Leases, where debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding payments that cover operation, repair, or maintenance. - Definition of external arrears: External debt payments arrears for program monitoring purposes are defined as external debt obligations (principal and interest) falling due after June 30, 2023, that have not been paid, considering the grace periods specified in contractual agreements. - Under this definition, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. - Coverage: This performance criterion covers the NFPS. It does not cover (i) arrears on trade credits, (ii) arrears on debt subject to renegotiation and restructuring and (iii) arrears resulting from the nonpayment of commercial claims that are the subject of litigation initiated prior to November 30, 2022. - Special provision for Venezuela: Nonpayment of external debt service to Venezuela will not give rise to arrears when the government cannot pay or settle based on the contractual terms solely due to factors outside the debtor’s control such as the existence of sanctions on Venezuela, as long as the 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, and their use or withdrawal for other purposes would constitute a breach of the PC. - Monitoring: This performance criterion will be monitored on a continuous basis. ### Floor on the Stock of Non-Borrowed Net International Reserves (NIR) - Definitions: NIR of the BCH are equal to the balance of payments concept of NIR defined as the U.S. dollar value of gross international reserves of the BCH minus gross official liabilities as defined below. Non-U.S. dollar denominated foreign assets and liabilities will be converted into U.S. dollar at the program exchange rates. - Gross official reserves: Defined consistently with BPM6 as readily available claims on nonresidents denominated in foreign convertible currencies, and 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 are assets that are pledged, collateralized or otherwise encumbered, claims on residents, claims in foreign exchange arising from derivatives vis-à-vis domestic currency, 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. SDR allocations are not netted out from gross international reserves for the calculation of net international reserves. - Monitoring: The stock of non-borrowed net international reserves will be measured as each test date. 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. ### NIR 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. - The NIR target will also be adjusted upward by the full amount of any excess in gross external borrowing by the Honduran public sector from private creditors in foreign currency relative to the baseline projections in the BOP. The baseline projections in the BOP include zero gross external borrowing by the Honduran public sector from private creditors in 2024 and 2025. ### Ceiling on the stock of the BCH’s Net Domestic Assets (NDA) - Definitions: NDA of the BCH are defined as the difference between currency issued and non-borrowed NIR measured at program exchange rates. - The ceiling applies to the stock of NDA measured at each test date. - Monitoring: Data will be provided to the Fund monthly with a lag of no more than 2 weeks 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. ### Ceiling on monetary financing of the BCH to the NFPS and the Public Financial Sector (PFS) - Definition: Monetary financing is defined as any disbursement from the BCH to the NFPS after January 1, 2023 or to the public financial sector (PFS), as defined in ¶5c, after November 15, 2024, under any loan between these entities, whether the loan is repayable or not or interest-bearing or not. - The only exception is 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. - Measurement and monitoring: This 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 PC will be monitored on a continuous basis. - For monitoring, the BCH balance sheet, with detail on the net credit balance to the NFPS and the PFS, will be provided to the Fund on a daily basis with a lag of no more than one business day. ### Quantitative indicative targets: definitions - 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 will be considered equivalent to the budgetary central government (Administración Central). - Measurement: The central government’s tax revenues will be measured at each test date as the cumulative value starting from the beginning of each calendar year. - Monitoring: Monthly data will be 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 is defined as total current spending minus interest spending minus priority social spending. - Current expenditure