IMF Completes Third and Fourth Reviews Under SBA and SCF with Honduras

IMF News, November 2, 2016

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Authors: Credit Facility
Published: November 2, 2016

Program approval and access

The blended program (three-year Stand-By Arrangement (SBA) and two-year Stand-By Credit Facility (SCF)) was approved on December 3, 2014 in the amount of about US$188.6 million (SDR 129.5 million), the equivalent of 100 percent of Honduras’ quota at that time.
The Executive Board completed the combined third and fourth reviews on October 26, 2016.
The Executive Board approved a rephasing of the SBA to take into account the increase in Honduras’ First Credit Tranche as a result of its quota increase (from SDR 129.5 million to SDR249.8 million) under the Fourteenth General Review of Quotas.
The completion of the reviews enables the authorities to access resources in the total amount of about US$168.20 million (SDR 121.875 million).
The authorities have expressed their intention to continue to treat the arrangements as precautionary.

Waivers and performance criteria

The Board granted a waiver of the end-December 2015 performance criterion on the ceiling of the stock of net domestic assets (NDA) as the authorities corrected the deviation by observing the end-June 2016 target.
The Board also granted a waiver on the non-observance of the end-June performance criterion on net lending by the public pension funds and on the arrears from state electricity company (ENEE), based on corrective policy measures taken.

Macroeconomic outcomes and developments (as described by IMF)

Considerable progress in restoring macroeconomic stability and reducing the fiscal deficit.
External current account deficit has narrowed.
Private credit is expanding at a sustainable pace.
Net international reserves have risen.
These developments have contributed to a systematic improvement in Honduras’s international sovereign debt credit ratings.

Structural reforms and policy priorities (IMF recommendations and observations)

Fiscal discipline and public finance:
- Authorities signaled intention to institutionalize hard-won fiscal discipline.
- Adoption in April 2016 of the fiscal responsibility law, which over the medium term would cap public spending and change its composition in favor of investment, is a significant step.
- Steadfast implementation of this law and other planned measures to increase public sector efficiency are critical to ensure that public debt ratios decrease over the medium term.
- Consolidation of reforms in the electricity sector is crucial to further strengthen public finances and foster competition in the electricity market.
Monetary policy and financial sector:
- Reforms to the monetary policy framework and exchange rate regime are needed to give the central bank the necessary tools to effectively respond to external shocks.
- To support these reforms and the ongoing process of de-dollarization and financial market development, measures to strengthen the central bank need to be fast tracked.
- Financial stability should be reinforced by enhancing the bank resolution framework and strengthening prudential regulations on household debt.
Growth, employment, and social policy:
- Honduras’s poverty level and informality remain high, while potential growth and employment remain relatively low.
- While social spending has been protected, structural reforms to boost growth and employment should focus on:
- reducing crime and violence;
- closing infrastructure gaps, especially in energy;
- increasing financial market access for poor households and the efficiency of public spending.

Representative quote

Mitsuhiro Furusawa, Acting Chair and Deputy Managing Director:

“Honduras’s economic reform program supported by the Fund’s blended Stand-By Arrangement and Standby Credit Facility has made considerable progress in restoring macroeconomic stability, reducing the fiscal deficit, and tackling some structural issues. At the same time, the external current account deficit has narrowed, private credit is expanding at a sustainable pace, and net international reserves have risen. Together, these favorable developments have contributed to a systematic improvement in Honduras’s international sovereign debt credit ratings.

“The authorities have signaled their intention to institutionalize hard-won fiscal discipline. The adoption in April 2016 of the fiscal responsibility law, which over the medium term would cap public spending and change its composition in favor of investment, is a significant step. The steadfast implementation of this law and other planned measures to increase public sector efficiency are critical to ensure that public debt ratios decrease over the medium term. The consolidation of the reforms in the electricity sector are crucial to further strengthen public finances and foster competition in the electricity market.

“Reforms to the monetary policy framework and exchange rate regime are needed to give the central bank the necessary tools to effectively respond to external shocks. To support these reforms and the ongoing process of de-dollarization and financial market development, measures to strengthen the central bank need to be fast tracked. At the same time, financial stability should be reinforced by enhancing the bank resolution framework and strengthening prudential regulations on household debt.

“Honduras’s poverty level and informality remain high, while potential growth and employment remain relatively low. While social spending has been protected, structural reforms to boost growth and employment should focus on reducing crime and violence; closing infrastructure gaps, especially in energy; and increasing financial market access for poor households and the efficiency of public spending.”

Press Release No. 16/482 (November 2, 2016) — IMF Communications Department