## _cr08241

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---

### Executive Summary — Background
- Honduras had three previous PRGF arrangements, the last of which ended in February 2007.
- The most recent PRGF program went off track due to large wage increases granted in 2006, including a 4-year agreement with teachers.
- Expansionary policies in 2007 produced emerging imbalances: higher inflation, rapid bank credit expansion, an import boom, a sharply weakened external current account deficit, and declining net international reserves.
- Authorities requested a 12-month SBA covering economic policies through December 2008; they do not intend to draw under the arrangement and view it as a bridge to a PRGF to be negotiated before end-year.

### Emerging Economic Imbalances — Key Findings
- Inflation and monetary indicators:
  - Inflation rose to near 9 percent last December (from 5.3 percent in 2006), above the authorities’ target range (5–6 percent).
  - Policy interest rates were raised by 150 basis points to 7.5 percent in 2007; subsequently raised by 25 bps to 7¾ percent in February 2008.
  - Real interest rates remained negative despite tightening.
- External sector:
  - External current account deficit almost doubled in 2007 to 10 percent of GDP.
  - Net international reserves fell by US$102 million in 2007.
  - Official exchange rate regime: Lempira fluctuates within a ± 7 percent crawling band; Lempira pegged at most appreciated side since 1999; band fixed since October 2005.
  - Staff estimates suggest no significant real exchange rate misalignment.
- Fiscal sector and public spending:
  - Overall fiscal deficit deteriorated since 2005; central government wage bill increased 25 percent in 2007 (33 percent for teachers).
  - Combined public sector wage in 2007 estimated at 11.7 percent of GDP.
  - Energy-related pressures and net lending from public pension institutes contributed to the deficit.
- Banking and credit:
  - Bank credit expanded rapidly—over 30 percent year-on-year—fueling imports and posing financial stability risks.
  - Entry of foreign banks increased competition and reduced stock of central bank open market paper.
- Energy sector vulnerabilities:
  - Electricity tariffs fixed from April 2006 to December 2007 while bunker fuel rose by 50 percent (to US$75 per barrel, from about US$50).
  - ENEE losses increased; financed by payment arrears to private generators and contractors (about 1.6 percent of GDP), transfers from the government, and short-term bank credit.
  - Overall energy subsidies in 2007, including ENEE losses, estimated at over 2 percent of GDP.
  - Two largest banks (about 30 percent of financial sector assets) and a medium-sized bank each had over 30 percent of capital exposed to the energy sector.

### The Stabilization Program — Overview and Objectives
- Program focus: restore macroeconomic stability to support sustained growth and poverty reduction.
- Key pillars:
  - Fiscal consolidation and reorientation: reduce overall fiscal deficit to 1½ percent of GDP in 2008 (from 2¼ in 2007); stabilize public sector wage bill; recover priority spending; maintain a stable debt-to-GDP ratio.
  - Contain inflation and safeguard external stability: aim for single digit inflation, bring credit growth to sustainable levels, build up net international reserves; prudential measures for banks; use exchange rate band more actively.
  - Strengthen energy sector: implement tariff policy to cover ENEE operational costs and clear arrears with private generators in collaboration with the World Bank and the IADB.
- Program modality:
  - Authorities view a 12-month precautionary SBA as appropriate for 2008 and as a bridge to a PRGF later in the year.
  - Transition to a PRGF contingent on satisfactory SBA performance, budget discipline, appropriate monetary/exchange mix, updated PRSP, and clarity on medium-term expenditure framework.

### Macroeconomic Outlook and Key Projections
- Growth and inflation:
  - Growth projected to abate from over 6 percent in 2007 to 4¾ percent in 2008.
  - Real GDP (annual percentage change): 2006: 6.3; 2007: 6.3; 2008: 4.8.
  - CPI inflation (annual percentage change): 2006: 5.3; 2007: 8.9; 2008: 9.0.
- External position and reserves:
  - External current account balance (percent of GDP): 2006: -4.7; 2007: -10.0; 2008: -9.5.
  - Gross international reserves (US$ millions): 2006: 2,824; 2007: 2,733; 2008: 2,992.
  - Gross international reserves (months of nonmaquila imports): 2006: 4.5; 2007: 3.9; 2008: 3.9.
  - Net international reserves (US$ million): 2006: 2,575; 2007: 2,473; 2008: 2,726.
- Fiscal balances (percent of GDP):
  - Overall public sector balance: 2006: -1.7; 2007: -2.3; 2008: -1.5.
  - Overall central government balance: 2006: -1.1; 2007: -2.1; 2008: -1.8.
  - Public sector debt: 2006: 36.2; 2007: 23.7; 2008: 22.5.
- Staff note on downside risks:
  - A 1 percent deceleration in the U.S. is estimated to lead to a similar slowdown in the Honduran economy via remittances and exports.
  - Other downside risks: higher fuel prices; pressures for expansionary policies ahead of primary elections scheduled for late 2008.

### Fiscal Consolidation and Reorientation — Measures and Targets
- Overall objective:
  - Reduce combined public sector deficit from 2¼ percent of GDP in 2007 to 1½ percent in 2008 (underlying adjustment of about 2 percent of GDP versus passive scenario).
  - Keep public debt broadly stable at about 22½ percent of GDP.
- Operations of Combined Public Sector (percent of GDP) — selected columns from source:
  - Total revenue: Prel. 2006: 24.3 | Passive 2007: 24.1 | Prog. 2008: 22.6 | 2008: 25.2.
  - Total expenditure: Prel. 2006: 26.0 | Passive 2007: 26.5 | Prog. 2008: 26.2 | 2008: 26.8.
  - Overall balance: Prel. 2006: -1.7 | Passive 2007: -2.3 | Prog. 2008: -3.6 | 2008: -1.5.
  - Memo: Anti-poverty spending: Prel. 2006: 7.0 | Passive 2007: 6.9 | Prog. 2008: 6.8 | 2008: 7.0.
- Revenue measures:
  - Strengthen tax administration and policy.
  - Make the solidarity tax permanent.
  - New service charges at HONDUTEL to raise nontax revenues.
  - Electricity tariffs raised in January; new tariff structure effective April to fully cover ENEE operational cost (structural performance criterion).
- Expenditure measures:
  - Tight control on current primary spending of the central government (indicative ceiling).
  - Increase public investment in infrastructure.
  - Improve targeting of electricity and direct fuel subsidies and reduce overall level.
  - Policy of no new net lending by public pension funds.
- Wage bill stabilization:
  - Central government wage bill target: stabilize at 9.2 percent of GDP in 2008 and reduce to 9.1 percent of GDP in 2009 (indicative target).
  - Overall public sector wage bill contained at 11.4 percent of GDP in 2008.
  - Specific actions: no further teacher wage increases beyond 2006 agreement; nominal wage increases for other civil servants in line with projected inflation; no net increase in central government employment; centralized payroll control; incorporate payroll into SIAFI; audit teacher census irregularities.

### Monetary Policy, Reserves, and External Stability
- Monetary objectives:
  - Contain inflation within 8–10 percent.
  - Reduce growth of bank credit to sustainable levels.
  - Target build up of net international reserves by US$253 million to stabilize nonmaquila import coverage at 4 months.
- Central Bank balance-sheet indicators (selected, as presented):
  - Net International Reserves (Millions of U.S. dollars): Dec 2007: 2,473; Mar: 2,473; Jun: 2,593; Sep: 2,623; Dec: 2,726.
  - Net Domestic Assets (end-period Lempiras): Dec 2007: -30,364; Mar: -31,078; Jun: -34,320; Sep: -36,036; Dec: -34,241.
  - Total stock of open market bills (Memorandum): Dec 2007: 16,705; Mar: 17,189; Jun: 16,809; Sep: 17,081; Dec: 16,834.
- Recent policy actions:
  - Policy interest rate raised to 7¾ percent in February.
  - Additional measures equivalent to 2 percentage points of reserve requirements in March via higher obligatory investments and placement of open market bills (prior actions).
  - Obligatory investments raised by 5 percentage points (from 4 to 9 percent of bank deposits) starting in March; government bonds eligible.
  - Reserve requirements lowered gradually from 12 to 7 percent on Lempira deposits (and from 34 to 24 percent on U.S. dollar deposits) for banks increasing loans to priority sectors.
- Staff concerns and recommendations:
  - Staff noted reserve requirement reduction could have an expansionary impact of up to 1 percent of GDP in 2008.
  - Recommended implementing uniform reserve requirements, avoiding easily circumvented credit rules, and letting market determine interest rates on government bonds.
  - Authorities intend to mop up excess liquidity and reassess measures at first program review.
- Exchange rate policy:
  - Authorities started to satisfy only part of bids at foreign exchange auctions, allowing marginal movement away from the most appreciated edge of the band.
  - Exchange rate management to be reexamined at first program review based on a study of exchange rate system options.

### Financial Sector Prudential Policies
- Rationale:
  - Encourage banks to internalize risks from rapid credit expansion (mainly consumption and commercial real estate).
  - FSAP update highlighted risks from entry of foreign banks and rapid credit growth.
- Measures:
  - Issue regulations to tighten loan classification and provisioning: general provisions for all loans and higher provisions for credit card debt and commercial loans with real estate collateral; household mortgages excluded from higher provisions.
  - CNBS to develop timetable to introduce risk-based supervision and issue a regulation (structural performance criterion, April 2008).
  - Swift implementation emphasized for impact in 2008.

### Energy Sector Reform
- Objectives:
  - Put ENEE on sound financial footing, improve governance, reduce distribution losses and fraud, and reverse underinvestment (coordinated with World Bank and IADB).
- Tariff and arrears policy:
  - World Bank estimate: raise electricity tariffs by 26 percent over end-2007 levels at December 2007 bunker prices (US$74 per barrel).
  - Actions taken: average tariffs adjusted up by 15 percent in January; further 11 percent increase in April when new tariff structure comes into effect (structural performance criterion).
  - Authorities intend to adjust tariffs periodically to pass-through increases in international fuel prices.
  - With congressional approval of 2008 budget, all payment arrears of ENEE with generators to be cleared by end-June through issuance of government bonds.

### Financing Strategy, SBA Features, and Access
- Financing strategy:
  - 2008 budget financed entirely through concessional foreign lending; concessional flows and sale of cellular license will exceed budgetary financing needs, allowing for negative domestic financing.
  - After over US$3 billion of debt relief, NPV of Honduras’ external public debt about 12 percent of GDP and expected to remain below 14 percent medium-term.
  - Petrocaribe concessional financing expected: US$350 million in 2008–09 (about 2.8 percent of 2007 GDP); US$80 million earmarked in 2008 budget for hydroelectric and grid upgrades.
  - Creation of a trust fund at the central bank to hold Petrocaribe proceeds for transparency and infrastructure use.
  - Proceeds of cellular license sale: 0.6 percent of GDP in 2008 budget earmarked for infrastructure (mostly roads).
- SBA features and access:
  - Precautionary SBA with low access; total access: 30 percent of quota (SDR 38.85 million).
    - First drawing: 25 percent of quota.
    - Remaining 5 percent divided evenly between three purchases after reviews.
  - Repurchase obligations under proposed SBA will average 1.1 percent of projected gross reserves for 2010–2012.
  - Assumes no purchases under the SBA for financing-gap tables.
- Illustrative balance of payments projections (selected, in U.S. dollars as presented):
  - Current account: 2007: -1,225; 2008: -1,308; 2009: -1,344.
  - Capital account: 2007: 1,158; 2008: 282; 2009: 233.
  - Financial account: 2007: -421,443; 2008: 1,541; 2009: 1,438.
  - Disbursements 1/: 2007: 246; 2008: 382; 2009: 454.
  - Amortization: 2007: -1,273; 2008: -78; 2009: -70.
  - Overall balance: 2007: -136; 2008: 164; 2009: 220.
  - Reserve assets: 2007: 109; 2008: -253; 2009: -279.
  - Financing gap: 2008: 765; 2009: 960; 2010: 22.
  - World Bank: 2008: 340.
  - IADB: 2008: 281; 2009: 530.
  - Bilaterals and other multilaterals: 2008: 151; 2009: 400.
  - IMF 2/: 2008: 0; 2009: 0.
  - Unidentified financing: 2009: 30; 2010: 30; 2011: 22.
  - Change in NIR (+ accumulation): -102 | 253 | 279 | 287 | 376.
  - Source: Fund staff estimates. (1/ Includes project-financed loans. 2/ Assumes no purchases under the SBA.)

