Press Release No. Press Release No.04/179

The following statement was in Tegucigalpa on August 25, 2004 by an International Monetary Fund (IMF) mission staff:

"An IMF mission has visited Tegucigalpa over the past week to conclude discussions for the first semi-annual review of the PRGF program. As in the past, our discussions with the authorities, private sector representatives, and representatives of the international community were very useful and constructive.

"Since the approval of the PRGF in February 2004, the authorities have shown great determination in implementing their program, in a difficult social and political environment and against the additional burden of sharply higher oil prices to which Honduras is particularly vulnerable. The quantitative targets of the program have been met, and the program is already delivering favorable results, with a broad-based recovery of growth and employment, and a major improvement in the external position. Nonetheless, high oil prices remain a source of strain, and inflation—buoyed also by the stronger-than-expected balance of payments inflows—has increased above the program path.

"In reviewing the macroeconomic policy framework, the mission was reassured by the favorable fiscal performance under the program. Revenues have been buoyant, benefiting from the economic recovery, as well as the strengthening of tax administration. On the expenditure side, appropriate restraint in managing non-essential current spending has allowed poverty-related outlays and public investment to rise, while keeping the overall fiscal program on track.

"The recent increase in inflation reflects mainly the impact of oil prices and the liquidity created by the strong international reserves inflows. The mission supports the authorities' strategy to accommodate the direct impact of the oil-price increase, while avoiding any second-round effects. Therefore, the inflation target for this year has been raised somewhat from the initial program objective, while the Central Bank will maintain prudent policies to stem further upward pressures on prices, including through appropriate monetary operations to curtail the impact of higher reserve inflows.

"Financial sector reforms are moving ahead, with important progress in strengthening banking regulations and supervision. The recent approval by the National Congress of three financial laws is a significant step in improving the legal and institutional framework of the financial sector. It is now important that Congress also approve the Financial System Law, which is a key element in the efforts to consolidate the health of the financial sector.

"Following the mission's return to Washington, and once Congress has approved the pending Financial Institutions Law, the Executive Board is expected to discuss the first review of the PRGF arrangement in September. Completion of the review will permit disbursement of the next tranche under the PRGF arrangement for the equivalent to about US$15 million."