is defined as the total expenditures of the SNPF minus the capital expenditures (i.e., the net acquisition of non-financial assets) of the SNPF. All expenditures are recorded on an accrual basis. - Measurement: Primary current spending of the NPFS excluding priority social spending will be measured at each test date as the cumulative value starting from the beginning of each calendar year. - Monitoring: Monthly data will be provided to the Fund within 45 days of the end of each month. - Floor on Priority Social Spending: - Definition: Priority social spending is defined for program purposes as the interventions by the central government with high impact on poverty reduction and long-term influence on beneficiaries that are listed in Table AII.4. - Measurement: Priority social spending will be measured at each test date as the cumulative value starting from the beginning of each calendar year. - Monitoring: Monthly data will be 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: The percentage of energy lost by ENEE in energy distribution is defined as the energy injected into the distribution network minus the sales invoices issued to its customers (both in GWh) during the 12 months prior to the test date, divided by the energy injected into the distribution network during the same period. - Monitoring: Monthly data will be provided to the Fund within 45 days of the end of each month. ### Table AII.4. Honduras: Priority Social Spending - Red Solidaria - Becas SEDESOL - Ciudad Mujer - Merienda Escolar - Bono Tecnológico - Bono Cafetalero - Bono Ganadero - Becas PROASOL - Bonos PROASOL ### Debt sustainability summary (excerpt) - Prudent fiscal management and sizeable net debt repayments have led to an improvement in Honduras’ debt dynamics compared to the September 2023 full DSA, resulting in an end-2023 public debt stock of 48 percent of GDP, 4 p.p. lower than projected at program approval. - Risk ratings remain unchanged: Risk of external debt distress assessed Low; risk of overall public debt distress assessed Moderate. - Honduras maintains a strong debt-carrying capacity. - The authorities remain committed to prudent macroeconomic policies, balancing social and investment needs with preserving fiscal and debt sustainability. - Vulnerabilities: The debt sustainability outlook remains vulnerable to policy slippages and risks of exogenous shocks, such as natural disasters and a deterioration of the global outlook. ### Public debt coverage (excerpt) - The DSA covers the non-financial public sector (NFPS), which includes the general government and non-financial SOEs. Debt from extrabudgetary trust funds is included; authorities abolished all trust funds in 2022. - Baseline 2023 debt stock includes 2.1 percent of GDP in domestic debt that was unaccounted for before approval of the Fund arrangements, composed of: - (i) 0.3 percent of GDP relates to central government arrears to domestic suppliers; - (ii) 0.6 percent of GDP consists of trust funds’ debt liabilities; - (iii) 1.2 percent of GDP pertains to arrears accumulated by ENEE, mainly to private electricity generators. - Contingent liability tailored stress test: - Default shock of 0 percent of GDP for other entities of the general government unchanged. - Default shock of 2 percent of GDP for SOE debt and government-guaranteed private debt to reflect risks from potential lawsuits linked to a highway concession project (0.4 percent of GDP) and the electricity utility (1.5 percent of GDP) and to capture publicly-guaranteed external debt of a financial SOE. *Prepared by staff of the International Monetary Fund and the International Development Association.* ### 0.2 percent of GDP by contracting bank loans in January 2023. ### 1hndea2024001-print-pdf - 0.2 percent of GDP by contracting bank loans in January 2023. ### Contingent liability coverage and calibration - Residency- and currency-based definitions of external debt: no material difference as non-residents do not hold domestic debt. - Public debt coverage used for the analysis: the entire public sector, including SOEs. - Sub-sectors covered: Central government; State and local government; Other elements in the general government; Social security fund; Extra budgetary funds (EBFs); Guarantees (to other entities in the public and private sector, including to SOEs); Central bank (borrowed on behalf of the government); Non-guaranteed SOE debt. - Contingent liability stress-test calibration (Text Table 2): - Other elements of the general government not captured in 1.: 0percent of GDP0.0 - SoE's debt (guaranteed and not guaranteed by the government) 1/: 2percent of GDP2.0 - PPP: 