## The second annual Poverty Reduction Strategy Paper (PRSP) Progress Report

## Source details

**Canonical URL:** [The second annual Poverty Reduction Strategy Paper (PRSP) Progress Report](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05387.pdf)

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---

### Consultation Process
- APR consultations coordinated with the PRSP Consultative Council through six regional workshops to ensure civil society participation and donor attendance.
- Approximately 800 people participated in the consultation process, mostly civil society representatives and donors.
- The PRSP, the APR, and other relevant PRSP material are posted on the Ministry of Finance (SEFIN) and SIERP websites.
- Contributions from consultations incorporated into the APR:
  - strengthening the employment component;
  - emphasizing participation and decentralization in PRSP implementation;
  - increasing transparency in monitoring and evaluation;
  - improving alignment of PRSP interventions to PRSP goals.
- Civil society proposals compiled in a matrix in Appendix E of the APR.
- Key issues raised in consultations:
  - need to urgently improve the impact of the strategy on growth, employment and poverty reduction;
  - need to strengthen overall competitiveness and reduce inefficiencies in the use of state funds and external resources.

### Medium-Term Macroeconomic Framework
- APR presents an updated medium-term macroeconomic framework consistent with the PRGF-supported economic program aiming at:
  - achieving sustainable growth;
  - reducing poverty;
  - maintaining macroeconomic and financial stability.
- Strategy elements: continuing structural reforms and prudent macroeconomic policies; reforms to boost growth by strengthening human capital and basic infrastructure, improving the environment for private sector development, and using international trade agreements (including CAFTA).
- Fiscal strategy under PRGF: gradual reduction of the fiscal deficit while orienting spending toward priorities (growth-enhancing investment and poverty spending). Key supporting reforms: broadening the tax base, strengthening tax administration, upgrading SIAFI, introducing the single treasury account, and gradual restructuring of the public sector.
- Noted risk: significant risks to the fiscal strategy (described in section III.A of the source).
- Macroeconomic projections (Percent of GDP, unless otherwise stated) — Honduras: Macroeconomic Framework Projection
  - Real GDP (growth, in percent): 2003 3.5, 2004 4.6, 2005 4.2, 2006 4.5, 2007 4.5, 2008 4.5, 2009 4.5
  - Inflation (eop, in percent): 2003 6.8, 2004 9.2, 2005 6.9, 2006 5.0, 2007 4.0, 2008 3.0, 2009 2.5
  - Total revenues and grants: 2003 27.4, 2004 28.7, 2005 29.4, 2006 29.0, 2007 28.9, 2008 28.7, 2009 28.7
  - Capital expenditures: 2003 6.2, 2004 6.5, 2005 7.7, 2006 7.2, 2007 7.6, 2008 7.7, 2009 8.1
  - Overall combined public sector balance: 2003 -5.1, 2004 -3.0, 2005 -2.5, 2006 -1.7, 2007 -1.7, 2008 -1.6, 2009 -1.6
  - Primary combined public sector balance: 2003 -4.6, 2004 -2.6, 2005 -2.3, 2006 -1.7, 2007 -1.7, 2008 -1.7, 2009 -1.7
  - Public sector debt 1/: 2003 75.3, 2004 72.8, 2005 56.1, 2006 54.0, 2007 51.7, 2008 49.6, 2009 47.7
  - External current account balance: 2003 -4.2, 2004 -5.2, 2005 -2.5, 2006 -2.4, 2007 -2.7, 2008 -3.2, 2009 -3.7
  - Gross international reserves in months of imports: 2003 3.7, 2004 4.8, 2005 4.9, 2006 4.9, 2007 4.9, 2008 4.8, 2009 4.6
  - Public external debt 1/: 2003 69.8, 2004 67.8, 2005 51.6, 2006 49.7, 2007 47.9, 2008 46.1, 2009 44.5
  - Sources: Ministry of Finance, Central Bank of Honduras, and Fund staff estimates.
  - 1/ Reduction in public sector debt after 2005 includes HIPC debt relief.
- 2005 fiscal strategy specifics:
  - rely on full benefits of 2002–03 tax reforms, further improvements in tax administration, strict expenditure control (including wage bill), and contingent spending cuts;
  - implement revised tax code approved in December 2004 including power to determine taxpayer’s income through indirect methods;
  - action plan: reduce taxpayer arrears, reduce stopfilers, strengthen tax audits.
- 2005 budget outcomes (as projected in the APR):
  - deficit of the consolidated public sector (after grants) will fall by 0.5 percent of GDP;
  - public investment will rise by over 1.0 percent of GDP;
  - poverty spending will rise by 0.3 percent of GDP;
  - main offsetting savings: wage bill, domestically financed goods and services (net of programs funded by the Education-for-All and Global Health Fund initiatives), and current transfers.
- APR recommendations: provide more in-depth discussion of how macro framework will be achieved under envisaged policies and analysis of effects on poverty of growth, labor market and financial sector reforms.

