IMF Staff Completes 2023 Article IV Mission to Honduras
IMF News, June 17, 2023
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- Published: June 17, 2023
Summary of recent economic developments and outlook
- Mission led by Mr. Ricardo Llaudes visited Tegucigalpa during June 5-16 for the 2023 Article IV consultation.
- Real GDP is now above pre-pandemic levels.
- Inflation pressures have been gradually easing.
- The strong recovery began moderating at the end of 2022 driven by lower growth in key trading partners that have lowered demand for Honduran exports.
- The current account deficit narrowed to 3.4 percent of GDP in 2022 on the back of strong remittances and exports.
- Gross international reserves remain at comfortable levels.
- Social conditions remain challenging, with high levels of poverty, unemployment, and food insecurity; around 1/4 of the population is at high risk of food insecurity.
Near-term projections and risks
- Real GDP growth is projected to decline to around 3 percent in 2023, driven by lower remittances, a less supportive external environment, and the impact of the drought.
- Inflation is expected to continue its downward trend, supported by a normalization in food prices.
- The current account deficit is expected to widen to close to 5 percent of GDP due to slower remittances growth and adverse global price developments.
- Substantial downside risks remain, particularly in the short run:
- The ongoing drought could be more severe and protracted than expected, with pronounced impacts on agricultural output, energy provision, and social conditions.
- A sharper U.S. economic slowdown, particularly in the U.S. labor market, and a further tightening in global financing conditions would impact remittances and domestic activity.
Key structural and social challenges
- Honduras remains one of the poorest and most unequal countries in the Western Hemisphere.
- Structural bottlenecks, especially in the energy sector, and limited formal economic opportunities stifle investment and fuel migration.
- Honduras is one of the world’s most vulnerable countries to climate disasters, with sizeable adaptation investment needs.
- Extreme climate events in Honduras have generated average annual losses equivalent to 6.3 percent of GDP during 1960-2022.
Near-term policy recommendations
- Anchor macroeconomic stability while creating fiscal space for investment and social spending, ensuring energy sector sustainability, supporting disinflation, and reducing FX market pressures.
- Fiscal policy:
- Careful fiscal management to preserve debt sustainability.
- Reorient spending toward greater investment in infrastructure (dams, roads, hospitals, and schools) and well-targeted social programs, such as the flagship program Red Solidaria.
- Continue revenue mobilization efforts to broaden the tax base and strengthen the efficiency of revenue collection.
- A far-reaching tax reform currently being debated in Congress would reduce the extensive exonerations to the income tax while safeguarding competitiveness; transparent and predictable implementation and corresponding regulations are crucial.
- Energy sector (urgent given drought-related blackouts):
- Swift measures to ensure sustainability of the energy sector and limit impacts on economic activity and the most vulnerable.
- Prompt identification of new energy sources to meet increasing domestic demand and limit fiscal and balance of payments impact.
- Ensure ENEE successfully reintegrates distribution activities as the outsourcing contract to a private company is ending.
- Monetary and exchange rate policy:
- Strengthened consistency between monetary and exchange rate policies to support the Lempira under the crawling band regime.
- Monetary policy implementation by the Central Bank of Honduras (BCH) should be data driven, proactively adjusting policy instruments, especially the Tasa de Politica Monetaria (TPM), in line with interest rate developments in trading partners.
- Ensure the rate of crawl of the Lempira reflects economic fundamentals and relative prices with trading partners.
Medium-term policy priorities and structural reforms
- Fiscal policy:
- Elimination of trust funds has strengthened spending transparency and accountability.
- Further enhance budget credibility and implementation, including introduction of a fiscal responsibility law, strengthening the Treasury Single Account, improvements to public financial management, and modernizing the public procurement framework.
- Diversify sources of financing and develop local debt markets, including by restarting issuances of government bonds in the domestic market.
- Avoid Central Bank financing of the government.
- Monetary and exchange rate frameworks:
- Strengthen frameworks to anchor inflation expectations, preserve external competitiveness, and enable a gradual return towards a market-based allocation of FX.
- Consider widening the exchange rate band and letting the rate of crawl reflect projected inflation differentials with trading partners to support the crawling band regime.
- Energy sector reform:
- Implement a wide-ranging strategy with significant investment across generation, transmission, and distribution.
- Accelerate implementation of the National Loss Reduction Plan (PNRP) to reduce technical and non-technical losses.
- Continue repaying arrears to generators and finalize renegotiation of contracts to lower costs.
- Governance and transparency:
- Continue commitment to fight corruption, improve transparency, and strengthen the AML/CFT framework.
- Noted measures: creation of a Ministry of Transparency and the expected establishment of an anti-corruption commission with UN support.
- Align AML/CFT framework with international standards, including promptly reversing measures introduced by Decree 93-2021 that considerably weakened the framework.
- Climate resilience:
- Swift and decisive climate adaptation actions are essential.
- Planned modernization of the Law on Climate Change and development of a strategy for climate change financing in line with Honduras’ Nationally Determined Contribution should help build resilience.
Engagement and consultations
- The mission held discussions with Finance Minister Rixi Moncada, Central Bank President Rebeca Santos, National Bank and Insurance Commission President Marcio Sierra, Tax Administration Service Minister Director Marlon Ochoa, and other senior officials, representatives of the private sector, labor unions, civil society, and the international community.
- The IMF team expressed appreciation for candid, productive, and transparent discussions and looks forward to continuing close discussions with the Honduran authorities.
IMF Staff Completes 2023 Article IV Mission to Honduras — Press Release No. 23/219, June 16, 2023.