### Program Reviews, Conditionality, and Prior Actions
- Program envisages three reviews, beginning end-June 2008.
- Prior actions included:
  - Tightening of monetary policy.
  - Congressional approval of the 2008 budget consistent with overall deficit of 1.5 percent of GDP and indicative current expenditure targets including the wage bill.
  - Measures to bring NIR and NDA to prior-action targets at end-March.
- Quantitative performance criteria and indicative targets measured cumulatively from January 1.
- Structural conditionality focuses on:
  - Implementing new tariff structure that fully covers ENEE operational costs.
  - Eliminating ENEE arrears to reduce financial system exposure.
  - Issuing regulation on risk-based supervision to encourage banks to internalize credit expansion risks (MEFP, Table 2).

### Staff Appraisal, Risks, and Recommendations
- Staff view the authorities’ program as appropriately addressing emerging imbalances through fiscal, monetary/exchange rate, and energy sector measures.
- Key risks:
  - A less favorable external environment (notably a U.S. slowdown).
  - Pressures for domestic expansionary policies ahead of primary elections scheduled for late 2008.
  - Higher oil prices and potential loosening of policies.
- Staff recommendations:
  - React promptly to adverse external developments and resist pressures for policy loosening.
  - Monitor liquidity effects of reserve requirement and obligatory investment changes; mop up excess liquidity as needed.
  - Implement prudential banking measures swiftly and reexamine exchange rate management at first review.
  - Finalize medium-term plan with policies for poverty alleviation and growth to support a PRGF before end-2008.
- Staff recommendation: approve the authorities’ request for a Stand-By Arrangement.

### Debt Sustainability — Appendix II (Summary)
- After HIPC and MDRI debt relief, NPV of external debt declined to 12 percent of GDP at end-2007.
- External debt-to-GDP declined from 60 percent at end-2003 to 16 percent at end-2007.
- Baseline projections:
  - NPV of external debt-to-GDP remains below 14 percent over the horizon of analysis.
  - Long-run growth stabilizes at 4.2 percent.
  - Export and import growth stabilize at about 8 and 7 percent, respectively.
  - Current account deficit remains below 6 percent of GDP on average.
- Under extreme negative shocks NPV of external debt-to-GDP peaks at 32 percent in 2013; public debt NPV remains below 40 percent under the most extreme stress test.
- Policy implications:
  - Consolidate revenue administration improvements.
  - Maintain overall fiscal balance below 2 percent of GDP.
  - Invest in energy sector to reduce fuel import dependency.

*Source: EXECUTIVE SUMMARY and selected excerpts from the staff report and annexes (Content unit: _cr08241).*

### Executive Summary ......................................................................................................

### Executive Summary

### Background
- Honduras had three previous PRGF arrangements, the last of which ended in February 2007. The most recent PRGF program focused on fiscal consolidation and structural reforms to strengthen growth and reduce vulnerabilities in the financial sector. The program went off track due to large wage increases granted in 2006, including a 4-year agreement with teachers.
- Over the last year, expansionary policies led to emerging imbalances: in 2007 inflation increased, bank credit expanded rapidly and led to a boom in imports, the external current account deficit weakened sharply, and net international reserves declined. The overall fiscal deficit deteriorated, partly reflecting the weakening finances of the public electricity company (ENEE).
- The authorities are requesting a 12-month SBA covering economic policies through December 2008. They consider Fund support will help anchor policymaking ahead of primary elections, reinforce confidence and unlock donor financing. They do not intend to draw under the arrangement, and view it as a bridge to a PRGF to be negotiated before end-year.

### The Emerging Economic Imbalances — Key Findings
- Inflation and monetary indicators:
  - Inflation rose to near 9 percent last December (from 5.3 percent in 2006), above the authorities’ target range (5–6 percent).
  - Core and headline inflation trends showed increases through 2007; headline inflation is among the highest in the region.
  - Despite a policy tightening in the second half of 2007 (policy interest rates raised by 150 basis points to 7.5 percent), real interest rates remain negative.
- External sector:
  - The external current account deficit almost doubled in 2007, reaching 10 percent of GDP, driven by rapid import growth.
  - Net international reserves fell by US$102 million in 2007; gross reserve coverage declined.
  - The official exchange rate regime allows the Lempira to fluctuate within a ± 7 percent crawling band; the Lempira has been pegged at the most appreciated side of the band since 1999 and the band was fixed since October 2005.
  - Staff estimates suggest no significant real exchange rate misalignment.
- Fiscal sector and public spending:
  - The overall fiscal deficit deteriorated since 2005 and the quality of public spending weakened.
  - Central government wage bill increased 25 percent in 2007 (33 percent for teachers).
  - The combined public sector wage in 2007 is estimated at 11.7 percent of GDP.
  - Energy-related pressures and net lending from public pension institutes contributed to the overall deficit.
- Banking and credit:
  - Bank credit expanded rapidly—over 30 percent year-on-year—contributing to an import boom and posing risks to financial sector health.
  - Entry of foreign banks and competition led to credit growth and a decline in the stock of central bank open market paper.
- Energy sector vulnerabilities:
  - From April 2006 to December 2007 electricity tariffs remained fixed while fuel costs rose by 50 percent (to US$75 per barrel of bunker, from about US$50).
  - ENEE losses increased and were financed with payment arrears to private generators and contractors (about 1.6 percent of GDP), transfers from the government, and short-term bank credit.
  - Overall energy subsidies in 2007, including ENEE losses, are estimated at over 2 percent of GDP.
  - Two largest banks (about 30 percent of financial sector assets) and a medium-sized bank each had over 30 percent of capital exposed to the energy sector.

### The Stabilization Program: Overview and Objectives
- Program focus: strengthen conditions for sustained growth and poverty reduction through consolidation of macroeconomic stability. Key program pillars:
  - Fiscal consolidation and reorientation:
    - Reduce the overall fiscal deficit to 1½ percent of GDP in 2008, from 2¼ in 2007.
    - Stabilize the public sector wage bill, recover priority spending, and maintain a stable debt-to-GDP ratio.
  - Containing inflation and safeguarding external stability:
    - Monetary program aims to maintain single digit inflation, bring credit growth to sustainable levels, and build up net international reserves.
    - Prudential measures to encourage banks to internalize risks from rapid credit expansion.
    - Use the existing exchange rate band more actively to help maintain external competitiveness and an adequate level of foreign reserves.
  - Strengthening the energy sector:
    - In collaboration with the World Bank and the IADB, implement a tariff policy that covers operational costs of ENEE and clear arrears with private generators.
- Program modality:
  - Authorities consider a 12-month precautionary SBA appropriate to reinforce confidence for 2008 and as a bridge to a PRGF later in the year.
  - With a precautionary SBA in place, the existing financing gap is expected to be covered by concessional flows.
  - A transition to a PRGF would require satisfactory performance under the SBA, budget discipline and expenditure control, an appropriate mix of monetary and exchange rate policies, an updated PRSP, and clarity about a medium-term expenditure framework.
  - Authorities plan to update the July 2001 PRSP through 2015 to give priority to a medium-term macroeconomic framework and improve alignment between public expenditure and poverty reduction.

### Staff Appraisal and Risks
- Staff view the authorities’ program as appropriately addressing emerging imbalances through the three key policy areas.
- Key risks:
  - A less favorable external environment.
  - Pressures for domestic expansionary policies ahead of primary elections scheduled for late 2008.
- Staff underscore the need to react promptly to changes in the external environment and resist pressures for loosening policies.
- Staff welcome the authorities’ prior actions as an important signal of commitment to the program.

*Source: EXECUTIVE SUMMARY (Content unit: _cr08241)*

### 9.      The authorities’

### 9.      The authorities’

### Program objectives and macroeconomic outlook
- Program is designed to preserve growth and contain inflation within a less favorable external environment.
- Growth projections:
  - Growth is projected to abate from over 6 percent in 2007 to 4¾ percent in 2008.
  - Monthly indicators point to a deceleration in economic activity since late 2007.
- Inflation:
  - Inflation is expected to remain at about 9 percent, driven by increases in electricity tariffs, a decline in fuel subsidies, and rising wages (e.g. the minimum wage was increased by 11 percent).
- External position:
  - Despite an expected deterioration in the terms of trade, the external current account deficit would start declining gradually and gross international reserves would be maintained at 4 months of nonmaquila imports.
- Key risks:
  - Near-term risks are somewhat tilted to the downside.
  - A higher-than-anticipated slowdown in the U.S. economy could adversely affect remittances and exports; staff research suggests that a 1 percent deceleration in the U.S. would lead to a similar slowdown of the Honduran economy.
  - Other downside risks include higher fuel prices and pressures for expansionary policies in the run-up to primary elections scheduled for late 2008.
  - It will be important to monitor developments closely and strengthen the program, if necessary.

### Key macroeconomic projections and indicators (as presented)
- Annual percentage change:
  - Real GDP: 2006: 6.3; 2007: 6.3; 2008: 4.8
  - CPI inflation: 2006: 5.3; 2007: 8.9; 2008: 9.0
- In percent of GDP, unless otherwise indicated:
  - Overall public sector balance: 2006: -1.7; 2007: -2.3; 2008: -1.5
  - Overall central government balance: 2006: -1.1; 2007: -2.1; 2008: -1.8
  - Public sector debt: 2006: 36.2; 2007: 23.7; 2008: 22.5
  - External current account balance: 2006: -4.7; 2007: -10.0; 2008: -9.5
  - Gross international reserves (US$ millions): 2006: 2,824; 2007: 2,733; 2008: 2,992
  - Gross international reserves (in months of imports of goods and services excluding maquila): 2006: 4.5; 2007: 3.9; 2008: 3.9
  - Net international reserves (US$ million): 2006: 2,575; 2007: 2,473; 2008: 2,726
- Sources: Central Bank of Honduras; Ministry of Finance; and Fund staff estimates.

