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Honduras

Author(s):
International Monetary Fund
Published Date:
October 2010
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I. Background

1. The government of President Porfirio Lobo took office in January 2010 in the context of a difficult social and economic situation. The economy was contracting, largely as a result of the global economic slowdown, while social tensions were high, as internal polarization intensified in the aftermath of the political crisis of 2009. In the first half of 2010, the government focused on diffusing social and political tensions, regaining full international recognition, and restoring macroeconomic stability.

2. In the economic policy area, the authorities gave priority to strengthening the financial position of the public sector and restarting the external assistance that had been interrupted in 2009. In April, the government secured Congress’ approval of a budget that targeted a reduction in the overall deficit of the public sector of almost 1 percent of GDP. Congress also approved an important tax reform, which, by broadening the tax base and improving tax administration, is expected to yield additional revenues of 1½-2½ percent of GDP by 2012. At the same time, the authorities resumed full relations with bilateral and multilateral donors to restart social and investment programs.

3. In the July 12, 2010 discussion of the Article IV consultation with Honduras, the Executive Board recommended that the authorities undertake fiscal consolidation to create space for higher public investment and social spending. It supported a fiscal strategy that keeps public sector deficits at below 2 percent of GDP over the medium term and improves expenditure composition through effective control of the wage bill. The Board also recommended reforms of public enterprises and public pension funds to improve their efficiency and reduce vulnerabilities. In addition, Directors recommended reining in central bank credit to protect international reserves and keep inflation under control. They also noted that some exchange rate flexibility, combined with wage moderation and prudent monetary policy, would be important to safeguard competitiveness.

4. The authorities consider that a Fund-supported program would help bolster the credibility of an economic program consistent with the above noted objectives. They are requesting an arrangement with the Fund to strengthen investor confidence, provide a framework for implementing key reforms, and help secure donor support. The economic program would be anchored on a strict restraint on government spending and on revenue measures to arrest the deterioration of the overall fiscal position and return public debt to a sustainable path.

II. Recent Developments And Policies

5. Recent macroeconomic developments are broadly in line with what was envisaged in the 2010 Article IV staff report. The monthly index of economic activity through June recorded an increase of 3.6 percent (yoy), consistent with a gradual recovery, while private sector credit remains subdued. End-August CPI inflation (12-month) was 4.5 percent (up from 3 percent at end-2009), while net international reserves stood at US$2.1 billion at mid-September, broadly unchanged from the level at end-2009 (which, in turn, was US$400 million below the level of end-2007).

6. Central bank credit is being restrained. Although the policy rate and reserve requirements remain at their mid-2009 levels, central bank’s monetary operations (including placement of its instruments) have helped reverse the expansion of its net domestic assets during 2009. In addition, the central bank stopped providing credit to the public sector bank.

7. Revenue performance in the first half of 2010 was somewhat weak. According to data through June, central government tax revenue was 2 percent lower than in the same period in 2009; this outcome was caused by a lagged effect of the 2009 contraction on income taxes, delays in implementing the April tax reform, and reorganization of the tax revenue office (DEI). However, total spending in the first semester also was some 3 percent lower than the outturn in the first half of 2009, reflecting subdued public investment and tight control over non-wage current expenditure.

8. The authorities have continued taking measures to strengthen the fiscal position.

In particular:

  • Wage bill control. In June, the authorities approved a plan to verify the number of government employees in the education and health sectors, suspend the hiring of new workers, and eliminate all redundant or irregular positions. In addition, they took steps to ensure that the increase in the wage bill in 2010 only reflects contractual obligations on wages in the education sector; nominal wages of government employees in other sectors have remained broadly unchanged.

  • Energy subsidies. In June, energy subsidies were eliminated, except for the consumers with electricity consumption below 150 kWh. The measure is expected to yield savings of up to 0.15 percent of GDP annually.

  • Public sector tariffs. Tariffs in the electricity (ENEE), telephone (Hondutel), and water (SANAA) companies have been raised with a view to eventually cover the projected cost of their services.

  • Domestic arrears. With IDB assistance, the authorities are finalizing the search for an internationally reputable company to audit overdue government payments to private suppliers, estimated at about 1.3 percent of GDP.

III. The Economic Program for 2010–11

9. The government’s economic program for 2010–11 seeks to restore macroeconomic stability by strengthening public finances and protecting the external position. The program is anchored on fiscal consolidation (to be achieved through strict control of current spending and higher tax revenues) and aims at reallocating public expenditure to priority areas. The program also envisages a strengthening of the operating balance of public sector enterprises through occasional tariff adjustments and efficiency improvements. Monetary and exchange rate policies will be geared at maintaining low inflation, safeguarding competitiveness, and strengthening the external reserves position. Structural measures aimed at improving public sector efficiency are also part of the program.

10. The authorities are confident that a Fund-supported program would bolster investor confidence and help catalyze external financing from official creditors. In addition, they see the program with the Fund as providing a liquidity buffer in the context of still fragile global recovery. Given the good prospects for securing external financing from the World Bank and the IADB for projects and budget support, the authorities do not foresee a financing need and intend to treat the Fund arrangement as precautionary.

A. Macroeconomic Framework

11. The program envisages a gradual economic recovery. The rebound in economic activity in Honduras’ main trading partners will have a lagged effect on domestic demand, while remaining political uncertainties and social pressures will preclude a rapid recovery of investor and consumer confidence. As a result, real GDP is projected to grow by 2½-3½ percent in 2010–11, before stabilizing at its long-term historic rate of 4 percent. At the same time, inflation is expected to remain below 6 percent during 2010–11 and converge towards 5 percent in the medium term.

Medium-Term Scenario
Prel.Projections
20082009201020112012201320142015
(annual percentage change)
Output and inflation
Real GDP4.0-1.92.43.54.04.04.04.0
CPI inflation (eop)10.83.05.75.85.55.35.35.3
(in percent of GDP, unless otherwise indicated)
Public Sector
Overall public sector balance-1.7-4.6-3.7-3.1-2.0-1.9-1.9-1.8
Overall central government balance-2.4-6.2-4.5-3.4-2.8-2.2-2.2-2.1
Public sector debt20.223.726.127.227.728.228.528.4
Total public investment6.05.95.15.86.26.46.46.5
of which public sector enterprises0.70.40.60.70.91.01.01.1
External sector
External current account balance-8.0-3.2-6.3-6.9-7.1-6.9-6.9-6.8
Gross international reserves (US$ millions) 1/2,6912,3312,3852,6062,8563,0683,2993,567
(in months of non-maquila imports)4.73.63.43.53.63.73.73.7
Sources: Central Bank of Honduras; Ministry of Finance; and Fund staff estimates.

Includes possible budget support loans.

Sources: Central Bank of Honduras; Ministry of Finance; and Fund staff estimates.

Includes possible budget support loans.

12. The external current account deficit is projected to increase to 6-7 percent of GDP in 2010–11. Following the sharp contraction of trade flows in 2009, exports and non-oil imports are expected to recover but, given the weak external demand, would remain below their pre-crisis levels until 2013. Oil imports, however, are projected to increase to the equivalent of 10–10½ percent of GDP in 2010–11 mainly on account of higher oil prices. Net capital inflows are also expected to rebound gradually from the extremely low levels of 2009, mainly as a result of an increase in government external borrowing and a pickup in FDI flows.

B. Fiscal Policy

13. The authorities’ main fiscal objective is to reduce the overall deficit of the public sector to levels consistent with a public debt-to-GDP ratio of about 30 percent. A resolute implementation of the tax reform approved in April and strict control of current spending would be critical to achieving that goal (see MEFP ¶5). In the near term, adherence to these policies would result in a reduction in the deficit of the overall public sector of more than 1½ percent of GDP during 2010–11 (the reduction in the central government deficit would be significantly larger). Thereafter, expenditure restraint combined with measures to continue to strengthen tax administration, reduce subsidies, and improve the operating balance of public sector enterprises would further lower the overall public sector deficit to 2 percent of GDP.

14. Fiscal policy in 2010 will halt the deterioration in the public finances observed in 2009. The program envisages that implementation of the April tax reform will result in higher revenue in the second half of the year, that, combined with new controls on the wage bill and tariff increases in public sector enterprises, will bring down the overall deficit of the public sector to 3.7 percent of GDP in 2010 (see text Table above).1 The projected reduction in the deficit of the central government will be larger as lower net income from interest revenue of public pension funds and higher investment by public enterprises would reduce the surplus of the rest of the public sector.2

Tax Revenue and Wages

(in percent of GDP)

15. The draft budget for 2011 submitted to Congress in September targets further progress in fiscal consolidation. The budget incorporates somewhat conservative revenue projections, partly to reflect uncertainties related to gains from improvements in tax administration. In addition, the budget sets ceilings on current expenditure, including one that keeps the central government wage bill at the projected 2010 level, while allowing for higher public investment and anti-poverty spending. Key elements of the program for 2011 include:

  • Revenue. The tax reform of last April, together with improvements in tax administration, are expected to yield central government revenue by the equivalent 1 percent of GDP, with the full revenue impact of the reform expected in 2012. Measures to strengthen tax administration will include steps to enhance the operations of the DEI and facilitate the implementation of the tax reform (MEFP ¶7).

  • Expenditure control. The authorities’ strategy hinges critically on reducing the public sector wage bill to 12.8 percent in 2011 (from 13.9 percent of GDP in 2009), largely by keeping the nominal wage bill of the central government in 2011 at the same level as in 2010. Closing redundant positions as well as those created without budget authorization and exercising strict control on nominal wages and reducing allocations for current spending will be key to achieving these targets (MEFP ¶7). Undoing the large increase in spending recorded in 2009 will also be important. The savings on current expenditure will enable the authorities to increase public investment and anti-poverty spending (see below).

  • Public sector enterprises. The operating balances of public sector enterprises are expected to improve as a result of implementing a tariff policy aimed at cost recovery and greater efficiency of public services.3 In addition, central government arrears to ENEE (about 0.1 percent of GDP) will be repaid during 2010. Comprehensive plans for restoring financial and operational viability of key public sector enterprises will be prepared in early 2011(MEFP ¶7).

  • Public pension funds. Major reforms are being prepared to correct the growing actuarial deficits of key public pension funds.4 A draft law to enable changes in the determination of benefits from and contributions to public pension funds will be submitted to Congress by end-2010 (MEFP ¶7).

  • Domestic arrears. The government intends to regularize domestic arrears to private sector suppliers and among public sector entities. Arrears to the private sector that are validated by the audit will be settled with a combination of cash and bonds. A plan to regularize intra-public sector arrears will also be developed before year end.

16. Financing mix. The authorities’ fiscal strategy aims at reversing the heavy reliance on domestic financing of budget deficits observed in 2009 (MEFP ¶7). In line with this, nearly 80 percent of financing of the deficits projected in 2010-11 is expected to come from external sources (including US$220 million budget support from World Bank and the IDB, and US$50 million from Taiwan, Province of China), while there will be no new credit from the central bank. The staff and authorities agreed that the proposed external program financing would contribute to easing pressures in the domestic financial system, and be consistent with preserving debt sustainability (Appendix I).

C. Monetary and Exchange Rate Policies

17. The economic program envisages a tightening of monetary conditions to safeguard the inflation and external objectives. Specifically, the authorities plan to continue placing central bank instruments to mop up excess liquidity and are committed to not resume central bank lending to the public sector or to any public sector bank. Moreover, the authorities stand ready to increase the policy interest rate and intensify open market operations if the inflation or external objectives are compromised (MEFP ¶8).

18. The program also contemplates an upgrading of the monetary policy framework. Building on recommendations of past technical assistance missions from the Fund, the authorities plan to reform the operational framework for monetary policy and set up the infrastructure for a well functioning foreign exchange market. In support of these reforms, a Fund technical assistance mission will visit Honduras later this year to assess the institutional capacity of the central bank, make recommendations to strengthen it, and establish a timetable for implementing reforms in this area (MEFP ¶9). In addition, the authorities intend to develop a plan to recapitalize and strengthen institutionally the central bank to enhance its ability to conduct independent monetary policy (MEFP ¶10).

D. Anti-Poverty Spending

19. Increasing social spending is a key goal of the authorities’ program. In cooperation with other multilaterals, the government plans to consolidate most of its anti-poverty spending in a conditional cash transfer program (Bono 10 mil). This program, modeled on successful experiences in Brazil and Mexico, aims at covering a large share of families living in extreme poverty by providing cash benefits conditional on regular monitoring of child growth and use of health and education services. The improved targeting of electricity subsidies is also part of the anti-poverty strategy. In addition, the economic program envisages that some of the savings generated from expenditure restraint in other areas would be allocated to social spending. To signal their commitment to protect social expenditure, the authorities proposed including a floor on such expenditure as part of the Fund program (MEFP ¶12). Although at present the authorities are focused on effective implementation of the cash transfer program, they intend to update their medium-term anti-poverty strategy during the arrangement period.

E. Financial Sector

20. A further strengthening of the financial system and enhancing enhance crisis preparedness are also part of the authorities’ program (MEFP ¶11). Although Honduras’ financial system weathered relatively well the global financial crisis and the ensuing slowdown in activity, the authorities plan to further strengthen its resilience by: (i) focusing supervision on the control of risks rather than only on adherence to standard banking norms; (ii) enforcing more effectively the capital charges and provisioning; (iii) requiring banks to develop business plans consistent with the borrowers’ ability to repay; (iv) enhancing liquidity monitoring; (v) re-activating the Early Warning Committee; and (vi) assessing the capital need of the deposit guarantee fund (FOSEDE) and Capitalization Fund. The authorities are developing an action plan for this reform program, and will begin its implementation later this year.

