Honduras and the IMF

News Brief: IMF Completes in Principle Honduras Third Review Under PRGF

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The following item is a Letter of Intent of the government of Honduras, which describes the policies that Honduras intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Honduras, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Tegucigalpa, Honduras
September 20, 2001

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington, D.C. 20431
United States of America

Dear Mr. Köhler:

Under the government of President Flores, economic developments in Honduras have been broadly positive, as the country has preserved macroeconomic stability and promoted an economic recovery following Hurricane Mitch. The government's economic program has benefited from the support of the three-year arrangement under the IMF's Poverty Reduction and Growth Facility (PRGF) which began in 1999.

The term of the current government is drawing to a close, with elections scheduled for November and a change in government in January 2002. During this political transition, we believe it is crucial to maintain strong economic policies. To this end, we would appreciate continued Fund support for our program. We have worked with the staff of the IMF to specify policies and targets for the remainder of 2001, as well as the broad outlines of the key policies and objectives for 2002, which are elaborated in the attached memorandum of economic policies. The details of the economic policies for 2002 will be agreed with the new government and presented to the Fund's Executive Board in a review of the program to be completed by May 2002. We understand that the completion of that review will require that banks with insufficient capital comply strictly with the action plans designed for them, and if not, that they are being treated in accordance with the Deposit Insurance Law.

We are requesting Board consideration of our economic program for the third year under the PRGF arrangement for the remainder of 2001 and 2002. We are also asking for a waiver for the nonobservance of two structural performance criteria approved under the second review of the PRGF arrangement, consisting of (i) by end-June 2000, conclude the bidding for HONDUTEL; and (ii) by end-October 2000, enact a civil service reform law that contains criteria for wage setting in the central government. We note that the current three-year PRGF arrangement expires on March 10, 2002, and we would appreciate an extension of the arrangement through December 31, 2002 to allow for Fund support of the program for 2002. On this basis, we are requesting the disbursement of the fourth loan equivalent to SDR 16.15 million, in accordance with the arrangement described in EBS/99/37 and our letter of March 10, 1999. Finally we believe that, with the IDB's recent confirmation that it will participate in the enhanced HIPC Initiative, the sufficient assurances are now in place, and we are therefore asking for the Fund to begin to provide its share of interim relief.

Sincerely yours,

Gabriela Nuñez de Reyes
Minister of Finance
Victoria Asfura de Díaz
Central Bank of Honduras


Memorandum of Economic Policies

I. Introduction

1. In 2000, the stabilization and reform program of the Honduran government was successful in supporting a recovery from the devastation caused by Hurricane Mitch. A pick-up in agricultural production and reconstruction spending helped lift real economic growth to 5 percent, and inflation fell to 10.1 percent during the year. The nonfinancial public sector registered a surplus of about 1 percent of GDP, while the central government recorded a deficit of about 4½ percent of GDP. Fiscal policy created room for an increase in social expenditures from 7.2 percent of GDP in 1999 to 8.1 percent of GDP in 2000 by controlling the growth in other expenditures. Also, capital outlays rose by less than expected, as reconstruction spending picked up only in mid-2000. Monetary policy helped achieve the inflation objective through effective control over the expansion in base money. While the interest rate on 90-day open market instruments (CAMs) remained constant at 14 percent throughout the year, bank lending rates declined by about 5 percentage points and the intermediation spread (the difference between deposit and lending interest rates) fell by 200 basis points to 12 percent by end-2000. The external current account deficit declined slightly to 4 percent of GDP, owing to slower-than-expected growth in non-oil imports, while remittances from abroad remained strong. As a result, gross international reserves amounted to US$1,285 million by end-2000, or about four months of imports of goods and services.