### Poverty Reduction
- APR notes modest progress in poverty reduction; achieving MDGs requires stepped-up policies and programs.
- Poverty incidence:
  - share of total population in poverty fell from 66 percent in 1999 to 64 percent in 2004;
  - share in extreme poverty declined from 49 percent to 44.6 percent.
- Observations:
  - slow poverty reduction linked to low growth in early 2000s and adverse agricultural commodity prices;
  - PRSP targets for extreme poverty were achieved in 2001 and 2002 but not in 2003 or 2004 despite economic recovery, suggesting lagged link between growth and poverty reduction.
- Government efforts highlighted in APR: prioritize programs and improve targeting, decentralize and improve service delivery, enhance public sector management, realign donor assistance.
- Public spending on anti-poverty programs: 8 percent of GDP, or nearly 30 percent of total public spending.
- Statistical and analytical improvements:
  - National Institute of Statistics (INE) improved systematic poverty analysis and completed field operations for the first Living Standard Measurement Survey (LSMS) in December 2004;
  - UNAT and INE collaborating with the Bank on a Poverty Assessment to enhance understanding of how growth affects poverty and identify key interventions for PRSP/MDG goals.
- Staff suggestion: incorporate updated welfare analysis findings in next PRSP progress report.

### Targets and Intermediate Indicators
- Performance improvements in 2004:
  - Three out of every four PRSP monitorable goals were met in 2004, compared with about one-third to one-half in 2002 and 2003.
  - Outcomes influenced by increased and appropriate PRSP implementation efforts and resource allocation to prioritized actions.
- Growth and elasticity:
  - A 2 percent annual growth rate in real per capita GDP was attained in 2004 after a period of zero/negative rates.
  - Elasticity of poverty reduction to economic growth is characteristically low in Honduras; higher per capita GDP plus other inputs are required for steady PRSP/MDG progress.
- Sectoral progress:
  - Education: improvement, particularly for the third cycle of basic education.
  - Infrastructure/services: coverage of electricity, telephone lines and sanitation services improved significantly.
  - Lagging areas: access to water and education coverage for the first and second cycle require prioritized efforts.
  - Access to water critical for progress in child mortality and malnutrition.
  - Recent improvements in child mortality and malnutrition noted, but new 2004 data not available; concerns that lack of water coverage, insufficient nutrition and early childhood development programs, and health system gaps could hinder future progress.
  - Slow progress in basic education is particularly worrisome among the extreme poor, given association of PRSP/MDGs with female literacy.

### Policies and Programs
- Need to better align budgetary programming with PRSP goals.
- Ongoing efforts: establishing a Medium-Term Expenditure Framework (MTEF) and improving donor harmonization.
- Recommendations:
  - develop cost-effectiveness criteria at sectoral levels for program prioritization;
  - use the recently approved Organic Budgetary Law as legal basis for MTEF development to improve budget-PRSP linkages.
- Institutional mechanisms:
  - enhanced operational mechanism via six sector-based coordinating boards (Mesas Sectoriales) for program alignment and donor harmonization.
- Governance improvements:
  - constitutional decree separating TNE and RNP ratified;
  - creation of new Supreme Audit Court (TSC) to strengthen public audit functions;
  - improvements in public financial management and procurement to promote fiscal transparency.
- DR-CAFTA and regional integration:
  - Authorities should maximize and share gains from DR-CAFTA and deeper regional integration across the population.
  - Gains expected to raise investment, exports, and growth.
  - Long tariff phase-out periods of 10, 15 and 20 years were negotiated for most sensitive commodities; authorities should assess need for compensatory measures to mitigate social impacts on specific sectors (e.g., traditional agriculture).
  - Authorities expected to commission a PSIA study on CAFTA by June 2005; staffs suggest incorporating PSIA results into the next PRSP progress report.