F. Risks

21. The authorities’ economic program is subject to several risks. First, the program’s balance of payments objectives would be jeopardized if the global economic recovery is slower than currently envisaged, world oil prices are higher than projected, or if there are delays in budgetary assistance expected in 2010 (US$140 million). Second, the relatively high degree of domestic dollarization increases the risk of uncovered foreign exchange positions in the economy. And, third, the inability to implement the fiscal and monetary measures contemplated in the program would result in a financing gap that would undermine the stabilization effort.

22. The authorities would need to adopt additional measures if any of these risks were to materialize. The authorities acknowledge this and are exploring the measures that could be implemented if, for example, the projected external financing were not to materialize fully or if political pressures thwarted the attempt to keep the nominal wage bill unchanged.

IV. Program Modalities

23. Staff proposes to support the authorities’ economic program with blended 18-month arrangements under the SCF and SBA with total access of 100 percent of quota (SDR129.50 million). The proposed duration would provide a reasonable time to reestablish confidence in the government’s commitment to macroeconomic stability, while the rationale for blended arrangements is based on the fact that Honduras meets the income criterion for blending PRGT and GRA resources as its per capita income is above IDA’s operational cutoff. Although the baseline balance of payments scenario does not contain financing gaps, staff consider that an access of 100 percent of quota (under precautionary arrangements), with about a third of the resources available in the first six months of the program, would provide sufficient financial buffers to withstand adverse shocks (Tables 10 and 11). (The proposed schedule of disbursements and purchases is provided in Table 9.)

Table 1.Honduras: Selected Economic Indicators
I. Social Indicators
Population7.47 millionLife expectancy at birth in years (2007)70
Per capita income in U.S. dollars (PPP, 2009)4,151Adult literacy (ages 15 and above, 2007)83.6 percent
Rank in UNDP Development Index (2009)112 of 182Percent of pop. below poverty line (2007)64
Unemployment rate (2009)4.3Gini index55
Underemployment rate (2009)36.0Oil imports (2008 actual)US$ 1.8 billion
Net FDI (as percent of GDP, 2009)3.5Main exportscoffee, bananas, shrimp, and maquila
II. Economic Indicators
Prel.Prog.Prog.
200620072008200920102011
(Annual percentage change, unless otherwise indicated)
National income and prices
GDP at constant prices6.66.34.0-1.92.43.5
GDP deflator5.36.98.54.44.94.0
Consumer prices (end of period, eop)5.38.910.83.05.75.8
Exchange rate (eop, depreciation -)
Lempiras per U.S. dollar0.00.00.00.0
Real effective rate1.72.25.57.5
Money and credit
Net domestic assets of the financial system1/28.941.08.68.85.16.1
Combined public sector credit 2/-9.02.14.815.05.88.5
Private sector credit28.132.49.84.94.16.6
Broad money21.618.25.30.95.68.3
Lending rate (eop, in percent)13.813.417.617.1
Deposit rate (eop, in percent)7.68.19.210.6
(In percent of GDP)
Combined public sector
Noninterest revenue and grants22.523.024.623.223.123.3
Noninterest expenditure24.825.227.328.727.226.2
Primary balance-2.3-2.2-2.7-5.5-4.1-3.0
Net interest payments-0.4-0.6-1.0-0.9-0.40.1
Savings2.62.22.7-0.9-0.31.5
Capital expenditure4.85.36.05.95.15.8
Overall balance-1.9-1.6-1.7-4.6-3.7-3.1
External financing1.91.02.70.93.12.8
Domestic financing0.50.3-0.93.80.60.3
Savings and investment
Fixed capital formation27.332.432.622.622.023.4
Gross national savings23.623.419.719.415.916.5
(In millions of U. S. dollars, unless otherwise indicated)
Balance of payments
Gross international reserves 3/2,8242,7332,6912,3312,3852,606
(in months of imports) 4/4.43.54.73.63.43.5
Change in net international reserves (increase -) 1/3/-44910257344-60-227
Change in net international reserves (increase -) 1/3/5/-460123119655-50-220
External current account balance (percent of GDP)-3.7-9.0-12.9-3.2-6.3-6.9
(excluding official transfers)-5.5-10.2-14.1-4.0-7.8-7.7
Exports, f.o.b. (annual percentage change) 6/4.59.611.7-21.27.17.4
Imports, f.o.b. (annual percentage change) 6/11.621.718.2-28.16.76.3
Public sector debt (in percent of GDP) 7/31.719.620.223.726.127.2
Public sector external debt (in percent of GDP) 7/27.916.416.717.217.619.0
Public sector external debt service (in percent
of exports of goods and services) 8/2.51.61.13.21.41.6
Sources: Central Bank of Honduras; Ministry of Finance; and Fund staff estimates.

Includes adjustments made for NIR and NDA due to Fund MDRI debt relief granted in January 2006 ($155 million).

In relation to base money at the beginning of the period.

Includes the one-off allocation of SDR 104.8 million in August, 2009.

Refers to the following year’s imports of nonmaquila goods and nonfactor services.

Excluding foreign currency reserve requirements, obligatory investments, as well as deposits by Hondutel.

Goods only.

Includes medium- and long-term public and publicly guaranteed external debt after HIPC, beyond HIPC, and MDRI. All external debt is denominated in foreign currency.

Debt service paid.

Sources: Central Bank of Honduras; Ministry of Finance; and Fund staff estimates.

Includes adjustments made for NIR and NDA due to Fund MDRI debt relief granted in January 2006 ($155 million).

In relation to base money at the beginning of the period.

Includes the one-off allocation of SDR 104.8 million in August, 2009.

Refers to the following year’s imports of nonmaquila goods and nonfactor services.

Excluding foreign currency reserve requirements, obligatory investments, as well as deposits by Hondutel.

Goods only.

Includes medium- and long-term public and publicly guaranteed external debt after HIPC, beyond HIPC, and MDRI. All external debt is denominated in foreign currency.

Debt service paid.

Table 2.Honduras: Operations of the Central Government(In millions of Lempiras)
200720082009201020102011
Prel.Prel. Jun.Prog.Prog.
Total revenue and grants44,70252,24147,00722,75252,46957,340
Current revenue41,00046,78941,98721,21047,64554,252
Tax revenue38,27042,32939,03519,90844,05450,322
Grants3,7015,4525,0201,5414,8243,088
Total expenditure51,50658,68363,66927,90365,56868,068
Current expenditure42,20445,98251,35123,83354,27554,633
Wages and salaries21,49024,51129,93814,90032,23532,235
Goods and services6,9126,8858,2352,6657,3907,702
Transfers12,24412,97411,1694,3539,5788,712
Interest payments1,5591,6122,0091,3993,0694,061
External867831837424771856
Domestic6927811,1729762,2983,205
Other current expenditure0005152,0031,922
Capital expenditure9,59512,87914,1454,08510,75513,435
Net lending-294-179-1,827-155380
Overall balance-6,804-6,442-16,662-5,151-13,099-10,728
Financing6,8046,44216,6625,15113,09910,728
External financing2,6087,0902,6321,0778,8268,375
Disbursements 2/4,2737,6755,8511,4428,7738,708
Amortization-2,297-1,470-3,129-545-901-1,068
Zero coupon bonds-97-103-109-57-115-125
Exceptional financing 3/7299895602811,069860
Change in arrears00-541-4400
Domestic financing4,351-75714,0864,1804,2732,352
Financial system-521-3936,2183,9931,7158,261
Rest of the financial system-6351,6992,027-2664,4723,709
Central bank115-2,0934,1914,259-2,7574,552
Bonds outside the financial system8774,3172,1882,0668,100-509
Rest of the NFPS8463,8642,1681,8307,283409
Other18552794275817-918
Financial stabilization bonds-155-74-74-3800
Floating debt 4/3,845-6,2435,680-1,879-5,542-5,400
Statistical discrepancy-155109-56-106
Sources: Honduran authorities; and Fund staff estimates.

Includes electricity and urban transport subsidies, and Bonochenta.

Projection for 2010-11 includes possible budget support from multilateral banks.

Includes debt forgiveness, accumulation, rescheduling, payment and/or forgiveness of arrears.

Wage and suppliers arrears and other unsettled payments in 2010-11.

Sources: Honduran authorities; and Fund staff estimates.

Includes electricity and urban transport subsidies, and Bonochenta.

Projection for 2010-11 includes possible budget support from multilateral banks.

Includes debt forgiveness, accumulation, rescheduling, payment and/or forgiveness of arrears.

Wage and suppliers arrears and other unsettled payments in 2010-11.

Table 2a.Honduras: Operations of the Central Government(In percent of GDP)
200720082009201020102011
Prel.Prel. Jun.Prog.Prog.
Total revenue and grants19.119.817.47.818.018.3
Current revenue17.517.715.57.316.417.3
Tax revenue16.316.014.46.815.116.1
Nontax revenue0.81.31.10.51.11.3
Transfers 1/0.30.40.00.00.10.0
Capital revenue0.00.00.00.00.00.0
Grants1.62.11.90.51.71.0
Of which: Millennium Challenge Corporation0.10.30.60.00.50.0
Total expenditure22.022.223.59.622.521.7
Current expenditure18.017.419.08.218.717.4
Wages and salaries9.29.311.15.111.110.3
Goods and services3.02.63.00.92.52.5
Transfers5.24.94.11.53.32.8
Interest payments0.70.60.70.51.11.3
External0.40.30.30.10.30.3
Domestic0.30.30.40.30.81.0
Other current expenditure0.00.00.00.20.70.6
Capital expenditure4.14.95.21.43.74.3
Overall balance-2.9-2.4-6.2-1.8-4.5-3.4
Financing2.92.46.21.84.53.4
External financing1.12.71.00.43.02.7
Disbursements 2/1.82.92.20.53.02.8
Amortization-1.0-0.6-1.2-0.2-0.3-0.3
Exceptional financing 3/0.30.40.20.10.40.3
Domestic financing1.9-0.35.21.41.50.8
Financial system-0.2-0.12.31.40.62.6
Rest of the financial system-0.30.60.7-0.11.51.2
Central bank0.0-0.81.51.5-0.91.5
Bonds outside the financial system0.41.60.80.72.8-0.2
Floating debt 4/1.6-2.42.1-0.6-1.9-1.7
Privatization / deposits abroad0.10.60.00.00.00.0
Nominal GDP (billion of Lempiras)234.2264.1270.5290.9290.9313.1
Sources: Honduran authorities; and Fund staff estimates.

Includes electricity and urban transport subsidies, and Bonochenta.

Projection for 2010-11 includes possible budget support from multilateral banks.

Includes debt forgiveness, accumulation, rescheduling, payment and/or forgiveness of arrears.

Wage and suppliers arrears and other unsettled payments in 2010-11.

Sources: Honduran authorities; and Fund staff estimates.

Includes electricity and urban transport subsidies, and Bonochenta.

Projection for 2010-11 includes possible budget support from multilateral banks.

Includes debt forgiveness, accumulation, rescheduling, payment and/or forgiveness of arrears.

Wage and suppliers arrears and other unsettled payments in 2010-11.

Table 2b.Honduras: Operations of the Central Government, 2010-2011 (Quarterly Data)(In millions of Lempiras)
Jun-10Sep-10Dec-10Mar-11Jun-11Sep-11Dec-11Sep-10Dec-10Mar-11Jun-11Sep-11Dec-11
Program (cummulative)Program (quarterly flows)
Total revenue and grants22,75236,07952,46910,92728,13642,33657,34013,32816,39010,92717,20914,20015,003
Current revenue21,21033,27947,64510,22127,01240,29354,25212,06914,36610,22116,79113,28213,959
Tax revenue19,90830,82844,0549,29825,26837,55850,32210,92013,2269,29815,97012,29012,764
Grants1,5412,8004,8247061,1252,0433,0881,2592,0247064189191,045
Total expenditure27,90346,24765,56814,87131,74448,46268,06918,34419,32214,87116,87216,71919,606
Current expenditure23,83338,59054,27511,78025,78939,61354,63414,75815,68511,78014,00913,82415,020
Wages and salaries14,90023,10332,2356,71615,58023,05432,2358,2039,1326,7168,8657,4749,181
Goods and services2,6655,2237,3901,7333,0815,4447,7022,5582,1671,7331,3482,3632,258
Transfers4,3537,0399,5781,9984,3706,8828,7132,6862,5391,9982,3722,5131,830
Interest payments1,3992,0003,0699531,9903,0584,0616011,0699531,0361,0681,003
External424615771239414678856192156239175265178
Domestic9761,3852,2987141,5762,3793,205409913714862803826
Other current expenditure5151,2252,0033817691,1751,923710779381388407747
Capital expenditure4,0857,34210,7553,0915,9548,84913,4353,2573,4133,0912,8632,8954,586
Net lending-153145380000000000
Overall balance-5,151-10,168-13,099-3,944-3,607-6,126-10,729-5,016-2,931-3,944337-2,518-4,602
Financing5,15110,16813,0993,9443,6076,12610,7295,0162,9313,944-3372,5184,602
External financing1,0773,8798,8268473,5556,0788,3752,8024,9478472,7082,5232,297
Disbursements 2/1,4423,9028,7739853,9346,3228,7082,4604,8729852,9482,3892,385
Amortization-545-658-901-224-476-723-1,068-112-244-224-252-247-344
Zero coupon bonds-57-115-115-61-61-124-125-580-610-64-1
Exceptional financing 3/2817501,06914615960386046931914612445257
Change in arrears-440000004400000
Domestic financing4,1806,2894,2743,09752472,3532,108-2,0153,097-3,045-52,305
Financial system3,9932,9451,7164,6503,6725,0158,261-1,048-1,2294,650-9781,3433,247
Rest of the financial system-2667134,4723,9561,9332,7184,552-2,027-4,9893,956-2,0237851,835
Central bank4,2592,232-2,7576941,7392,2973,7099793,7596941,0455581,412
Bonds outside the financial system2,0665,8048,100-53-620-467-5093,7382,296-53-567153-41
Rest of the NFPS1,8305,8257,2830004093,9951,459000409
Other275-20817-178-993-260-918-295837-178-815733-658
Financial stabilization bonds-380000003800000
Floating debt 4/-1,879-2,461-5,542-1,500-3,000-4,500-5,400-582-3,081-1,500-1,500-1,501-900
Statistical discrepancy-1060000000232-338000
Sources: Honduran authorities; and Fund staff estimates.

