IMF Executive Board Approves US$113.2 Million Stand-By Arrangement and US$75.4 Million Stand-By Credit Facility for Honduras

Press Release No. 14/545
December 4, 2014The Executive Board of the International Monetary Fund (IMF) yesterday approved a US$113.2 Stand-By Arrangement and a US$75.4 arrangement under the Stand-By Credit Facility¹(SBA/SCF) for Honduras for a combined SDR 129.5 million (about US$188.6 million or 100 percent of Honduras’s quota). The arrangements are intended to support the authorities’ three-year economic program, which aims to maintain macroeconomic stability and improve conditions for sustainable economic growth and poverty reduction.

The Executive Board’s decision makes available a total of SDR 38.85 million (about US$56.6 million) and the remainder in six varying tranches upon completion of semi-annual program reviews. The Honduran authorities plan to treat the arrangements as precautionary.

Following the Executive Board’s discussion on Honduras, Mr. Min Zhu, Deputy Managing Director and Acting Chair, made the following statement:

“The Honduran authorities’ program, which is supported by an SBA/SCF arrangement with the Fund, aims at preserving macroeconomic stability—by further strengthening fiscal and external positions—and improving the conditions for sustainable and inclusive growth.

“Sustained fiscal consolidation will be necessary to reduce the country’s large fiscal deficit and contain public debt. The authorities began moving in this direction with the implementation of tax policy measures earlier this year, followed by expenditure reductions and steps to improve the financial position of the state electricity company. Looking forward, efforts should focus on further reducing current expenditure, improving tax administration, and strengthening the electricity company’s finances. The authorities’ program also seeks to protect social spending and public investment, mainly by shifting the composition of public expenditure away from inefficient current outlays.

“Sound monetary policy and exchange rate flexibility will help keep inflation in check and protect international reserves. Exchange rate flexibility would also protect competitiveness and ease the cost of fiscal adjustment. The presence of currency mismatches by borrowers calls for more stringent macroprudential measures to reduce risks in the banking sector.

“Structural reforms are an essential component of the authorities’ program. Key reforms are being implemented in the electricity sector, pensions, and the framework for public-private sector partnerships. The authorities are also expanding the social safety net, which would support efforts to reduce poverty.”

Annex

Recent economic developments

The government that took office in January 2014 has vowed to reduce macroeconomic imbalances, promote inclusive economic growth, and improve domestic security.

Macroeconomic conditions have been improving in 2014. Real economic activity rose by 2.6 percent from January–August (compared with 2.1 percent in the same period last year). The effects of ongoing fiscal consolidation on economic growth have been offset by more favorable external conditions and increased private investment related to the dissipation of political uncertainty (from last year’s elections) and improved confidence. The fiscal position has also strengthened. The combined public sector deficit declined to 1 percent of GDP in January–August, from 3.3 percent of GDP in the same period last year. Driven by the December 2013 fiscal measures and weather-related factors, inflation increased to about 6.3 percent in October (4.6 percent in the previous year). The balance of payments has shown signs of improvement, with an improving trade balance, solid growth of remittances, and higher international reserves.

Growth of monetary aggregates remains moderate. The central bank has kept the policy rate and reserve requirements unchanged while withdrawing liquidity through open market operations and helping keep credit growth at about 10 percent. In the year ending September, the lempira depreciated by about 3 percent, which resulted in a small appreciation in real effective terms.

For 2015, real GDP growth is expected to remain at 3 percent, with supportive external conditions, further improvements in confidence and a recovering coffee sector continuing to offset the effects of fiscal adjustment. Inflation is projected to fall to 5.8 percent in 2015, as the one-off effects that pushed it up in 2014 dissipate. The external current account deficit would decline to about 7 percent of GDP, reflecting more favorable external conditions and the effects of fiscal consolidation. International reserve coverage is expected to rise slightly to 3.8 months of imports. The combined public sector deficit is expected to continue to decline, falling to somewhat above 3 percent of GDP in 2015.

Program Summary

The government’s economic program seeks to preserve macroeconomic stability by strengthening the fiscal and external positions, while improving conditions for sustainable inclusive growth. It is also expected to bolster investor confidence and catalyze resources from multilateral institutions and donors.

On the fiscal side, the program seeks to restore discipline and contain public debt growth, which would require reducing the overall balance of the combined public sector from around 7½ percent of GDP in 2013 to about 2 percent of GDP in 2017. To help achieve this, the authorities plan a reduction in the ratio of the wage bill to GDP over the next three years while keeping the level of spending in key social programs to preserve the expansion that these programs experienced in recent years. In particular, the government plans to use part of this spending on improving housing for low-income families under its recently-established Vida Mejor program, which will consolidate existing social programs (notably the conditional cash-transfer programBono 10 mil). Part of the savings from reductions in the wage bill will be allocated to Vida Mejor.

Monetary policy will be managed proactively to keep inflation in check and help strengthen the external position. The central bank has adopted a plan to modernize its policy framework, which includes improving short-term liquidity management and enhancing the reporting of monetary and economic data necessary for decision making by the open market operations commission.

Finally, structural reforms are expected to play a crucial role in supporting fiscal consolidation and improving growth prospects. The program comprises reforms in the electricity sector, including ENEE; the telecommunications company (HONDUTEL); and the Social Security Institute. In addition, with IMF technical assistance, the National Tax Directorate (DEI) plans to implement a program to strengthen tax administration.

Honduras became a member of the IMF on December 27, 1945, has an IMF quota of SDR 129.5 million (about US$188.6 million).

¹ The SCF provides financing to low-income countries on concessional terms.