2. For the remainder of 2001 and beyond, the government remains committed to pursuing macroeconomic stability, structural and social reforms to achieve faster, poverty-reducing growth. To this end, the government will continue to conduct economic policies within the framework of the three-year program (1999-2002), for which the IMF is providing financial support under the Poverty Reduction and Growth Facility (PRGF). The remainder of this memorandum details the macroeconomic and structural objectives and measures for the remainder of 2001 as well as the broad outlines of the economic program for 2002. The details of the program for 2002 will be determined during the midterm review of the program, which will be held with the new government that takes office in January 2002.

A. Macroeconomic Framework

3. The government's policies are designed to minimize the effects of the decline this year in the terms of trade and achieve real economic growth of 3½-4 percent in 2001. Growth is then expected to rise to 4-4½ percent in 2002 and to 5-5½ percent a year in

2003-06. Reducing inflation over the medium term is another principal objective of the government's program. Lower inflation contributes to a more stable exchange rate, and facilitates business and investment decisions, which enhances growth potential. Moreover, price stability directly benefits the poor, who suffer disproportionally from the inflation tax. Policies will limit inflation to 10 percent in 2001 and then reduce inflation to 8 percent in 2002 and 6 percent in 2003. The external current account deficit is expected to widen to over 5 percent of GDP in 2001-03, as reconstruction spending remains strong in 2001, and then to decline slightly in subsequent years. Continued inflows of foreign investment and official financial assistance would help boost net international reserves by US$25 million in 2001 and by US$60 million in 2002 to keep the reserve cushion at about four months of imports of goods and services. In the social area, the government's strategy is elaborated in the Poverty Reduction Strategy Paper and focuses on improving basic services in education, health, water supply, sanitation and housing, and alleviating extreme poverty.

4. To achieve these objectives, the government will pursue a sound fiscal policy, prudent monetary and exchange rate policies, and structural and social reforms. The nonfinancial public sector deficit in 2001 is expected to reach 2.1 percent of GDP, as current spending will be contained, while allowing for an increase in social expenditures and reconstruction outlays. In 2002, the nonfinancial public sector deficit will remain at 2.0 percent of GDP, as reconstruction outlays taper off. In both years, assistance from the international community will help finance the social and reconstruction outlays. A prudent monetary policy will help achieve the program's inflation target, and the exchange rate policy, as well as a sound public and private sector wage policy, will aim at preserving external competitiveness. The priorities in the structural area will include financial sector reform and progress with privatization and civil service reform to strengthen the medium-term fiscal position. The government is also committed to a comprehensive and participatory strategy to improve governance, including measures to increase transparency in fiscal and monetary policies, and measures that reduce the potential for corruption.

5. The government believes that the policies set out below will be sufficient to achieve the program's objectives, but notes that the outlook is sensitive to a number of risks, such as the effects of the cyclical downturn in the U.S. economy on workers' remittances and on the growth of maquila exports. Another risk to the program stems from a possible decline of disbursements, as the reconstruction program comes to completion. A further risk to the program can come from teachers' wages, the potential pressure for additional public spending in an election year, and weaknesses in the financial sector, which are in the process of correction. Notwithstanding these risks, the government stands ready to take additional measures and seek new understandings with the IMF should the program diverge from its specified targets.

B. Fiscal Policy

6. Fiscal policy will remain prudent to help contain inflation, while allowing for higher social and reconstruction expenditures. In 2001 the government expects the central government deficit to remain around 4½ percent of GDP, including 0.8 percent of GDP in additional social expenditures made possible by interim HIPC debt relief. The budget allows for total social expenditures to rise from 8.1 percent of GDP in 2000 to 10 percent in 2001 by limiting the growth of nonsocial current expenditures and improving revenue performance in 2001.

7. Regarding revenues, in 2001 the government will increase efforts to improve tax administration to keep central government tax revenues above 17.6 percent of GDP (corresponding to current revenues above 18.5 percent of GDP). The Executive Revenue Department (DEI) will reorganize the large taxpayers' unit and strengthen procedures for tax collections through banks in line with the recommendations of the recent IMF technical assistance report. To improve the collection of import taxes, a key objective in 2001 will be to strengthen customs administration. In particular, the DEI plans to (i) improve the detection of underinvoicing of imports; (ii) connect all customs offices electronically; and (iii) improve cross-checking with third-party sources of information on tax receipts and returns. In 2001 the ministry of finance will establish a working group to review tax policy in line with recommendations from the IMF technical assistance report.