Includes electricity and urban transport subsidies, and Bonochenta.

Projection for 2010 includes possible budget support from multilateral banks.

Includes debt forgiveness, accumulation, rescheduling, payment and/or forgiveness of arrears.

Wage and suppliers arrears and other unsettled payments.

Sources: Honduran authorities; and Fund staff estimates.

Includes electricity and urban transport subsidies, and Bonochenta.

Projection for 2010 includes possible budget support from multilateral banks.

Includes debt forgiveness, accumulation, rescheduling, payment and/or forgiveness of arrears.

Wage and suppliers arrears and other unsettled payments.

Table 3.Honduras: Operations of the Combined Public Sector, 1/(In millions of Lempiras)
200720082009201020102011
Prel.Prel. Jun.Prog.Prog.
Total revenue and grants57,16769,39867,15132,91071,34176,618
Current revenue52,82363,35961,57031,07265,86072,814
Tax revenue38,35243,64140,57520,78345,98752,244
Nontax revenue9,66813,48813,2596,93714,49414,728
Interest earnings 2/3,3464,4804,2542,2314,2123,699
Operating balance of public enterprises1,4571,7493,4811,1211,1672,143
Capital revenue633573545285619701
Grants3,7115,4665,0361,5534,8623,103
Total expenditure60,85173,84979,64536,32382,24186,318
Current expenditure46,68656,09863,89029,92566,82968,066
Wages and salaries26,40731,20837,67319,22439,74240,222
Goods and services8,89610,01912,6914,11110,57611,208
Transfers8,1929,2317,5613,6528,8788,008
Operating losses of the central bank-417147883348071,014
Interest payments1,9121,8701,8841,5393,0704,140
External877840845452880972
Domestic1,0351,0301,0391,0882,1903,168
Other1,3213,0553,2941,0643,7563,474
Capital expenditure12,51815,75016,0756,08514,87318,253
Net lending1,6462,001-3203135380
Overall balance-3,684-4,451-12,494-3,413-10,900-9,700
Financing3,6844,45112,4943,41310,9009,700
External financing2,3947,0962,4409799,1418,778
Disbursements 3/4,2967,8555,8511,4429,0899,111
Amortization-2,536-1,645-3,323-643-901-1,068
Zero coupon bonds-97-103-109-57-115-125
Exceptional financing 4/7319895622831,069860
Domestic financing618-2,35010,2802,0081,759922
Financial system-768-4028,3372,0072,9874,486
Central bank2,0636607,9314,113-2,2074,568
Net credit to the NFPS2,104-547,1434,117-3,0144,625
Operating balance of the central bank-417147883348071,014
Rest of the financial system-2,831-1,061406-2,1065,194-82
Bonds outside the financial system318527369282817-918
Financial stabilization bonds-87-18-18-1800
Floating debt 5/1,141-5,459969-485-2,045-2,646
Privatization proceeds / deposits abroad 6/143,00162322200
Statistical discrepancy 7/672-296-22642600
Sources: Honduran authorities; and Fund staff estimates.

Includes Central Government, Social Security Institutions, Public Enterprises, Local Governments and Decentralized agencies

Interest earned on public pension funds personal and housing loans to their affiliates.

Projection for 2010-11 includes possible budget support from multilateral banks.

Includes debt forgiveness, accumulation, rescheduling, payment and/or forgiveness of arrears.

Wage and suppliers arrears and other unsettled payments in 2010-11.

Includes proceeds of the sale of a cellular band license in 2008.

For 2008 discrepancies are due to methodological differences between the Ministry of Finance and the Central Bank.

Sources: Honduran authorities; and Fund staff estimates.

Includes Central Government, Social Security Institutions, Public Enterprises, Local Governments and Decentralized agencies

Interest earned on public pension funds personal and housing loans to their affiliates.

Projection for 2010-11 includes possible budget support from multilateral banks.

Includes debt forgiveness, accumulation, rescheduling, payment and/or forgiveness of arrears.

Wage and suppliers arrears and other unsettled payments in 2010-11.

Includes proceeds of the sale of a cellular band license in 2008.

For 2008 discrepancies are due to methodological differences between the Ministry of Finance and the Central Bank.

Table 3a.Honduras: Operations of the Combined Public Sector,1/(In percent of GDP)
200720082009201020102011
Prel.Prel. Jun.Prog.Prog.
Total revenue and grants24.426.324.811.324.524.5
Current revenue22.624.022.810.722.623.3
Tax revenue16.416.515.07.115.816.7
Nontax revenue4.15.14.92.45.04.7
Interest earnings 2/1.41.71.60.81.41.2
Operating balance of public enterprises0.60.71.30.40.40.7
Capital revenue0.30.20.20.10.20.2
Grants1.62.11.90.51.71.0
Of which: Millennium Challenge Corporation0.10.30.60.00.50.0
Total expenditure26.028.029.412.528.327.6
Current expenditure19.921.223.610.323.021.7
Wages and salaries11.311.813.96.613.712.8
Goods and services3.83.84.71.43.63.6
Transfers3.53.52.81.33.12.6
Operating losses of the central bank0.00.30.30.10.30.3
Interest payments0.80.70.70.51.11.3
External0.40.30.30.20.30.3
Domestic0.40.40.40.40.81.0
Other0.61.21.20.41.31.1
Capital expenditure5.36.05.92.15.15.8
Net lending0.70.8-0.10.10.20.0
Overall balance-1.6-1.7-4.6-1.2-3.7-3.1
Financing1.61.74.61.23.73.1
External financing1.02.70.90.33.12.8
Disbursements 3/1.83.02.20.53.12.9
Amortization-1.1-0.6-1.2-0.2-0.3-0.3
Exceptional financing 4/0.30.40.20.10.40.3
Domestic financing0.3-0.93.80.70.60.3
Financial system-0.3-0.23.10.71.01.4
Central bank0.90.22.91.4-0.81.5
Net credit to the NFPS0.90.02.61.4-1.01.5
Operating balance of the central bank0.00.30.30.10.30.3
Rest of the financial system-1.2-0.40.2-0.71.80.0
Bonds outside the financial system0.10.20.10.10.3-0.3
Financial stabilization bonds0.00.00.00.00.00.0
Floating debt 5/0.5-2.10.4-0.2-0.7-0.8
Privatization proceeds / deposits abroad 6/0.01.10.20.10.00.0
Statistical discrepancy 7/0.3-0.1-0.10.10.00.0
Memorandum items:
Nominal GDP (billion of Lempiras)234.2264.1270.5290.9290.9313.1
Sources: Honduran authorities; and Fund staff estimates.

Includes Central Government, Social Security Institutions, Public Enterprises, Local Governments and Decentralized agencies.

Interest earned on public pension funds personal and housing loans to their affiliates.

Projection for 2010-11 includes possible budget support from multilateral banks.

Includes debt forgiveness, accumulation, rescheduling, payment and/or forgiveness of arrears.

Wage and suppliers arrears and other unsettled payments in 2010-11.

Includes proceeds of the sale of a cellular band license in 2008.

For 2008 discrepancies are due to methodological differences between the Ministry of Finance and the Central Bank.

Sources: Honduran authorities; and Fund staff estimates.

Includes Central Government, Social Security Institutions, Public Enterprises, Local Governments and Decentralized agencies.

Interest earned on public pension funds personal and housing loans to their affiliates.

Projection for 2010-11 includes possible budget support from multilateral banks.

Includes debt forgiveness, accumulation, rescheduling, payment and/or forgiveness of arrears.

Wage and suppliers arrears and other unsettled payments in 2010-11.

Includes proceeds of the sale of a cellular band license in 2008.

For 2008 discrepancies are due to methodological differences between the Ministry of Finance and the Central Bank.

Table 3b.Honduras: Operations of the Combined Public Sector, 1/ 2010-2011 (Quarterly Data)(in millions of lempiras)
Jun-10Sep-10Dec-10Mar-11Jun-11Sep-11Dec-11Sep-10Dec-10Mar-11Jun-11Sep-11Dec-11
Program (cummulative)Program (quarterly flows)
Total revenue and grants32,91050,40171,34114,73336,87356,02076,61817,49120,94014,73322,14019,14720,598
Current revenue31,07247,10265,86113,85835,40253,46172,81416,03018,75813,85821,54418,05919,353
Tax revenue20,78332,29045,9879,79326,09638,94452,24411,50613,6989,79316,30312,84813,300
Nontax revenue6,93710,78814,4943,4027,04210,71914,7283,8513,7063,4023,6403,6774,008
Interest earnings 2/2,2313,2654,2128361,7982,7793,6991,034947836961982920
Operating balance of public enterprises1,1217601,167-1744661,0182,143-361408-1746405521,125
Capital revenue285466619164337501701180153164173164200
Grants1,5532,8334,8627111,1342,0573,1031,2812,0287114239231,045
Total expenditure36,32358,50282,24119,44841,11762,07586,31822,17923,73919,44821,66920,95824,243
Current expenditure29,92547,91566,83015,07332,92049,64568,06617,99118,91414,85117,68816,51118,001
Wages and salaries19,22429,04739,7428,48819,86729,04840,2229,82310,6958,48811,3809,18111,174
Goods and services4,1117,71110,5762,3614,6717,86311,2083,5992,8652,3612,3103,1923,346
Transfers3,6525,9888,8782,2634,3746,6138,0082,3352,8902,2632,1102,2391,395
Operating losses of the central bank3344438072223815951,014109364222159214419
Interest payments1,5392,1773,0701,0182,1153,1854,1406388931,0181,0971,070955
External452675880321515780972223205321194265192
Domestic1,0881,5022,1906971,6002,4043,168414689697902805763
Other1,0642,5503,7577221,5132,3433,4741,4861,2077227928291,132
Capital expenditure6,08510,27214,8734,3758,19712,43018,2534,1884,6014,3753,8224,2335,823
Net lending313314538000012240000
Overall balance-3,413-8,101-10,900-4,715-4,244-6,055-9,700-4,688-2,799-4,715471-1,811-3,645
Financing3,4138,10110,9004,7154,2446,0559,7004,6882,7994,715-4711,8113,645
External financing9793,8799,1418473,5556,0788,7782,9005,2628472,7082,5232,700
Disbursements 3/1,4423,9029,0899853,9346,3229,1112,4605,1879852,9482,3892,788
Amortization-643-658-901-224-476-723-1,068-15-244-224-252-247-344
Zero coupon bonds-57-115-115-61-61-124-125-580-610-64-1
Exceptional financing 4/2837501,06914615960386046731914612445257
Domestic financing2,0084,2221,7593,868689-239222,214-2,4633,868-3,179-712945
Financial system2,0073,6882,9873,3321,9521,9954,4861,682-7013,332-1,381442,491
Central bank4,1132,446-2,2073,5982,0762,7994,568-1,667-4,6533,598-1,5227231,769
Net credit to the NFPS4,1172,568-3,0143,9741,9052,7724,625-1,549-5,5823,974-2,0698671,853
Operating balance of the central bank3344438072223815951,014109364222159214419
Rest of the financial system-2,1061,2435,194-266-124-804-823,3493,951-266142-679722
Bonds outside the financial system282-20817-178-993-260-918-302837-178-815733-658
Financial stabilization bonds-180000001800000
Floating debt 5/-485554-2,045714-270-1,758-2,6461,039-2,599714-983-1,489-888
Privatization proceeds / deposits abroad 6/222000000-22200000
Statistical discrepancy 7/426000000000000
Sources: Honduran authorities; and Fund staff estimates.

Includes Central Government, Social Security Institutions, Public Enterprises, Local Governments and Decentralized agencies.

Interest earned on public pension funds personal and housing loans to their affiliates.

Projection for 2010 includes possible budget support from multilateral banks.

Includes debt forgiveness, accumulation, rescheduling, payment and/or forgiveness of arrears.

Wage and suppliers arrears and other unsettled payments.

Includes proceeds of the sale of a cellular band license in 2008

For 2008 discrepancies are due to methodological differences between the Ministry of Finance and the Central Bank.

Sources: Honduran authorities; and Fund staff estimates.

Includes Central Government, Social Security Institutions, Public Enterprises, Local Governments and Decentralized agencies.

