IMF Executive Board Concludes 2018 Article IV Consultation with Honduras
IMF News, June 29, 2018
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- Published: June 29, 2018
Recent macroeconomic performance and program completion
- On May 30, 2018, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Honduras.
- Honduras successfully concluded its 2014-2017 Fund-supported program, which:
- Restored investor confidence and reduced macroeconomic imbalances.
- Catalyzed structural reforms, including modernization of the fiscal policy framework now anchored by a fiscal responsibility law (FRL).
- Growth and demand:
- The economy grew 4¾ percent in 2017, boosted by domestic demand, mainly private consumption supported by record remittances inflows and public investment.
- Inflation:
- Headline inflation picked up to 4¾ percent in 2017 from 3¼ percent in 2016 on the back of strong demand and rising oil prices.
- External position and reserves:
- International reserves were equivalent to 5.3 months of imports of goods and services at end-2017, within Fund adequacy metrics.
- Fiscal developments:
- The fiscal deficit increased slightly from ½ percent of GDP in 2016 to ¾ percent of GDP in 2017, still below the deficit ceiling of the FRL (1½ percent of GDP).
- Public revenues were boosted by a ½ percent of GDP windfall stemming from a series of tax amnesties granted after the introduction of the new tax code.
- Monetary and financial sector:
- Monetary policy was accommodative in 2017, resulting in an increase in credit to the economy of 9½ percent.
- Modernization of the exchange rate regime continued as the authorities reduced surrender requirements by additional 10 percent (20 percent up to date).
- Financial indicators as of end-2017: banks’ capital adequacy ratio was 13¾ percent (well above the regulatory minimum); non-performing loans ratio was 2¼ percent (historical lows).
Outlook and risks (2018–2019)
- Growth projections:
- In 2018-19, growth is expected to hover around 3¾ percent reflecting worsening external conditions.
- Fiscal and external projections:
- The fiscal deficit would remain somewhat below the FRL ceiling as the authorities plan to limit the increase in public debt further.
- The current account deficit would widen to about 4 percent of GDP both in 2018 and 2019 as remittances’ growth moderates and oil prices rise.
- Key risks:
- Tighter global financial conditions due to the normalization of the U.S. monetary policy.
- More restrictive U.S. immigration policies.
- Vulnerabilities to domestic political polarization and potential deterioration in the institutional framework.
Executive Board assessment and policy recommendations
- Overall assessment:
- Directors commended the authorities for successful completion of the Fund‑supported program and noted the reduction in macroeconomic imbalances and institutional enhancements, particularly the FRL.
- Directors emphasized the need for deeper reforms to entrench macroeconomic stability and place Honduras on a higher, more inclusive growth path.
- Near‑term policy mix:
- Directors supported the authorities’ near‑term policy mix and favored a more prudent fiscal stance than required under the FRL to signal commitment to macroeconomic stability.
- Directors welcomed readiness to unwind the supportive monetary policy stance, if needed, to anchor inflation expectations and contain inflationary pressures.
- Fiscal policy and public finances:
- Need for continued ambitious fiscal reforms and revenue mobilization to boost potential growth, expand the social safety net, and reduce poverty.
- Positive results of the conditional cash transfers program were noted and its envisaged expansion should remain within the ceilings of the FRL.
- Calls for a comprehensive review of large tax expenditures and rationalization of expenditures.
- Caution against adverse effects of repeated tax amnesties on compliance and revenue mobilization.
- Stronger efforts needed to resolve the financial situation of the state electricity company, right‑size the wage bill, and enhance transparency and efficiency of public expenditure.
- Monetary and exchange rate policy:
- Welcome for progress toward modernization of monetary policy (reductions in surrender requirements; introduction of collateralized transactions in the interbank market).
- Recommendation to speed up adoption of the new central bank law to enshrine the primacy of inflation as a monetary policy target.
- Recommendation to deepen the money and foreign exchange markets and allow more exchange rate flexibility to provide a cushion against external shocks.
- Financial sector and supervision:
- Welcome for banking system stability and progress toward adopting Basel III standards.
- Recommendation for sustained implementation of the Financial Sector Stability Review recommendations.