### Public Expenditure Management
- Tracking HIPC debt relief savings:
  - Mechanism for tracking budgetary savings from HIPC debt relief is adequate and satisfactory to Fund and IDA.
  - New poverty reduction framework (FRP) keeps track of fiscal savings from HIPC relief and monitors channeling toward poverty-reducing activities.
  - Previous FRP reformed to be compatible with expanded definition of poverty-reducing spending.
  - Authorities replaced the 2002 poverty fund (Decree 70-2002) with a virtual fund that tags specific budget expenditures as poverty-reducing.
  - Legislative reform approved and operating guidelines for the virtual fund and its consultative council drafted and publicly available on SEFIN and SIERP websites.
  - Tagging of poverty-reducing spending incorporated into the 2004 and 2005 budgets; budget planning and execution of PRSP-related spending managed by SEFIN through SIAFI.
  - Under current tracking, the Central Bank of Honduras calculates total budgetary savings from HIPC relief annually; this is incorporated into the national budget to identify public spending and financing sources for poverty-reducing programs.
  - Publicly available information verifies that increased external resource inflows, including HIPC relief, have been dedicated to poverty-reducing activities with no substantial decline in domestic resources allocated to these activities.
  - Authorities have satisfactorily met targets for poverty spending as a share of GDP.
- Continued efforts needed in expenditure management:
  - develop government capacity to manage, monitor, evaluate and improve PRSP implementation and integrate stakeholder participation in design and monitoring;
  - support implementation of Public Human Resource Reform to ensure equitable working environment, better performance incentives, improved civil service quality, and better public service management and delivery in key economic and social sectors;
  - strengthen fiscal, financial and fiduciary management for more accurate, timely, relevant and transparent public sector reporting.
- Bank support: IDA’s Poverty Reduction Strategy Technical Assistance Credit (PRS TAC) cofinanced by the Government of Sweden and the Government of the United Kingdom.

### Monitoring and Evaluation
- APR increased transparency in monitoring and evaluation and called for improved monitoring mechanisms and incorporation of consultation inputs.
- Civil society proposals and consultation findings have been used to strengthen monitoring, targeting and decentralization.
- Staffs emphasize the importance of continued improvements in statistical capacity (INE, LSMS) and incorporating updated welfare analyses (Poverty Assessment) into future APRs to better link growth and policy reforms to poverty outcomes.

---

### The Integrated Poverty Reduction Tracking System (SIERP) could be further

### Enhancing SIERP and fiscal transparency
- SIERP could be further enhanced by incorporating administrative data at the sectoral and municipal levels, and by reestablishing the interface with SIAFI to provide information on execution of anti-poverty spending online.
- SIERP already provides broad access to and systematizes progress made to date in the implementation of the strategy, and it is a useful targeting tool for decision makers to allocate resources geographically by providing disaggregated information on progress made in attaining PRSP goals.
- SIERP website is: http://www.sierp.hn
- Enhancing SIERP could:
  - contribute to the formulation, execution and monitoring of PRSP programs, projects and indicators at the national, departmental and municipal levels;
  - contribute to fiscal transparency by incorporating execution of disaggregated poverty reduction spending by programmatic area.

### Poverty and Social Impact Analyses (PSIAs) and incorporation into policy
- PSIAs were carried out to assess the economic and social impact of the tax reform packages and the impact of the rise in oil prices. The APR incorporates these PSIA results.
- SEFIN has incorporated PSIA findings into its action plans for strengthening revenue administration to ensure achievement of equity gains from the tax reform.
- The PSIA on tax reform determined the impact to be slightly progressive, both on vertical and horizontal equity grounds.
- The largest redistributive impact of the tax reform packages would come once they are fully implemented and complemented by progressive public spending.
- Improvements in tax administration to reduce tax evasion and increase revenue collection will be key to the distributive gains of the reform.
- The work was coordinated by UNAT, under close collaboration with SEFIN, and with Bank technical and financial support.
- Additional PSIAs:
  - Two other PSIAs have been initiated: on the distributional impact of public spending (to be financed by the Bank) and on the wage policy (to be financed by DFID).
  - Programmed PSIAs include assessing potential social and economic impact of the implementation of DR-CAFTA and on the distributional impacts of public subsidies.
- Staffs attach particular importance to:
  - the redistributive impact and potential equity gains from public spending;
  - identification of potential winners and losers of the trade agreement.
- Recommendation: Compensatory actions should be prepared to address adverse effects on vulnerable groups.
- Recommendation: Authorities are encouraged to translate the poverty and inequality incidence analysis into specific anti-poverty policy actions and account on progress made in the next PRSP progress report.