35 percent of PPP stock → 5.7 - Financial market (the default value of 5 percent of GDP is the minimum value): 5percent of GDP5.0 - Total (2+3+4+5) (in percent of GDP): 12.7 - Notes: - The default shock of 2% of GDP is triggered where government-guaranteed debt is not fully captured under public debt definition (1.). If already included in government debt (1.) and risks associated with SoE's non-guaranteed debt are negligible, the country team may reduce this to 0%. - PPP stock is calculated as 35 percent of the country’s PPP capital stock from the World Bank database, updated to account for a PPP project worth 1.6 percent of GDP. - The default minimum value of 5 percent of GDP for the financial market shock is kept unchanged given Honduras’ financial sector does not exhibit significant vulnerabilities warranting an upward adjustment. - Third, the default shock to account for risks stemming from public private partnerships (PPPs) remains at 5.7 percent of GDP to reflect potential liabilities from PPP projects. ### Recent economic performance (2023) and near-term outcomes - Real GDP growth: 3.6 percent in 2023, driven by strong domestic demand and a recovery in public investment. - Inflation: declined to 5.2 percent in 2023 after peaking at over 10 percent in 2022. - Current account deficit: declined to 3.9 percent from 6.7 percent in 2022 (authorities revised 2022 current account deficit in August 2023 from 3.2 to 6.7 percent of GDP due to revisions in goods imports). - Fiscal outturns: - Fiscal deficit of 1.3 percent of GDP in 2023 (smaller than programmed 2.0 percent of GDP) due to strong tax revenues and spending discipline offsetting robust public investment. - Social spending execution slower than expected due to capacity constraints; some overperformance expected again amid execution challenges. - Bank loan contracting: 0.2 percent of GDP by contracting bank loans in January 2023. ### Financial sector resilience and indicators - Capital adequacy ratio: 13.6 percent in July 2024 (requirement: 10 percent). - Non-performing loans (NPLs): 2.2 percent of total loans with ample provisioning. - Credit growth: beginning to slow as the BCH tightened liquidity conditions and raised interest rates. - Stress test results: banking commission stress tests indicate robustness and resilience even in severe stress scenarios. - Domestic bond market and issuance: - From late 2023 authorities resumed regular domestic debt issuances and placed more than 1 percent of GDP in government bonds. - Domestic bond interest rates: 6-6.5 percent for the shortest terms and between 9.75-10.5 percent for the longest terms. - Public domestic debt maturity: over 4 years (rising). ### Public and external debt stock, composition, and service (end-2023 and near term) - Public and publicly guaranteed (PPG) debt: 47.6 percent of GDP at end-2023. - External debt: 27.5 percent of GDP at end-2023. - Changes from 2022 to 2023: - Total external debt moderated from 36.5 percent of GDP in 2022 to 34.7 percent of GDP in 2023. - PPG external debt-to-GDP declined to 27.5 percent in 2023 from 29.2 percent in 2022. - Creditor composition of PPG external debt (2023): - 72 percent multilateral creditors - 11.4 percent official bilateral creditors - 16.6 percent commercial banks or Eurobond holders - Creditor flows in 2023: - Reduction primarily due to a decrease of US$222.1 million or 7.8 percent y/y in debt owed to bilateral and commercial creditors, despite a US$60 million (0.9 percent y/y) increase in debt to multilateral creditors. - External debt service (2023): - Total external debt service payments: US$997.5 million - Multilateral creditors: US$604.7 million - Commercial creditors: US$283 million - Bilateral creditors: US$110 million - External debt service projections: around US$909 million in 2024 and US$983 million in 2025. - Domestic debt service (2023): - Approximately US$1,257 million total - Capital payments: 45 percent (US$566 million) - Interest payments: 53 percent (US$666 million) - Commissions and fees: around 2 percent (US$24 million) - Weighted average maturities: - External multilateral: 31.3 year - Official bilateral: 24.6 years - Commercial debt: 4.4 years - Net amortization effect in 2023: - Higher capital payments (US$610 million) compared to disbursements received (US$437 million) contributed to reduction in gross public debt to 47.6 percent of GDP. ### Macroeconomic and policy assumptions (baseline and projections) - Baseline drivers: staff projections and EFF/ECF program targets. - Real sector: - Real GDP growth projected around 3.8 percent in 2024 (driven mostly by private consumption) and to