Interest earned on public pension funds personal and housing loans to their affiliates.

Projection for 2010 includes possible budget support from multilateral banks.

Includes debt forgiveness, accumulation, rescheduling, payment and/or forgiveness of arrears.

Wage and suppliers arrears and other unsettled payments.

Includes proceeds of the sale of a cellular band license in 2008

For 2008 discrepancies are due to methodological differences between the Ministry of Finance and the Central Bank.

Table 4.Honduras: Summary Accounts of Central Bank and Financial System(end December)
Proj.Proj.
200620072008200920102011
(In millions of Lempiras)
I. Central Bank
Net International Reserves 1/49,38647,50846,48239,98841,12846,775
(in millions of US$)2,6142,5142,4602,1162,1772,403
Net International Reserves (in millions of US$, TMU) 2/2,4042,2822,1621,5071,5571,777
Net Domestic Assets-35,793-31,145-30,014-22,283-22,784-26,871
Credit to the public sector (net)-5,053-2,014-3446,1963,9358,523
Other depository institutions (net)-23,260-22,780-23,608-27,368-27,572-34,838
Other financial institutions-3,531-2,339-2,0194,9566,9166,616
Nonfinancial private sector-1,848-1,055-472-135-252-252
Medium and long-term net foreign assets825699604949746792
Other items net-2,926-3,658-4,173-6,880-6,558-7,711
Currency13,59316,36316,46817,70618,34419,904
II. Other Depository Institutions
Net Foreign Assets2,0403281,2133,2464,8645,090
(in millions of US$)1081764172257262
Foreign assets (million Lempiras)13,55514,49815,35912,12913,05712,875
Foreign liabilities (million Lempiras)-11,515-14,170-14,146-8,883-8,194-7,785
Net Domestic Assets95,508116,971123,552122,434128,013138,648
Credit to the monetary authorities (net)26,4100032,10331,86939,397
Credit to other financial institutions (net)-2,668-4,646-7,967-15,670-19,403-21,736
Credit to the combined public sector-1,210-3,324-2,789-2,3462,9462,896
Central government-4,404-7,330-5,994-5,539-248-497
Other nonfinancial public sector1,3211,738648656656656
Local governments1,8732,2682,5572,5372,5372,737
Credit to the private sector91,048120,815134,807138,651144,553154,263
Local currency64,33290,809101,385109,893114,768125,269
Foreign currency26,71530,00633,42228,75829,78528,994
Other items net-18,072-23,109-28,719-30,304-31,952-36,173
Liabilities97,547117,299124,765125,680132,876143,738
of which: Deposits in domestic currency68,78284,03287,59587,92793,183101,387
of which: Deposits in foreign currency28,09132,52335,98936,49738,58841,246
III. Financial System
Net Foreign Assets51,70847,96647,74441,09843,85549,729
(in millions of US$)2,7372,5392,5272,1752,3212,555
Net Domestic Assets58,49582,33489,40997,306102,238108,519
Credit to the nonfinancial combined public sector-6,262-5,338-3,1333,8516,88011,419
Credit to the private sector93,317123,551135,621142,280148,183157,893
Local currency66,05992,932101,385112,515117,368127,869
Foreign currency27,25830,61934,23629,76530,81530,024
Other assets net-3,385-4,982-6,107-7,614-9,404-10,722
Other items net 3/-25,175-30,897-36,972-41,210-43,422-50,072
Broad Money (M4)110,203130,300137,153138,404146,093158,248
(Rate of growth 12 months)
Currency issue22.320.40.67.53.68.5
Currency in circulation17.314.0-0.49.44.510.6
Broad money21.618.25.30.95.68.3
Liabilities in Lempiras25.320.73.71.51.51.5
Liabilities in foreign currency15.615.310.21.31.31.3
Credit to the private sector28.132.49.84.94.16.6
M123.515.32.05.04.89.4
Memorandum item
NDA (millions Lempiras, TMU)-31,839-26,748-24,387-10,773-11,080-13,676
Sources: Central Bank of Honduras; and Fund staff estimates.

Includes allocation of SDR 104.8 million in August, 2009.

Excluding domestic liabilities in foreign currency and deposits of Hondutel.

Includes the revaluation account reflecting changes in the value of assets due to exchange rate fluctuations.

Sources: Central Bank of Honduras; and Fund staff estimates.

Includes allocation of SDR 104.8 million in August, 2009.

Excluding domestic liabilities in foreign currency and deposits of Hondutel.

Includes the revaluation account reflecting changes in the value of assets due to exchange rate fluctuations.

Table 4a.Honduras: Summary Accounts of Central Bank and Financial System Quarterly Data
Projections
Mar-10Jun-10Sep-10Dec-10Mar-11Jun-11Sep-11Dec-11
(In millions of Lempiras)
I. Central Bank
Net International Reserves 1/41,46441,71940,13241,12842,46945,16246,64646,775
(in millions of US$)2,1942,2082,1242,1772,2312,3552,4152,403
Net International Reserves (in millions of US$, TMU) 2/1,5341,5981,4621,5571,6061,7511,7831,777
Net Domestic Assets-24,893-26,206-25,741-22,784-24,980-28,154-29,960-26,871
Credit to the public sector (net)8,29210,4978,6913,9357,5475,9736,7238,523
Other depository institutions (net)-32,893-37,139-34,716-27,572-31,998-33,432-35,751-34,838
Other financial institutions5,7866,5456,5136,9166,5976,6686,6296,616
Nonfinancial private sector-109-184-228-252-247-247-247-252
Medium- and long-term net foreign assets9491,0001,031746752809845792
Other items net-6,918-6,926-7,032-6,558-7,631-7,926-8,158-7,711
Currency16,57115,51314,39018,34417,48917,00716,68619,904
II. Other Depository Institutions
Net Foreign Assets4,2504,5304,5224,8644,4784,3763,9755,090
(in millions of US$)225240239257235228206262
Foreign assets (million Lempiras)12,60412,53412,86713,05712,78112,81712,60312,875
Foreign liabilities (million Lempiras)-8,354-8,003-8,345-8,194-8,303-8,442-8,627-7,785
Net Domestic Assets125,438125,197126,777128,013131,322132,624135,330138,648
Credit to the monetary authorities (net)37,06641,29838,25631,86935,85337,48639,82339,397
Credit to other financial institutions (net)-17,614-18,374-19,196-19,403-20,379-20,725-21,218-21,736
Credit to the combined public sector-2,869-5,241-9362,9462,8203,1742,1142,896
Central government-5,932-8,443-4,129-248-373-19-1,079-497
Other nonfinancial public sector611709656656656656656656
Local governments2,4522,4932,5372,5372,5372,5372,5372,737
Credit to the private sector139,187139,197140,711144,553146,750146,788149,099154,263
Local currency108,870108,870111,307114,768116,788116,431118,991125,269
Foreign currency30,31730,32729,40429,78529,96230,35730,10828,994
Other items net-30,330-31,683-32,057-31,952-33,722-34,100-34,487-36,173
Liabilities129,688129,727131,299132,876135,800137,000139,306143,738
of which: Deposits in domestic currency90,14591,97791,52693,18394,85497,18096,943101,387
of which: Deposits in foreign currency38,44636,62238,66738,58839,84138,71441,25741,246
III. Financial System
Net Foreign Assets43,71144,26842,65043,85544,81047,40148,48549,729
(in millions of US$)2,3132,3432,2572,3212,3542,4722,5102,555
Net Domestic Assets98,87497,44398,659102,238103,761101,674102,566108,519
Credit to the nonfinancial combined public sector5,4225,2577,7556,88010,3679,1478,83611,419
Credit to the private sector142,933143,172144,341148,183150,380150,418152,729157,893
Local currency111,626111,811113,907117,368119,388119,031121,591127,869
Foreign currency31,30731,36230,43430,81530,99231,38731,13830,024
Other assets net-7,322-7,465-9,436-9,404-10,421-10,326-10,462-10,722
Other items net 3/-42,160-43,521-44,001-43,422-46,566-47,565-48,537-50,072
Broad Money (M4)142,585141,711141,310146,093148,571149,075151,051158,248
(Rate of growth 12 months)
Currency issue13.63.30.63.65.59.616.08.5
Currency in circulation12.2-0.11.44.56.910.616.510.6
Broad money2.83.17.25.64.25.26.98.3
Liabilities in Lempiras1.51.51.51.51.51.51.51.5
Liabilities in foreign currency1.31.31.31.31.31.31.31.3
Credit to the private sector3.84.33.74.15.25.15.86.6
M15.94.410.04.85.610.89.49.4
Memorandum item
NDA (millions Lempiras, TMU)-12,407-14,679-13,231-11,080-12,855-16,083-17,004-13,676
Sources: Central Bank of Honduras; and Fund staff estimates.

Includes allocation of SDR 104.8 million in August, 2009.

Excluding domestic liabilities in foreign currency and deposits of Hondutel.

Includes the revaluation account reflecting changes in the value of assets due to exchange rate fluctuations.

Sources: Central Bank of Honduras; and Fund staff estimates.

Includes allocation of SDR 104.8 million in August, 2009.

Excluding domestic liabilities in foreign currency and deposits of Hondutel.

Includes the revaluation account reflecting changes in the value of assets due to exchange rate fluctuations.

Table 5.Honduras: Balance of Payments(In millions of U.S. dollars, unless otherwise indicated)
Prel.Projections
200720082009201020112012201320142015
Current account-1,116-1,800-450-964-1,131-1,215-1,238-1,307-1,358
Trade balance-3,104-4,051-2,471-2,827-3,088-3,264-3,401-3,534-3,684
Exports5,7846,4585,0905,5715,9436,3686,8357,3427,893
Of which: maquila3,2413,5602,7722,9093,0843,3073,4853,6773,883
Imports-8,888-10,509-7,560-8,398-9,031-9,632-10,236-10,876-11,577
Of which: maquila-2,180-2,282-1,797-1,859-1,949-2,075-2,164-2,262-2,368
Of which: petroleum products-1,211-1,819-1,082-1,565-1,725-1,843-1,937-2,057-2,191
Services-288-310-143-239-198-133-133-131-143
Of which: tourism receipts546619611650707730770814854
Income (net)-395-420-489-541-545-595-580-619-612
Of which: payments on direct investments-535-460-472-477-536-593-565-597-713
Of which: public sector interest payments-46-45-46-58-46-50-56-63-57
Current transfers (net)2,6712,9822,6522,6442,7012,7772,8762,9783,082
Public sector142160126112118122132136132
Private sector2,5292,8222,5262,5312,5832,6552,7442,8422,949
Capital account1,20780121131118110786060
Financial account591,2783136961,1531,3151,3721,4781,566
Direct investment (net)9269015006877908849701,0551,134
Of which: FDI to maquila22010257225142147159172184
Portfolio investments (net)-22-2756-15-12-6-4-4-4
Other investments-844403-24324375437407426436
Commercial credit (net)3423-19-22241373941
Currency and deposits (net)3-589-691320202021
Public sector long-term borrowing (net)-1,0573029213326296268268263
Disbursements256433261348395356341346349
Amortization-1,313-131-252-135-69-61-72-77-85
Other medium and long-term borrowing (net)12857-114-263444324149
Other and short-term borrowing (net)4726-208-72136495762
Errors and omissions-326299-3985800000
Overall balance-176-143-41457140210212230268
Net international reserves (- increase)9954343-60-220-250-212-230-268
Reserve assets9142360-55-221-250-212-230-268
Of which: SDR allocation
Reserve liabilities812-16-6-50000
Exceptional financing778971300000
Of which: debt relief (excluding MDRI from IMF)4983294400000
Program loans 1/0001408040000
World Bank000804040000
IADB00060400000
Other000000000
Bilaterals and other multilaterals000000000
IMF000000000
Unidentified financing000000000
Memorandum items:
Terms of trade (percent change)-2.60.914.0-2.2-1.3-2.50.2-0.30.6
Terms of trade, excluding maquila (percent change)-2.6-0.315.4-3.3-1.5-2.7-0.1-0.9-1.5
Exports of goods and services (percent change)9.011.7-17.89.17.16.87.27.27.3
Of goods only9.611.7-21.29.56.77.17.37.47.5
Imports of goods and services (percent change)19.417.5-26.111.67.15.76.26.26.4
Of goods only21.718.2-28.111.17.56.76.36.36.4
Current account (in percent of GDP)-9.0-12.9-3.2-6.3-6.9-7.1-6.9-6.9-6.8
Excluding official transfers-10.2-14.1-4.0-7.0-7.7-7.8-7.7-7.7-7.4
Overall balance (in percent of GDP)-1.4-1.0-2.90.40.91.21.21.21.3
Non-oil current account (percent of GDP)0.80.14.43.93.63.73.94.04.2
Gross reserves (end of period) 2/2,7332,6912,3312,3852,6062,8563,0683,2993,567
In months of next year imports2.83.72.92.82.93.03.03.03.1
In months of next year imports (excluding maquila)3.54.73.63.43.53.63.73.73.7
Outstanding public external debt2,0262,3872,4582,6943,0993,4353,7043,9724,234
External Public Debt to GDP ratio (in percent)16.417.117.217.619.020.120.821.121.1
Public sector debt service paid to exports (in percent)1.61.13.21.41.51.41.51.61.5
Nominal GDP (millions of U.S. dollars)12,34913,92514,26815,34016,30817,10817,82018,82020,031
Sources: Central Bank of Honduras; and Fund staff estimates and projections.