### Risks to the strategy (section III.A)
- Despite progress, the overall strategy faces significant risks, including:
  - Continued fiscal adjustment:
    - Progress to date made possible by the strong domestic consensus in favor of reaching HIPC completion.
    - This consensus could weaken after the completion point and in the run-up to the presidential election.
    - Controls over the public wage bill under the PRGF arrangement (2004–06) have been effective, but implementation of a permanent resolution to integrate teachers’ benefits to their overall salaries before the 2007 budget is a critical element of a sustainable medium-term budget.
    - Implementation of CAFTA and further opening of the telecommunications market will boost growth prospects, but measures will be needed to offset lower tax and tariff revenue.
  - Institutional weaknesses:
    - Weaknesses in the judiciary and the supreme audit agency (which is just now concluding its restructuring process) pose risks to program implementation.
    - IDA’s CAS contemplates technical and financial assistance for institutional building in all lending scenarios; IDA is currently supporting enhancements to public sector management and judicial reform.
  - Ensuring financial integrity and stability:
    - Passage of laws and regulations aimed at strengthening the financial system has reduced the risk of a financial crisis, but the banking system is still weak and continues to pose significant risks to the PRSP.
    - Government of Honduras, supported by the IDA and the Fund, is implementing a financial system reform that addresses vulnerabilities identified in the 2003 FSAP with technical assistance and concessional funds from a Financial Sector Adjustment Technical Assistance Credit (FSTAC) and a Financial Sector Adjustment Credit (FSAC); utmost priority needs to be given to fully executing this reform.
  - Enhancing the economy’s resilience to shocks:
    - External shocks and natural disasters could have a major negative impact on growth and hamper poverty reduction.
    - Authorities should ensure the economy’s ability to absorb shocks and structural change, including by gradually moving toward a more flexible exchange rate system in the medium term.
    - Key preconditions include further strengthening of the financial sector and improving the monetary operations of the central bank.
- Recommendation: The APR would benefit from a more in-depth analysis of the risks to the strategy; IDA and Fund staffs recommend incorporating the analysis of these risks, including contingency measures, into the next PRSP progress report.
- Recommendation: Immediate implementation of measures aimed at raising the likelihood of attaining PRSP/MDG goals should be made a greater priority.

### Priority areas for strengthening the PRS and its implementation (section III.B)
- Staffs’ assessment:
  - The APR presents a coherent medium-term macroeconomic framework and credible efforts toward implementing the poverty reduction strategy.
  - Important risks and vulnerabilities remain: wage policy framework, institutional weaknesses, consolidating the fiscal adjustment, ensuring financial stability, and enhancing resilience to shocks.
  - These risks underscore the need for continued prudent macroeconomic policies, complemented by structural reforms to raise competitiveness.
  - Sustained macroeconomic stability and broad-based economic growth continue to be key elements for achieving policy objectives and strategy targets.
- Progress already achieved includes:
  - improving macroeconomic stability and reducing the fiscal deficit, while simultaneously achieving poverty-reducing spending targets;
  - strengthening transparency in fiscal and public financial management systems (including SIAFI and continued improvements in the government’s fiscal, financial and fiduciary management);
  - consolidating the system of monitoring indicators (by developing SIERP);
  - pursuing government-led efforts to realign donor assistance to the PRSP; and
  - better understanding distributional impacts of reforms and external shocks, in particular by completing two PSIAs, on the tax reform and the rise in oil prices.
- Areas where further work is needed include:
  - continued fiscal consolidation, including through ensuring a sustainable wage policy, maintaining the tax ratio, and pursuing further public sector restructuring;
  - financial stability by avoiding any slippages in the implementation of the authorities’ financial system reform program;
  - expanding the prioritization of programs at the sectoral level through cost-effectiveness criteria;
  - identifying contingency measures to address the risks to the strategy, to ensure attaining PRSP/MDG goals; and
  - scaling up social auditing mechanisms such as citizen report cards, to ensure that programs and projects translate into tangible and sustainable benefits to the population.
- Institutional commitment:
  - The PRSP law approved in 2004 with the support of all major political parties places PRSP implementation above the electoral cycle by establishing that the fundamental objective of public policies is to reach the PRSP goals.

### Issues for Executive Directors (questions listed by staffs)
- Do the Executive Directors concur with the areas identified by staffs as key implementation risks?
- Do the Executive Directors concur with the areas identified by staffs as priorities for strengthening the PRS and its implementation?