### Fiscal consolidation and reorientation
- Overall objectives:
  - Under the program, the overall deficit of the combined public sector will decline from 2¼ percent of GDP in 2007 to 1½ percent in 2008.
  - This represents an underlying adjustment of about 2 percent of GDP, compared to a passive scenario in which no measures are taken.
  - The deficit target is expected to be in line with the budget to be approved by congress in April (prior action) and will help keep public debt broadly stable at about 22½ percent of GDP (MEFP ¶ 5).
  - Authorities intend to redirect spending to priority sectors, particularly public investment.
- Operations of Combined Public Sector (percent of GDP):
  - Prel. 2006 | Passive 2007 | Prog. 2008 | 2008 (column headings in source)
  - Total revenue: 24.3 | 24.1 | 22.6 | 25.2
    - of which: tax revenue: 15.6 | 16.7 | 16.0 | 16.8
    - of which: nontax revenue: 4.5 | 4.1 | 4.0 | 4.5
    - of which: op. surplus of ENEE: 0.0 | -0.5 | -1.3 | -0.2
  - Total expenditure: 26.0 | 26.5 | 26.2 | 26.8
    - Current expenditure: 20.0 | 20.7 | 20.9 | 20.3
      - of which: central gov. primary spending: 15.1 | 16.3 | 16.5 | 15.8
      - Central gov. wages: 8.3 | 9.2 | 9.4 | 9.2
    - Capital expenditure: 4.8 | 4.8 | 4.5 | 6.5
    - Net lending: 1.2 | 0.9 | 0.8 | 0.0
  - Overall balance: -1.7 | -2.3 | -3.6 | -1.5
  - Memo item: Anti-poverty spending: 7.0 | 6.9 | 6.8 | 7.0
  - Sources: Ministry of Finance; and Fund staff estimates.
- Policy mix to achieve consolidation:
  - Revenue measures:
    - Strengthen tax administration and policy.
    - Make the solidarity tax permanent.
    - New services charges in the public telecommunication company to increase nontax revenues.
    - Electricity tariffs raised in January and a new tariff structure to come into effect in April (structural performance criterion) to fully cover ENEE operational cost.
  - Expenditure measures:
    - Tight control on current primary spending of the central government (indicative ceiling).
    - Increase public investment in infrastructure projects.
    - Improve targeting of electricity and direct fuel subsidies while reducing overall level.
    - Policy of no new net lending by public pension funds.
- Wage bill stabilization:
  - Agreement to stabilize central government wage bill at 9.2 percent of GDP in 2008 and to reduce it to 9.1 percent of GDP in 2009 (indicative target).
  - Overall public sector wage bill contained at 11.4 percent of GDP in 2008, below 2007 levels.
  - Specific actions:
    - Implement moderate wage increases: no further wage or benefit increases for teachers beyond the 2006 agreement; nominal wage increases for other civil servants in line with projected inflation.
    - Control public employment: no increase in net employment at central government; planned hiring fully compensated by retirements and separations.
    - Strengthen payroll control: centralized unit for payroll management at the ministry of finance; incorporate payroll into SIAFI; act on irregularities from teacher census and audit; extend audit to rest of central government.
    - Complete restructuring plans for two largest state enterprises in late 2008.

### Financing strategy and debt outlook
- Budget financing:
  - The budget is financed entirely through concessional foreign lending. External concessional loans and proceeds from the sale of a cellular license band will exceed budgetary financing needs, allowing for negative domestic financing.
  - After receiving over US$3 billion of debt relief, the NPV of Honduras’ external public debt is about 12 percent of GDP and is expected to remain below 14 percent in the medium-term—well below distress thresholds (50 percent of GDP) (Appendix II).
- Key sources of financing highlighted:
  - Petrocaribe: Concessional financing for US$350 million in 2008–09 is expected (about 2.8 percent of 2007 GDP), with about US$80 million earmarked in the 2008 budget to finance hydroelectric projects and upgrade transmission and distribution infrastructure. The remainder planned for energy projects over 2009–12.
    - Creation of a trust fund at the central bank to hold Petrocaribe proceeds to ensure transparency and use for infrastructure only.
  - Proceeds of a cellular license sale: 2008 budget earmarks these one-time proceeds (0.6 percent of GDP) for identified infrastructure projects, mostly roads.
- Reliance on domestic financing:
  - Reliance on domestic financing will be substantially reduced.

### Monetary policy, reserves, and external stability
- Monetary program objectives:
  - Contain inflation within a range of 8–10 percent by containing second-round effects of food and energy price and wage increases.
  - Reduce growth of bank credit to more sustainable levels.
  - Target build up of net international reserves of US$253 million to stabilize nonmaquila import coverage at 4 months.
- Central Bank balance-sheet indicators (selected):
  - Net International Reserves (in millions of Lempiras): Dec 2007: 46,727; Mar: 46,728; Jun: 49,480; Sep: 50,553; Dec: 53,079
  - Net International Reserves (Millions of U.S. dollars): Dec 2007: 2,473; Mar: 2,473; Jun: 2,593; Sep: 2,623; Dec: 2,726
  - Net Domestic Assets: Dec 2007: -30,364; Mar: -31,078; Jun: -34,320; Sep: -36,036; Dec: -34,241
  - Credit to the public sector (net): Dec 2007: 4,748; Mar: 6,941; Jun: 3,672; Sep: 1,539; Dec: 2,046
  - Currency: Dec 2007: 16,363; Mar: 15,650; Jun: 15,160; Sep: 14,517; Dec: 18,838
  - Total stock of open market bills (Memorandum): Dec 2007: 16,705; Mar: 17,189; Jun: 16,809; Sep: 17,081; Dec: 16,834
  - Source: Central Bank of Honduras.
- Recent monetary tightening and measures:
  - Central bank raised policy interest rate by 25 bps to 7¾ percent in February.
  - Implementing additional measures equivalent to 2 percentage points of reserve requirements in March through a combination of higher obligatory investments and placement of open market bills (prior actions).
  - Changes to obligatory investments and reserve requirements to align with neighboring countries and discourage consumption lending (MEFP ¶6):
    - Increase in obligatory investments: raised gradually by 5 percentage points (from 4 to 9 percent of bank deposits), starting in March. Government bonds eligible to meet these investments.
    - Reduction in reserve requirements: lowered gradually from 12 to 7 percent on Lempira deposits (and from 34 to 24 percent on U.S. dollar deposits), in monthly steps starting in March, for banks that increase their share of loans to priority sectors (which exclude consumer loans and retail).
- Staff concerns and recommendations:
  - Staff noted that reduction in reserve requirements could have an expansionary impact of up to 1 percent of GDP in 2008.
  - Staff advised implementing uniform reserve requirements, avoiding credit rules that could be circumvented, and allowing market forces greater role in determining interest rates on government bonds.
  - Authorities intend to mop up any excess liquidity and reassess measures in first program review.
- Exchange rate policy:
  - Geared to support monetary policy, safeguard external competitiveness and protect the economy against shocks.
  - Authorities have started to satisfy only part of bids at foreign exchange auctions, allowing marginal movement away from most appreciated edge of the band.
  - Exchange rate management to be reexamined in the first program review based on a study of the options for the exchange rate system (MEFP ¶7).

### Financial sector prudential policies
- Rationale:
  - Prudential policy will encourage banks to internalize risks associated with rapid expansion of bank credit, particularly for consumption.
  - Recent FSAP update noted entry of foreign banks and rapid credit expansion (mainly for consumption and commercial real estate) may put stress on the financial system.
- Measures:
  - Issuance of regulations to tighten loan classification and provisioning, with general provisions for all loans and higher provisions for credit card debt and commercial loans with real estate collateral.
  - Household mortgages excluded from higher provisions to avoid restricting mortgage credit to low-income households.
  - Swift implementation important for effect this year.
  - CNBS to develop timetable to introduce risk-based supervision, including issuance of a regulation (MEFP ¶8) (structural performance criterion).
  - Plans to use FSAP update recommendations to deepen banking reforms.

### Energy sector reform
- Importance:
  - Reforming electricity sector essential to safeguard public finances and support growth.
  - Strategy coordinated with World Bank and IADB to put ENEE on sound financial footing, improve governance, reduce distribution losses and fraud, and reverse underinvestment (MEFP ¶9).
  - New ENEE manager named in early 2008 and an investment plan prepared.
- Tariff and arrears policy:
  - Program envisages tariff structure that fully covers operational costs.
  - World Bank estimate implies raising electricity tariffs by 26 percent over end-2007 levels at December 2007 bunker prices (US$74 per barrel).
  - Actions taken:
    - Average tariffs adjusted up by 15 percent in January and will be increased by a further 11 percent in April, when new tariff structure comes into effect (structural performance criterion).
    - Authorities intend to adjust tariffs periodically to pass-through further increases in international fuel prices above current level to domestic prices, in accordance with current law.
    - With congressional approval of 2008 budget, all payment arrears of ENEE with generators will be cleared by end-June through issuance of government bonds.

### Financing, access, and program modalities
- SBA and financing gap:
  - SBA would help unlock financing needed to cover a gap in 2008.
  - Financing gap estimated at about US$76 million and projected to be filled by World Bank and IADB budget-support loans and grants, and financing from other bilateral creditors.
  - Swiftly unlocking external financing important to avoid derailing authorities’ investment program.
  - Honduras will continue to remain current on its external debt payment obligations.
- Proposed SBA features:
  - Precautionary SBA with low access and minimum risk of failure to repay the Fund, covering macroeconomic program through end-December 2008.
  - Total access under arrangement: 30 percent of quota (SDR 38.85 million).
    - First drawing: 25 percent of quota.
    - Remaining 5 percent divided evenly between three purchases after reviews.
  - Honduras is current on Fund payments and has no GRA purchases outstanding.
  - Repurchase obligations under proposed SBA will average 1.1 percent of projected gross reserves for 2010–2012.
- Projections (selected, in U.S. dollars) from source table:
  - Current account: 2007: -1,225; 2008: -1,308; 2009: -1,344; 2010: -1,244; 2011: -1,126
  - Capital account: 2007: 1,158; 2008: 282; 2009: 233; 2010: 36
  - Financial account: 2007: -421,443; 2008: 1,541; 2009: 1,438; 2010: 1,443
  - Disbursements 1/: 2007: 246; 2008: 382; 2009: 454; 2010: 237; 2011: 201
  - Amortization: 2007: -1,273; 2008: -78; 2009: -70; 2010: -61; 2011: -62
  - Overall balance: 2007: -136; 2008: 164; 2009: 220; 2010: 227; 2011: 354
  - Reserve assets: 2007: 109; 2008: -253; 2009: -279; 2010: -289; 2011: -376
  - Financing gap: ... | 2008: 765 | 2009: 960 | 2010: 22
  - World Bank: ... | 2008: 340 | 2009: 0 | 2010: 0
  - IADB: ... | 2008: 281 | 2009: 530
  - Bilaterals and other multilaterals: ... | 2008: 151 | 2009: 400
  - IMF 2/: ... | 2008: 0 | 2009: 0
  - Unidentified financing: ... | 2008: 0 | 2009: 30 | 2010: 30 | 2011: 22
  - Memorandum item: MDRI from IDB: 1,128 (2007)
  - Change in NIR (+ accumulation): -102 | 253 | 279 | 287 | 376
  - Source: Fund staff estimates.
  - 1/ Includes project-financed loans.
  - 2/ Assumes no purchases under the SBA.
- Program reviews and conditionality:
  - Program envisages three reviews, beginning at end-June 2008.
  - Prior actions include tightening of monetary policy and congressional approval of the 2008 budget consistent with overall deficit of 1.5 percent of GDP and in line with current expenditure indicative targets, including the wage bill.
  - Quantitative performance criteria and indicative targets measured cumulatively from January 1 (MEFP, Table 1).
  - Structural conditionality focuses on:
    - Implementing new tariff structure that fully covers operational costs of ENEE.
    - Eliminating arrears of ENEE to help reduce exposure of financial system to energy sector.
    - Issuing regulations on risk-based supervision to encourage banks to internalize risks associated with rapid expansion of credit (MEFP, Table 2).

*Source: _cr08241 - 9.      The authorities’*

### 25.      During 2007, significant imbalances began to emerge in the Honduran economy.

### _cr08241 - 25.      During 2007, significant imbalances began to emerge in the Honduran economy.

### Emerging macroeconomic imbalances (2007)
- Growth remains robust, but expansionary fiscal and monetary policies, in a context of a de facto fixed exchange rate, have produced:
  - rising inflation;
  - a sharp increase in the external current account deficit;
  - a decline in international reserves (with a turnaround, since early February, in the declining trend of international reserves).
- Rapid expansion of bank credit is fueling imports and posing risks to economic stability and financial health.
- Weaknesses in the energy sector pose risks to public finances, the financial system, and growth.

