IMF Executive Board Concludes 2012 Article IV Consultation with Honduras

Public Information Notice (PIN) No. 13/19
February 15, 2013

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On February 8, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Honduras.1


Economic growth slowed down in 2012, while inflation was broadly stable. After reaching 3¾ percent in 2011, real gross domestic product (GDP) growth in 2012 is estimated at 3¼ percent, reflecting partly a contraction of the maquila sector. Headline inflation was 5.4 percent at end-2012, slightly below its level a year earlier. Core inflation, however, remained broadly stable at about 6 percent y/y throughout the year.

Fiscal policy became expansionary in 2012. Government real expenditure grew slightly faster than in 2011 and tax revenue growth declined sharply. The latter reflected continuing tax exemptions, weak revenue administration, the expiration of tax measures adopted in 2010, and a Supreme Court ruling against changes to the income tax from 2011. The central government deficit is estimated to have widened to 6 percent of GDP in 2012, from 4½ percent of GDP in 2011. While performance of state-owned enterprises also weakened, ongoing surpluses by public pension contained the combined public sector (CPS) deficit to 4¼ percent of GDP in 2012. Reduced domestic demand for new government paper and limited access to official external financing led to the accumulation of domestic arrears (whose stock is estimated to have reached about 4 percent of GDP at end-2012) and to central bank credit to finance the deficit.

The external position continued to weaken during 2012. The external current account deficit is projected to have risen to almost 10 percent of GDP in 2012, driven partly by robust domestic demand and less favorable terms of trade. Net international reserve losses for 2012 reached about US$370 million, with gross reserve coverage falling to 3 months of imports (from 3½ months of imports at end-2011), reflecting also a weakening in the private capital account in the second half of 2012.

Monetary policy efforts have not been enough to prevent the deterioration of the external position. Low policy interest rates and a tightly-managed exchange rate have supported the expansion of domestic demand since 2010. Bank credit growth rose significantly in 2012, particularly foreign currency loans and consumer credit. Reflecting partly crowding out by the public sector, loan and deposit interest rates in lempiras rose substantially since mid-2012, but this did not contain credit growth. The current exchange rate system has not eliminated the excess demand for foreign exchange or brought the real effective exchange rate in line with fundamentals.

The financial sector remains generally sound. Non-performing loans (NPLs) are low (2½ percent in November 2012) and have been declining; and capital levels and provisions against NPLs have been increased. New regulations to strengthen risk management have been introduced, and are expected to be fully implemented during 2013-14. Financial dollarization remains at about 30 percent and there are significant currency mismatches, especially on the borrowers’ side, which poses risks. The Superintendency of Banks has been addressing this issue through higher capital requirements on undhedged loans. The rapid growth of consumer lending also poses risks.

Looking ahead, real GDP growth is projected to remain at 3¼ percent in 2013, while inflation is expected to rise to about 6 percent. The CPS deficit is projected to increase to 4½ percent of GDP as a small increase in revenues is outpaced by higher current spending, notably on domestic interest obligations. The external current account deficit is projected to rise further, driven partly by strong import growth. International reserves coverage is expected to remain at about three months of imports.

Executive Board Assessment

Executive Directors welcomed Honduras’ robust economic growth since 2010 and modest inflation. However, they noted that the external and fiscal positions have weakened, increasing downside risks and vulnerabilities, and poverty reduction remains a major challenge. Directors therefore underscored the need to tighten macroeconomic policies and press ahead with structural reforms to safeguard external and fiscal sustainability, rebuild policy buffers, and stimulate broad-based economic growth.

Directors welcomed the planned reduction of the budget deficit in 2013, and urged early adoption of the measures needed to ensure this outcome and avoid further central bank borrowing or accumulation of domestic payments arrears. They called for sustained medium-term fiscal consolidation, with a strengthened fiscal framework to instill credibility in fiscal policy. In this regard, Directors stressed the importance of reducing tax exemptions and strengthening tax administration to boost revenue. They supported plans to restrain the public sector wage bill and transfer some spending responsibilities to local governments, and emphasized the importance of reducing energy subsidies through improved targeting. These measures should be accompanied by renewed efforts to improve public financial management and strengthen debt management.