*Source: _cr05387 - The second annual Poverty Reduction Strategy Paper (PRSP) Progress Report (APR) of the Government of Honduras; and _cr05387 - 16. The Integrated Poverty Reduction Tracking System (SIERP) could be further_*

### 1.      The second annual Poverty Reduction Strategy Paper (PRSP) Progress Report

### The second annual Poverty Reduction Strategy Paper (PRSP) Progress Report (APR) of the Government of Honduras

### Consultation Process
- APR consultations were coordinated with the PRSP Consultative Council and held through six regional workshops to ensure civil society participation and donor attendance.
- Approximately 800 people participated in the consultation process, mostly civil society representatives and donors.
- The PRSP, the APR, and other relevant PRSP material are posted on the Ministry of Finance (SEFIN) and SIERP websites.
- Contributions from consultations incorporated into the APR include:
  - strengthening the employment component;
  - emphasizing participation and decentralization in PRSP implementation;
  - increasing transparency in monitoring and evaluation;
  - improving alignment of PRSP interventions to PRSP goals.
- Civil society proposals compiled in a matrix in Appendix E of the APR.
- Key issues raised in consultations:
  - need to urgently improve the impact of the strategy on growth, employment and poverty reduction;
  - need to strengthen overall competitiveness and reduce inefficiencies in the use of state funds and external resources.

### Medium-Term Macroeconomic Framework
- The APR presents an updated medium-term macroeconomic framework consistent with the PRGF-supported economic program aiming at:
  - achieving sustainable growth;
  - reducing poverty;
  - maintaining macroeconomic and financial stability.
- Strategy elements: continuing structural reforms and prudent macroeconomic policies; reforms to boost growth by strengthening human capital and basic infrastructure, improving the environment for private sector development, and using international trade agreements (including CAFTA).
- Fiscal strategy under PRGF: gradual reduction of the fiscal deficit while orienting spending toward priorities (growth-enhancing investment and poverty spending). Key supporting reforms: broadening the tax base, strengthening tax administration, upgrading SIAFI, introducing the single treasury account, and gradual restructuring of the public sector.
- Noted risk: significant risks to the fiscal strategy (described in section III.A of the source).
- Macroeconomic projections (Percent of GDP, unless otherwise stated) — Honduras: Macroeconomic Framework Projection
  - Real GDP (growth, in percent): 2003 3.5, 2004 4.6, 2005 4.2, 2006 4.5, 2007 4.5, 2008 4.5, 2009 4.5
  - Inflation (eop, in percent): 2003 6.8, 2004 9.2, 2005 6.9, 2006 5.0, 2007 4.0, 2008 3.0, 2009 2.5
  - Total revenues and grants: 2003 27.4, 2004 28.7, 2005 29.4, 2006 29.0, 2007 28.9, 2008 28.7, 2009 28.7
  - Capital expenditures: 2003 6.2, 2004 6.5, 2005 7.7, 2006 7.2, 2007 7.6, 2008 7.7, 2009 8.1
  - Overall combined public sector balance: 2003 -5.1, 2004 -3.0, 2005 -2.5, 2006 -1.7, 2007 -1.7, 2008 -1.6, 2009 -1.6
  - Primary combined public sector balance: 2003 -4.6, 2004 -2.6, 2005 -2.3, 2006 -1.7, 2007 -1.7, 2008 -1.7, 2009 -1.7
  - Public sector debt 1/: 2003 75.3, 2004 72.8, 2005 56.1, 2006 54.0, 2007 51.7, 2008 49.6, 2009 47.7
  - External current account balance: 2003 -4.2, 2004 -5.2, 2005 -2.5, 2006 -2.4, 2007 -2.7, 2008 -3.2, 2009 -3.7
  - Gross international reserves in months of imports: 2003 3.7, 2004 4.8, 2005 4.9, 2006 4.9, 2007 4.9, 2008 4.8, 2009 4.6
  - Public external debt 1/: 2003 69.8, 2004 67.8, 2005 51.6, 2006 49.7, 2007 47.9, 2008 46.1, 2009 44.5
  - Sources: Ministry of Finance, Central Bank of Honduras, and Fund staff estimates.
  - 1/ Reduction in public sector debt after 2005 includes HIPC debt relief.
- 2005 fiscal strategy specifics:
  - rely on full benefits of 2002–03 tax reforms, further improvements in tax administration, strict expenditure control (including wage bill), and contingent spending cuts;
  - implement revised tax code approved in December 2004 including power to determine taxpayer’s income through indirect methods;
  - action plan: reduce taxpayer arrears, reduce stopfilers, strengthen tax audits.
- 2005 budget outcomes (as projected in the APR):
  - deficit of the consolidated public sector (after grants) will fall by 0.5 percent of GDP;
  - public investment will rise by over 1.0 percent of GDP;
  - poverty spending will rise by 0.3 percent of GDP;
  - main offsetting savings: wage bill, domestically financed goods and services (net of programs funded by the Education-for-All and Global Health Fund initiatives), and current transfers.
- APR recommendations: provide more in-depth discussion of how macro framework will be achieved under envisaged policies and analysis of effects on poverty of growth, labor market and financial sector reforms.