8. On expenditures, in April 2001 the government issued rules to all ministries and decentralized agencies aimed at curbing nonsocial current expenditures. The government will maintain transport subsidies at L 114 million and electricity subsidies at L 280 million and ensure that these subsidies are well targeted towards the poor. In April 2001, decrees were issued that established a global limit for the wage bill in 2001 and 2002 and linked wage increases to productivity or merit and scaled back a number of civil service posts. As a result, wages and salaries (excluding positions financed with HIPC debt relief) will amount to 9.2 percent of GDP, mostly reflecting past legal commitments to teachers for wage increases under the 1997 wage agreement. Most of the capital spending during 2001 consists of completion of Mitch-related reconstruction projects and increased investments in social and poverty-reduction programs, particularly in education and rural development. The government will continue to adjust expenditures in line with available external financing to limit the government's recourse to domestic financing.

9. The government is planning to subsidize debt service of restructured agricultural loans by issuing bonds for about 0.1-0.3 percent of GDP in 2001. In addition, it will guarantee new loans to qualified agricultural producers amounting to about 0.14 percent of GDP in 2001. To make this scheme transparent, the names of the beneficiaries and amounts of the public subsidy received will be published. The restructured loans cannot be rediscounted by FONAPROVI. Furthermore, if the restructured loans become nonperforming they will be reclassified two steps down for the purpose of provisioning.

10. The budget for 2002 was submitted to congress on September 14 of this year. While many aspects are still being developed, this budget will limit the central government wage bill to 9.1 percent of GDP. The government has already initiated a campaign informing the public on the importance of a prudent public sector wage policy to keep the fiscal position sustainable.

11. To ensure medium-term fiscal sustainability, the government will submit to congress a draft civil service reform law in December 2001. This law will modernize the existing civil service regime, and establish the institutional procedures for setting posts, rules for hiring and firing, and criteria for setting annual wage increases in the central government. Also, the government shall work towards establishing a three-year expenditure framework (MTEF) with World Bank assistance. To ensure that the wage bill declines in the medium term as a percent of GDP, the authorities will continue implementing the public sector employment rationalization plan (in addition to implementing the wage policy contained in the civil service reform law). Based on redundancies identified in a Cincorp Hay report, and wage bill reduction strategies in the Capra International report, the government will start implementing an action plan, which seeks to gradually reduce the central government wage bill to 7 percent of GDP by 2006. It envisages a pilot program for redundancies, provision of services for easier transition of retrenched personnel into the private sector, and creation of incentives to retain a smaller but better qualified civil service. As a first step, in 2001 the government has canceled existing vacant posts and made available voluntary departures. With assistance from the World Bank and the IDB, it has begun to: (i) complete the clean-up of the human resource databases at the ministries of education and health; (ii) implement the reclassification of posts of teachers in at least two departments, and health workers in at least one hospital; and (iii) as part of the strategy for decentralization of health and education, has begun in 2001 to trim about 750 of the 4,000 redundant administrative positions at the ministry of education. In addition, the wage scale reclassification that started in 1999 will be fully implemented by end-December 2001.

12. Social security reform is also essential for fiscal sustainability, as well as to improve social policies. Reform of the Honduran Social Security Institute (IHSS) continues according to the action plan, which envisions the separation (operationally and on an accounting basis) of the IHSS pension fund from the health fund by end-December 2001 with World Bank support. In June 2001 congress passed the Social Security Reform Law, which, among other things, raised the cap on contributions to social security thereby considerably improving the financial position of the IHSS.

