## Press Release: IMF Approves Three-Year Arrangement Under the ESAF for Honduras

_IMF News, March 26, 1999_

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## Bibliographic details
- Published: March 26, 1999

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### IMF approval and financing
- The IMF approved a three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF) for Honduras in an amount equivalent to SDR 156.75 million (about US$215 million) to support the government’s economic program for 1999-2001.
- The first annual loan is equivalent to SDR 76 million (about US$104 million) and will be available in two semiannual installments.
- The first semiannual installment, equivalent to SDR 59.85 million (about US$82 million), will be available on April 12, 1999.
- ESAF loan terms: interest rate of 0.5 percent a year, repayable over 10 years, with a 5½-year grace period.

### Background and recent economic performance
- Early- to mid-1990s: IMF-supported programs reduced fiscal imbalances, reformed the tax system, increased central bank autonomy, and liberalized interest rates and exchange and trade systems.
- Persistent challenges: real GDP growth averaged less than 4 percent a year in the first half of the 1990s; inflation stood at 26 percent at the end of 1996; external position remained weak.
- 1997–September 1998: real GDP growth accelerated to 5 percent in 1997 and to an estimated 5½ percent in the 12 months ended in September 1998.
- January–September 1998 fiscal performance: central government deficit narrowed to about 2 percent of GDP from 3 percent of GDP in calendar year 1997.

### Impact of Hurricane Mitch (late October 1998)
- The hurricane caused unprecedented human suffering and virtually crippled the economy.
- Estimated direct losses of inventories and fixed assets amounted to about 50 percent of annual GDP.
- Calendar year 1998 macro effects:
  - Real GDP growth slowed to an estimated 3 percent.
  - Unemployment increased.
  - 12-month rate of inflation picked up to 15½ percent.
  - Central government and balance of payments deficits widened.

### Medium-term strategy and the 1999 program
- Main objectives:
  - Achieve a rapid, sustained recovery.
  - Address considerable social needs exacerbated by the hurricane.
- Targets:
  - Recovery in the rate of real GDP to about 5-6 percent a year by 2000-01 following an expected decline in real GDP by 2-3 percent in 1999 (mainly reflecting extensive damage to the agricultural sector).
  - Reduction in the 12-month inflation rate to 13-14 percent by December 1999 and to 8 percent by end-2001.
  - Maintain an international reserve position equivalent to 3½-4 months of imports.
- Fiscal strategy for 1999:
  - Revised budget to shift spending toward emergency relief and reconstruction.
  - Contain growth in nonemergency expenditures.
  - Strengthen revenue through improvements in tax administration.
  - Program contemplates a marked widening of the combined public sector deficit in 1999 to about 8½ percent of GDP, expected to be financed almost entirely by concessional loans and debt relief.

### Debt and HIPC considerations
- Prior to the hurricane, Honduran external debt indicators did not reach the thresholds required for eligibility under the Heavily Indebted Poor Countries (HIPC) Initiative.
- In the wake of the hurricane, IMF, World Bank, and Inter-American Development Bank staffs have begun work on a comprehensive reassessment of the country’s debt situation and prospects for debt relief in the context of the initiative.

### Structural reforms
- Public sector objectives:
  - Complete transfer of control of the telephone company to a private partner.
  - Conclude privatization of the electricity distribution network.
  - Grant concessions to the private sector for management and operation of public works and airports.
  - Reform civil service: eliminate duplication and overlap among institutions; reclassify positions and salaries to attract and retain skilled staff.
- Financial sector measures:
  - Identify and address weaknesses in legal and institutional framework for bank supervision.
  - Implement recommendations of the banking commission resulting from ongoing on-site inspection of banks during the ESAF arrangement.

### Addressing social needs
- Social sector policies focus:
  - Tackling poverty through faster economic growth.
  - Improving delivery and targeting of basic health, education, and social safety net services.
  - Priority given to disease prevention, neonatal and child care, and minimum nutritional support.
- Program contemplates creation of a fund to finance repair of low-income houses.

### The challenge ahead
- Success depends on:
  - Continued implementation of sound policies by Honduran authorities.
  - A continuous flow of external assistance and debt relief.
- IMF membership and exposure:
  - Honduras is an original member of the IMF; its quota is SDR 129.5 million (about US$177 million).
  - Outstanding use of IMF credit currently totals SDR 78.7 million (about US$108 million).

