Press Release No. 06/262

Press Release No. 06/262

An International Monetary Fund (IMF) staff mission led by Mr. Luis Breuer issued the following statement in Tegucigalpa:

"An IMF mission visited Honduras during November 13-21 to conduct the discussions on recent economic developments and macroeconomic policies for the 2006 Article IV consultation. The mission met with President Manuel Zelaya and Vice President Elvin Santos, Minister of the Presidency Yani Rosenthal, Central Bank President Gabriela Núñez de Reyes, Minister of Finance Rebeca Santos, Banking and Insurance Commission President Gustavo Alfaro, and with a broad range of representatives from congress, the business sector, banks, civil society, and donors. The mission would like to express its gratitude to the authorities for the fruitful policy discussions and the excellent cooperation received during its stay.

"The economy has performed well this year supported by benign external conditions. Growth is expected to exceed 5 percent in 2006, reflecting higher consumption and strong growth of construction, financial sector services, and coffee production. Inflation has dropped to under 5 percent, helped by the stable exchange rate and favorable agricultural supply. Net international reserves rose in the first semester due mainly to the strong growth of family remittances and have stabilized at around US$2.3 billion.

"The overall fiscal deficit is projected to rise somewhat in 2006, to around 2 percent of GDP, reflecting weaker state enterprise finances, higher wages and subsidies, and the increase in net lending from a public pension fund. These factors more than offset the underexecution of public investment (including pro-poor projects), lower quasi-fiscal deficit of the central bank, and higher tax revenue. The authorities launched an ambitious reform of the tax office, which includes the merit-based selection of tax and customs officials and the strengthening of tax collection procedures.

"The mission supports the authorities' goals of sustaining high growth and alleviating poverty, while maintaining fiscal discipline and macroeconomic stability. The mission agreed with the authorities on the need to further strengthen tax revenue, control public spending and redirect it to priority areas, and improve efficiency in the state telephone and electricity companies. The mission shared the authorities' view that further actions will be critical to offset the increase in the wage bill expected in 2007 and beyond, in order to protect pro-poor and investment spending and to consolidate macroeconomic stability. There was also agreement on the need to address other challenges, including transforming the state enterprises so that they contribute to efficiency and support the public finances, improving the targeting of subsidies to the poor, and protecting the financial integrity of public pension funds.

"The mission welcomed the authorities' objective of lowering inflation to the level of main trading partners over the medium term. In the mission's view, this goal will require a gradual tightening of monetary policy in the coming months, which should also help bring to more sustainable levels the rapid expansion in bank credit. The mission welcomed the central bank's plans to implement further steps to reform its monetary operations and develop local capital markets and the payments system.

"The financial sector is continuing its recovery. The mission agreed that further strengthening would be important with the continued strict enforcement of supervisory and prudential rules; these would also help banks internalize potential risks from the rapid expansion in credit, in particular in U.S. dollar terms, and prepare for greater competition from growing regional integration.

"The mission was encouraged by the authorities' support of regional integration and noted that further enhancing the investment climate would require maintaining stable investment rules and reducing red tape as well as upgrading infrastructure (electricity, ports, and roads) as planned. It would also be important to avoid further fiscal incentives in attracting foreign investment, which would weaken the government's tax base and its ability to implement its ambitious social and growth agenda.

"During its stay, the mission sensed a broad agreement among Honduran leaders over the goals of economic policies, including growth and poverty alleviation, as well as a clear understanding of the policy challenges. This situation presents a good opportunity to further strengthen national consensus on policies, including measures to deal with short-term challenges in the fiscal sector. The IMF will continue to maintain a close policy dialogue with the authorities. Upon its return to Washington, the mission will prepare a report to the IMF's Executive Board, as a basis for a Board discussion that is tentatively scheduled for early 2007."