13. The government will establish a poverty reduction fund no later than September 2001. The national council will supervise this fund, which will track inflows of debt relief and privatization proceeds and the social expenditures mandated by the PRSP. The fund will be included in the central government budget. The government will also continue with the outside monitoring of external assistance and regular audits of external inflows.

C. Monetary Policy

14. The central bank will maintain a strong credit policy and will communicate clearly the objectives of monetary policy to the public. Specifically, net domestic assets are expected to contract significantly in 2001, and with currency issue expected to increase by 7.7 percent, net international reserves will rise to US$1,021 million to keep the international reserve cushion equivalent to about 4 months of imports of goods and service. To increase the efficiency of monetary policy, the central bank began last year to shift from direct controls such as mandatory investment requirement to open market securities with market-determined interest rates (CAMs). In May 2001, the mandatory investment requirement for commercial banks was reduced by 2 percentage points, and this requirement will be lowered further from 5 percent of deposits to 3 percent for both commercial banks and savings and loans institutions by September 2001. These steps will make interest rates on CAMs a better signal of market pressures, deepen the market for CAMs, increase the transparency of monetary operations and the efficiency of financial intermediation, and potentially reduce the spread between lending and deposit rates.

15. The central bank (CBH) must have a strong income position to be truly independent in using monetary instruments to pursue the inflation objective. The CBH's income position has been impaired by the zero interest rate bond received in 1997 in compensation for the exchange rate losses it suffered on the foreign loans it was holding on behalf of the government and on past subsidized credit operations with the government and the banks. The authorities will examine options for improving the central bank's income position to ensure that the CBH's operating profit is sufficient to cover the costs of its monetary and foreign exchange policy. In 2001 the CBH will hire an external auditor in order to publish in 2002 a complete set of financial statements for 2001 consistent with international standards.

16. To increase the efficiency of financial intermediation, the authorities are committed to improve the payments system. An electronic, nationwide check-clearing system is expected to become fully operational by end-2001. This system will greatly reduce the time and costs involved in settling payments, facilitate a future interbank market in foreign exchange, and a more efficient market for public securities.

D. The Financial Sector

17. The government is committed to building a strong financial system to avoid disruptions to macroeconomic stability. It will exercise strong supervision and further improve the regulatory framework. In May 2001, congress approved a law that establishes a new system of limited deposit insurance to replace the current full guarantee of bank deposits (which was an emergency measure) in September 2002. A sound financial sector and appropriate bank resolution policies will be prerequisites for moving to limited deposit insurance. Congress also recently approved laws on insurance and reinsurance companies and the stock exchange. A law regulating private pension funds will be approved by December 2001. By December 2001 a revised financial sector law will be submitted to congress that will: (i) reduce the maximum of related lending from the current 120 percent of capital to the international norm of 30 percent in steps over 3 years; (ii) lower the limit on banks' equity participation in other firms from 50 percent to 20 percent over 2 years; and (iii) introduce legal protection for banking commission (CNBS) staff for actions adopted in the conduct of their responsibilities.

18. On prudential supervision, banks not meeting the minimum 10 percent risk-weighted capital adequacy ratio (CAR) will be required to agree with the CNBS on binding action plans. For banks in excess of the limit on related lending, the plans will include a phased reduction over three years. The CNBS will declare a preventive audit for banks with CARs below 6 percent. The program of on-site inspections will continue, including for finance companies and savings and loans institutions.

19. The government believes that public disclosure of banks' financial statements will help strengthen market discipline. The CNBS issued a resolution in July 2001 that requires banks to start in November 2001 to publish on a quarterly basis key prudential indicators (including liquidity ratios of banks, the value of all restructured loans, properly adjusted balances and income statements, CARs, and related lending ratios).

20. To reduce the cost of credit, the government will seek congressional approval of the law on a registry for movable property, which is a first step to give smaller enterprises the ability to secure collateralized loans. To enhance enforcement of financial and other claims, congress amended the constitution as a first step towards the approval of the law on the judicial career currently in congress. Work will also be initiated in 2001 to reform the lengthy rules of civil procedure that increase the cost of legal transactions.