- Calls for careful monitoring of household debt, concentration of consumer loans in public pensions fund portfolios, and the expansion of development banks toward first‑tier operations.
- Need for further strengthening of the AML/CFT framework.
- Structural and institutional reforms:
- Urgent need to implement supply‑side reforms to boost competitiveness, growth, and job creation.
- Strengthening the rule of law is critical to improve the business environment.
- Acknowledgement of ongoing progress in fighting corruption in collaboration with international agencies and recommendation to enhance transparency of the current asset disclosure regime for public officials.
- Continued efforts recommended to reduce red tape and increase the ease of doing business.
- Need to update national statistics for effective policy formulation; Directors welcomed progress made by the authorities.
Key economic indicators (selected)
- GDP at constant prices (annual percent change): 2013: 2.8; 2014: 3.1; 2015: 3.8; 2016: 4.8; 2017: 3.7; 2018: (Prel.) GDP deflator entries shown separately.
- GDP deflator (annual percent change): 2013: 1.4; 2014: 6.8; 2015: 6.9; 2016: 3.5; 2017: 4.2; 2018: 4.3.
- Consumer prices (eop, annual percent change): 2013: 4.9; 2014: 5.8; 2015: 2.4; 2016: 3.3; 2017: 4.7; 2018: 5.0; 2019: 4.5.
- Exchange rate (eop, Lempiras per U.S. dollar 1/): 2013: 20.7; 2014: 21.6; 2015: 22.4; 2016: 23.5; 2017: 23.6; 2018: 23.8.
- Real effective rate 2/: 2013: 0.2; 2014: 1.8; 2015: -2.3; 2016: -1.5; 2017: -1.2.
- Private sector credit (annual percent change): 2013: 11.2; 2014: 10.7; 2015: 10.4; 2016: 10.6; 2017: 9.4; 2018: 10.8.
- Broad money (annual percent change): 2013: 8.4; 2014: 13.2; 2015: 13.9; 2016: 12.4; 2017: 9.5; 2018: 9.1.
- Lending rate (eop, in percent): 2013: 16.9; 2014: 15.9; 2015: 14.0; 2016: 14.3.
- Deposit rate (eop, in percent): 2013: 11.0; 2014: 8.8; 2015: 8.2.
- Primary balance (percent of GDP): 2013: -7.0; 2014: -3.4; 2015: 0.1; 2016: 0.3; 2017: 0.5.
- Overall balance (percent of GDP): 2013: -7.5; 2014: -3.9; 2015: -0.9; 2016: -0.5; 2017: -0.8.
- Gross debt (percent of GDP): 2013: 38.6; 2014: 39.3; 2015: 39.0; 2016: 39.9; 2017: 40.3; 2018: 40.8; 2019: 41.3.
- Gross fixed capital formation (percent of GDP): 2013: 22.9; 2014: 23.0; 2015: 25.1; 2016: 23.4; 2017: 24.0; 2018: 24.9.
- Gross national savings (percent of GDP): 2013: 13.4; 2014: 16.0; 2015: 20.5; 2016: 22.3; 2017: 21.1; 2018: 21.2.
- Gross international reserves (millions of dollars): 2013: 3,255; 2014: 3,698; 2015: 3,992; 2016: 4,177; 2017: 5,086; 2018: 5,172; 2019: 5,351.
- Gross international reserves (in months of imports) 3/: 2013: 5.3; 2014: 5.1.
- Change in net international reserves (increase -): 2013: -546; 2014: -264; 2015: -303; 2016: 124; 2017: -708; 2018: -50; 2019: -155.
- Current account balance (percent of GDP): 2013: -9.5; 2014: -6.9; 2015: -4.7; 2016: -2.7; 2017: -1.7; 2018: -3.8.
- Exports f.o.b. (annual percent change): 2013: -6.6; 2014: 4.0; 2015: 1.3; 2016: -3.5; 2017: 9.3.
- Imports f.o.b. (annual percent change): 2013: -3.7; 2014: 1.2; 2015: 0.8; 2016: -5.5; 2017: 7.2; 2018: 5.7; 2019: 3.9.
IMF Executive Board Concludes 2018 Article IV Consultation with Honduras, June 29, 2018.