gradually converge toward potential (around 3 ¾ percent). - By 2034, baseline projects convergence to a growth rate of 3.9 percent. - Inflation: - Projected to remain within BCH reference range (4 percent ± 1p.p) in remainder of 2024 and slightly above upper limit in 2025. - Fiscal sector: - NFPS deficit expected to close 2024 at 1.5 percent of GDP (broadly in line with 2023 outturn). - 2025 draft budget bill baseline deficit: 1.5 percent of GDP. - Moderate fiscal consolidation assumed to return NFPS deficit to 1 percent of GDP in 2026. - Projected three-year fiscal adjustment in primary balance: 0.7 percentage points of GDP between 2024 and 2026. - If major reform of tax exemptions materializes, poses upside risk to revenue projection. - ENEE arrears: increased to 1¾ percent of GDP as of June 2024; plans to reduce arrears via financing and issuance of domestic debt purchased by domestic banks. - External sector: - Current account projected to widen to 5.3 percent in 2024 due to drought-related export declines and higher energy import demand; medium-term convergence to 4 percent of GDP. - Reserve adequacy expected to remain within 100-150 percent of the ARA metric and above 4 months of import cover over the medium term. - Financing assumptions: - External: net positive financing from IFIs; Eurobond placements of USD 700 million in 2026 and USD 600 million in 2030 assumed. - Grant element of new external public sector borrowing projected to average 18.5 percent over 2023-27. - Domestic: 2022 monetary financing of US$1 billion (3.2 percent of GDP); as of end-2023 most resources spent, with remaining treasury deposits used in 2024; assumption of normalization of regular Treasury bond issuance at market rates and roll-over of amortizations. - Authorities published an annual borrowing plan, a calendar of auctions and a Medium-term Debt Management Strategy (MTDS). - Coordination: Ministry of Finance must obtain authorization from central bank for debt issuance operations; Public Credit Commission meets quarterly. ### Projections tables and key indicators (selected entries from Text Table 3) - Real GDP growth (percent), Current DSA: 12.6 4.13.63.83.63.63.83.83.93.9 - Inflation, Period Average (percent), Current DSA: 4.5 9.16.74.85.14.54.04.04.04.0 - GDP deflator growth (percent), Current DSA: 4.6 9.36.24.85.14.54.04.04.04.0 - Primary balance (percent of GDP), Current DSA: ‐2.4 1.20.20.00.00.50.40.50.50.5 - Overall balance (percent of GDP), Current DSA: ‐3.7‐0.2‐1.3‐1.5‐1.5‐1.0‐1.0‐1.0‐0.5‐0.1 - Current account balance (percent of GDP), Current DSA: ‐5.5‐6.7‐3.9‐5.3‐4.7‐4.5‐4.2‐4.0‐3.5‐2.7 - Net FDI (percent of GDP), Current DSA: 1.8 2.32.52.62.72.72.72.72.72.7 ### Assessment of baseline realism and debt dynamics - Drivers of debt dynamics: contributions of past and projected debt-creating flows for PPG external debt remain broadly unchanged; current account and FDI expected to positively contribute to PPG external debt accumulation relative to historical experience. - Forecast errors: unexpected changes in debt for Honduras are within the interquartile range for both public and PPG external debt when compared with distribution for LICs. - Realism of planned fiscal adjustment: projected three-year adjustment of 0.7 percentage points of GDP between 2024 and 2026 falls below the top quartile of past LIC adjustments, alleviating credibility concerns. - Consistency with growth and public investment: projected growth path for 2024-2025 broadly in line with multiplier-based projections; public investment expected to remain around 4 percent of GDP in the medium term and its contribution to real GDP growth remains marginal across previous and current DSA. *Source: 1hndea2024001-print-pdf - 0.2 percent of GDP by contracting bank loans in January 2023.* ### 12. Honduras’ debt-carrying capacity is classified as strong (Text Table 4). Debt-carrying ### Honduras’ debt-carrying capacity is classified as strong ### Debt-carrying capacity (CI score) - CI score for Honduras stands at 3.12, above the threshold of 3.05 for a “strong” rating. - CI score components and contributions (Components, Coefficients (A), 10-year average values (B), (A*B) = (C), Contribution of components): - CPIA: 0.39; 3.38; 1.30; 42% - Real growth rate (in percent): 2.72; 3.54; 0.10; 3% - Import coverage of reserves (in percent): 4.05; 45.91; 1.86; 60% - Import coverage of reserves^2 (in percent): -3.99; 21.08; -0.84; -27% - Remittances (in percent): 2.02; 15.49; 0.31; 10% - World economic growth (in percent): 13.52; 2.91; 0.39; 3% - CI Score: 3.12; CI rating: Strong ### Debt burden thresholds under strong debt-carrying capacity - External debt burden thresholds (under strong debt-carrying capacity): - PV of debt in percent of Exports: 70 - PV of total public debt in percent of GDP: 240 - PV of debt in percent of GDP: 55 - Debt service in percent of Exports: 21 - Debt service in percent of Revenue: 23 ### DSA stress tests and tailored shocks - The DSA uses standardized, tailored, and contingent liability stress tests. - All six standardized stress tests apply to Honduras. - Tailored stress tests triggered: natural disaster and market financing. - Natural disaster tailored shock triggered due to exposure to frequent extreme weather events (hurricanes and droughts) and meeting frequency and economic loss criteria: 2 disasters every 3 years; economic loss above 5 percent of GDP per year. - Market financing shock applies due to outstanding Eurobonds. - Honduras does not qualify for a commodity price shock (requires commodities ≥ 50 percent of total goods and services exports over previous three-year period). - Contingent liabilities test is customized for Honduras. ### External DSA results - Under the baseline scenario: - All PPG external debt burden indicators remain below prescribed thresholds throughout the DSA horizon. - PV of PPG external debt ratios: - Averaging 20.7 percent of GDP over 2024-34. - Averaging 61.3 percent of exports over 2024-34. - Two peaks in 2027 and 2030 on debt service indicators linked to repayments of Eurobonds issued in 2017 and 2020. - Under the most extreme standardized stress test (combined shocks to growth, primary balance, exports, other balance of payments flows, and the exchange rate): - PV of PPG external debt-to-GDP ratio projected to increase sharply to 41.5 percent of GDP in 2026 before gradually receding. - PV of PPG external debt-to-exports peaks at 137.3 percent in 2027 before declining. - PV of PPG external debt-to-GDP and debt service-to-revenue ratios are most sensitive to the combined-shocks scenario. - PV of debt-to-exports and debt service-to-exports ratios are most adversely impacted by an exports shock. ### Public DSA results - Baseline scenario: - PV of public debt-to-GDP ratio projected to decline from 44.8 percent of GDP in 2024 to 40.5 percent of GDP in 2028, reaching 29.5 percent of GDP by 2044. - Path supported by reforms under the ECF/EFF program and a return to a fiscal deficit below 1 percent by 2026. - All public debt indicators, including PV of debt-to-revenue and debt service-to-revenue ratios, remain below their levels suggested in the historical scenario. - Under customized stress test scenarios: - PV of public debt-to-GDP ratio breaches its benchmark in the most extreme scenario—a growth shock—from 2028 onwards. - Growth shock also most extreme for PV of debt-to-revenue and debt service-to-revenue ratios, illustrating vulnerability of public debt dynamics to growth shocks. ### Market-financing and domestic debt - Market-financing risk indicators: - Maximum gross financing needs over a 3-year period under the baseline projection expected to be around 6 percent of GDP (benchmark: 14 percent). - EMBI spreads stood at 337 basis points as of October 30, 2024 (benchmark: 570 basis points). - Domestic debt: - Domestic-public debt-to-GDP projected to remain above the LIC-DSF median (17.2) throughout the forecast horizon. - Domestic-debt-service to revenue ratio was 18.2 in 2023 and will remain below the average for countries using the LIC-DSA until 2038. - Authorities’ borrowing strategy prioritizes concessional terms, active debt management, and an updated medium-term debt strategy that rebalances toward more domestic debt to reduce risk of debt distress. ### Risk rating and vulnerabilities - Risk of external debt distress: Low (all PPG external debt burden indicators remain below thresholds under baseline and stress scenarios). - Risk of overall public debt distress: Moderate (PV of debt-to-GDP breaches benchmark under the most extreme stress test). - Fiscal outlook assumption: overall fiscal balance gradually adjusts back to below 1 percent of GDP by 2026 in the baseline. - Downside risks: challenging global environment and adverse weather events. - Policy implication: important to adhere to the ECF/EFF reform agenda and balance urgent investment and social spending needs while safeguarding debt sustainability. ### Climate change risks and natural disaster tailored test - Vulnerability: - Honduras identified as highly vulnerable to climate change risk; Global Climate Risk Index (CRI) 2019 identified Honduras as the second most severely affected country from 1998 to 2017. - Historical impacts and projections: - Between 1960 and 2022, annual losses from