IMF Executive Board Concludes 2018 Article IV Consultation with Honduras
IMF News, July 3, 2018
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- Published: July 3, 2018
Overview
- 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 helped restore investor confidence, reduce macroeconomic imbalances, and catalyze structural reforms including modernization of the fiscal policy framework anchored by a fiscal responsibility law (FRL).
Macroeconomic performance (2017)
- GDP growth: "Boosted by domestic demand, mainly private consumption supported by record remittances inflows and public investment, the economy grew 4¾ percent in 2017."
- Headline inflation: increased to "4¾ percent" in 2017 from "3¼ percent" in 2016 due to strong demand and rising oil prices.
- External position: international reserves equivalent to "5.3 months of imports of goods and services at end-2017," within Fund adequacy metrics.
- Fiscal balance:
- Fiscal deficit increased slightly from "½ percent of GDP in 2016 to ¾ percent of GDP in 2017," remaining below the FRL deficit ceiling of "1½ percent of GDP."
- Public revenues were boosted by a "½ percent of GDP windfall" from tax amnesties after the new tax code.
- Monetary and financial conditions:
- Monetary policy was accommodative in 2017, with credit to the economy increasing "9½ percent."
- Exchange-rate modernization: authorities reduced surrender requirements by an additional "10 percent" (total "20 percent" to date).
- Banking system indicators (as of end-2017):
- Banks’ capital adequacy ratio: "13¾ percent" (well above the regulatory minimum).
- Non-performing loans ratio: "2¼ percent" (historical lows).
Outlook for 2018-2019 and risks
- Growth projections: "In 2018-19, growth is expected to hover around 3¾ percent reflecting worsening external conditions."
- Fiscal stance: "The fiscal deficit would remain somewhat below the FRL ceiling as the authorities plan to limit the increase in public debt further."
- Current account: "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 normalization of U.S. monetary policy.
- More restrictive U.S. immigration policies.
- Vulnerability to domestic political polarization and potential deterioration in the institutional framework.
Executive Board Assessment
- Commendations and recognition:
- Directors commended completion of the Fund‑supported program and noted reduction in macroeconomic imbalances and institutional enhancements, particularly the FRL.
- These gains are viewed as critical for a favorable medium‑term outlook.
- Near‑term policy mix:
- Directors supported the authorities’ near‑term policy mix and encouraged a more prudent fiscal stance than required under the FRL to signal commitment to macroeconomic stability.
- They welcomed readiness to unwind the supportive monetary policy stance if needed to anchor inflation expectations and contain inflationary pressures.
- Structural and fiscal reform priorities:
- Need for continued ambitious fiscal reforms and revenue mobilization to boost potential growth, expand the social safety net, and reduce poverty.
- Positive results noted from the conditional cash transfers program and planned expansion within FRL ceilings.
- Called for a comprehensive review of large tax expenditures and rationalization of expenditures.
- Cautioned against adverse effects of repeated tax amnesties on compliance and revenue mobilization.
- Emphasized resolving the financial situation of the state electricity company, right‑sizing the wage bill, and enhancing transparency and efficiency of public expenditure.
- Monetary and financial sector recommendations:
- Welcome progress in monetary policy modernization (reductions in surrender requirements; introduction of collateralized transactions in the interbank market).
- Recommended speeding up adoption of new central bank law to enshrine the primacy of inflation as a monetary policy target.
- Recommended deepening money and foreign exchange markets, more exchange rate flexibility, and support for domestic capital markets.
- Welcomed banking system stability and progress toward Basel III; recommended sustained implementation of Financial Sector Stability Review recommendations.
- Recommended careful monitoring of household debt, concentration of consumer loans in public pensions fund portfolios, and expansion of development banks toward first‑tier operations.
- Underscored need for further strengthening of the AML/CFT framework.
- Structural and governance reforms:
- Underscored need to implement supply‑side reforms to boost competitiveness, growth, and job creation.
- Noted strengthening rule of law is critical to improve the business environment.
- Acknowledged progress in fighting corruption in collaboration with international agencies and recommended enhancing transparency of the current asset disclosure regime for public officials.
- Emphasized need to reduce red tape and increase ease of doing business.
- Statistics:
- Directors emphasized the need to update national statistics for effective policy formulation and welcomed progress made by the authorities.
Selected Economic Indicators (annual percent change unless otherwise indicated)
- National income and prices:
- GDP at constant prices: 2013: "2.8", 2014: "3.1", 2015: "3.8", 2016: "4.8", 2017: "3.7"
- GDP deflator: 2013: "1.4", 2014: "6.8", 2015: "6.9", 2016: "3.5", 2017: "4.2", 2018: "4.3"
- Consumer prices (eop): 2013: "4.9", 2014: "5.8", 2015: "2.4", 2016: "3.3", 2017: "4.7", 2018: "5.0", 2019: "4.5"
- Exchange rate (eop, depreciation -) 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"
- Money and credit:
- Private sector credit: 2013: "11.2", 2014: "10.7", 2015: "10.4", 2016: "10.6", 2017: "9.4", 2018: "10.8"
- Broad money: 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"
- Nonfinancial public sector:
- 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"
- Saving and investment:
- 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"
- External sector:
- 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/: "5.3", "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.: 2013: "-6.6", 2014: "4.0", 2015: "1.3", 2016: "-3.5", 2017: "9.3"
- Imports f.o.b.: 2013: "-3.7", 2014: "1.2", 2015: "0.8", 2016: "-5.5", 2017: "7.2", 2018: "5.7", 2019: "3.9"
Sources: Central Bank of Honduras, Ministry of Finance, and IMF staff estimates and projections.