### Poverty Reduction
- APR notes modest progress in poverty reduction; achieving MDGs requires stepped-up policies and programs.
- Poverty incidence:
  - share of total population in poverty fell from 66 percent in 1999 to 64 percent in 2004;
  - share in extreme poverty declined from 49 percent to 44.6 percent.
- Observations:
  - slow poverty reduction linked to low growth in early 2000s and adverse agricultural commodity prices;
  - PRSP targets for extreme poverty were achieved in 2001 and 2002 but not in 2003 or 2004 despite economic recovery, suggesting lagged link between growth and poverty reduction.
- Government efforts highlighted in APR: prioritize programs and improve targeting, decentralize and improve service delivery, enhance public sector management, realign donor assistance.
- Public spending on anti-poverty programs: 8 percent of GDP, or nearly 30 percent of total public spending.
- Statistical and analytical improvements:
  - National Institute of Statistics (INE) improved systematic poverty analysis and completed field operations for the first Living Standard Measurement Survey (LSMS) in December 2004;
  - UNAT and INE collaborating with the Bank on a Poverty Assessment to enhance understanding of how growth affects poverty and identify key interventions for PRSP/MDG goals.
- Staff suggestion: incorporate updated welfare analysis findings in next PRSP progress report.

### Targets and Intermediate Indicators
- Performance improvements in 2004:
  - Three out of every four PRSP monitorable goals were met in 2004, compared with about one-third to one-half in 2002 and 2003.
  - Outcomes influenced by increased and appropriate PRSP implementation efforts and resource allocation to prioritized actions.
- Growth and elasticity:
  - A 2 percent annual growth rate in real per capita GDP was attained in 2004 after a period of zero/negative rates.
  - Elasticity of poverty reduction to economic growth is characteristically low in Honduras; higher per capita GDP plus other inputs are required for steady PRSP/MDG progress.
- Sectoral progress:
  - Education: improvement, particularly for the third cycle of basic education.
  - Infrastructure/services: coverage of electricity, telephone lines and sanitation services improved significantly.
  - Lagging areas: access to water and education coverage for the first and second cycle require prioritized efforts.
  - Access to water critical for progress in child mortality and malnutrition.
  - Recent improvements in child mortality and malnutrition noted, but new 2004 data not available; concerns that lack of water coverage, insufficient nutrition and early childhood development programs, and health system gaps could hinder future progress.
  - Slow progress in basic education is particularly worrisome among the extreme poor, given association of PRSP/MDGs with female literacy.

### Policies and Programs
- Need to better align budgetary programming with PRSP goals.
- Ongoing efforts: establishing a Medium-Term Expenditure Framework (MTEF) and improving donor harmonization.
- Recommendations:
  - develop cost-effectiveness criteria at sectoral levels for program prioritization;
  - use the recently approved Organic Budgetary Law as legal basis for MTEF development to improve budget-PRSP linkages.
- Institutional mechanisms:
  - enhanced operational mechanism via six sector-based coordinating boards (Mesas Sectoriales) for program alignment and donor harmonization.
- Governance improvements:
  - constitutional decree separating TNE and RNP ratified;
  - creation of new Supreme Audit Court (TSC) to strengthen public audit functions;
  - improvements in public financial management and procurement to promote fiscal transparency.
- DR-CAFTA and regional integration:
  - Authorities should maximize and share gains from DR-CAFTA and deeper regional integration across the population.
  - Gains expected to raise investment, exports, and growth.
  - Long tariff phase-out periods of 10, 15 and 20 years were negotiated for most sensitive commodities; authorities should assess need for compensatory measures to mitigate social impacts on specific sectors (e.g., traditional agriculture).
  - Authorities expected to commission a PSIA study on CAFTA by June 2005; staffs suggest incorporating PSIA results into the next PRSP progress report.