floods and storms averaged 6.3 percent of GDP. - Storms Eta and Iota (November 2020) estimated to have caused damage amounting to 7.5 percent of GDP. - Based on historical trends and natural hazard risk patterns, and absent additional climate or policy changes, combined effects of excessive rainfall, tropical cyclones, and earthquakes projected to lead to a cumulative loss of approximately 5.4 percent of annual GDP by 2050 relative to a hypothetical scenario without impacts of natural hazards. - Natural disaster tailored stress test calibration: - Calibrated to average floods and storms damages between 1960-2022. - Assumptions: - 4 percent one-off shock to external PPG debt-to-GDP ratio in the second year of the projection period. - 6.3 percent reduction of GDP growth. - 4.5 percent reduction of export growth. - Result: deterioration in Honduras indicators for external debt and a substantial increase in financing needs. - Policy and financing responses: - Resilient, low-carbon public investment and increased public adaptation investment emphasized to reduce socioeconomic costs and reconstruction needs. - World Bank approved a Policy Credit with a Catastrophe Deferred Drawdown Option (CAT DDO) totaling up to $119 million to support disaster, climate risk, and disease outbreak management; CAT DDO will be activated in the event of a natural disaster. - Authorities have expressed interest in an arrangement under the RSF. *Source: IMF staff calculations and IMF country analysis as presented in the Honduras DSA chapter.* ### 24. The authorities broadly agreed with the assumptions and results of the DSA. They ### 24. The authorities broadly agreed with the assumptions and results of the DSA. They ### Authorities' assessment and policy stance - The authorities broadly agreed with the assumptions and results of the DSA. - Recognized downside risks: - Potential impacts of climate shocks. - A slowdown in economic activity due to weaker external demand related to key exports and its implication for economic activity. - Noted improvement in market-financing risks: - Market financing risks have been easing, as evidenced by the gradual decline in EMBI spreads for Honduras in recent months. - Highlighted continued importance of concessional lending from multilateral institutions. - Reaffirmed commitments to: - Transparency by continuing to compile a broader debt coverage for previously unaccounted domestic debt. - Debt sustainability through prudent fiscal policies. ### External Debt Sustainability — baseline projections and selected indicators (2021–44) - External debt (nominal): - 2021: 40.7 - 2022: 36.5 - 2023: 34.7 - 2024: 32.5 - 2025: 33.0 - 2026: 33.1 - 2027: 33.3 - 2028: 32.7 - 2029: 32.0 - 2030: 29.5 - 2031: 29.4 - 2032: 27.8 - 2033: 26.3 - 2034: 24.7 - 2044: 16.5 - Public and publicly guaranteed (PPG) external (of which): - 2021: 32.4 - 2024: 25.3 - 2034: 17.5 - 2044: 9.3 - Identified net debt-creating flows (selected): - 2024: 1.5 - 2025: 0.9 - 2026: 0.7 - 2034: -0.3 - Non-interest current account deficit (percent of GDP): - 2024: 4.1 - 2025: 3.6 - 2034: 2.5 - Net FDI (negative = inflow): - 2024: -2.6 - 2034: -2.7 - Average (projection): -2.7 - Endogenous debt dynamics (contributions): - Contribution from nominal interest rate (2024): 1.2 - Contribution from real GDP growth (2024): -1.2 - Contribution from price and exchange rate changes: (historical series shows negative contributions; table contains truncated entries) - Residual: - 2024: -3.7 - 2025: -0.4 - 2034: -1.2 - Sustainability indicators (selected): - PV of PPG external debt-to-GDP ratio (series shows values e.g., 25.6, 23.1, 22.8, ...; selected projection snapshots): - 2024: 25.6 - 2034: 15.8 - 2044: 8.4 - PV of PPG external debt-to-exports ratio: - 2024: 69.4 - 2034: 47.8 - 2044: 25.8 - PPG debt service-to-exports ratio (selected): - 2024: 9.0 - 2025: 9.1 - 2026: 6.5 - 2034: 5.7 - PPG debt service-to-revenue ratio (selected): - 2024: 11.1 - 2025: 11.2 - 2026: 7.9 - 2034: 6.8 - Gross external financing need (Billion of U.S. dollars) (selected): - 2024: 4.4 - 2025: 4.4 - 2026: 4.1 - 2034: 4.6 - Key macroeconomic assumptions (selected): - Real GDP growth (in percent): - 2021: 12.6 - 2024: 3.8 - 2025: 3.6 - 2034: 3.9 - Average projection: 3.8 - GDP deflator in US dollar terms (change in percent): - 2024: 2.3 - 2025: 1.1 - 2034: 2.0 - 2044: -3.4 (noted in table) - Effective interest rate (percent): - 2024: 3.8 - 2025: 3.7 - 2034: 3.5 - Growth of exports of G&S (US$ terms, percent): - 2024: 0.1 - 2025: 3.2 - 2034: 5.6 ### Public Debt Sustainability — baseline projections and selected indicators (2021–44) - Public sector debt (percent of GDP): - 2021: 51.8 - 2022: 51.8 - 2023: 47.6 - 2024: 46.7 - 2025: 46.4 - 2026: 45.4 - 2034: 36.3 - 2044: 30.2 - Change in public sector debt (selected): - 2021: 2.5 - 2023: -4.1 - 2024: -1.0 - 2034: -1.1 - Identified debt-creating flows (selected): - 2024: -0.9 - 2025: -0.8 - 2034: -0.8 - Primary deficit (percent of GDP): - 2021: 2.3 - 2022: -1.2 - 2023: -0.2 - 2024: 0.0 - 2025: 0.1 - Projections imply a persistent small primary surplus/near-balance in later years (e.g., -0.5 values across many projection years). - Revenue and grants (percent of GDP): - 2024: 28.3 - 2034: 28.2 - Historical and projection averages around 28.2–29.1 - PV of public debt-to-GDP ratio (selected): - 2024: 45.7 - 2034: 34.8 - 2044 (memorandum): 29.5 - PV of public debt-to-revenue and grants ratio: - 2024: 164.0 - 2034: 123.5 - Projection average: 140.9 - Debt service-to-revenue and grants ratio (selected): - 2024: 22.8 - 2025: 22.5 - 2026: 18.1 - 2034: 17.1 - Gross financing need (percent of GDP) (selected): - 2024: 6.2 - 2025: 6.2 - 2026: 4.4 - 2034: 4.3 - Key macro-fiscal assumptions (selected): - Real GDP growth (in percent): - 2024: 3.8 - Projection average: 3.8 - Average nominal interest rate on external debt (in percent): - 2024: 4.2 - 2025: 4.2 - 2034: 4.4 - Average real interest rate on domestic debt (in percent): - 2024: 3.0 - 2025: 1.8 - 2034: 3.7 - Inflation rate (GDP deflator, in percent): - 2024: 4.0 - 2025: 5.1 - 2034: 4.0 - Growth of real primary spending (deflated by GDP deflator, in percent): - 2024: 5.9 - 2025: 3.4 - 2034: 3.9 ### Stress tests, sensitivity analysis, and risk indicators - Tables and figures present: - Sensitivity Analysis for key indicators of PPG external debt (2024–34): baseline and multiple scenarios (alternative, bound tests, tailored tests) with thresholds and breaches noted (bold indicates breach). - Sensitivity Analysis for public debt (2024–34): baseline, alternative scenarios, bound tests, tailored tests, and TOTAL public debt benchmark (70). - Figures identify most extreme shocks over 2024–34 (e.g., Combination, Exports, Commodity price, Market Financing) and show resulting paths for: - Debt Service-to-Revenue Ratio - PV of Debt-to-Exports Ratio - PV of Debt-to-GDP Ratio - Debt Service-to-Exports Ratio - Market financing risk indicators: - EMBI spreads have declined gradually in recent months (no specific numeric series provided in this excerpt). - Gross financing need (GFN) benchmarks and potential heightened liquidity needs are illustrated in figures. ### Implementation notes and supplementary context - The supplement provides an update on developments since the Staff Report (EBS/24/125) on November 21, 2024, including: - Implementation of prior actions for the reviews. - Issuance of an external bond by Honduras. - Exchange rate policy implementation. - November inflation data. - Updated information on the impact of Tropical Storm Sara and the policy response. - The thrust of the staff appraisal remains unchanged. - Document approval and preparation: - Approved by Rodrigo Valdés (WHD) and Anna Ivanova (SPR). - Prepared by the Honduras team of the Western Hemisphere Department. - Date on supplement: December 3, 2024. *Sources: Country authorities; and staff estimates and projections contained in the DSA tables and figures.* ### 1. The authorities have completed remaining prior actions for the reviews. On November ### 1hndea2024001-print-pdf - 1. The authorities have completed remaining prior actions for the reviews. On November ### Prior actions and ENEE arrears - Council of Ministers decree (published November 28) established a committee composed of the Central Bank of Honduras, the National Banking and Insurance Commission (CNBS), the Ministry of Finance (SEFIN), the Ministry of Energy, ENEE, and the Secretariat of the Presidency to coordinate financial policies related to the electricity sector and financing for ENEE (prior action). - SEFIN made a payment towards its accounts payable to ENEE for slightly more than the required 4,101.6 million Lempiras (prior action), filling the shortfall from the 5,000 million Lempiras destined to reduce the stock of arrears. - ENEE used these resources, plus 898.4 million Lempiras obtained from domestic bond placements since late October, to pay arrears to private generators, reducing the outstanding stock as of end-November to 14.8 billion Lempiras. - With further payments funded by additional debt issuances and transfers from SEFIN to be made before year end, ENEE is on track to meet the end-December performance criterion to reduce arrears to 11.5 billion Lempiras. ### External bond issuance and reserves - Honduras completed issuance of a ten-year thematic external bond on November 21 that raised US$700 million (1. 