### Selected economic indicators (as presented)
- National income and prices (annual percentage changes, unless otherwise indicated):
  - GDP at constant prices: 1995: 4.2; 1996: 3.7; 1997: 5.1; 1998: 3.0; 1999 (Prel./Prog.): -3.0
  - GDP deflator: 1995: 24.8; 1996: 22.4; 1997: 22.7; 1998: 13.7; 1999: 15.3
  - Consumer prices (end of period): 1995: 26.8; 1996: 25.5; 1997: 12.8; 1998: 15.7; 1999: 13.0
  - Consumer prices (period average): 1995: 29.5; 1996: 23.8; 1997: 20.2; 1998: 13.6; 1999: (not listed)
- External sector (data on U.S. dollars):
  - Exports, f.o.b.: 1995: 27.6; 1996: 9.6; 1997: 8.0; 1998: 4.5; 1999: -22.5
  - Imports, c.i.f.: 1995: 12.3; 1996: 12.0; 1997: 15.9; 1998: 14.7; 1999: 17.2
  - Effective exchange rate (depreciation -)1 Nominal rate: 1995: -12.7; 1996: -12.0; 1997: -2.6; 1998: -6.5; 1999: ...
  - Real effective rate: 1995: 5.8; 1996: 0.3; 1997: 15.0; 1998: 5.4; 1999: (not listed)
- Central government (annual percent changes unless otherwise indicated):
  - Current revenue: 1995: 46.8; 1996: 18.8; 1997: 28.7; 1998: -7.7; 1999: (not listed)
  - Expenditure and net lending: 1995: 19.7; 1996: 21.2; 1997: 21.9; 1998: 39.1; 1999: 40.3
- Money and credit:
  - Net domestic assets2: 1995: 3.6; 1996: 16.2; 1997: 12.9; 1998: 15.1; 1999: 14.4
  - Public sector: 1995: -8.7; 1996: -4.5; 1997: -11.4; 1998: -14.3; 1999: 0.0
  - Private sector: 1995: 15.4; 1996: 25.0; 1997: 35.5; 1998: 28.4; 1999: 18.7
  - Money and quasi-money: 1995: 20.8; 1996: 32.2; 1997: 43.3; 1998: 23.6; 1999: (not listed)
  - Interest rate (on certificate of deposit): 1995: 17.1; 1996: 19.9; 1997: 21.7; 1998: 18.0
- Central government overall balance (in percent of GDP): 1995: -2.8; 1996: -4.1; 1997: -3.2; 1998: -8.6; 1999: (not listed)
- Revenue and grants (in percent of GDP): 1995: 18.3; 1996: 17.3; 1997: 19.3; 1998: 21.1; 1999: 21.4
- Financing of the nonfinancial public sector (in percent of GDP):
  - 1995: 2.7; 1996: 1.3; 1997: 0.9; 1998: 8.3; 1999: (not listed)
  - Foreign financing: 1995: 4.7; 1996: 3.8; 1997: 2.9; 1998: 1.5; 1999: 7.8
  - Domestic financing: 1995: -2.0; 1996: -0.2; 1997: -1.6; 1998: -0.6; 1999: 0.5
- Public sector savings3 (in percent of GDP): 1995: 7.1; 1996: 6.9; 1997: 5.6; 1998: 2.2; 1999: (not listed)
- Combined public sector balance4 (in percent of GDP): 1995: -3.5; 1996: -4.7; 1997: -2.9; 1998: -1.4; 1999: (not listed)
- Fixed capital formation (in percent of GDP): 1995: 23.0; 1996: 23.3; 1997: (not listed)
- External current account deficit (excluding official transfers) (in percent of GDP): 1995: -4.8; 1996: -3.9; 1997: -12.5; 1998: (not listed)
  - Alternative line: 1995: -8.2; 1996: -6.9; 1997: -6.6; 1998: -16.3
- Gross national savings (in percent of GDP): 1995: 18.5; 1996: 21.5; 1997: 20.0; 1998: (not listed)
- External public debt inclusive of Fund credit (in percent of GDP): 1995: 101.2; 1996: 94.8; 1997: 78.8; 1998: 71.6; 1999: 80.2
- Debt-service ratio (before debt relief) (in percent of exports of goods and services): 1995: 33.0; 1996: 32.6; 1997: 24.6
- Change in net international reserves (increase -) (in millions of U.S. dollars): 1995: -116; 1996: -98; 1997: -280; 1998: -168; 1999: -45
- Gross international reserves (in millions of U.S. dollars): 1995: 296; 1996: 283; 1997: 548; 1998: 770; 1999: 918
- Reserves (in months of imports): 1995: 1.9; 1996: 1.6; 1997: 3.3; 1998: 3.4; 1999: (not listed)
- Stock of external debt (in millions of U.S. dollars): 1995: 3,952; 1996: 3,767; 1997: 3,650; 1998: 3,788; 1999: 4,385
- Stock of external debt arrears (in millions of U.S. dollars): 1995: 127; 1996: 179; 1997: 120; 1998: 136; 1999: 0

*Press Release No. 99/11, March 26, 1999.*

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