Budgetary support dependent on reaching agreement on a Fund program.

Includes foreign currency deposits of financial institutions at the central bank for reserve requirements.

Sources: Central Bank of Honduras; and Fund staff estimates and projections.

Budgetary support dependent on reaching agreement on a Fund program.

Includes foreign currency deposits of financial institutions at the central bank for reserve requirements.

Table 6.Honduras: Structure and Performance of the Banking Sector(In percent, unless otherwise indicated)
June
20052006200720082009 1/2010
Total assets (in millions of Lempiras) 2/126,737157,941191,612213,486220,277231,258
(In percent of GDP)69.076.681.880.881.485.6
Number of banks161618171717
Domestic988888
Foreign7810999
Bank concentration
Number of banks accounting for at least
25 percent of total assets222222
75 percent of total assets679666
Bank rating (CAMEL)
Number of banks (Category IV and V)112111
Share of total assets2.12.63.51.82.02.0
Capital adequacy
Regulatory capital to risk-weighted assets14.613.212.914.014.314.8
Capital (net worth) to assets8.48.48.39.19.39.1
Asset quality and composition
Nonperforming loans(NPLs) to total loans 3/6.63.93.04.34.74.8
NPLs net of provisions to capital11.24.12.14.64.23.5
Restructured loans to regulatory capital2.81.30.80.59.07.6
Nonperforming assets net of provisions
to regulatory capital68.657.648.744.547.248.8
Provisions to total loans3.43.22.83.64.14.2
Provisions to NPLs66.881.590.484.386.588.5
Sectoral distribution of loans to total loans:
Commerce18.817.817.811.111.612.1
Construction and real estate19.123.326.231.933.534.7
Agriculture and related sectors5.95.54.54.95.14.6
Manufacturing19.119.016.016.515.415.2
Consumption13.515.116.516.615.715.6
Other23.619.419.019.018.717.9
Profitability
Return on assets (ROA) 4/1.61.81.91.61.21.4
Return on equity (ROE)19.021.723.118.812.613.9
Interest margin to total income47.049.150.048.448.148.1
Personnel expenses to administrative expenses37.336.040.842.339.640.9
Liquidity 5/
Liquid assets to total assets29.226.222.420.821.124.2
Liquid assets to total short-term liabilities64.356.649.650.552.259.9
Dollarization
Deposits in foreign currency in percent of total32.029.428.129.630.030.1
Credit in foreign currency in percent of total34.836.330.729.325.126.1
Sources: National Commission of Banking and Insurance.

Preliminary.

Includes contingent assets.

NPLs exclude restructured loans, mostly to the agricultural sector.

Assets include off-balance sheet items.

Includes cash, public sector securities, and other liquid assets.

Sources: National Commission of Banking and Insurance.

Preliminary.

Includes contingent assets.

NPLs exclude restructured loans, mostly to the agricultural sector.

Assets include off-balance sheet items.

Includes cash, public sector securities, and other liquid assets.

Table 7.Honduras: External Vulnerability Indicators
Prel.Projections
2006200720082009201020112012201320142015
(percent change)
Exports of goods and services, U.S. dollars4.89.011.7-17.89.17.16.87.27.27.3
Imports of goods and services, U.S. dollars11.619.417.5-26.111.67.15.76.26.26.4
Terms of trade (deterioration -)-3.7-2.60.914.0-2.2-1.3-2.50.2-0.30.6
Real effective exchange rate, end-of-period1.51.64.97.7
(In percent of GDP, unless otherwise indicated)
Current account balance-3.7-9.0-12.9-3.2-6.3-6.9-7.1-6.9-6.9-6.8
Capital and financial account9.310.39.73.05.47.88.38.18.28.1
External public debt27.816.417.117.217.619.020.120.821.121.1
External public debt
(in percent of exports of goods and services)50.330.932.640.841.044.045.645.945.945.6
Debt service on external public debt
(In percent of exports of goods and services)2.41.61.13.21.41.51.41.51.61.5
Gross official reserves
in millions of U.S. dollars2823.92732.72690.52330.52385.22606.52856.53068.23298.63566.7
in percent of short-term external debt396339459641751808796788772766
in months of next year’s imports 1/4.43.54.73.63.43.53.63.73.73.7
NIR
in millions of U.S. dollars2,6142,5142,4602,1172,1772,4032,6532,8653,0953,363
in percent of short-term external debt367312419582685745739736724722
in months of next year’s imports 1/3.22.63.42.62.52.62.72.82.82.9
Sources: Central Bank of Honduras, and Fund staff estimates.

Imports of goods and non-factor services excluding maquila.

Sources: Central Bank of Honduras, and Fund staff estimates.

Imports of goods and non-factor services excluding maquila.

Table 8.Honduras: Indicators of Fund Credit(In units indicated)
20082009Projections
201020112012201320142015
Existing Fund credit
Stock, in millions of SDRs 1/20.320.319.316.312.28.14.11.0
Obligations, in millions of SDRs0.70.71.03.14.24.14.13.1
Proposed SCF
Stock, in millions of SDRs 1/3.251.864.864.864.455.8
Obligations, in millions of SDRs 2/0.00.00.30.30.78.9
Principal0.00.00.00.00.48.6
Interest and charges0.00.00.30.30.30.3
Proposed SBA
Stock, in millions of SDRs 1/32.458.364.864.843.712.1
Obligations, in millions of SDRs 3/0.20.70.80.821.832.0
Principal0.00.00.00.021.031.6
Interest and charges0.20.70.80.80.70.4
Stock of existing
and prospective Fund credit 1/
In millions of SDRs20.320.354.9126.3141.7137.6112.268.9
In percent of quota15.715.742.497.6109.4106.386.653.2
In percent of exports of goods and services0.40.51.32.72.92.62.01.1
In percent of external debt1.31.33.16.26.35.74.32.5
In percent of gross reserves1.11.43.57.47.66.85.23.0
Obligations to the Fund from existing arrangements
and prospective Fund arrangements
In millions of SDRs0.70.71.23.85.35.326.644.0
In percent of quota0.50.50.92.94.14.120.534.0
In percent of exports of goods and services0.00.00.00.10.10.10.50.7
In percent of external debt0.00.00.10.20.20.21.01.6
In percent of gross reserves0.00.00.10.20.30.31.21.9

End of period.

Expected repayment schedule, assuming full drawings and a constant 0.50 percent rate of charge. The Honduran authorities have expressed their intention to treat the arrangement as precautionary, since balance of payment pressures have not materialized. No interest payments until December 2011.

Expected repayment schedule, assuming full drawings and a rate of charge of 1.29 percent. The Honduran authorities have expressed their intention to treat the arrangement as precautionary, since balance of payment pressures have not materialized.

End of period.

Expected repayment schedule, assuming full drawings and a constant 0.50 percent rate of charge. The Honduran authorities have expressed their intention to treat the arrangement as precautionary, since balance of payment pressures have not materialized. No interest payments until December 2011.

Expected repayment schedule, assuming full drawings and a rate of charge of 1.29 percent. The Honduran authorities have expressed their intention to treat the arrangement as precautionary, since balance of payment pressures have not materialized.

Table 9.Disbursements, Purchases, and Timing of Reviews under the SCF/SBA Arrangements
Date of availabilityConditionsAmount (millions of SDRs)Percent of quota
TotalSCFSBATotalSCFSBA
Upon Board approvalBoard approval of the arrangements35.6133.237532.37527.502.5025.00
February 15, 2011Observance of end-December 2010 performance criteria and structural benchmarks and completion of first review16.1889.71256.47512.507.505.00
May 15, 2011Observance of end-March 2011 performance criteria and structural benchmarks and completion of second review19.42512.9506.47515.0010.005.00
August 15, 2011Observance of end-June 2011 performance criteria and structural benchmarks and completion of third review19.42512.9506.47515.0010.005.00
November 15, 2011Observance of end-September 2011 performance criteria and structural benchmarks and completion of fourth review19.42512.9506.47515.0010.005.00
February 15, 2012Observance of end-December 2011 performance criteria and structural benchmarks and completion of fifth review19.42512.9506.47515.0010.005.00
Total129.5064.7564.75100.0050.0050.00
Honduras’ quota is SDR 129.5 million.
Honduras’ quota is SDR 129.5 million.
Table 10.Balance of Payments: Baseline and Stress Scenarios, 2009-11(In millions of U.S. dollars)
Stress 1/
2009201020112011
Current account deficit4509641,1311,187
Exports5,0905,5715,9435,866
Remittances2,5262,5012,5512,501
Imports (non-oil)6,4786,8337,3067,245
Payments on direct investments472477536526
Public sector (amortization)2521356969
Private sector (amortization)396205133133
S-T debt original maturity396205133133
Banks
Non-bank Private Sector
S-T debt remaining maturity
Sub-total (requirements)1,0981,3041,3331,389
Net FDI500690790726
Gross M-T, L-T borrowing (public sector)261481475475
S-T debt20513313393
New borrowing126-10653
Portfolio56-15-12-12
Other Inv.70-911515
S-T private sector borrowing (new)10
Other capital flows-342166151122
Change in reserves (+ = decrease)347-60-220-220
Sub-total (sources)1,0981,3041,3331,199
Financing gap000190
IMF Financing190
Remaining gap0
Memorandum items
Assumptions:
Growth rate of exports9.46.75.3
Growth rate of FDI38.014.55.2
Growth rate of remittances-1.02.00.0
Roll over of S-T debt (in percent)10070
Sources: Central Bank of Honduras and Fund staff estimates.

Stress scenario assumes lower exports, imports, remittances, and lower and lower FDI (around US$61 million).

Sources: Central Bank of Honduras and Fund staff estimates.

Stress scenario assumes lower exports, imports, remittances, and lower and lower FDI (around US$61 million).

Table 11.Potential Foreign Currency Drains and Buffers in 2010-11(In millions of U.S. dollars)
20102011
A. Potential liquidity drains3,3463,455
Prospective current account deficit9641,131
Maturing external debt obligations340205
Commercial bank FX deposits 1/2,0422,119
B. Liquidity buffers2,4342,665
Commercial banks’ net external assets257262
Net International Reserves2,1772,403
C. Potential liquidity shortfall (A-B)912790
D. Additional liquidity from official financing140270
IADB6040
World Bank8040
IMF0190
E. Coverage of potential drains (percent)
Liquidity buffers (B/A)72.777.1
Liquidity buffers and Official financing (B+D)/A76.984.9
Memorandum items:
Commercial bank local currency deposits4,9325,209
Currency in circulation718769
IMF lending (percent of GDP)0.01.2
IMF lending (percent of NIR)0.07.9
IMF lending (percent of FX deposits)0.09.0
IMF lending (percent of commercial banks deposits)0.02.6
Sources: Central Bank of Honduras and Fund staff estimates.

Foreign currency deposits of residents at domestic banks. These deposits correspond to about 30 percent of total deposits, and have been volatile during periods of loss of confidence.

Sources: Central Bank of Honduras and Fund staff estimates.

Foreign currency deposits of residents at domestic banks. These deposits correspond to about 30 percent of total deposits, and have been volatile during periods of loss of confidence.

24. Program conditionality would be streamlined and focused on macro-critical areas:

  • Prior action. The submission to Congress of a budget for 2011 targeting a deficit of the central government of 3.4 percent of GDP (and consistent with the overall deficit of the public sector of 3.1 percent of GDP) would be a prior action.

  • Quantitative performance criteria. The program contains numerical quarterly ceilings (through December 2011) on (i) the overall public sector deficit; (ii) the net domestic financing of the public sector; (iii) the net domestic assets of the central bank; and (iv) the contracting and guaranteeing of nonconcessional external public sector debt. In addition, the program will contain a floor on the NIR of the central bank and ceilings of zero on new credit from the central bank to the government and the public banks (see MEFP Table 1).

  • Structural benchmarks. The structural conditionality under the program will focus on measures critical to fiscal consolidation, for improving the composition of public expenditure, and for upgrading the monetary framework (see MEFP Table 2).

25. Safeguards assessment. The proposed arrangements require an update of the earlier assessment of safeguards (2004 and 2008). Accordingly, a mission will visit Honduras in December of 2010 to conduct such an assessment (to be completed by the time of the first program review).

V. Capacity to repay the Fund

26. Honduras has a strong capacity to repay the Fund. Its current obligations to the Fund are low (SDR 20.3 million at end-August 2010), the proposed access would not affect significantly the level of total external debt (24 percent of GDP), and the risk of debt distress is low according to the most recent Debt Sustainability Analysis and its present update. Even if all disbursements and purchases under the proposed arrangement were made, the maximum repayment in any one year (2012) would represent only 2.9 percent of exports of goods and services and 7.6 percent of the projected level of gross reserves (Table 8).

VI. Staff Appraisal

27. The economy of Honduras is recovering gradually from the impact of the global recession and the political crisis of 2009. Last year, output declined in real terms, unemployment increased, and revenues fell sharply. In 2010, real GDP is expected to grow by 2½ percent, while inflation is projected to rise to about 6 percent (yoy). However, the overall position of the public sector remains weak, disbursements of external e Modified: 10/5/10 been slow to recover, and international reserves are below pre-crisis levels.

28. The government that took office in January 2010 recognized early on the need to take decisive measures to restore macroeconomic stability and strengthen public finances. The revised 2010 budget and the April tax reform package approved by Congress sought to arrest the deterioration of the fiscal position. In addition, tariffs in key public enterprises were raised to ensure cost-recovery, and a plan was approved to strengthen control over current spending, in particular over employment and wages. The authorities also decided to initiate an audit of government’s arrears to the private sector.