### Rationale for a precautionary Stand-By Arrangement (SBA)
- Staff considers a precautionary SBA important to support the authorities’ program over the coming months.
- A PRGF is judged better suited for structural challenges, but a medium-term structural reform agenda with broad support is not yet finalized.
- A precautionary SBA is judged appropriate to:
  - promptly address economic imbalances;
  - reinforce confidence in the authorities' economic program;
  - unlock donor financing;
  - serve as a bridge to a new PRGF later this year.

### Fiscal strategy and public investment
- Fiscal consolidation and redirection of spending to priority sectors are central to the authorities’ program.
- The program includes an underlying adjustment of 2 percent of GDP, which permits:
  - a reduction in the overall deficit;
  - a substantial increase in public investment, reversing recent trends.
- Debt ratios are expected to remain below their indicative thresholds and resilient to shocks over the medium and long term.
- Increased public investment includes hydroelectric projects aimed to support growth objectives and help reduce fuel imports and the external current account deficit over the medium term.
- Authorities are improving the targeting of electricity and direct fuel subsidies; staff emphasizes the importance of:
  - further strengthening targeting of these subsidies;
  - limiting subsidies to agreed ceilings in the context of rising oil prices.

### Public wages and expenditure priorities
- Staff welcomes the authorities’ intention to stabilize and then reduce the public wage bill as a percent of GDP.
- Honduras’ public wage bill is described as high by regional standards; its sharp rise has:
  - crowded out anti-poverty spending and public investment;
  - added to inflationary pressures.
- Key priorities going forward:
  - resist pressures for additional wage increases;
  - develop a comprehensive wage policy for the public sector.

### External financing, Petrocaribe resources, and monetary interactions
- In contrast to past years, the budget is expected to be more than financed by concessional external lending, allowing a marked reduction in net domestic financing and supporting monetary policy.
- Authorities intend to move swiftly to unlock external financing.
- Plan to earmark resources obtained from Petrocaribe for hydroelectric projects is welcomed.
- Creation of a trust fund at the central bank is intended to ensure these resources are managed and recorded transparently.
- Staff encourages authorities to resist pressures to use these funds for current spending.

### Monetary policy, liquidity, and prudential measures
- Monetary tightening is key to the program.
- Staff welcomes authorities’ actions to significantly tighten monetary policy ahead of the Board meeting and steps on prudential policy to address rapid bank credit expansion.
- Staff notes concern that recent changes in reserve requirements and obligatory investments could:
  - have an increasingly expansionary impact on liquidity;
  - have limited effectiveness in redirecting credit to priority sectors.
- Staff recommendations on monetary measures:
  - monitor the impact of changes on liquidity carefully;
  - promptly mop up excess liquidity, as the authorities intend;
  - adjust measures as necessary at the time of the first review to ensure program targets are met.

### Exchange rate regime and external vulnerability
- Authorities’ actions to allow greater flexibility within the existing exchange rate regime are welcomed.
- While the exchange rate appears to be in line with fundamentals, external conditions are deteriorating significantly.
- The economy is highly vulnerable to oil prices and to a slowdown in the U.S. economy, which would adversely affect remittances and exports.
- Staff encourages authorities to stand ready to allow greater exchange rate flexibility, especially if external developments are more adverse than anticipated.
- Authorities have agreed to reexamine exchange rate management at the first review, in line with a study on the exchange rate system.

### Electricity sector reforms and financial footing
- The program aims to ensure the electricity company is on a sound financial footing.
- Staff commends:
  - the decisive increase in electricity tariffs;
  - the intention to adjust the new tariff periodically to pass-through any further increase in international fuel prices, helping avoid new arrears with generators.
- Expected clearance of all payment arrears with generators through the issuance of government bonds is a key step.
- Staff encourages continued cooperation with the World Bank and the IADB to:
  - strengthen governance of the electricity company;
  - reduce distribution losses and fraud;
  - reverse persistent underinvestment in the sector.

### Program implementation risks and sequencing
- The proposed Stand-By Arrangement is expected to:
  - provide an anchor for economic policymaking;
  - reinforce confidence;
  - pave the way for an early move to a PRGF.
- Prior actions (monetary tightening and expected congressional approval of the budget) underscore authorities’ ownership.
- Key risks and conditional actions emphasized by staff:
  - resist pressures for expansionary policies in the run-up to primary elections scheduled for late 2008;
  - improve implementation of the capital budget;
  - adjust policies promptly if deterioration in external conditions is higher-than-anticipated.
- Staff urges authorities to finalize swiftly a medium-term plan with policies for poverty alleviation and growth that could be supported under the Poverty Reduction and Growth Facility before end-2008.

### Staff recommendation
- In light of the above considerations, staff recommends approval of the authorities’ request for a Stand-By Arrangement.

*Source: _cr08241 - 25.      During 2007, significant imbalances began to emerge in the Honduran economy.*

### 7.5 millionLife expectancy at birth in years (2007)

### _cr08241 - 7.5 millionLife expectancy at birth in years (2007)

### I. Social Indicators
- Population: 7.5 million
- Life expectancy at birth in years (2007): 7.5 millionLife expectancy at birth in years (2007) [text source header]
- Adult literacy (ages 15 and above, 2007): 80 percent
- Percent of population below poverty line (2007): 64
- Gini index: 55
- Main exports: coffee, bananas, shrimp, and maquila
- Oil imports (2006 actual): US$ 1.0 billion
- Per capita income in U.S. dollars (2006): (value not provided in source)
- Rank in UNDP Development Index (2007/08): (value not provided in source)
- Unemployment rate (2007): 3.4
- Underemployment rate (2007): 32.2
- Net FDI (as percent of GDP, 2007): 3.3
- Other social indicator number shown near header: 69 (context not specified in source)

### II. Macroeconomic and Price Developments (Selected annual figures and projections)
- Real GDP growth (2004–2009 series shown): 6.2 6.1 6.3 6.3 4.8 4.6 4.6  (table layout contextual)
- GDP deflator (annual percent changes in table): 6.2 7.3 4.8 7.0 8.8 7.7
- Consumer prices (end of period, eop): 9.2 7.7 5.3 8.9 9.0 7.9
- Exchange rate (eop, depreciation -) Lempiras per U.S. dollar: -4.9 -1.2 0.0 0.0 ...... (table entries)
- Real effective rate: -1.4 0.9 1.7 2.3 ...... (table entries)

### Money, Credit, and Rates (selected)
- Net domestic assets 1/: 4.5 13.2 32.3 37.7 20.6 12.0
- Combined public sector credit: 52.1 1.4 127.4 -25.0 29.6 28.0
- Private sector credit: 15.9 16.4 29.2 32.1 18.2 13.2
- Broad money growth: 18.1 15.5 22.5 16.1 16.1 12.9
- Lending rate (eop, in percent): 18.2 16.8 13.8 13.4 ...
- Deposit rate (eop, in percent): 11.1 10.4 7.6 8.1 ...

### Public Sector (Central Government) Operations (percent of GDP)
- Total revenue and grants: 17.6 18.2 18.6 19.8 19.7 (2005–2009 series)
- Current revenue: 16.4 16.7 17.4 18.1 18.1
- Tax revenue: 14.5 15.4 16.2 16.4 16.7
- Nontax revenue: 1.0 1.0 0.9 1.3 1.2
- Grants: 1.1 1.5 1.2 1.7 1.5
- Total expenditure: 19.9 19.3 20.7 21.6 21.3
- Current expenditure: 15.6 16.1 16.9 16.4 15.9
- Wages and salaries: 8.2 8.3 9.2 9.2 9.1
- Capital expenditure: 4.4 3.4 3.8 5.3 5.5
- Overall balance: -2.3 -1.1 -2.1 -1.8 -1.6
- Financing: 2.3 1.1 2.1 1.8 1.6
- External financing: 1.9 1.2 1.0 2.9 3.1
  - Disbursements: 2.9 1.8 1.8 3.2 3.4
  - Amortization: -2.7 -1.2 -1.0 -0.4 -0.4
- Memorandum: Poverty spending (ERP): 7.7 7.0 6.9 7.0 7.1
- Nominal GDP (in millions of Lempiras): 183,748 204,685 232,817 265,530 299,198

### Quarterly Central Government Flows (selected cumulative quarterly flows, in millions of Lempiras)
- Total revenue and grants (cumulative): 9,969 25,869 38,339 52,608 9,969 15,900 12,469 14,269
- Total expenditure (cumulative): 11,842 26,040 40,110 57,441 11,842 14,198 14,070 17,331
- Overall balance (quarterly cumulative): -1,873 -170 -1,771 -4,833 -1,873 1,703 -1,601 -3,062
- Financing (quarterly cumulative): 1,873 170 1,771 4,833 1,873 -1,703 1,601 3,062

### Combined Public Sector (percent of GDP)
- Total revenue and grants: 24.2 24.3 24.1 25.2 25.2
- Current revenue: 22.8 22.8 22.6 23.2 23.3
- Tax revenue: 15.2 15.6 16.7 16.8 17.0
- Total expenditure: 25.6 26.0 26.5 26.8 26.7
- Current expenditure: 20.3 20.0 20.7 20.3 20.0
- Capital expenditure: 5.1 4.8 4.8 6.5 6.7
- Overall balance: -1.4 -1.7 -2.3 -1.5 -1.5
- Financing (overall): 1.4 1.7 2.3 1.5 1.5
- Public sector debt (percent of GDP, memorandum in other table): 52.8 35.4 23.7 22.5 22.1 (series across years)

### Banking System Summary (selected levels and growth)
- Net International Reserves (Central Bank, in millions US$): 32,911 40,175 48,651 46,727 53,079 60,814
- Accumulation over the year (US$ millions): 1,766 2,126 2,575 2,473 2,726 3,005
- Net Domestic Assets (Central Bank): -23,532 -29,062 -35,058 -30,364 -34,241 -39,151
- Credit to the public sector (net): 2,851 4,547 1,764 4,748 2,046 3,052
- Credit to the private sector (financial system, selected): 60,089 69,964 90,426 119,460 89,465 141,202 159,810 (series across tables)
- Broad money (M4, in millions of Lempiras): 79,231 91,741 112,553 131,641 152,794 172,514
- Currency in circulation (end-of-period stock, millions of Lempiras): 16,930 24,313 24,896 16,705 16,835 23,347
- Annual operating losses of the BCH (in millions of Lempiras): 1,465.0 1,288.7 939.5 1,698.8 514.6 (series)