21. To assess financial sector vulnerabilities and prevent potential crises, the authorities would like to participate in a Financial Sector Assessment Program (FSAP) as soon as possible.

E. Other Structural Policies and Governance

22. Further progress with privatization is essential to achieve a sustainable fiscal position and to promote faster poverty-reducing growth. The investment requirements to meet the growing demand for electricity at competitive costs exceed available public resources. Therefore, the government will continue to seek congressional approval for the Framework Law on the Electricity Sector, which is the first step towards privatizing electricity distribution and creating an appropriate regulatory framework. It has also designated a technical working group of the electricity cabinet to develop by December 2001 a strategic plan, which will include options for restructuring the state electricity enterprise (ENEE) and for developing a competitive market for electricity. The capitalization of the state telecommunications company (HONDUTEL) has been postponed while the government reviews the options for increasing the role of the private sector in this area. In the meantime, the government will auction a bandwidth (Band B) for cellular telephones.

23. The government is committed to strengthening good governance and fighting corruption. This is a complex problem that must be attacked from many sides, emphasizing prevention as much as correction. The government has engaged the participation of the civil society by establishing a National Anti-Corruption Council. Guided by the results of a recent World Bank-sponsored survey, the council will make proposals for a comprehensive anti-corruption strategy. The government recognizes that maximum transparency with regard to all public sector activities will be an essential component of such a strategy. In March 2001 the new law on government contracting and procurement was passed, marking an important step towards a modern and fully transparent government purchasing system.

24. To increase transparency of economic policies, the government will strive to comply gradually with the IMF codes for transparency in fiscal, monetary, and financial policies. An assessment of fiscal policy practices is well advanced, and by September 2001 the government expects to have prepared an action plan. As a first step, the 2002 budget will include specific uses of the funds that had been assigned under the "global allocation" category and will require a monthly report on the use of these funds. An assessment of the transparency of monetary and financial policies has been initiated and will be completed by end-2001.

25. There is a great need to improve economic and sociodemographic statistics. The government has established an independent National Institute of Statistics (INE) and has commissioned a study to diagnose the existing state of the Honduran statistics as part of the transition phase. The Population and Housing Census will be completed shortly. The government is considering whether to adhere to the IMF's General Data Dissemination System (GDDS), which will help to develop a coherent strategy for improving all aspects of statistics and could provide a vehicle for donor support.

26. To improve the investment climate for domestic and foreign investors, the government will seek congressional approval in 2001 of the law simplifying procedures to establish new companies.

F. External Sector

27. A competitive exchange rate is critical for medium-term sustainability of the balance of payments. Competitiveness depends on exchange rate policy, as well as many other factors, such as productivity, structural reforms, and prudent income policies. The CBH will continue adjusting the rate of crawl of the base exchange rate, which determines the exchange rate band, to offset the projected inflation differential between Honduras and its trading partners and prevent an appreciation of the currency in real effective terms. Foreign inflation is projected at 3.4 percent a year in 2001 and 2002.

28. The continued support of the international community will be essential in order to improve the debt profile over the medium term. The authorities have made considerable progress in most of the conditions necessary to reach the HIPC completion point by end-2002. The Poverty Reduction Strategy will begin to be implemented at end-September 2001. Substantial progress has been made towards completing those conditions in the social area: 81 percent of the participatory schools (PROHECO) have been completed, an increase in community participation and planning of social investment projects is well under way, and there is some progress on strengthening basic health services for the poor. In the area of governance, initial steps have been taken to prepare an anti-corruption strategy. After some delays the government is moving in fulfilling the financial sector condition (application of the Basel core principles) and on reform of the social security system.

