## IMF Executive Board Concludes 2018 Article IV Consultation with Honduras

_IMF News, July 3, 2018_

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## Bibliographic details
- Published: July 3, 2018

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### 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.*

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## References

- [Honduras and the IMF](http://www.imf.org/external/country/HND/index.htm)
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_Source: https://www.imf.org/en/news/articles/2018/07/03/pr18268-imf-executive-board-concludes-2018-article-iv-consultation-with-honduras_