### External Sector and Balance of Payments (selected)
- Current account (US$ millions): -678 -290 -508 -1,225 -1,308 -1,344 (series)
- Trade balance (US$ millions): -1,293 -1,497 -2,122 -2,962 -3,493 -3,808
- Exports (US$ millions): 4,534 5,048 5,195 5,594 5,968 6,409
  - Of which: maquila (US$ millions): 2,888 3,150 3,128 3,314 3,510 3,701
- Imports (US$ millions): -5,827 -6,545 -7,317 -8,556 -9,461 -10,217
  - Of which: Petroleum products (US$ millions): -608 -839 -1,008 -1,209 -1,454 -1,484
- Services (US$ millions): -204 -229 -298 -287 -282 -250
  - Tourism receipts (US$ millions): 414 463 488 557 640 755
- Income (net, US$ millions): -446 -460 -538 -598 -462 -507
  - Payments on direct investments: -390 -479 -624 -737 -612 -673
  - Public sector interest payments: -91 -91 -71 -48 -45 -41
- Current transfers (net, US$ millions): 1,265 1,895 2,450 2,622 2,930 3,222
  - Public sector transfers: 181 158 191 131 164 177
  - Private sector transfers: 1,084 1,737 2,259 2,491 2,766 3,045
- Capital account (US$ millions): 515 941 1,485 1,158 282 2
  - HIPC/MDRI related entries appear in table notes (values shown in table)
- Financial account (US$ millions): 948 86 -453 -421 1,443 1,541
  - Direct investment (net): 553 599 674 815 899 917
  - Public sector long-term borrowing (net): 204 -550 -1,313 -1,027 304 384
- Net international reserves (increase -) (US$ millions): -516 -360 -449 102 -253 -279
- Gross international reserves (end of period, US$ millions): 2,159 2,526 2,824 2,733 2,992 3,294
  - In months of next year imports (excluding maquila): 4.8 4.8 4.5 3.9 3.9 4.0
- External current account balance (percent of GDP): -7.7 -3.0 -4.7 -10.0 -9.5 -9.0
  - Excluding official transfers: -9.8 -4.6 -6.5 -11.0 -10.7 -10.2
- Exports, f.o.b. (annual percentage change, goods only): 20.8 11.3 2.9 7.7 6.7 7.4
- Imports, f.o.b. (annual percentage change, goods only): 22.1 12.3 11.8 16.9 10.6 8.0
- Outstanding external debt (US$ millions): 5,082 4,154 3,052 2,035 2,422 2,873
- Debt to GDP ratio (in percent): 57.9 42.9 28.3 16.6 17.6 19.2
- Public sector external debt service (in percent of exports of goods and services): 3.3 3.7 2.6 2.0 1.6 1.3
- Nominal GDP (millions of U.S. dollars): 8,772 9,672 10,774 12,279 13,779 14,956

### Illustrative Medium-Term Scenario (Table 6, selected)
- Real GDP (annual percentage change): 6.1 6.3 6.3 4.8 4.4 4.2 4.2 (2005–2013 series)
- Nominal GDP (annual percentage change): 12.7 11.5 11.0 10.5 10.2 13.8 11.4 13.7 14.1 (table series)
- Implicit GDP deflator (percent): 7.3 4.8 7.0 8.8 7.7 6.7 6.3 6.1 5.8 (table series)
- Overall public sector balance (percent of GDP): -1.4 -1.7 -2.3 -1.5 -1.6 -1.8 -1.8 (series)
- Overall central government balance (percent of GDP): -2.3 -1.1 -2.1 -1.8 -1.6 -1.8 -1.8
- Public sector debt (percent of GDP): 52.8 35.4 23.7 22.5 22.1 22.2 22.5 23.2 22.9 (series)
- External current account balance (percent of GDP): -9.0 -7.8 -3.0 -4.7 -10.0 -9.5 -6.7 -6.1 -6.0 (series)
- Gross international reserves (US$ millions): 3,265 3,554 3,929 4,367 4,815 (medium-term levels shown)
- Gross domestic investment (percent of GDP): 24.9 27.7 30.4 32.7 32.3 (series)
- National savings (percent of GDP): 21.9 23.0 20.4 23.2 23.8 24.4 24.4

### IMF Arrangement and Fund Credit Indicators (selected)
- Stand-By Arrangement (SBA) Board approval: April 7, 2008 — SBA access shown as SDR millions and US$ millions in Table 7 and Table 8
  - Board approval of SBA (April 7, 2008): SDR millions 32.375  US$ millions 52.61  Percent of Quota 125.00  Percent of Total Access 83.33
  - Total access (sum in Table 7): 38.850 SDR millions / 63.133 US$ millions / 30.00 Percent of Quota / 100 Percent of Total Access
- Indicators of Fund Credit (Table 8, selected series):
  - Stock of existing Fund credit, in millions of SDRs (end of period series): 175.1 144.6 115.4 125.7 117.6 20.3 19.3 16.3 12.2 8.1 (multi-year series)
  - Proposed SBA stock, in millions of SDRs: ... 36.7 38.9 ... (table entries)
  - Obligations to the Fund from existing and prospective arrangements (in millions of SDRs, series): 10.3 2.7 3.0 2.7 0.7 0.9 1.7 2.4 11.7 23.9 16.0 5.0 (series)
  - Projections and memorandum items provided in tables; expected repayment schedule assumes a constant 4.38 rate of charge.

### External Vulnerability Indicators (selected, Table 9)
- Exports of goods and services (% change): 19.2 11.0 2.3 7.9 7.4 8.4 (series)
- Imports of goods and services (% change): 20.8 11.9 11.1 15.6 10.4 8.1 (series)
- Terms of trade (percent change): 6.5 11.7 2.0 2.6 -5.3 -3.8 (series)
- Gross official reserves (US$ millions, multi-year series shown): 2,159 2,526 2,824 2,733 2,992 3,294 3,265 3,554 3,929 4,367 4,815 (extended series in tables)
- Net International Reserves (NIR) in US$ millions (selected): 1,766 2,126 2,575 2,473 2,726 3,005 (accumulation over the year)

### Financial Sector Structure (selected, Table 10)
- Total assets (in millions of lempiras, and percent of GDP across years): 126,737 157,941 191,612 75,118 89,386 (levels shown; percent of GDP entries in table)
- Number of banks (years shown): 16 19 16 16 16 18 0 (table entries)
- Capital adequacy (Regulatory capital to risk-weighted assets): 14.5 12.9 13.0 14.6 13.2 12.9 (series)
- Capital (net worth) to assets: 8.1 7.6 8.4 8.4 8.3 (series)
- Bank concentration indicators and CAMEL ratings summarized in table (number of banks in categories and shares of assets shown)

*Sources: Central Bank of Honduras; Ministry of Finance; Honduran authorities; and Fund staff estimates (as presented in the source PDF).*

### 6.4 Nonperforming loans( NPLs) to total loans 3/11.38.76.63.93.0

### 6.4 Nonperforming loans( NPLs) to total loans 3/11.38.76.63.93.0

### Banking sector indicators
- Nonperforming loans (NPLs) to total loans: 3/11.38.76.63.93.0
- 13.7
- NPLs net of provisions to capital: 43.037.411.24.12.1
- 6.1
- 2.81.30.8 Restructured loans to regulatory capital: 47.220.5
- Provisions to total loans: 3.7 o
- Provisions to NPLs: 4.03.23.43.22.8
- 64.6
- 38.738.266.881.590.4

### Sectoral distribution of loans (share of total loans)
- Commerce: 16.0 17.715.818.817.817.8
- Construction and real estate: 19.1 12.918.719.123.326.2
- Agriculture and related sectors: 7.8 11.27.85.95.54.5
- Manufacturing: 20.3 g
- Consumption: 17.519.419.119.016.0
- Other: 13.4 13.813.013.515.116.5
- Unlabeled/other category: 23.4 26.925.323.619.419.0

### Profitability and efficiency
- Return on assets (ROA) 4/: 1.2 0.81.21.61.83.8
- 14.9
- Return on equity (ROE): 8.211.819.021.746.3
- Interest margin to total income: 44.4 41.545.047.049.150.0
- 35.4
- 37.336.040.8 Personnel expenses to administrative expenses: 38.036.7

### Liquidity
- Liquid assets to total assets: 28.1 30.124.929.226.222.4
- 60.7
- Liquid assets to total short-term liabilities: 64.153.264.356.649.6

### Dollarization
- Foreign currency in percent of total deposits: 36.0
- 34.234.532.029.428.1
- 33.8
- Foreign currency credit in percent of total credit: 26.228.734.836.330.7

### Nominal GDP (levels)
- 161,507 129,167142,818183,748204,685232,817

### Selected policy measures and prudential actions (from MEFP text)
- Fiscal and budgetary:
  - 2008 budget target: combined public sector deficit of 1½ percent of GDP (paragraphs 1–5).
  - Central government wage bill targets: 9.2 percent of GDP in 2008 and 9.1 percent of GDP in 2009 (indicative target).
  - Anti-poverty spending target: increase to 7.0 percent of GDP (indicative floor).
  - Public sector investment target: increase to 6.5 percent of GDP.
  - One-time proceeds of 0.6 percent of GDP from sale of a mobile phone band to finance budgeted investments.
- Monetary and prudential:
  - Central bank policy interest rate raised by 25 bps to 7¾ percent in February (paragraph 6).
  - Measures equivalent to 2 percentage points in reserve requirements (either by increasing obligatory investments with a monetary effect or through additional sales of central bank bills to nonbank local investors) to bring NIR at end-March to the level of end-2007 (prior action).
  - Central bank to raise obligatory investments by 5 percentage points in March (starting with 2 percentage points and subsequent monthly increases until June).
  - Central bank to reduce reserve requirements (by 5 and 10 percentage points for local and U.S. dollar deposits, respectively, in monthly steps over March–November) for banks directing credit to productive sectors.
  - CNBS to issue stricter norms for loan classification and raise loan provisioning (mainly for consumption credit) in March 2008; equivalent to about 0.2 percentage points of risk-weighted capital asset ratio (paragraph 8).
  - CNBS to issue a regulation on risk-based supervision (structural performance criterion, April 2008).
- Energy sector:
  - Implement tariff structure to cover operational costs; raise electricity tariffs by an average of 11 percent to cover ENEE’s operational cost at current bunker prices (US$72 per barrel) when revised tariff structure comes into effect in April (structural performance criterion).
  - Government to issue bonds (L4 billion or 1½ percent of GDP) to clear ENEE arrears with private generators; upon transfer all public sector arrears with ENNE (½ percent of GDP) will be cleared.
  - All arrears as of end-March 2008 of ENEE with private generators to be cleared by end-June 2008 (structural performance criterion). New arrears of ENEE with the private sector: continuous ceiling 0 (Table 2).
- Revenue and tax measures:
  - Make permanent an income tax surcharge (Aporte Solidario Temporal) of 5 percent in the 2008 budget.
  - Estimated annual yield from tax strategy: 0.6 percent of GDP.
  - Introduce temporary charges for international calls (US$0.03 per minute) and increase HONDUTEL fixed line charges to increase revenue by about 0.3 percent of GDP.
- Subsidies and targeting:
  - Limit direct electricity subsidy and Bonochenta to users consuming less than 150 kwh per month (from 300 kwh) in April.
  - Cap direct fuel subsidy at L1000 million (0.4 percent of GDP) for 2008 and target to the poor.
  - Appoint technical group and prepare report by July 2008 with recommendations to improve delivery and targeting of subsidies.
- Public pension funds:
  - Adopt new lending policy consistent with loan recovery by public pension funds; expected fiscal savings of 0.8 percent of GDP in 2008.