29. Honduras was declared eligible for HIPC relief when it passed the Decision Point in June 2000. Since then, interim relief is being received from CABEI and the World Bank; interim relief from Paris Club creditors has not been necessary given the deferral granted to Honduras for all debt service due between November 1998 and March 2001 in the wake of Hurricane Mitch. In the near future, Honduras expects to start receiving interim relief from the IDB and the IMF. We expect to satisfy all the conditions for reaching the completion point no later than end-2002. The delivery of full HIPC relief will reduce the public sector's debt service to levels that are still high but sustainable. The government is making its best efforts to obtain comparable HIPC debt relief from all creditors. It will continue to manage debt prudently and will not contract any nonconcessional loans and arrears with all creditors.

G. Program Monitoring

30. The third year of the PRGF-supported program will be monitored based on indicative targets for end-September 2001, and quantitative performance criteria for end-December 2001, and structural performance criteria and benchmarks as set out in Tables 1 and 2, respectively. The prior action is the submission to congress of a budget for 2002 that limits the central government's wage bill to no more than 9.1 percent of GDP. The details of economic policies in 2002, together with quantitative performance criteria for end-June 2002, will be discussed during the next review under the PRGF, which will be no later than May 2002, subject to the satisfaction of the quantitative and structural performance criteria at end-December 2001.

Table 1. Honduras: Quantitative Performance Criteria at end-December 2001
and Indicative Targets for end-September 2001 1


(Stocks in millions of lempiras, unless otherwise specified)

















1. Ceiling on net domestic financing of the nonfinancial


public sector (NFPS) 2








2. Ceiling on net domestic assets of
the central bank 3








3. Floor on the net liquid international reserves of


the central bank (stocks in millions of U.S. dollars) 4








4. Ceiling on contracting of nonconcessional external debt of the public sector (stocks in millions of U.S. dollars)


    Maturity of less than one year







    Maturity of more than one year








5. Ceiling on the stock of arrears on external debt-service


payments of the public sector (in millions of U.S. dollars)








6. Ceiling on central government wage bill








7. Floor on current tax revenue







1 Definitions are set out in the technical memorandum of understanding (TMU).
The stocks have been revised to include uncashed checks, nonbanking debt of the central government, and accounts abroad held by agencies of the NFPS consistent with the definition of net domestic financing set out in the TMU.
The targets will be adjusted upward in the case of a shortfall in external disbursements from the World Bank and the IDB. The adjustment will be the full lempira amount of the difference between projected external disbursements of selected loans from the World Bank and IDB of US$75 million and actual amounts for September and December 2001.
The targets will be adjusted downward in the case of a shortfall in external disbursements from the World Bank and the IDB. The adjustment will be the full amount of the difference between projected external disbursements of selected loans from the World Bank and IDB of US$75 million and actual amounts for September and December 2001.

Table 2. Honduras: Prior Actions, Structural Performance Criteria
And Benchmarks Under the Third Year of the PRGF Arrangement

Program Timing

A. Prior Action


Submit to Congress a budget that limits the wage bill in 2002 to no more than 9.1 percent of GDP.


B. Structural performance criteria


1. Any bank not meeting the 10 percent CAR should be subject to action plans, any
bank with
CAR below 6 percent should be subjected to an "auditoria preventiva."

end-December 2001


2. Require banks to publish quarterly financial information including adjusted CARs starting with end-September information.

end-November 2001


3. Submit to congress a draft of a Civil Service Reform Law that authorizes the government toset a limit on its wage bill in relation to GDP, and has as an objective the absorption of special wage regimes into the government's overall wage policy.

end-December 2001


4. Approve a budget that limits central government wage bill in 2002 to no more than
9.1 percent of GDP.

end-December 2001


5. Continue adjusting the base rate so as to prevent an appreciation in real terms.



C. Structural benchmarks


1. Submit to congress revisions to the financial institutions law to include:

end-December 2001


Reduction of the related lending limit from 120 percent of capital to 30 percent in 3 years.


Lower the banks share of equity participation in other firms from a limit of 50 percent to 20 percent over two years.


Assure legal protection to CNBS staff for actions in the conduct of their responsibilities.