29. Resolute adherence to the program of fiscal consolidation will be critical to the success of the government’s economic strategy. The authorities’ objective of reducing the overall public sector deficit to 3.1 percent of GDP in 2011 is appropriately ambitious. Increasing revenues required to attain this deficit target will require full implementation of the tax reform of April 2010 and a substantial strengthening of tax administration. In addition, strict control over current expenditure would be critical to the success of the fiscal consolidation strategy. Staff supports the authorities’ objective of controlling the public sector wage bill, in particular after the education and health sectors benefited from significant wage and employment increases in recent years. Controlling these outlays will help create space for increasing anti-poverty spending and public investment. Fiscal consolidation needs to continue beyond 2011 to stabilize the debt-to-GDP ratio at below 30 percent of GDP.

30. Reforms of public enterprises and pension funds are key components of the authorities’ fiscal strategy. Recent tariff increases in public sector enterprises are an important step toward restoring their financial viability. Going forward, tariff adjustments should adhere to the criteria set by domestic legislation, and plans should be developed to enhance the operational efficiency and competitiveness of these enterprises. Staff welcomes the authorities’ plan to submit to Congress reform proposals for public pension funds later in 2010. The proposals should seek to rationalize the scope of benefits and set parameters for the funds’ investment policies that restore their solvency.

31. Monetary and exchange rate policies should be geared at keeping inflation low, protecting competitiveness, and strengthening the external position. In line with these objectives, the central bank is committed to controlling the expansion of its net domestic assets through active placement of its bills and adjusting its policy interest rate. Staff welcomes the central banks’ decision to stop extending credit to the government and public sector banks. The authorities are encouraged to take early steps to modernize their monetary policy framework in line with recommendations of past Fund technical assistance.

32. The authorities are committed to advancing financial sector reforms. Staff welcomes the authorities’ plans to improve the regulatory framework, supervisory practices, and strengthen the financial safety net as recommended in the 2009 update to the Financial Sector Assessment Program (FSAP). In particular, introduction of new norms for risk assessment by supervisors and for risk management by banking institutions, as well as restoration of the early warning committee and recapitalization of the deposit guarantee fund will help increase resilience of the system. The authorities’ intention to improve access to financial services through effective implementation of the secured transaction law, establishment of a public registry of movable collateral, and implementation of new norms to increase transparency, information disclosure, and protection to users of financial services, are also welcome.

33. A slower-than-expected economic recovery and less favorable external conditions are significant risks. The economic program is based on relatively conservative assumptions regarding the pace of recovery and the increase in fiscal revenues, and the key policies received support of Congress but shocks to export revenues and oil prices could weaken the balance of payments outlook. In addition, delays in adoption of critical measures included in the program would jeopardize achievement of program objectives. The authorities are encouraged to identify contingency measures, especially in the fiscal area, to enable them to respond to some of these shocks.

34. In view of the strength of the authorities’ economic program, staff supports their request for SBA/SCF arrangements of SDR 129.5 million.

Figure 1.Honduras: Real Sector Developments

Sources: Central Bank of Honduras; Ministry of Finance; and Fund staff estimates.

Figure 2.Honduras: Fiscal Developments

Sources: Ministry of Finance; and Fund staff estimates.

Figure 3.Honduras: Monetary and Financial Developments

Source: Central Bank of Honduras; and Fund staff estimates.

Figure 4.Honduras: External Sector Developments

Source: Central Bank of Honduras, and Fund staff estimates.

Table 12.Honduras: External Borrowing Requirements 2010-2015(in millions of U.S. dollars)
2009201020112012201320142015
Current account deficit4509641,1311,2151,2381,3071,358
Exports5,0905,5715,9436,3686,8357,3427,893
Remittances2,5262,5012,5512,6162,7052,8032,906
Imports (non-oil)6,4786,8337,3067,7898,2998,8209,386
Oil imports1,0821,5651,7251,8431,9372,0572,191
Payments on direct investments472477536593565597713
Public sector (debt amortization)2521356961727785
Private sector (debt amortization)396205133133169218275
Sub total (requirements)1,0981,3041,3331,4091,4791,6021,718
Net foreign direct investment5006907908849701,0551,134
Long-term gross public sector borrowing261488475396341346349
Of which : World Bank5813994130939595
Of which : IADB2414817810010010098
Short-term debt (inflow)205133133169218275337
New borrowing (private sector)126-106555535558
Other capital flows-342159151155109101108
Change in reserves (+ = decrease)347-60-220-250-212-230-268
Sub total (sources)1,0981,3041,3331,4091,4791,6021,718
Financing gap0000000
IMF Financing0000000
Remaining gap0000000
Source: Central Bank of Honduras and Fund staff estimates.
Source: Central Bank of Honduras and Fund staff estimates.
Appendix I. Debt Sustainability Analysis-Update5

October 15, 2010

This updated debt sustainability analysis (DSA) yields results similar to those reported in the June 2010 DSA—the risk of debt distress continues to be regarded as low. The analysis continues to be based on the assumptions that macroeconomic policies will be strengthened to stabilize the external current account deficit at sustainable levels and that a prudent borrowing strategy will be maintained. Under those assumptions Honduras’ debt would remain low and sustainable, with all debt indicators remaining below their indicative thresholds and robust under various stress tests. However, debt dynamics would weaken if policies deviate from the program and/or a permanent adverse shock to GDP growth.

Key Assumptions

Strengthened macroeconomic policies. As in the 2010 Article IV consultation documents, the scenario continues assuming that macroeconomic policies are strengthened starting in the second half of 2010, and remain strong over the medium term. In addition to a tax reform approved last April that would yield revenue equivalent to 1½–2½ percent of GDP (on an annual basis) over three years, the baseline also assumes the adoption of additional measures, which the authorities are currently considering. These include controlling the wage bill, reduce subsidies, and adjust electricity tariffs to reduce the public sector deficit to about 2 percent of GDP over the medium term.

Real GDP will grow by 4 percent per year helped by improved performance in exports of commodities, in the maquila6 sector, and remittances. Also, growth prospects are assumed to be enhanced by higher public investment, which is assumed to reach 6.5 percent of GDP over the medium term (compared to 5.3 percent in 2007–09).

The overall fiscal deficit of the public sector will stabilize at about 2 percent of GDP.7 Public sector revenues and grants are projected to increase to around 25 percent of GDP by 2012. The composition of expenditure would be tilted toward investment and poverty reduction, and after 2013 would increase broadly in line with nominal GDP. The fiscal deficit would be financed mostly by concessional resources from multilateral and bilateral creditors.

The noninterest external current account deficit is projected to decline below 6 percent of GDP in the long term. This would be the result of favorable dynamics in the trade balance, tourism, and remittances. The current account deficit would be largely financed by official sources and foreign direct investment (FDI), and support the projected expansion in maquila and tourism.

Annual export growth would reach nearly 8 percent over the long run. A projected decline in the prices of Honduras’ main commodities exports (coffee and bananas) is expected to be offset by continued productivity gains and higher access to international markets (through CAFTA and a trade agreement with the European Union, which would become effective in 2012).

Annual import growth would stabilize at about 7 percent per year. Nonfuel imports are projected to increase moderately, in line with domestic demand growth and maquila activity. Fuel imports volumes are assumed to grow in line with real GDP.

Non-concessional financing. The program for October 2010-March 2012 envisages a continuous ceiling for contracting non-concessional financing of US$350 million;8 of the total, US$280 million corresponds to a new multi-sector loan from the Central American Bank for Economic Integration (CABEI).9 Also, as in the 2010 Article IV, it is assumed that Honduras would progressively tap additional non-concessional sources of financing (which would rise from 5 percent to 23 percent of total disbursements in the long-run), mostly loans from bilateral (Paris Club and non-Paris Club countries) and commercial sources.

Fund arrangements. The Honduran authorities are requesting Fund support in the form of 18-month SBA/SCF blended arrangements in the amount of SDR129.5 million (100 percent of quota). An initial disbursement (combined SBA/SCF) of SDR35.61 million (27.5 percent of quota) would become available upon Board approval. Even though the authorities plan to treat the arrangements as precautionary, it will be assumed for this DSA update that the country uses all Fund resources as programmed.

External debt sustainability analysis

Honduras’ external debt would remain sustainable. All external debt indicators remain below their thresholds10, with the PV of external debt projected to stay at below 22 percent of GDP over the entire horizon of the analysis (Table 3a and Figure 1).

Table 1a.Honduras: Public Sector Debt Sustainability Framework, 2007-2030(In percent of GDP, unless otherwise indicated)
ActualEstimateProjections
200720082009AverageStandard Deviation2010201120122013201420152010-15

Average
202020302016-30

Average
Public sector debt 1/19.720.623.727.729.429.930.430.430.027.125.0
o/w foreign-currency denominated16.417.117.219.221.322.523.123.122.820.517.70.71
Change in public sector debt-12.00.93.14.01.70.50.50.0-0.4-0.4-0.1
Identified debt-creating flows-3.0-1.44.32.11.60.60.4-0.1-0.2-0.1-0.2
Primary deficit0.10.24.00.72.42.61.70.60.50.50.51.10.70.70.6
Revenue and grants24.426.324.824.524.525.025.025.025.025.025.1
of which: grants1.62.11.91.71.01.51.51.51.50.60.7
Primary (noninterest) expenditure24.526.528.927.226.225.625.625.525.625.725.8
Automatic debt dynamics-3.0-1.50.2-0.6-0.10.0-0.2-0.6-0.7-0.7-0.8
Contribution from interest rate/growth differential-2.0-0.60.80.1-0.2-0.5-0.6-0.6-0.7-0.7-0.8
of which: contribution from average real interest rate-0.10.10.40.70.70.60.60.60.50.40.2
of which: contribution from real GDP growth-1.9-0.80.4-0.6-0.9-1.1-1.2-1.2-1.2-1.1-1.0
Contribution from real exchange rate depreciation-1.0-0.9-0.5-0.70.10.50.40.0-0.1
Other identified debt-creating flows-0.1-0.10.00.00.00.00.00.00.00.00.0
Privatization receipts (negative)0.00.00.00.00.00.00.00.00.00.00.0
Recognition of implicit or contingent liabilities0.00.00.00.00.00.00.00.00.00.00.0
Debt relief (HIPC and other)-0.1-0.10.00.00.00.00.00.00.00.00.0
Other (specify, e.g. bank recapitalization)0.00.00.00.00.00.00.00.00.00.00.0
Residual, including asset changes-9.12.3-1.21.90.10.00.10.1-0.2-0.40.1
Other Sustainability Indicators
PV of public sector debt19.117.818.922.424.024.625.125.225.022.821.4
o/w foreign-currency denominated15.914.312.413.916.017.217.817.917.716.114.1
o/w external15.914.312.413.916.017.217.817.917.716.114.1
PV of contingent liabilities (not included in public sector debt)
Gross financing need 2/2.81.67.95.96.04.84.64.74.84.84.6
PV of public sector debt-to-revenue and grants ratio (in percent)78.467.676.091.198.298.4100.4100.599.790.985.0
PV of public sector debt-to-revenue ratio (in percent)83.873.482.197.8102.4104.7106.9106.9106.093.387.5
o/w external 3/69.559.054.060.768.073.075.876.275.466.157.6
Debt service-to-revenue and grants ratio (in percent) 4/11.15.413.913.517.516.816.416.917.216.715.9
Debt service-to-revenue ratio (in percent) 4/11.95.815.014.518.317.917.518.018.317.116.3
Primary deficit that stabilizes the debt-to-GDP ratio12.1-0.71.0-1.40.00.10.10.50.91.10.8
Key macroeconomic and fiscal assumptions
Real GDP growth (in percent)6.24.0-1.93.82.92.43.54.04.04.04.03.74.04.04.0
Average nominal interest rate on forex debt (in percent)1.52.21.91.80.42.31.71.81.82.01.91.92.02.12.0
Average real interest rate on domestic debt (in percent)5.83.86.67.66.96.98.28.28.58.27.27.95.02.04.2
Real exchange rate depreciation (in percent, + indicates depreciation)-3.7-5.8-3.1-0.68.3-4.1
Inflation rate (GDP deflator, in percent)6.98.54.46.59.54.94.05.65.15.25.55.15.35.35.3
Growth of real primary spending (deflated by GDP deflator, in percent)11.612.66.78.913.7-3.6-0.11.73.73.84.21.64.24.14.1
Grant element of new external borrowing (in percent)24.221.224.823.823.723.123.523.020.2
Sources: Country authorities; and staff estimates and projections.

The consolidated public sector includes the central government, local governments, decentralized agencies, social security institutions, central bank, and public enterprises. Net debt is used.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Sources: Country authorities; and staff estimates and projections.