*Source: _cr08241 - 6.4 Nonperforming loans( NPLs) to total loans 3/11.38.76.63.93.0*

### 1.      This memorandum sets out technical understandings between the Honduran authorities

### _cr08241 - 1.      This memorandum sets out technical understandings between the Honduran authorities

### I. FISCAL TARGETS
- Scope and measurement:
  - The deficit of the combined public sector (CPS) is measured from the financing side and corresponds to the net borrowing requirements of the CPS from both external and domestic sources.
  - The CPS comprises the nonfinancial public sector (NFPS) and the operating result (quasi-fiscal balance) of the central bank.
  - The NFPS covers the central government (including its agencies), local governments and decentralized agencies, the social security institute (IHSS), the pension institutes for executive branch staff (INJUPEMP) and teachers (INPREMA), and the public enterprises.
- Central government:
  - The deficit of the central government is measured from the financing side.
  - The central government includes the executive, judicial, and legislative branches and consolidates operations of trust funds created to support agricultural loans and so-called deconcentrated agencies.
- Expenditure definitions:
  - Current primary expenditure of the central government = total current expenditure less interest payments.
  - Central government wage bill = all central government wages and salaries including severance payments, plus employer social security and pension contributions, and other remunerations (such as special bonuses and performance related remuneration to teachers under the PASCE).
- Anti-poverty spending:
  - Comprises all spending on programs and projects of the Poverty Reduction Strategy (whether financed by domestic savings, HIPC debt relief, grants, and external loans), as defined in the relevant annex of the 2003 PRSP and the latest update to the PRS.
  - Programs and projects in the PRSP will be labeled in the 2008 budget and tagged through the SIAFI.
  - Anti-poverty spending will be presented by economic classification, type of program, and source of financing.
- Public enterprises:
  - Operating surplus of public enterprises = operating revenue (excluding interest earnings and transfers) minus operating expenditure (excluding interest payments and transfers).
  - Public enterprises for the program: State Electricity Company (ENEE), State Telecommunications Company (HONDUTEL), State Water and Sewerage Company (SANAA), and State Ports Company (ENP).
- Net domestic financing of the CPS comprises:
  - The operating result of the central bank and the change relative to end-2007 in the stocks of:
    1. outstanding indebtedness of the NFPS to the domestic financial system (direct bank credit plus bank holdings of public sector bonds less deposits);
    2. outstanding public sector bonds held outside the financial system;
    3. outstanding deposits held abroad;
    4. outstanding suppliers’ credit and floating debt (uncashed and undelivered checks, and unpaid invoices and orders) of the central government, and unpaid orders of the rest of the NFPS (all domestic debt is in domestic currency);
    5. proceeds from the sale of the mobile phone license.
- Discrepancies:
  - Authorities will undertake periodic reconciliations to minimize discrepancies between above-the-line and financing data, to be carried out prior to completion of the first and second reviews under the program if needed.

### II. MONETARY TARGETS
- Net International Reserves (NIR) of the central bank:
  - NIR = gross international reserves that are readily available (including the balance of the Trust Fund instituted to manage financing from Petrocaribe) minus short-term reserve liabilities (including purchases and credits from the Fund), as described in the international reserves table prepared by the central bank according to the new monetary statistics presentation (MEMF).
  - Readily available reserves exclude assets pledged or otherwise encumbered, including reserve assets used as collateral or guarantee for a third-party external liability.
  - NIR excludes:
    1. any conversion of short-term reserve liabilities;
    2. foreign assets stemming from foreign currency deposits of financial institutions at the central bank;
    3. transfer to the central bank of foreign currency deposits of HONDUTEL, INJUPEMP, and IHSS held abroad, which amounted to US$121 million at end-2007.
  - NIR will be valued at current exchange rates.
- Net domestic assets (NDA):
  - NDA = difference between currency issue and NIR, both measured on the basis of end-of-period data.
- Prior action:
  - Monetary measures equivalent to 2 percentage points in reserve requirements (MEFP ¶6) will be defined over a base of end-December local currency deposits.
  - The stock of central bank bills in the hands of nonbank local investors = total stock of central bank bills less the stock in the hands of commercial banks (otras sociedades de deposito).
- Adjustor:
  - The end-June performance criterion for the floor on NIR will be adjusted downwards by the amount of the proceeds from the sale of the mobile phone license that are unrealized by that date, or the amount of the proceeds that are realized in lempiras, by up to US$80 million.
  - Conversely, the end-June performance criterion for the ceiling on NDA will be adjusted upwards by up to the same amount.

### III. EXTERNAL TARGETS
- Definition of debt:
  - Follows point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt adopted on August 24, 2000: debt is a current (not contingent) liability created under a contractual arrangement through provision of value in the form of assets (including currency) or services, requiring future payments in assets or services to discharge principal and/or interest.
  - Forms of debt include:
    1. loans (advances of money, including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements);
    2. suppliers’ credits (deferred payments after delivery of goods/services);
    3. leases (debt = present value at lease inception of all expected lease payments during the agreement, excluding operation, repair, or maintenance payments).
  - Arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on obligations not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.
- Stock of external debt arrears:
  - For program ceiling purposes, external debt-service arrears = overdue debt service arising in respect of obligations incurred directly or guaranteed by the public sector, except on debt subject to rescheduling or restructuring as indicated by respective creditors.
- Borrowing on nonconcessional terms:
  - Ceiling applies to contracting or guaranteeing of nonconcessional external debt by the CPS or any other agencies on their behalf, and applies to commitments contracted or guaranteed for which value has not been received.
- Concessionality:
  - Based on a currency-specific discount rate using the 10 year (6-month) average of the OECD’s commercial interest reference rates (CIRR) for loans or leases with maturities greater (less) than 15 years, following Fund methodology of April 8, 1996 and June 30, 2000.
  - Maturity determined on the basis of the original loan contract.
  - Only debt with a grant element equivalent to at least 35 percent (difference between nominal value and net present value of debt) will be excluded from the debt ceiling.
  - In assessing concessionality for multiple financing instruments considered as integrated incurrence of debt, Fund staff will consider: (i) identical intended use or purposes; (ii) inter-related schedules for disbursement; (iii) cross-conditions for entry into legal effect, availability of funds and default; (iv) identical parties to the financing.
- Exclusions from external debt ceiling:
  1. use of Fund resources;
  2. debts classified as international reserve liabilities of the central bank;
  3. short-term import financing (maturity less than one year);
  4. debts to restructure, refinance, or prepay existing debts;
  5. central bank instruments placed in the domestic market held by nonresidents.

### IV. STRUCTURAL REFORMS — E. ENERGY POLICY
- ENEE arrears:
  - Arrears of ENEE are defined as overdue payments (principal and interest) as stipulated in the corresponding contracts.
  - With proceeds from the issue of government bonds authorized in the 2008 budget, ENEE will clear all arrears to generators by end-June 2008.
  - No new arrears to the private sector shall accumulate during 2008.

### IV. STRUCTURAL REFORMS — F. MONITORING AND REPORTING REQUIREMENTS
- Frequency and deadlines:
  - Information required to monitor compliance with quantitative and structural performance criteria and benchmarks specified in the MEFP will be supplied to the Fund at least monthly (electronically, to the extent possible) within 45 days of the end of the previous month (unless otherwise noted).
- Reporting for fiscal ceilings:
  - Ceilings on the deficit of the central government and of the CPS will be monitored below-the-line based on monthly reports Financiamiento de la Administración Central and Financiamiento del Sector Público Combinado prepared by the central bank, which contain:
    - Net external financing of the central government and the NFPS with detailed information on disbursements, amortizations, exceptional financing, zero-coupon bond, and accumulation of arrears; prepared by the central bank and reconciled with the Ministry of Finance.
    - Net domestic financing of the central government and the NFPS with detailed information on:
      1. net domestic financing from the central bank and the rest of the financial system to the central government and the NFPS, as contained in the Panorama Financiero monthly report;
      2. net placement of bonds (including stabilization bonds) by the central government and the NFPS outside the financial system, as reported by the central bank with data from the Public Credit Directorate of the Ministry of Finance;
      3. change in foreign currency deposits held abroad by the central government and the NFPS;
      4. change in the outstanding stock of suppliers’ credit and floating debt of the central government, as reported by the Treasury, and the rest of the NFPS as reported by the central bank.
    - To monitor net domestic financing to the CPS, the central bank will provide the Fund with detailed cash-basis data on the operating revenue and expenditure of the central bank.
- Wage bill and tax revenue reporting:
  - Ceilings on the wage bill of the central government will be monitored monthly based on the ministry of finance report: Información institucional por objeto de gasto - servicios personales y aportes patronales.
  - A breakdown of tax revenue by type of tax will be provided monthly to the Fund.
- Anti-poverty spending reporting:
  - Anti-poverty spending will be monitored quarterly based on ministry of finance information, obtained from the detailed central government report: Cuenta Financiera.
  - The Ministry of Finance will provide the breakdown between anti-poverty and other spending by expenditure category (wages and salaries, goods and services, current transfers, fixed capital formation, and capital transfers).
- Monetary monitoring:
  - The floor on NIR and the ceiling on NDA of the central bank will be monitored based on information produced by the central bank, in accordance with the new presentation of the monetary statistics (MEMF). This information will be provided within two weeks of the end of the previous month.
- External debt monitoring:
  - Ceilings on contracting of nonconcessional external debt and on nonaccumulation of external payments arrears will be monitored with information provided by the Ministry of Finance.
  - Accounting of nonreschedulable external debt-service arrears by creditor (if any), with detailed explanations, will be transmitted monthly within four weeks of the end of each month.
  - A loan-by-loan accounting of all new loans contracted or guaranteed by the public sector, including detailed information on the amounts, currencies, and terms and conditions, and relevant supporting materials, will be transmitted by the central bank quarterly within four weeks of the end of each quarter.

*Memorandum of technical understandings between the Honduran authorities and the Fund for monitoring the 2008 Stand-By Arrangement.*

### Appendix II. Assessing External and Public Sector Debt Sustainability

### Appendix II. Assessing External and Public Sector Debt Sustainability

### Summary findings on external debt dynamics and outlook
- After HIPC Initiative and MDRI debt relief, the NPV of Honduras external debt declined to 12 percent of GDP at end-2007.
- External debt-to-GDP declined from 60 percent of GDP at end-2003 to 16 percent at end-2007.
- Debt to multilateral institutions represented about 77 percent of the total stock of debt at end-2007.
- Under the baseline scenario:
  - The NPV of external debt-to-GDP will remain below 14 percent over the horizon of the analysis.
  - Long-run growth will stabilize at 4.2 percent.
  - Export and import growth will stabilize at about 8 and 7 percent, respectively.
  - The current account deficit will remain below 6 percent of GDP (on average).
  - Financing will remain mostly external and concessional for the medium term, although at a declining rate of concessionality.
- In the long run, after likely graduation from concessional multilateral donor financing, the grant element of new debt will decline below 35 percent.
- Under extreme negative shocks the NPV of external debt-to-GDP peaks at 32 percent in 2013; otherwise debt ratios remain substantially below indicative debt burden thresholds.

### Public sector debt outlook and risks
- The NPV of public debt-to-GDP will remain below 20 percent under the baseline scenario.
- Under the most extreme stress test (a permanent decline in GDP), the NPV of public debt-to-GDP remains below 40 percent.
- Consolidation of improvements in revenue administration will be key to keep the debt service ratio at current levels.
- Selected projected indicators (baseline trajectories shown in source tables):
  - NPV of debt-to-GDP (baseline): 10.8, 11.8, 12.1, 12.1, 12.3, 12.5, 12.3, 9.0 (selected years shown in table).
  - NPV of debt-to-exports (baseline): 21.9, 24.0, 24.0, 23.6, 23.5, 23.8, 23.1, 19.6 (selected years shown in table).
  - NPV of debt-to-revenue (baseline): 58.7, 51.3, 52.3, 52.2, 52.6, 53.0, 53.4, 39.1 (selected years shown in table).
  - Debt service-to-exports ratio (baseline): 15.7, 26.2, 20.7, 5.1, 4.5, 4.3, 3.9, 3.6, 3.4, 3.1, 2.6 (time series in table).
  - Total gross financing need (billions of U.S. dollars): 0.5, 1.3, 1.7, 0.7, 0.7, 0.5, 0.4, 0.3, 0.4, 0.6, 0.2 (time series in table).
  - NPV of public sector debt (baseline table): 15.8, 14.7, 14.7, 15.1, 16.1, 16.0, 16.6, 17.3 (selected years shown in table).
  - NPV of public sector debt-to-revenue and grants ratio (baseline): 62.5, 58.4, 58.3, 59.8, 63.7, 63.3, 65.6, 68.2 (selected years shown in table).