2. Approve by the National Congress the law regulating private pension funds.

end-December 2001


3. CBH engage an external auditor in order to publish in 2002 a complete set of financial


statements audited externally in line with international standards.

end-December 2001


4. Submit to Congress a Law to redefine the minimum wage to reduce indexation.

end-December 2001


5. Establish and start implementing an action plan to improve transparency in fiscal policy in line with the recommendations of the FAD ROSC mission

end-September 2001




6. Require detailed budgeting and reporting to the Ministry of Finance of the use of "asignaciones globales" (global allocations).

end-December 2001

Honduras—Technical Memorandum of Understanding

This technical memorandum defines the quantitative benchmarks and performance criteria established in the memorandum of economic policies (MEP) attached to the letter of intent dated September —, 2001.

I. Net Domestic Financing of the Nonfinancial Public Sector

1. For the purposes of the program, the nonfinancial public sector (NFPS) covers the central government, local governments, the Honduran Social Security Institute (Instituto Hondureño de Seguridad Social (IHSS)), the National Institute of Pensions of the Executive Branch Staff (Instituto Nacional de Jubilaciones y Pensiones de los Empleados y Funcionarios del Poder Ejecutivo (INJUPEMP)), the National Institute of Pensions of Teachers (Instituto Nacional de Pensiones y Retiros del Magisterio (INPREMA)), the National Company of Electricity (Empresa Nacional de Energia Electrica (ENEE)), the National Company of Water and Sewerage (Servicios Nacionales de Acueductos y Alcantarillado (SANAA)), National Company of Ports (Empresa Nacional Portuaria (ENP)), The National Telecommunications Company (Compañia Hondureña de Telecomunicación (HONDUTEL)) and other decentralized agencies and public enterprises.

2. Net domestic financing of the NFPS comprises all domestic sources of financing. Thus, net domestic financing of the NFPS is defined as the sum of net credit (direct bank credit less deposits plus net bond placements) from the domestic financial system to the NFPS, net bond placements by the NFPS outside the financial system, and suppliers' credit and increases in floating debt (checks issued but not yet cashed) of the NFPS (all domestic debt is in domestic currency). It also includes any deposits by NFPS entities in foreign accounts.

3. According to the above definition, the level of net domestic financing of the NFPS was a negative L 11,995 million on December 31, 2000, which will be used as the basis for the ceilings that form performance criterion for December 2001.

II. Net Domestic Assets of the Central Bank

4. The net domestic assets (NDA) of the CBH will be measured as the difference between currency issue and net foreign assets of the CBH, both measured on the basis of end-of-period data. Net foreign assets of the CBH include net liquid international reserves of the CBH as defined below and other net foreign assets of the CBH, including short-term nonliquid assets and medium- and long-term net foreign assets. The NDA of the CBH at end-December 2000 amounted to a negative of L 5,897 million.

5. The ceiling on NDA will be adjusted upward in the case of a shortfall in external disbursements from the World Bank and the IDB. The adjustment will be the full lempira amount of the difference between projected external disbursements of selected loans (see below) from the World Bank and IDB of US$77 million and actual amounts for September and December 2001.

III. Net International Reserves

6. For the purpose of the floor on net international reserves (NIR), NIR are measured as gross foreign assets of the CBH that are readily available (i.e., excluding zero-coupon bonds and contributions in gold/foreign exchange to international organizations other than the IMF) minus short-term foreign liabilities of the CBH, and its liabilities to the Fund, as described in the international reserves table of the CBH weekly executive summary. Readily available foreign assets exclude those that are pledged or otherwise encumbered, including but not limited to reserve assets used as collateral or guarantee for a third-party external liability. The benchmarks exclude any conversion of short-term foreign liabilities and all foreign assets stemming from commercial banks' foreign currency deposits at the CBH. The NIR will be valued at current exchange rates. At end-2000, the value of NIR thus defined was US$996 million.