The consolidated public sector includes the central government, local governments, decentralized agencies, social security institutions, central bank, and public enterprises. Net debt is used.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues excluding grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Table 2a.Honduras: Sensitivity Analysis for Key Indicators of Public Debt 2010-2030
Projections
20102011201220132014201520202030
PV of Debt-to-GDP Ratio
Baseline2224252525252321
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages2223242425252322
A2. Primary balance is unchanged from 20102225283032344257
A3. Permanently lower GDP growth 1/2224252627283255
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2011-20122225283031323646
B2. Primary balance is at historical average minus one standard deviations in 2011-20122225282929292625
B3. Combination of B1-B2 using one half standard deviation shocks2224272828293034
B4. One-time 30 percent real depreciation in 20112230313131312930
B5. 10 percent of GDP increase in other debt-creating flows in 20112234353535353229
PV of Debt-to-Revenue Ratio 2/
Baseline9198981001011009185
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages9194949798989389
A2. Primary balance is unchanged from 201091102110121129137167226
A3. Permanently lower GDP growth 1/9199101106109111129219
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2011-201291103111119124128145185
B2. Primary balance is at historical average minus one standard deviations in 2011-20129110311311511511410598
B3. Combination of B1-B2 using one half standard deviation shocks91100106111113115119135
B4. One-time 30 percent real depreciation in 201191123123125124123116120
B5. 10 percent of GDP increase in other debt-creating flows in 201191139139141141139128117
Debt Service-to-Revenue Ratio 2/
Baseline1318171617171716
A. Alternative scenarios
A1. Real GDP growth and primary balance are at historical averages1317161517171716
A2. Primary balance is unchanged from 20101318181921232737
A3. Permanently lower GDP growth 1/1318171718192235
B. Bound tests
B1. Real GDP growth is at historical average minus one standard deviations in 2011-20121318181921212431
B2. Primary balance is at historical average minus one standard deviations in 2011-20121318182020191918
B3. Combination of B1-B2 using one half standard deviation shocks1318171819202023
B4. One-time 30 percent real depreciation in 20111318181819202224
B5. 10 percent of GDP increase in other debt-creating flows in 20111318252623222221
Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

Sources: Country authorities; and staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of the length of the projection period.

Revenues are defined inclusive of grants.

Table 3a.:External Debt Sustainability Framework, 2007-2030 1/(In percent of GDP, unless otherwise indicated)
ActualHistorical 0 StandardProjections
200720082009Average 0 Deviation2010201120122013201420152010-2015 Average202020302016-2030 Average
External debt (nominal) 1/25.825.322.924.126.127.428.228.428.226.925.8
o/w public and publicly guaranteed (PPG)16.417.117.219.221.322.523.123.122.820.517.7
Change in external debt-10.3-0.5-2.51.22.01.30.80.2-0.2-0.30.0
Identified net debt-creating flows-2.73.8-1.51.21.30.90.50.30.1-0.4-1.7
Non-interest current account deficit8.412.42.65.33.25.66.56.56.46.46.25.94.95.7
Deficit in balance of goods and services27.531.318.319.920.219.919.819.519.117.812.8
Exports53.252.742.242.743.044.045.346.046.348.857.8
Imports80.684.060.662.663.263.865.165.465.466.670.5
Net current transfers (negative = inflow)-21.5-21.7-19.3-15.95.7-17.2-16.6-16.2-16.1-15.8-15.4-14.3-11.3-13.3
o/w official-1.2-1.9-1.4-0.7-0.7-0.7-0.7-0.7-0.7-0.8-0.4
Other current account flows (negative = net inflow)2.42.83.63.02.82.92.72.72.52.43.4
Net FDI (negative = inflow)-7.5-6.3-4.2-5.41.3-4.5-4.8-5.2-5.4-5.6-5.7-5 .9-6.3-6.0
Endogenous debt dynamics 2/-3.6-2.30.00.0-0.3-0.5-0.5-0.4-0.4-0.4-0.3
Contribution from nominal interest rate0.70.60.60.50.50.50.60.60.60.60.7
Contribution from real GDP growth-2.0-0.90.5-0.5-0.8-1.0-1.1-1.1-1.1-1.0-1.0
Contribution from price and exchange rate changes-2.3-2.0-1.1
Residual (3-4) 3/-7.6-4.3-1.00.10.70.30.3-0.1-0.30.11.8
o/w exceptional financing-1.0-1.21.9-0.10.00.00.00.00.00.00.0
PV of external debt 4/18.018.820.722.122.923.223.222.522.2
In percent of exports42.743.948.250.250.650.450.146.138.5
PV of PPG external debt12.413.916.017.217.817.917.716.114.1
In percent of exports29.332.537.139.039.439.038.333.124.4
In percent of government revenues54.060.768.073.075.876.275.466.157.6
Debt service-to-exports ratio (in percent)4.15.09.15.24.74.64.54.74.94.73.0
PPG debt service-to-exports ratio (in percent)1.71.13.71.91.61.71.82.12.42.81.9
PPG debt service-to-revenue ratio (in percent)3.92.46.73.63.03.23.44.24.85.74.6
Total gross financing need (Billions of U.S. dollars)0.71.60.80.70.80.80.80.80.91.11.3
Non-interest current account deficit that stabilizes debt ratio18.712.95.14.44.55.35.66.16.46.24.9
Key macroeconomic assumptions
Real GDP growth (in percent)6.24.0-1.93.82.92.43.54.04.04.04.03.74.04.04.0
GDP deflator in US dollar terms (change in percent)6.98.54.56.59.54.92.70.90.21.52.32.12.12.12.1
Effective interest rate (percent) 5/2.12.72.42.20.52.62.22.22.22.42.32.32.52.72.5
Growth of exports of G&S (US dollar terms, in percent)9.011.7-17.812.223.28.87.07.37.27.27.37.57.48.57.8
Growth of imports of G&S (US dollar terms, in percent)19.417.5-26.112.619.611.27.35.96.26.26.47.26.67.26.7
Grant element of new public sector borrowing (in percent)24.221.224.823.823.723.123.523.020.222.1
Government revenues (excluding grants, in percent of GDP)22.824.223.022.923.523.523.523.523.524.424.424.3
Aid flows (in Billions of US dollars) 7/0.50.70.50.60.40.50.50.50.50.40.8
o/w Grants0.20.30.30.30.20.30.30.30.30.20.3
o/w Concessional loans0.30.40.30.30.30.20.20.20.20.30.4
Grant-equivalent financing (in percent of GDP) 8/2.51.82.12.01.91.91.01.01.2
Grant-equivalent financing (in percent of external financing) 8/48.838.253.157.358.058.743.243.946.4
Memorandum items:
Nominal GDP (Billions of US dollars)12.313.914.315.316.317.117.818.820.027.149.5
Nominal dollar GDP growth13.512.82.57.56.34.94.25.66.45.86.26.26.2
PV of PPG external debt (in Billions of US dollars)1.82.12.62.93.13.33.54.36.7
(PVt-PVt-1)/GDPt-1 (in percent)2.52.81.81.41.10.91.80.60.80.7
Gross remittances (Billions of US dollars)2.62.82.52.42.52.62.72.83.03.86.5
PV of PPG external debt (in percent of GDP + remittances)10.612.013.814.915.515.615.414.112.4
PV of PPG external debt (in percent of exports + remittances)20.823.727.328.929.429.329.025.719.8
Debt service of PPG external debt (in percent of exports + remittances)2.61.41.21.31.31.61.82.21.6
Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and p = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

Sources: Country authorities; and staff estimates and projections.

Includes both public and private sector external debt.

Derived as [r - g - ρ(1+g)]/(1+g+ρ+gρ) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and p = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that PV of private sector debt is equivalent to its face value.

Current-year interest payments divided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 10 years, subject to data availability.

Defined as grants, concessional loans, and debt relief.

Grant-equivalent financing includes grants provided directly to the government and through new borrowing (difference between the face value and the PV of new debt).

External debt indicators remain below their indicative, policy-related thresholds under all stress tests and alternatives scenarios (Figure 1). Under the historical scenario, debt burden indicators are lower than those under the baseline scenario because the projected averages (from 2011) of FDI and real GDP growth are higher than the estimated values for 2010. On the other hand, the noninterest current account average is lower than the one for 2010.

Public sector debt sustainability analysis

Honduras’ public sector debt would remain low and sustainable. Public sector debt would remain at about 25 percent of GDP (21 percent in PV terms). As the fiscal deficit would progressively decline to about 2 percent of GDP and growth rebounds to its long-term rate, the sustainable primary deficit would be about 1 percent of GDP.

Stress Tests

The alternative scenarios and stress tests show that public sector debt dynamics are vulnerable to adverse shocks (exogenous or policy-related). The status quo stress test, which assumes a primary fiscal deficit at the 2011 level in terms of GDP until the end of the projection period, as well as a permanent decline in real GDP growth, would place the PV of public debt-to-GDP ratio on an upward trend (Table 2a). Also, a one-time real depreciation of 30 percent (e.g. under a severe balance of payments correction) or a 10 percent of GDP increase in other debt-creating flows (e.g. in case of severe financial sector distress that leads to the realization of contingent liabilities) would rise the PV of public debt-to-revenue ratio over 100 percent in the long term, compared to 85 percent under the baseline scenario.

Conclusion

Based on the above analysis, Honduras’ debt is assessed to be at low risk of debt distress. Assuming consistent pursuit of strengthened macroeconomic policies, Honduras’ debt indicators would remain below their indicative thresholds and broadly resilient to adverse shocks. Under alternative policies, however, public sector debt dynamics would weaken. Honduras’ favorable debt outlook reflects the low initial levels of public debt, which resulted in large debt relief granted to Honduras during 2000s.

Given that Honduras would progressively tap more nonconcessional sources of financing, it will be important to build on the existing capacity to manage debt and to formulate a strategy linked to medium-term fiscal framework. Authorities are committed to strengthen their debt management capacity, including with additional new technical assistance.

Table 3b.Honduras: Sensitivity Analysis for Key Indicators of Public and Publicly Guaranteed External Debt, 2010-2030(In percent)
Projections
20102011201220132014201520202030
PV of debt-to GDP ratio
Baseline1416171818181614
A. Alternative Scenarios
A1. Key variables at their historical averages in 2010-2030 1/141413121110811
A2. New public sector loans on less favorable terms in 2010-2030 21417181920202122
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2011-20121416181818181614
B2. Export value growth at historical average minus one standard deviation in 2011-2012 3/1422343534342818
B3. US dollar GDP deflator at historical average minus one standard deviation in 2011-20121417181919191714
B4. Net non-debt creating flows at historical average minus one standard deviation in 2011-2012 4/1422292929282416
B5. Combination of B1-B4 using one-half standard deviation shocks1422313131312517
B6. One-time 30 percent nominal depreciation relative to the baseline in 2011 5/1422242425242218
PV of debt-to-exports ratio
Baseline3237393939383324
A. Alternative Scenarios
A1. Key variables at their historical averages in 2010-2030 1/3232292624221618
A2. New public sector loans on less favorable terms in 2010-2030 23239414344444239
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2011-20123237383838373223
B2. Export value growth at historical average minus one standard deviation in 2011-2012 3/32611121111081058244
B3. US dollar GDP deflator at historical average minus one standard deviation in 2011-20123237383838373223
B4. Net non-debt creating flows at historical average minus one standard deviation in 2011-2012 4/3250656463614928
B5. Combination of B1-B4 using one-half standard deviation shocks3252777675735732
B6. One-time 30 percent nominal depreciation relative to the baseline in 2011 5/3237383838373223
PV of debt-to-revenue ratio
Baseline6168737676756658
A. Alternative Scenarios
A1. Key variables at their historical averages in 2010-2030 1/6159555147433343
A2. New public sector loans on less favorable terms in 2010-2030 26171778285868592
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2011-20126169757878776757
B2. Export value growth at historical average minus one standard deviation in 2011-2012 3/619314514714614311372
B3. US dollar GDP deflator at historical average minus one standard deviation in 2011-20126171788181806959
B4. Net non-debt creating flows at historical average minus one standard deviation in 2011-2012 4/61921211241231219766
B5. Combination of B1-B4 using one-half standard deviation shocks619213013313213010469
B6. One-time 30 percent nominal depreciation relative to the baseline in 2011 5/61951001041051038976
Debt service-to-exports ratio
Baseline22222232
A. Alternative Scenarios
A1. Key variables at their historical averages in 2010-2030 1/22112211
A2. New public sector loans on less favorable terms in 2010-2030 222222233
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2011-201222222232
B2. Export value growth at historical average minus one standard deviation in 2011-2012 3/22345574
B3. US dollar GDP deflator at historical average minus one standard deviation in 2011-201222222232
B4. Net non-debt creating flows at historical average minus one standard deviation in 2011-2012 4/22233343
B5. Combination of B1-B4 using one-half standard deviation shocks22233453
B6. One-time 30 percent nominal depreciation relative to the baseline in 2011 5/22222232
Debt service-to-revenue ratio
Baseline43334565
A. Alternative Scenarios
A1. Key variables at their historical averages in 2010-2030 1/43333332
A2. New public sector loans on less favorable terms in 2010-2030 243344467
B. Bound Tests
B1. Real GDP growth at historical average minus one standard deviation in 2011-201243344565
B2. Export value growth at historical average minus one standard deviation in 2011-2012 3/434667107
B3. US dollar GDP deflator at historical average minus one standard deviation in 2011-201243445565
B4. Net non-debt creating flows at historical average minus one standard deviation in 2011-2012 4/43456696
B5. Combination of B1-B4 using one-half standard deviation shocks43456697
B6. One-time 30 percent nominal depreciation relative to the baseline in 2011 5/44556786
Memorandum item:
Grant element assumed on residual financing (i.e., financing required above baseline) 6/1616161616161616
Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Sources: Country authorities; and staff estimates and projections.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baseline.