### Scenario and stress-test results (high-level)
- Alternative scenarios analyzed include:
  - A1. Key variables at their historical averages.
  - A2. New public sector loans on less favorable terms (interest rate on new borrowing higher by 2 percentage points).
  - Bound tests B1–B6 (single-variable and combination shocks), including a one-time 30 percent nominal depreciation relative to the baseline in 2008.
- Outcomes in sensitivity analyses (selected results from tables):
  - NPV of debt-to-GDP under baseline and selected scenarios: baseline values around 10.8–12.5; historical-average and less-favorable-financing scenarios produce modest deviations from the baseline; bound and combination shocks raise ratios substantially in some tests.
  - NPV of debt-to-exports and debt-to-revenue rise sharply under shocks to net nondebt creating flows and combinations of adverse shocks (specific series reported in tables).
  - For public debt (Table 3): baseline NPV of debt-to-GDP around 15.8–17.7 over 2008–2018; A3 (permanently lower GDP growth) and B-variant bound tests produce substantially higher ratios (e.g., A3 shows 24.4 and 42.5 in later years; B1 shows 29.0 and 36.8 in later years for certain horizons).

### Key macroeconomic and financing assumptions used in projections
- Real GDP growth (projections): 6.1, 6.3, 6.3, 5.1, 1.5, 4.8, 4.6, 4.5, 4.4, 4.2, 4.2, 4.5, 4.2, 4.2, 4.2 (series in table).
- GDP deflator in U.S. dollar terms (change in percent): 4.0, 4.6, 7.2, 2.9, 2.8, 7.0, 3.8, 2.0, 1.2, 1.0, 0.7, 2.6, 3.4, 5.5, 4.3 (series in table).
- Effective interest rate (percent): 1.7, 1.6, 1.5, 2.0, 0.4, 3.8, 3.0, 2.7, 2.3, 2.3, 2.3, 2.7, 2.3, 2.6, 2.4 (series in table).
- Grant element of new public sector borrowing (in percent) (selected projected values): 38.8, 39.3, 39.7, 38.9, 36.0, 35.7, 38.1, 31.9, 30.9, 31.6 (series in table).
- Aid flows (in billions of US dollars) (selected): 1.1, 1.9, 1.5, 0.6, 0.7, 0.5, 0.4, 0.4, 0.4, 0.6, 1.5 (series in table).
- Grant-equivalent financing (in percent of GDP) (selected projected values): 2.5, 2.5, 1.9, 1.7, 1.6, 1.5, 1.4, 1.4, 1.5 (series in table).

### Policy recommendations and measures highlighted
- Short-run stabilization program to:
  - Contain demand pressures.
  - Initiate a sustainable energy policy.
  - Increase public investment.
  - Make permanent recent revenue gains.
- Medium-term structural reforms to:
  - Sustain growth in traditional sectors.
  - Improve the investment climate to spur growth in maquila, tourism, construction, and the financial sector.
- Sound fiscal policy to keep the overall fiscal balance below 2 percent of GDP.
- Investments in the energy sector to help reduce dependency on imported fuel.
- Consolidation of improvements in revenue administration to keep the debt service ratio at current levels.

*Source: Fund staff simulations and projections in Appendix II. Assessing External and Public Sector Debt Sustainability.*

### Appendix III. Honduras––Summary of Annexes

### Appendix III. Honduras––Summary of Annexes

### Fund Relations — Key Facts and Assessments
- Outstanding purchases: SDR 20.34 million, 15.71 percent of the quota.
- De jure exchange arrangement: a crawling band; de facto exchange rate regime: a conventional pegged arrangement.
- Exchange rate mechanics:
  - Exchange rate for the lempira is determined daily in foreign exchange auctions.
  - Banks and exchange houses must sell to the central bank 100 percent of their daily net purchases of foreign exchange at the exchange rate established the previous day.
  - Buyers of foreign exchange bid at a price that cannot differ by more than 7 percent from the base exchange rate, in either direction.
  - Base exchange rate is adjusted every five auctions according to anticipated inflation differentials with major trading partners, changes in trading partners’ currencies vis-à-vis the U.S. dollar, and the level of the CBH’s net international reserves.
  - Official bid exchange rate on December 31, 2007: L18.90 per U.S. dollar.
- Article VIII: Honduras has accepted the obligations under Article VIII, Section 2, 3, and 4 and maintains a system free of restrictions on payments and transfers for current international transactions.
- Article IV consultation: last concluded February 21, 2007; next consultation proposed to follow the July 15, 2002 decision on consultation cycles.
- FSAP / ROSC / Safeguards:
  - FSAP mission conducted in 2003; FSAP Update conducted September 24 to October 9, 2007.
  - Fiscal ROSC conducted February 26–March 2, 2001 (IMF Country Report No. 02/16) and updated (IMF Country Report No. 05/256).
  - Data ROSC conducted July 8–24, 2003 (IMF Country Report No. 05/230).
  - Banco Central de Honduras (BCH) safeguards assessment completed February 11, 2004; identified weaknesses and recommended actions.
  - BCH responses: (i) appointment of an international audit firm complying with International Standards on Auditing; (ii) publication of the bank’s audited financial statements; (iii) establishment of an Audit Committee.
  - Remaining vulnerabilities in BCH legal framework and internal controls; an update assessment of BCH safeguards framework has been recently initiated in relation to the requested new arrangement.
- Historical and program status:
  - Honduras’ most recent Stand-By Arrangement expired in 1992.
  - Membership status: Joined December 27, 1945.
  - Quota: 129.50 SDR Million, 100.00 percent of quota.
  - Fund holdings of currency: 120.87 SDR Million, 93.34 percent of quota.
  - Reserve position: 8.63 SDR Million, 6.66 percent of quota.
  - SDR Department: Net cumulative allocation 19.06 SDR Million, 100.00 percent; Holdings 0.17 SDR Million, 0.89 percent.
- Outstanding purchases and loans (PRGF Arrangements listed):
  - PRGF approved 02/27/2004–02/26/2007: Amount approved 71.20 (SDR Million); Amount drawn 40.68 (SDR Million).
  - PRGF approved 03/26/1999–12/31/2002: Amount approved 156.75 (SDR Million); Amount drawn 108.30 (SDR Million).
  - PRGF approved 07/24/1992–07/24/1997: Amount approved 47.46 (SDR Million); Amount drawn 33.90 (SDR Million).
- Projected payments to Fund (SDR million; based on existing use of resources and present holdings of SDRs):
  - Principal forthcoming: 2008 … 1.02; 2009 … 3.05; 2010 … 4.07.
  - Charges/interest forthcoming: 2008 … 0.71; 2009 … 0.69; 2010 … 0.69; 2011 … 0.67; 2012 … 0.65.
  - Total forthcoming (as listed): 2008 … 0.71; 2009 … 0.69; 2010 … 1.70; 2011 … 3.73; 2012 … 4.72.
- HIPC / MDRI:
  - Decision point date: June 30, 2000.
  - Assistance committed (NPV terms) End-1999: Total assistance (US$ million) 556.00; Of which: IMF assistance (US$ million) 30.30.
  - Completion point date: April 2005.
  - Disbursement of IMF assistance (SDR million): Amount disbursed 22.66; Interim assistance 8.80; Completion point balance 13.86; Additional disbursement of interest income 3.70; Total disbursements 26.36.
  - Total Debt Relief (SDR Million): 107.46; Of which: MDRI 98.24; HIPC 9.21.
  - Debt Relief by Facility: January 2006 GRP/PRGF/Total N/A 107.46 107.46.

### Relations with the World Bank Group — Portfolio and Strategy
- IDA active portfolio (as of January 22, 2008):
  - 16 projects; total commitment US$347.6 million; US$198 million remain to be disbursed.
  - Honduras was declared IDA-only in September 1991.
- Expected IDA disbursements:
  - Calendar year 2008: $93.5 million.
  - Calendar year 2009: $144.1 million.
  - Calendar year 2010: $46 million.
  - Of which $27.3 million and $30 million in 2008 and 2009 respectively would be in the form of fast-disbursing budget support (Annex I text).
  - Annex II indicates $32–$34 million in 2008 would be in the form of fast-disbursing budget support (Annex II text).
- Current CAS: covers 2007–2010.
- Focus areas of active projects:
  - Infrastructure, growth to address poverty, and financial sector institutional development.
  - Specific sectors listed in Annex II: rural poverty and human resource development; transport and infrastructure; natural resource management and environment; public sector and economic management; disaster preparedness; investment climate improvement and private sector participation.
- Notable operations and pipeline (Annex II):
  - First Programmatic Financial Sector Development Policy Credit (US$25 million) approved early 2005; pending disbursement of second tranche.
  - Pipeline for calendar year 2008 under preparation: budget support credit (US$20 million), Rural Competitiveness Project (US$30million), Road Reconstruction and Improvement ($30 million), Utility Restructuring ($30 million).
  - GEF grant: $12 million approved May 2006 for Corazón Transboundary Biosphere Reserve Project.
- Economic and sector work under CAS:
  - Delivered: Public Expenditure Review, an Energy Strategy Study, an FSAP update and a ROSC Study for the current fiscal year.
  - To be delivered: Country Environmental Assessment and Institutional and Governance Assessment.
  - Public Expenditure Tracking Survey in preparation.
  - Region-wide activities on energy, decentralization, disaster mitigation, financial sector, and service delivery.
- IMF–World Bank collaboration areas:
  - PRSP preparation and Progress Reports; HIPC and MDRI initiatives; financial sector reform; energy sector reform; public expenditure monitoring; preparation of Debt Sustainability Analyses (DSAs).
  - Joint outputs: PRSP Progress Reports (first PR December 2003; second PR March 2005; third and fourth PR July 2007); joint DSA under the LIC-DSA framework completed September 2006.
  - Joint technical programs: Fund-Bank FSAP update mission September/October 2007; co-managed 2003 FSAP.

### Relations with the Inter-American Development Bank (IADB)
- As of January 22, 2008:
  - 31 projects in the Bank's loan portfolio for US$671.3 million, with an undisbursed balance of US$460.3 million.
  - After the Bank Debt Relief the annual allocation for 2008 is US$97.1 million for each year.
  - Total MDRI debt relief from IDB to Honduras was approved in February 2007 and the debt relief amount was US$1367 million (principal plus interest).
  - A new country strategy is expected to be approved for the board in March 2008.

### Statistical Issues — Data Coverage and Dissemination
- Data quality and coverage:
  - Data on the public finances, balance of payments, and external debt broadly satisfy minimum criteria required for surveillance and program monitoring purposes.
  - A consistent and reliable method is needed for deriving estimates of private capital flows.
- GDDS participation: Honduras has participated in the General Data Dissemination System (GDDS) since September 29, 2005.

### Active IDA Operations — Financial Summary (as of January 22, 2008)
- Selected IDA project commitments and undisbursed balances (commitment / undisbursed; in millions of U.S. dollars):
  - Community-Based Education Project: 41.5 / 0.0
  - Financial Sector Technical Assistance: 9.9 / 7.4
  - Health System Reform Project: 27.1 / 8.1
  - Land Administration Program: 25.0 / 4.2
  - Emergency Disaster Mitigation: 9.0 / 8.3
  - Forests and Rural Productivity: 20.0 / 7.5
  - Trade Facilitation and Productivity Enhancement: 28.1 / 18.0
  - Regional Development in the Copan Valley: 12.0 / 2.0
  - Judicial Branch Modernization: 15.0 / 13.3
  - Nutrition and Social Protection: 20.0 / 17.0
  - Nuestras Raices Program: 15.0 / 3.6
  - 1st Programmatic Financial Sector Development Policy Credit: 25.0 / 12.8
  - Poverty Reduction Strategy Technical Assistance: 8.0 / 4.5
  - Rural Infrastructure Project: 47.0 / 44.9
  - Barrio-Ciudad Project: 15.0 / 14.3
  - Water and Sanitation Project: 30.0 / 31.3
- Totals reported:
  - IDA/IBRD Contribution: IDA 1,477.8 / disbursed 198.5; IBRD 691.0 / disbursed 0.0; TOTAL 2,205.6 / undisbursed 198.5.
- IBRD/IDA loan disbursements (Calendar Year gross disbursements, amortization (cash), and net disbursements shown across years 1999–2007 in source tables).

