Press Release No. 10/374

Press Release No. 10/374
October 1, 2010

The Executive Board of the International Monetary Fund (IMF) approved financing for an 18-month program for Honduras in the amount of SDR 129.5 million (about US$201.8 million) to support the country’s efforts to restore macroeconomic stability and advance economic reforms consistent with Honduras’s poverty reduction and growth objectives.

The reform program is supported by a blend of resources from two IMF credit lines, the Stand-By Arrangement (SBA) and the Standby Credit Facility (SCF). The SCF was recently created as part of a comprehensive reform of the IMF’s facilities for low-income countries and provides financing on concessional terms.

An initial disbursement of SDR 35.61 million will become available immediately after the Board approval, but the Honduran authorities plan to treat the credit as precautionary.

Following the Executive Board’s discussion of Honduras, Mr. John Lipsky, First Deputy Managing Director and Acting Chair, made the following statement:

“The Honduran economy is recovering gradually from the effects of the global slowdown and the domestic political crisis of 2009. The authorities’ economic program supported by the Fund seeks to strengthen public finances, protect the external position, and rebuild investor confidence, catalyzing donor support and financing from international institutions.

“The fiscal consolidation strategy aims to stabilize the public debt-to-GDP ratio below 30 percent, and create space for increasing anti-poverty spending and public investment. The authorities are strongly committed to implement the tax reform approved in April 2010 and strengthen tax administration. It will also be important to exercise strict control over current expenditure, improve the composition of public spending, and strengthen the financial position of public enterprises and pension funds.

“Monetary policy will remain geared toward safeguarding the inflation and external objectives of the program. The central bank intends to upgrade the monetary policy framework and to strengthen its implementation capacity.

“Honduras’s financial system has weathered the global financial crisis and the ensuing downturn in activity relatively well. Efforts will nevertheless continue to enhance the system’s resilience by improving the regulatory framework and supervisory practices, and strengthening the financial safety net,” Mr. Lipsky said.

ANNEX

Recent Economic Developments

Honduras is gradually recovering from the impact of the global slowdown and political turmoil. In 2009, real GDP declined by 2 percent, the overall public sector deficit widened from 1.7 percent of GDP in 2008 to 4.6 percent, and gross international reserves declined by about US$360 million. The fiscal deterioration was due to a strong increase in current expenditure of the central government, while the financial position of public sector enterprises and pension funds also worsened. The fiscal deficit was financed by costly short-term bonds, central bank credit, and domestic arrears. In 2010, real GDP is projected to increase by 2.4 percent, reflecting the rebound in economic activity of key trading partners and the recovery in domestic confidence. Inflation is projected to increase moderately, to below 6 percent, mostly due to rising international prices and domestic utility price adjustments.

Program Summary

The government’s economic program for 2010-11 seeks to restore macroeconomic stability, strengthen public finances, and protect the external position. The support from the Fund is intended to provide liquidity buffers in the context of still fragile global recovery, as well as help establish a framework for key reforms and mobilize donor assistance. The program contemplates the following policies and structural reforms, mostly in the public sector.

Fiscal policy will aim at deficit reduction and improving the composition of public expenditure. The tax reform approved in April 2010 and improvements in tax administration, combined with strict control on current spending, will enable an increase in anti-poverty programs (including bono 10 mil) and public investment. Fiscal reforms under the program will seek to restore financial viability of public sector enterprises and strengthen the financial position of public pension funds.

Monetary and financial policies will aim at keeping inflation low, strengthening international reserves and containing external current account deficits. Key financial sector reforms include upgrading the supervisory and regulatory frameworks, strengthening the financial safety net, and improving access to financial services.

The macroeconomic framework targets real GDP growth of 3.5-4.0 percent during 2011-12. Inflation would be kept at below 6 percent. The overall deficit of the public sector would be reduced to 3.7 percent of GDP in 2010 and 3.1 percent of GDP in 2011 and public debt would stabilize below 30 percent of GDP. Imports coverage of international reserves is projected to increase, and the external current account deficit is expected to remain at about 7 percent of GDP.

Honduras joined the IMF as a member on December 27, 1945. Its quota is SDR 129.5 million (about US$201.8 million).