7. The targets for NIR will be adjusted downward in the case of a shortfall in external disbursements from the World Bank and the IDB. The adjustment will be the full amount of the difference between projected external disbursements of selected loans from the World Bank and IDB of US$77 million and actual amounts for September and December 2001. Selected loans include, from the World Bank: Public Sector Modernization Structural Adjustment Credit (US$14 million) and IDA reflows (US$20 million); and from the IDB: Modernization of State (US$28 million) and PRSP Support (US$15 million).

IV. External Debt and Arrears

8. For the purpose of the ceiling on the contracting of nonconcessional external debt of the NFPS and the CBH, nonconcessional is defined as having a grant element (net present value--NPV) relative to face value of less than 35 percent, based on the currency- and maturity-specific Commercial Reference Rates (CIRR), published monthly by the OECD.

9. This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (Executive Board Decision approved August 24, 2000) but also to commitments contracted or guaranteed for which value has not been received. The definition of debt set forth in No. 9 of the guidelines reads as follows: "(a) For the purpose of this guideline, the term "debt" will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers' credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lesser retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property. (b) Under the definition of debt set out in point 9(a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt."

10. Excluded from the ceiling on debt with a maturity of less than one year are import-related credits as well as short-term borrowing by the CBH for reserve management purposes up to a maximum of US$50 million. Borrowing from the Fund is excluded from both ceilings (maturities of less than and at least one year).

11. For the purpose of the ceiling on arrears, the stock of arrears on external debt-service payments (including both principal and interest) of the public sector is defined as all debt-service arrears on public and publicly guaranteed external debt.

V. Central Government Wage Bill

12. For the purposes of this program, the central government includes the executive, judicial and legislative branches of government as defined in Chapter III, Article 5 of the 2000 Budget Decree No. 13-99-E. The ceiling on the central government wage bill is defined as gross wages including severance payments, plus employer social security and pension contributions. Thus defined, the central government wage bill for 2000 was L 7,765 million.

13. The wage bill ceiling for December 2001 will be adjusted upward by no more than L 197.2 million, corresponding to additional wage payments for poverty programs funded from HIPC Interim relief received (Budget Item 29).

VI. Current Tax Revenue

14. The current tax revenue includes central government taxes collected by the revenue authority of the ministry of finance (Dirección Ejecutiva de Ingresos) during the period January 1, 2001 to December 31, 2001, including penalties and interest on late taxes and back taxes paid as a result of judgments. The tax revenues in question correspond to the classification of the ministry of finance used for reporting to the IMF and as published in the Annual Memoirs of the ministry of finance. It consists of revenue from direct taxes (including on property and net assets), all indirect taxes on production and consumption and international trade taxes. It also includes all taxes on petroleum products, including earmarked taxes for the road fund. It excludes tax revenue that is later reimbursed and overpayment of taxes. Thus defined, current tax revenue in 2000 was L 14,795 million.

VII. Monitoring and Reporting Requirements

15. All performance criteria are defined in terms of stocks as in Table 1 of the MEP.

16. The information required to monitor the performance criteria will be supplied to the IMF monthly according to the following sources:

17. The ceiling on net domestic financing of the NFPS will be monitored from the accounts of the CBH, and the accounts of the commercial banks (Consolidated Balance of the Rest of the Banking System in the monthly Financial Panorama of the CBH), and information provided by the ministry of finance and the CBH, including uncashed checks, and orders unpaid. This will include balances on accounts held abroad by any nonfinancial public sector entity.

18. The net domestic assets performance criterion will be monitored on the basis of information in the Weekly Executive Summary and monthly Panorama Financiero produced by the CBH.

19. The NIR performance criterion will be monitored on the basis of the Consolidated Balance Sheet of the central bank contained in the CBH's monthly Panorama Financiero.

20. The external debt and arrears performance criteria will be monitored on the basis of information provided by the CBH.

21. The central government wage bill performance criterion will be monitored on the basis of information provided by the ministry of finance.

The current tax revenue performance criterion will be monitored on the basis of the information provided by the ministry of finance.