*Prepared by the Western Hemisphere Department (In collaboration with other departments); Approved by David J. Robinson and Adnan Mazarei; March 24, 2008.*

### Annex III. Honduras—Relations with the Inter-American Development Bank

### Annex III. Honduras—Relations with the Inter-American Development Bank (As of February 28, 2008)

### A. Statement of IDB Loans (in millions of U.S. dollars)
- 2004 — Financial sector program — Approved — 25.0
- 2004 — Poverty Reduction Sector Program — Approved — 30.0
- 2004 — Improvement of the PPP Atlantic Corridor (Sections of the CA-5 Norte Highway) — Approved — 50.0
- 2004 — Middle Education and Labor Program — Approved — 30.6
- 2004 — Strengthening of Fiscal Management — Approved — 15.0
- 2004 — Municipal Development Program Tegucigalpa II — Approved — 22.5
- 2004 — Social Protection Program — Approved — 20.0
- 2004 — PPP support to rural electrification and to the energy sector — Approved — 35.0
- 2005 — Improvement of Health Conditions in Honduras — Approved — 16.6
- 2005 — National Sustainable Tourism Program — Approved — 35.0
- 2005 — Comprehensive Development Autochthonous People — Approved — 11.1
- 2006 — Fiscal Reform (Policy-based loan) — Approved — 30.0
- 2006 — Sanitation and Water Investment Complementary — Approved — 30.0
- 2006 — Housing Program — Approved — 30.0
- 2006 — Sectorial-Social Program Associated to the ERP (Policy-based loan) — Approved — 30.0

- Approved Total 2004–2006 — 410.8

- 2007 — Multiphase Program of Road Rehabilitation in Sections of the PPP Touristy Corridor — Approved — 40.0
- 2007 — Supplemental Financing Improvement PPP Atlantic Corridor — Approved — 30.0
- 2007 — Rural Business Development Program (PRONEGOCIOS) — Approved — 27.1

- Approved Total 2007 — 97.1

- 2008 — Support for Public Finances and Municipal Management — 28.6
- 2008 — Support Energy Sector II Program — 48.6
- 2008 — Logística Corredor Infrastructure Program — 20.0

- Pipeline Total 2008 — 97.1

### B. Operations (as of February 28, 2008)
- Summary totals:
  - Approved — 671.28
  - Disbursed — 210.9
  - Undisbursed — 460.3

- By sector (Approved / Disbursed / Undisbursed):
  - Credit and Multisectoral Preinvestment — 12.0 / 11.6 / 0.4
  - Agriculture and Rural Development — 35.3 / 33.2 / 2.1
  - Urban Development and Housing — 30.0 / 29.9 / 0.12
  - Education — 43.6 / 10.1 / 33.5
  - Energy — 65.0 / 13.5 / 51.5
  - Social Investment — 113.9 / 28.5 / 85.4
  - Private Sector Development — 10.0 / 8.6 / 1.4
  - Environment and Natural Disasters — 40.3 / 1.4 / 38.9
  - State Reform and Modernization — 93.6 / 52.0 / 41.5
  - Health — 16.6 / 3.4 / 13.2
  - Sanitation — 56.0 / 4.4 / 51.6
  - Transportation — 120.0 / 6.9 / 113.0
  - Tourism — 35.0 / 7.4 / 27.6

### C. Net Flow of Resources
- Disbursements by year:
  - 2001 — 103.8
  - 2002 — 47.7
  - 2003 — 89.7
  - 2004 — 138.3
  - 2005 — 64.9
  - 2006 — 91.6
  - 2007 — 90.0
- Amortization by year (does not include HIPC):
  - 2001 — 24.4
  - 2002 — 28.5
  - 2003 — 44.8
  - 2004 — 44.0
  - 2005 — 32.2
  - 2006 — 32.3
  - 2007 — 54.7
- Net flow of resources by year:
  - 2001 — 79.4
  - 2002 — 19.2
  - 2003 — 44.9
  - 2004 — 94.3
  - 2005 — 32.7
  - 2006 — 59.4
  - 2007 — 25.0
- Commitments made by year:
  - 2001 — 68.1
  - 2002 — 81.8
  - 2003 — 82.5
  - 2004 — 228.1
  - 2005 — 62.7
  - 2006 — 117.9
  - 2007 — 95.0
- Undisbursed commitments by year:
  - 2001 — 353.9
  - 2002 — 389.2
  - 2003 — 380.5
  - 2004 — 480.6
  - 2005 — 478.4
  - 2006 — 511.8
  - 2007 — 438.6

### D. IADB Loan Commitments and Disbursements (narrative highlights)
- As of January 22, 2008:
  - Number of projects in the Bank’s loan portfolio — 31 projects
  - Portfolio amount — US$671.3 million
  - Undisbursed balance — US$460.3 million
- Post‑Bank Debt Relief annual allocation for 2008 — US$97.1 millions for each year
- Total MDRI debt relief from IDB to Honduras:
  - Approved — February 2007
  - Debt relief amount (principal plus interest) — US$1367 million
- A new country strategy is expected to be approved by the board in March 2008

*Source: Annex III. Honduras—Relations with the Inter-American Development Bank (As of February 28, 2008).*

### 38.85 million SDR (30 percent of the quota) that will help them anchor economic policy

### 38.85 million SDR (30 percent of the quota) that will help them anchor economic policy

### Program objective and context
- Stand-By Arrangement (SBA) approved to support Honduras’ 2008 economic program and to serve as a bridge to a PRGF before the end of 2008.
- Primary objectives: correct economic imbalances, strengthen macro stability, and place the energy sector on a sustainable footing.
- The arrangement was described in IMF Press Release No. 08/76 dated April 8, 2008, which stated approval of a 12-month SBA for Honduras for SDR 38.8 million (about US$63.5 million); authorities intended to treat the arrangement as precautionary.
- The program is timed ahead of primary elections later in the year and seeks to anchor economic policy during this critical period.

### Fiscal policy: consolidation and reorientation
- Targets and commitments:
  - Reduce the overall fiscal deficit from 2 ¼ percent in 2007 to 1 ½ percent in 2008.
  - The overall fiscal deficit will be reduced to 1.5 percent of GDP in 2008 from 2.3 percent in 2007 through a mix of revenue and expenditure measures.
- Expenditure policy:
  - Cautious control on current primary spending of the central government.
  - Stabilization and subsequent reduction of the public wage bill as a percentage of GDP.
  - Limit net lending by public pension funds to protect their financial integrity.
  - Allow for a substantial increase in public investment, particularly in infrastructure projects (electricity and transportation).
- Revenue and subsidies:
  - Strengthen tax administration.
  - Improve targeting of electricity and direct fuel subsidies to the poor.
  - One-time proceeds from sale of a mobile phone band, equivalent to 0.6 percent of GDP, intended to finance already budgeted infrastructure investments (mostly roads).
- Financing composition:
  - 2008 budget expected to have a higher degree of financing by concessional external lending, allowing for sharply reduced net domestic financing.
  - Petrocaribe financing from Venezuela expected to yield US$ 350 million in 2008-09, with US$ 80 million in 2008 for investment in hydroelectric projects and to improve electricity transmission and distribution.

### Monetary and external sector policies
- Inflation and monetary stance:
  - Aim to maintain inflation in single digits; program seeks to contain inflation in a range of 8-10 percent.
  - Central bank raised policy interest rates to 7.75 percent in February 2008 and increased reserve requirements.
  - Monetary policy aimed at bringing bank credit growth to more sustainable levels and avoiding second-round effects from food and energy prices and wage increases.
- Credit and banking:
  - Rapid credit expansion noted: rise in credit of 30 percent (reflecting competition after entry of foreign banks).
  - Program contains measures to encourage banks to tackle rapid credit growth and bring it down to sustainable levels.
  - Prudential policies to strengthen banking system resilience and introduce forward-looking risk-based supervision.
- Exchange rate and reserves:
  - Real exchange rate near long-term equilibrium and stable over the last two years; official regime allows the Lempira to fluctuate in a 7 percent band.
  - Exchange rate policy will be managed to maintain external competitiveness and used more actively within the existing framework to support monetary policy.
  - Net international reserves (NIR) fell by $100 million in 2007 but remain adequate to cover four months of non-maquila imports and are expected to recover throughout the program.
  - Program aims to build net international reserves by US$253 million, to keep coverage around 4 months of nonmaquila imports.

### Energy sector reform and financing
- Main problems:
  - Losses at ENEE (national electricity enterprise), accumulation of arrears to private generators and contractors, heavy dependence on fossil fuels for generation.
- Measures and outcomes:
  - Electricity rates increased by 16 percent in January; a new tariff structure to come into effect with an additional 11 percent increase.
  - Tariff increases expected to cover ENEE operational costs and arrears with private generators.
  - Plan to reduce energy distribution losses and fraud; stimulate and reactivate investment in the sector; improve ENEE finances and clear arrears with generators.
  - Energy sector reforms to be supported by the World Bank and IADB.
- Petrocaribe and transparency:
  - Petrocaribe financing expected to provide US$ 350 million in 2008-09, with US$ 80 million in 2008 for hydroelectric investment and transmission/distribution improvements.
  - A trust fund has been set up in the central bank to ensure Petrocaribe resources are used transparently and for infrastructure only.
  - Periodic reports will be presented to a blue ribbon panel with civil society representatives.

### Recent developments and macroeconomic performance
- Growth and inflation:
  - Growth remained robust at over 6 percent in 2007.
  - Inflation increased to 9 percent in 2007 from 5.3 percent in 2006, reflecting rising international food and oil prices.
- External current account and reserves:
  - External current account deficit almost doubled to 10 percent of GDP in 2007 due to rapid import growth.
  - Net international reserves slightly declined in 2007, though the trend has been recently reversed.
- Fiscal and public enterprise pressures:
  - Overall fiscal deficit deteriorated in 2007, partly reflecting rising current spending including wages (teacher’s agreements) and weakening public company finances, particularly ENEE.
- Debt outlook:
  - Honduras’ debt outlook characterized as positive; debt ratios should remain below indicative thresholds and resilient to shocks over the medium and long term.
  - Low initial debt ratios cited as a product of debt relief and consolidation of macro stability; public debt expected to remain on a sustainable path even under extreme tests.

### Risks and vulnerabilities
- External risks:
  - Less-favorable external environment primarily related to a downturn in the US economy, expected to slow the Honduran economy and affect remittances.
  - Level of oil prices presents a risk given reliance on fossil fuels in the electricity sector.
- Domestic political economy:
  - Expansionary policies ahead of the primary elections could undermine program objectives and fiscal discipline.
- Energy sector contingent liabilities and fiscal pressure from ENEE weaknesses.

### Implementation status and prior actions
- 2008 budget approved by Congress on the terms accorded with the Fund on April 2.
- Prior actions related to the policy interest rate, NIR and NDA of the Central Bank were fulfilled at the end of March.
- Last prior action related to open market operations fulfilled on April 3.
- Authorities seek Executive Directors’ support for the SBA to regain momentum in structural reform and to anchor economic policy in 2008; SBA intended to serve as a bridge to a PRGF to be presented later in the year.

*International Monetary Fund — Press Release No. 08/76 (April 8, 2008) and accompanying staff report excerpts.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08241.pdf_