### Public Expenditure Management
- Tracking HIPC debt relief savings:
  - Mechanism for tracking budgetary savings from HIPC debt relief is adequate and satisfactory to Fund and IDA.
  - New poverty reduction framework (FRP) keeps track of fiscal savings from HIPC relief and monitors channeling toward poverty-reducing activities.
  - Previous FRP reformed to be compatible with expanded definition of poverty-reducing spending.
  - Authorities replaced the 2002 poverty fund (Decree 70-2002) with a virtual fund that tags specific budget expenditures as poverty-reducing.
  - Legislative reform approved and operating guidelines for the virtual fund and its consultative council drafted and publicly available on SEFIN and SIERP websites.
  - Tagging of poverty-reducing spending incorporated into the 2004 and 2005 budgets; budget planning and execution of PRSP-related spending managed by SEFIN through SIAFI.
  - Under current tracking, the Central Bank of Honduras calculates total budgetary savings from HIPC relief annually; this is incorporated into the national budget to identify public spending and financing sources for poverty-reducing programs.
  - Publicly available information verifies that increased external resource inflows, including HIPC relief, have been dedicated to poverty-reducing activities with no substantial decline in domestic resources allocated to these activities.
  - Authorities have satisfactorily met targets for poverty spending as a share of GDP.
- Continued efforts needed in expenditure management:
  - develop government capacity to manage, monitor, evaluate and improve PRSP implementation and integrate stakeholder participation in design and monitoring;
  - support implementation of Public Human Resource Reform to ensure equitable working environment, better performance incentives, improved civil service quality, and better public service management and delivery in key economic and social sectors;
  - strengthen fiscal, financial and fiduciary management for more accurate, timely, relevant and transparent public sector reporting.
- Bank support: IDA’s Poverty Reduction Strategy Technical Assistance Credit (PRS TAC) cofinanced by the Government of Sweden and the Government of the United Kingdom.

### Monitoring and Evaluation
- APR increased transparency in monitoring and evaluation and called for improved monitoring mechanisms and incorporation of consultation inputs.
- Civil society proposals and consultation findings have been used to strengthen monitoring, targeting and decentralization.
- Staffs emphasize the importance of continued improvements in statistical capacity (INE, LSMS) and incorporating updated welfare analyses (Poverty Assessment) into future APRs to better link growth and policy reforms to poverty outcomes.

*Source: The second annual Poverty Reduction Strategy Paper (PRSP) Progress Report (APR) of the Government of Honduras, as presented in the supplied content unit.*

### 16.      The Integrated Poverty Reduction Tracking System (SIERP) could be further

### 16.      The Integrated Poverty Reduction Tracking System (SIERP) could be further

### Enhancing SIERP and fiscal transparency
- SIERP could be further enhanced by incorporating administrative data at the sectoral and municipal levels, and by reestablishing the interface with SIAFI to provide information on execution of anti-poverty spending online.
- SIERP already provides broad access to and systematizes progress made to date in the implementation of the strategy, and it is a useful targeting tool for decision makers to allocate resources geographically by providing disaggregated information on progress made in attaining PRSP goals.
- SIERP website is: http://www.sierp.hn
- Enhancing SIERP could:
  - contribute to the formulation, execution and monitoring of PRSP programs, projects and indicators at the national, departmental and municipal levels;
  - contribute to fiscal transparency by incorporating execution of disaggregated poverty reduction spending by programmatic area.

### Poverty and Social Impact Analyses (PSIAs) and incorporation into policy
- PSIAs were carried out to assess the economic and social impact of the tax reform packages and the impact of the rise in oil prices. The APR incorporates these PSIA results.
- SEFIN has incorporated PSIA findings into its action plans for strengthening revenue administration to ensure achievement of equity gains from the tax reform.
- The PSIA on tax reform determined the impact to be slightly progressive, both on vertical and horizontal equity grounds.
- The largest redistributive impact of the tax reform packages would come once they are fully implemented and complemented by progressive public spending.
- Improvements in tax administration to reduce tax evasion and increase revenue collection will be key to the distributive gains of the reform.
- The work was coordinated by UNAT, under close collaboration with SEFIN, and with Bank technical and financial support.
- Additional PSIAs:
  - Two other PSIAs have been initiated: on the distributional impact of public spending (to be financed by the Bank) and on the wage policy (to be financed by DFID).
  - Programmed PSIAs include assessing potential social and economic impact of the implementation of DR-CAFTA and on the distributional impacts of public subsidies.
- Staffs attach particular importance to:
  - the redistributive impact and potential equity gains from public spending;
  - identification of potential winners and losers of the trade agreement.
- Recommendation: Compensatory actions should be prepared to address adverse effects on vulnerable groups.
- Recommendation: Authorities are encouraged to translate the poverty and inequality incidence analysis into specific anti-poverty policy actions and account on progress made in the next PRSP progress report.