9 percent of GDP). - The bond was issued at par, carries a coupon of 8.65 percent, and was more than four times oversubscribed. - As a result of the issuance: - Gross international reserves increased from US$7.0 billion (4.4 months of imports) at end-October 2024 to US$7.6 billion (4.8 months of imports or around 115 percent of the ARA metric) at end-November 2024. - The end-December QPC for international reserves will be adjusted upwards by the proceeds of the issuance, as specified in the TMU. - Fund-provided resources will be aimed at closing Honduras’ balance of payment gap and enable a smaller reserve drawdown in 2024, given broadly unchanged gross external financing needs and the use of the bond (Lempira equivalent) to substitute for domestic financing. ### Fiscal implications and debt outlook - Authorities plan to use the bond proceeds to: - build-up deposits at the Treasury Single Account (TSA) at the central bank; - repay domestic arrears, including 0.4 percent of GDP (around $160 million) in ENEE arrears; - pre-finance planned near-term current and capital expenditures in lieu of domestic market issuances. - The bond issuance increases projected end-2024 gross public debt by around 2 percent of GDP to about 48.6 percent of GDP, still below the expected debt level for 2024 at program approval (51.3 percent of GDP). - Staff findings: main findings of the debt sustainability assessment remain unchanged; Staff will update the Debt Sustainability Analysis in the context of the Third Review. ### Exchange rate and inflation developments - Exchange rate: - From October 18 through December 2, the Lempira depreciated against the USD at an annualized daily rate of about 10.5 percent. - Year-to-date, the Lempira has depreciated 2.2 percent against the USD, with the bulk of the movement (1.7 percentage points) taking place since mid-September. - Inflation (November): - Headline inflation: 3.9 percent (down from 4.1 percent in October). - Core inflation: 5.0 percent (down from 5.2 percent in October). - Imported goods inflation: increased marginally from 2.9 percent in October to 3.1 percent in November. - Assessment: - The decline in headline inflation was mainly driven by base effects as food prices stabilized in 2024 following strong increases in 2023. - There were no clear signs of strong pass-through from exchange rate movements to prices. - The November inflation print increases downside risk to staff’s end-2024 inflation projection of 4.8 percent. ### Impact of Tropical Storm Sara and policy response - Preliminary assessment: Tropical Storm Sara’s impact appears smaller than initially feared; damages and losses expected to be lower than Julia (2022; 1.1 percent of GDP in total damage) and Eta/Iota (2020; 8.5 percent of GDP total damage). - Damages and production: - Public infrastructure reconstruction needs likely to focus on roads and bridges, including a vital bridge in La Ceiba. - About 50 health centers and about 200 schools were damaged. - Agricultural sector most affected; initial Ministry of Agriculture estimate points to losses of around 0.2- 0.3 percent of GDP. - Authorities indicate no apparent impact of the storm on food prices. - Preliminary fiscal cost and financing: - Preliminary additional spending needs identified by the authorities: around US$80 million (0.2 percent of GDP) not incorporated in the program baseline. - Of this, about one quarter (US$20 million) would be spent in 2024, largely financed through budget reallocations, donations received (US$5.6 million), and a US$4.7 million disaster insurance disbursement. - Authorities have lined up financing for priority reconstruction needs, including from the external bond issuance, to be planned after full damage assessment. - Authorities requested a US$51 million World Bank disbursement (expected in the coming days and not in the program baseline) from repurposed project financing resources. - Resources from CABEI (US$11 million for La Ceiba bridge reconstruction) are temporarily shifted to urgent reconstruction needs within the existing road program. - Authorities have the option of requesting disbursements of available larger disaster facilities from the IDB (up to US$400 million) and World Bank (up to US$110 million), though no such requests have been made to date. - Other policy measures: - CNBS issued a resolution to encourage banks to restructure loans of those affected by the storm. *Source: 1hndea2024001-print-pdf.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1hndea2024001-print-pdf.pdf_