Directors concurred that monetary policy should be tightened, including by raising the policy rate and reserve requirements. They welcomed the recent decision to recapitalize the central bank. Directors noted the staff’s assessment that the real effective exchange rate was not in line with fundamentals. They generally encouraged the authorities to make use of the scope for greater exchange rate flexibility allowed by the current exchange rate band, to help absorb external shocks, protect the international reserve position, and support fiscal and monetary tightening.

Directors regarded plans to reform state-owned enterprises as critical to strengthen the fiscal position and support growth, and encouraged timely implementation. They called for enhanced monitoring and assessment of risks associated with public-private partnerships, and welcomed the ongoing reform of public pension funds. Directors noted the financial system is stable and sound, but advised that rapid credit growth and currency mismatches be closely watched. They encouraged steadfast implementation of regulations on risk management, and supported the use of macroprudential tools to contain risks.

Honduras: Selected Economic Indicators


2008 2009 2010 2011 2012 2013
    (Annual percentage change, unless otherwise indicated)

National income and prices


GDP at constant prices

4.2 -2.4 3.7 3.7 3.3 3.3

GDP deflator

7.8 7.7 4.7 7.7 4.3 5.2

Consumer prices (end of period)

10.8 3.0 6.5 5.6 5.4 5.9

Exchange rate (end of period, depreciation -)


Lempiras per U.S. dollar

19.0 19.0 19.0 19.1 ...

Real effective rate

4.9 7.8 1.6 1.2 ...

Money and credit


Private sector credit

9.9 5.0 3.1 10.3 16.9 21.6

Broad money

5.3 1.1 9.4 12.4 9.7 15.7

Lending rate (end of period, in percent)

18.5 17.1 15.1 14.2 ... ...

Deposit rate (end of period, in percent)

13.1 10.6 8.0 7.4 ... ...
    (In percent of GDP, unless otherwise indicated)

Combined public sector


Noninterest revenue and grants

25.7 22.8 22.7 21.9 21.7 22.0

Noninterest expenditure

27.4 28.2 26.1 24.9 25.9 25.9

Primary balance

-1.7 -5.4 -3.4 -3.0 -4.2 -3.9

Net interest payments

-1.0 -0.9 -0.6 -0.2 0.9 1.0

Public saving

2.8 -0.8 0.6 1.1 0.7 -0.1

Capital expenditure

6.0 5.8 5.4 5.9 5.8 5.7

Overall balance

-1.7 -4.5 -2.8 -2.8 -4.3 -4.6

Public sector debt 1/

22.9 24.6 29.7 32.1 34.7 36.2

Of which: External debt

16.8 16.9 17.9 18.2 19.9 24.5

Public sector external debt service (in percent


of non-maquila exports)

2.8 12.2 3.9 4.5 2.9 4.4

Savings and investment


Gross fixed capital formation

33.6 22.0 21.6 25.2 23.7 24.5

Gross national savings

18.2 18.0 16.3 16.6 13.8 13.3

External sector


Gross international reserves (millions of dollars)

2,691 2,331 2,931 3,043 2,778 2,695

GIR (In months of imports) 2/

4.7 3.6 3.6 3.5 3.0 2.9

Change in net international reserves (increase -)

185 604 -589 50 367 50

External current account balance

-15.4 -4.0 -5.3 -8.5 -9.9 -11.2

Exports, f.o.b. (annual percentage change)

7.2 -22.1 26.6 27.6 2.4 1.4

Imports, f.o.b. (annual percentage change)

17.6 -29.4 20.7 23.4 2.5 6.7









Sources: Central Bank of Honduras, Ministry of Finance, and IMF staff estimates and projections.

1/ Debt series revised based on more comprehensive data series provided by the authorities in September 2012.

2/ Refers to the following year's imports of non-maquila goods and nonfactor services.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


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