### Risks to the strategy (section III.A)
- Despite progress, the overall strategy faces significant risks, including:
  - Continued fiscal adjustment:
    - Progress to date made possible by the strong domestic consensus in favor of reaching HIPC completion.
    - This consensus could weaken after the completion point and in the run-up to the presidential election.
    - Controls over the public wage bill under the PRGF arrangement (2004–06) have been effective, but implementation of a permanent resolution to integrate teachers’ benefits to their overall salaries before the 2007 budget is a critical element of a sustainable medium-term budget.
    - Implementation of CAFTA and further opening of the telecommunications market will boost growth prospects, but measures will be needed to offset lower tax and tariff revenue.
  - Institutional weaknesses:
    - Weaknesses in the judiciary and the supreme audit agency (which is just now concluding its restructuring process) pose risks to program implementation.
    - IDA’s CAS contemplates technical and financial assistance for institutional building in all lending scenarios; IDA is currently supporting enhancements to public sector management and judicial reform.
  - Ensuring financial integrity and stability:
    - Passage of laws and regulations aimed at strengthening the financial system has reduced the risk of a financial crisis, but the banking system is still weak and continues to pose significant risks to the PRSP.
    - Government of Honduras, supported by the IDA and the Fund, is implementing a financial system reform that addresses vulnerabilities identified in the 2003 FSAP with technical assistance and concessional funds from a Financial Sector Adjustment Technical Assistance Credit (FSTAC) and a Financial Sector Adjustment Credit (FSAC); utmost priority needs to be given to fully executing this reform.
  - Enhancing the economy’s resilience to shocks:
    - External shocks and natural disasters could have a major negative impact on growth and hamper poverty reduction.
    - Authorities should ensure the economy’s ability to absorb shocks and structural change, including by gradually moving toward a more flexible exchange rate system in the medium term.
    - Key preconditions include further strengthening of the financial sector and improving the monetary operations of the central bank.
- Recommendation: The APR would benefit from a more in-depth analysis of the risks to the strategy; IDA and Fund staffs recommend incorporating the analysis of these risks, including contingency measures, into the next PRSP progress report.
- Recommendation: Immediate implementation of measures aimed at raising the likelihood of attaining PRSP/MDG goals should be made a greater priority.

### Priority areas for strengthening the PRS and its implementation (section III.B)
- Staffs’ assessment:
  - The APR presents a coherent medium-term macroeconomic framework and credible efforts toward implementing the poverty reduction strategy.
  - Important risks and vulnerabilities remain: wage policy framework, institutional weaknesses, consolidating the fiscal adjustment, ensuring financial stability, and enhancing resilience to shocks.
  - These risks underscore the need for continued prudent macroeconomic policies, complemented by structural reforms to raise competitiveness.
  - Sustained macroeconomic stability and broad-based economic growth continue to be key elements for achieving policy objectives and strategy targets.
- Progress already achieved includes:
  - improving macroeconomic stability and reducing the fiscal deficit, while simultaneously achieving poverty-reducing spending targets;
  - strengthening transparency in fiscal and public financial management systems (including SIAFI and continued improvements in the government’s fiscal, financial and fiduciary management);
  - consolidating the system of monitoring indicators (by developing SIERP);
  - pursuing government-led efforts to realign donor assistance to the PRSP; and
  - better understanding distributional impacts of reforms and external shocks, in particular by completing two PSIAs, on the tax reform and the rise in oil prices.
- Areas where further work is needed include:
  - continued fiscal consolidation, including through ensuring a sustainable wage policy, maintaining the tax ratio, and pursuing further public sector restructuring;
  - financial stability by avoiding any slippages in the implementation of the authorities’ financial system reform program;
  - expanding the prioritization of programs at the sectoral level through cost-effectiveness criteria;
  - identifying contingency measures to address the risks to the strategy, to ensure attaining PRSP/MDG goals; and
  - scaling up social auditing mechanisms such as citizen report cards, to ensure that programs and projects translate into tangible and sustainable benefits to the population.
- Institutional commitment:
  - The PRSP law approved in 2004 with the support of all major political parties places PRSP implementation above the electoral cycle by establishing that the fundamental objective of public policies is to reach the PRSP goals.

### Issues for Executive Directors (questions listed by staffs)
- Do the Executive Directors concur with the areas identified by staffs as key implementation risks?
- Do the Executive Directors concur with the areas identified by staffs as priorities for strengthening the PRS and its implementation?

*Source: _cr05387 - 16.      The Integrated Poverty Reduction Tracking System (SIERP) could be further*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05387.pdf_