Press Release No. 05/76

Press Release: IMF and World Bank Support US$1 Billion in Debt Service Relief for Honduras

April 5, 2005

The World Bank's International Development Association (IDA) and the International Monetary Fund (IMF) have agreed this week that Honduras has taken the necessary steps to reach its completion point under the enhanced Heavily Indebted Poor Countries (HIPC) Debt Initiative. Honduras is the 16^th country to reach its completion point under the enhanced framework of the HIPC Debt Initiative, joining Benin, Bolivia, Burkina Faso, Ethiopia, Ghana, Guyana, Madagascar, Mali, Mauritania, Mozambique, Nicaragua, Niger, Senegal, Tanzania, and Uganda.¹

Debt relief under the enhanced HIPC Debt Initiative from all of Honduras' creditors will surpass US$1 billion over time (or US$556 million in net present value (NPV) terms as of the end of 1999).² IDA will provide debt relief under the enhanced HIPC Debt Initiative amounting to US$98 million in NPV terms (approximately US$118.9 million in debt service relief) to be delivered from 2000 through 2012. The IMF will provide debt relief of SDR 22.66 million (equivalent toUS$30.3 million) in NPV terms on payments falling due to the IMF during 2001-07. The remaining bilateral and multilateral creditors are also expected to provide their share of relief required under the enhanced HIPC Initiative. Debt relief, together with bilateral assistance beyond HIPC relief, is estimated to have reduced Honduras' debt-to-export ratio to 92.5 percent and its debt-to-government revenue ratio to 188 percent in 2003. Those levels are 58 percentage points and 62 percentage points, respectively, below the HIPC thresholds.

The World Bank's Director for Central America, Jane Armitage, praised the authorities' efforts in reaching the HIPC completion point and indicated that "the HIPC completion point is an important achievement for Honduras, reflecting major and sustained reform efforts over several years. The resulting debt relief removes a huge obstacle from the road to faster growth and development, and is an important part of a larger effort to reduce poverty in the coming years."

"HIPC completion represents a milestone in Honduras' journey to achieving rapid and sustainable growth and reducing poverty. It is the result of the authorities' efforts to build strong domestic ownership of the economic program. The challenge now is to persevere in the implementation of sound policies to ensure that Honduras' potential for sustained higher growth and further social progress is realized," said Mr. Markus Rodlauer, Senior Advisor of the Western Hemisphere Department of the IMF.

Resources made available by debt relief provided under the HIPC Initiative are being allocated to fund key pro-poor growth programs, as outlined in Honduras' Poverty Reduction Strategy Paper (PRSP). Honduras' PRSP is the result of broad-based consultations and presents the government's objectives and priority measures for reducing poverty.

Background

Honduras' performance under the program supported by the Poverty Reduction and Growth Facility has been satisfactory. In 2004 growth accelerated to about 5 percent on the back of a broad-based recovery, while inflation stabilized after drifting up during most of the year due to high oil prices. The external position improved significantly, owing to the strong growth in remittances and capital inflows. These achievements were helped by the authorities' efforts to summon social consensus, which made it possible to address challenging policy issues. Nevertheless, achieving sustained growth and significant poverty reduction will hinge on maintaining a sound fiscal policy framework and further implementing growth-inducing policies.

Honduras has also made significant progress in implementing its PRSP. This has contributed to the decline of extreme poverty to 44.6 percent in 2004 (from 49 percent in 2000), while overall poverty declined more modestly by two percentage points (to 64 percent) during this period. Secondary education indicators have improved, as have the infrastructure coverage indicators in electricity and sanitation services; however, advances in primary education and access to water have been slower than envisaged. Overall, despite the early success in implementing the PRSP, further efforts are needed to achieve the PRSP targets and Millennium Development Goals (MDGs).

The authorities have satisfactorily met their poverty spending targets. Total PRSP spending (adjusted for hurricane Mitch-related programs) increased by a cumulative total of US$476.2 million since 2000, of which about half (US$236.5 million) was financed through interim HIPC relief. In addition, the government has made significant improvements in its public expenditure management system, including the full automation of poverty-spending tracking.

Steps Taken To Reach the Completion Point under the Enhanced HIPC Debt Initiative

Upon reaching the decision point under the enhanced framework of the HIPC Debt Initiative in July 2000, Honduras committed to undertake a series of measures and reforms to reach the completion point. In addition to restoring a stable macroeconomic environment, preparing a full Poverty Reduction Strategy Paper (PRSP) through a participatory process and implementing it for at least one year, the authorities also have

(i) Prepared and implemented a participatory, comprehensive anti-corruption strategy,

(ii) Reformed the social security system

(iii) Strengthened basic health services for the poor

(iv) Improved the quality of education by increasing the number of schools with community participation,

(v) Increased the efficiency and targeting of safety nets,

(vi) Made substantial progress in strengthening the financial sector.

The HIPC Initiative

In 1996, the World Bank and the IMF launched the HIPC Initiative to create a framework for all creditors, including multilateral creditors, to provide debt relief to the world's poorest and most heavily indebted countries, and thereby reduce the constraint on economic growth and poverty reduction imposed by the debt build-up in these countries. The Initiative was modified in 1999 to provide three key enhancements:

• Deeper and Broader Relief. External debt thresholds were lowered from the original framework. As a result, more countries became eligible for debt relief and some countries became eligible for greater relief.

• Faster Relief. A number of creditors began to provide interim debt relief immediately at the "decision point." Also, the new framework permitted countries to reach the "completion point" faster.

• Stronger Link Between Debt Relief and Poverty Reduction. Freed resources were to be used to support poverty reduction strategies developed by national governments through a broad consultative process.

To date, 27 countries³ —two-thirds of the HIPCs—have reached their "decision points" and are receiving debt relief from all sources that will amount to more than US$54 billion over time, and an average NPV stock-of-debt reduction of nearly two-thirds.