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Figure 1a.Honduras: Indicators of Public and Publicly Guaranteed External Debt under Alternatives Scenarios, 2010-2030 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio in 2020. In figure b. it corresponds a Exports shock; in c. to a Exports shock; in d. to a Exports shock; in e. to a Exports shock and in figure f. to a Exports shock

Figure 2a.Honduras: Indicators of Public Debt Under Alternative Scenarios, 2010-2030 1/

Sources: Country authorities; and staff estimates and projections.

1/ The most extreme stress test is the test that yields the highest ratio in 2020.

Revenues are defined inclusive of grants.

Attachment I. Letter of Intent

Tegucigalpa, September 10, 2010

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Mr. Strauss-Kahn,

1. During 2009, the Honduran economy was severely affected by the global slowdown and a domestic political crisis. Real GDP declined by almost 2 percent and unemployment rose significantly. In addition, the fiscal position deteriorated markedly and international reserves declined by about US$360 million, to the lowest level since 2006. Although external conditions have begun to improve in 2010, economic growth is still weak and the recovery faces risks.

2. To establish the conditions for robust and sustainable growth in the medium term, the Government has started to implement key reforms, and has developed an economic program for 2010–11 aimed at reducing macroeconomic imbalances and strengthening the finances of the public sector. We expect that strong implementation of this program will help bolster investor confidence and strengthen the support of the international community. In support of this program, we are requesting 18-month arrangements with the Fund, in the total amount of SDR129.5 million, equivalent to 100 percent of Honduras’ quota at the Fund (with a blend of resources from the Stand-By and Standby Credit Facilities, of SDR 64.75 million each). We intend to treat the arrangement as precautionary.

3. The main objective of this program is to restore macroeconomic stability, strengthen public finances, help establish the conditions for sustainable economic growth and increase resources for investment. In the attached Memorandum of Economic and Financial Policies (MEFP), we outline the economic program and set out the policies of the Government for 2010–11. These policies reflect the Government’s commitment to fiscal consolidation, improvements in revenue mobilization and tax administration, combined with improvements in the composition of public sector expenditure, strict control of the public sector wage bill, that enable an increase in anti-poverty programs and public investment. The government believes that the policies contained in the MEFP are adequate to achieve the objectives of its program, and it is committed to take any further measures that may be needed for this purpose. We will consult with the Fund on the adoption of these measures as needed, and in advance of revisions to the policies contained in the MEFP, in accordance with IMF policies on such consultation.

4. During the program, the Government will not introduce or intensify any exchange rate restrictions, multiple currency practice, and import restrictions for balance of payments purposes, and will continue to comply with all obligations of Article VIII of the IMF’s Articles of Agreement.

5. Program implementation will be monitored through five quarterly reviews, with the first one to be completed on or after February 15, 2011. The quantitative performance criteria and structural benchmarks under the program are set out in Tables 1 and 2 of the attached MEFP. Consistent with the commitment to keep the public informed, the Government will publish the program documents and will report periodically on progress under the program.

Sincerely yours,
/s//s/
Maria Elena Mondragón de VillarWilliam Chong Wong
President, Central Bank of HondurasMinister of Finance

Attachments

Attachment II. Memorandum of Economic and Financial Policies for 2010–11

I. Background and Program Objectives

1. During 2009, the economy of Honduras was severely affected by the global slowdown and a domestic political crisis. Real GDP declined by 1.9 percent, resulting in a significant loss of employment. The impact of these developments, combined with domestic macroeconomic policies in place, resulted in a deterioration in the external position, as net capital inflows (FDI and official assistance) contracted by more than the external current account deficit, and gross international reserves fell by 15 percent to US$2.3 billion (3½ months of imports).

2. The government of President Porfirio Lobo, which took office in January 2010, inherited a weak economic situation and large fiscal imbalances. In 2009, the overall deficit of the public sector rose sharply to 4.6 percent of GDP (from 1.7 percent in the previous year), reflecting a large widening in the deficit of the central government (from 2.4 percent of GDP in 2008 to 6.2 percent last year). A strong increase in government spending (mostly public sector wages) and weaker tax revenue were the main contributors to the higher deficit, which was financed with a combination of short-term domestic debt, central bank credit, and domestic arrears. The financial position of public sector enterprises and pension funds also worsened.

3. Since taking office, the new government has taken several measures to restore macroeconomic stability and strengthen the public finances. Last April, Congress approved a comprehensive tax reform that is expected to yield revenues by up to 2½ percent of GDP (on an annual basis). In June, we initiated a process of employment verification in the education and health sectors (which account for the bulk of the government wage bill), eliminated subsidies to all users with electricity consumption above 150 kWh per month, and improved the targeting of the energy subsidy to the poor, and public enterprises adjusted their tariffs to better reflect operating costs. These measures will contribute to reduce fiscal disequilibrium.

4. Consistent with the goals stated in the Visión de País 2010-2038 and the strategic elements of the Plan de Nación 2010-2022, our economic policy’s main objectives will be to restore macroeconomic stability, strengthen public finances, help establish the conditions for sustained economic growth, and increase resources for investment. In line with these objectives, our economic program aims at bolstering confidence in the government’s policies, strengthening the fiscal position of the central government and key public sector entities, raising the level and efficiency of social spending, and boosting our international reserves. We expect that prompt adoption and steadfast implementation of this program will help mobilize official external financing to support its objectives.

5. We believe that a large and sustainable reduction in fiscal deficits and improvement in the composition of public expenditure are critical to the success of our economic program. To this end, the program targets a reduction in the deficit of the central government of almost 3 percent of GDP during 2010-11 (from 6.2 percent of GDP in 2009). During this period, the overall fiscal deficit of the consolidated public sector would be lowered by1.6 percent of GDP; higher investment by public sector enterprises would be the main reason for the smaller decline in the consolidated public sector deficit. The projected reduction in the fiscal deficit will be driven by higher tax revenues resulting from the implementation of the April 2010 reform, improved tax administration and collection, and, importantly, strict control of current spending. Monetary and exchange rate policies will be consistent with our inflation and external objectives. The program also envisages structural reforms which are critical to its success, mostly in public finances and the financial sector.

II. Macroeconomic Policies for 2010-11

6. Our program envisages a gradual economic recovery, with real GDP growth in the range of 2½-3½ percent during 2010-11. Inflation is expected to rise, largely reflecting higher prices of imported goods (mostly petroleum), but will be kept below 6 percent throughout the program period. The deficit in the external current account is projected to rise to 6-7 percent of GDP (from 3.2 percent in 2009) owing to higher prices of imported commodities (mostly oil) and strong import demand for public and private investment. A strong pickup in foreign direct investment and in official external financing is expected to be more than sufficient to cover the current account deficit and, as a result, gross international reserves are expected to increase gradually throughout the program period.

A. Fiscal Policy

7. Our fiscal policy aims at improving the quality of public expenditure, reducing the overall deficit of the public sector to 2 percent in the medium term, and keeping the debt-to-GDP ratio at below 30 percent. In line with these objectives, the overall deficit of the consolidated public sector for end-2010 will be lowered to 3.7 percent of GDP (0.9 percent less than in 2009), on account of higher tax revenue and expenditure restraint. The 2011 budget that we plan to submit to Congress by mid-September 2010 (prior action) will target an overall fiscal deficit of the central government of 3.4 percent of GDP, consistent with the overall deficit of the consolidated public sector of 3.1 percent of GDP. The budget will accommodate higher spending in priority areas, mostly poverty reduction and public investment. To achieve this objective we plan to fully implement the tax measures approved last April, and exercise strict control of public sector current spending, especially of the wage bill. In addition, we plan to adopt measures to strengthen the operating balance of public sector enterprises. The key elements of our program for 2010–11 include:

  • Improvements in tax policy and administration. In support of the tax reform, we plan to further strengthen the institutional framework for tax collections. In particular, we will: (i) submit to the National Congress the necessary reforms, including to the tax code, to enforce tax compliance; (ii) maintain unchanged the rules, regulations, resolutions and technical directives related to the proper implementation of the reform to the zero tax rate, taxes on income and sales, and excise taxes contained in Decree 17-2010; iii) review the tax exemptions established in various laws in order to ensure their proper application and strengthen their respective controls by the Ministry of Finance and the tax collection agency (DEI) by June 2011; (iv) continue the institutional upgrading of the DEI, strengthening its capacity to control, analyze, and collect revenue; and (v) improving management of human resources in the areas of training programs and internal wage policy, to facilitate the implementation of the civil service career path and incentives plan. At the same time, we will improve the administrative capacity of the DEI, we will strengthen the large taxpayers unit with equipment and qualified personnel, and we will develop a manual of job description and salaries (March 2011).

  • Control of expenditure on goods and services. For 2011, we will maintain the ceiling established in the 2010 budget on central government expenditure on goods and services. In addition, we will start using reverse auctions and online purchases to reduce costs and increase availability of medicine, fuels, and other goods in the public sector.

  • Control of the wage bill. Our policies will aim at reining in the growth of the wage bill of the central government, which is projected to decline to 10.3 percent of GDP in 2011 (from 11.1 percent of GDP in 2010). Payroll control will be tightened by: (i) completing, by end-September 2010, the process of employment verification in the education and health sectors (by the Ministry of Finance and with the support of Ministry of Planning and External Cooperation), based on the information available from the 2009 census and the employment audit carried out by the Government Audit Office (TSC), and the findings of the joint Government/Teachers commission envisaged in the August 28, 2010 agreement, and detailed employment records provided by the respective ministries; (ii) eliminating all redundant and irregular positions identified by the TSC; (iii) setting-up a centralized unit for payroll monitoring at the Ministry of Finance by end- 2010; (iv) linking payroll management modules for the education and health ministries to the integrated system of financial management (SIAFI) by October 2010 and fully incorporating it into SIAFI by March 2011; (v) requiring prior approval by the Ministry of Finance for any modification of the budgeted payroll of the central government; and (vi) integrating payments to day laborers into SIAFI and the financial system.

  • Improved public investment management. We will develop by March 2011 a plan to strengthen the management of investment projects at the institutional and project execution levels, through the simplification of the mechanisms and processes for the procurement, implementation, and monitoring of public investment.

  • Strengthening of the operating balance of key public enterprises. We plan the following measures to strengthen the operating balance of public enterprises: (i) raise electricity tariffs by 3 percent by end-September 2010 and thereafter adjust electricity tariffs periodically in line with fuel costs as stipulated in the law; (ii) regularize overdue payments of other public sector entities (December 2010) to the electricity company (ENEE) so as to enable the repayment of ENEE’s overdue obligations to the private sector by March 2011; and (iii) prepare by March 2011 comprehensive plans to restore the financial viability and enhance the operational efficiency of the public enterprises.

  • Strengthening the financial position of public pension funds. The pension funds together with the Banking and Securities Commission (CNBS) have developed an action plan for reforming the law that would reduce the actuarial deficit of the pension system (INPREMA, INJUPEMP, INPREUNAH) by changing the bases of defined benefits. We will present a draft law based on this action plan to the National Congress by December 2010. We are also reviewing and reforming regulations to allow pension funds to diversify their investment instruments within the limits that guarantee their liquidity, profitability and safety (December 2010).

  • Audit of government arrears to private sector suppliers. By January 2011, a contract will be signed with a reputable international audit company to undertake an audit of accumulated domestic arrears to the private sector. Based on this audit, we will develop a plan to only clear arrears generated from contracts that adhered to existing regulations and procedures.

  • Reform of the civil service law. By December 2011, the government, with the support of the Inter-American Development Bank (IADB), will review the legislation that regulates recruitment and selection processes, and recruitment procedures for all existing regimes in the public administration. This diagnosis will be the basis of a plan to reform the Civil Service Law, which will be later presented to Congress for its discussion and approval.

  • Budget financing. Our strategy will encompass a lower reliance on domestic financing and refraining from using central bank financing to the budget. In line with this objective, we have requested budget support from the World Bank and the IADB totaling US$220 million for 2010–11. In addition, the Central American Bank for Economic Integration (CABEI) approved a non-concessional loan of US$280 million, which remains within the limit on the contracting of nonconcessional debt (US$350 million). We will not incur external arrears at any time during the program period.

  • Use of higher-than-projected revenue and external disbursements of budget support. Our fiscal projections for 2010-11 are based on conservative assumptions for output and revenue growth. If tax revenues were to be higher than projected, we will use up to 50 percent of the excess revenue to repay domestic debt, and allocate the rest to counterpart financing of social investment projects (TMU, paragraph 7, Table B). Also, if external disbursements for budget support exceed the amount projected, we will save the total amount of the excess in the net international reserves of the central bank, which will also reduce the ceiling on net domestic assets.

  • Improved public debt management. With the objective of strengthening the capacity to manage to public debt and link government borrowing plans to a sound, multiyear fiscal framework, we will update the Guidelines for Public Sector Borrowing (Propuesta de Lineamientos de Política de Endeudamiento Público) 2011-2014 in the following areas: (i) establish a borrowing ceiling for the central government, based on the debt sustainability analysis prepared by the public credit department of the Ministry of Finance; (ii) properly record and administer domestic arrears and contingencies resulting from public-private partnerships (PPPs) and other contracts; (iii) strengthen the fiscal risks unit of the Ministry of Finance to improve debt profile; and (iv) establish by February 2011 specific norms for controlling and managing the outstanding debt of local governments.

B. Monetary and Exchange Rate Policies

8. Our monetary policy will aim at keeping inflation at single digits and maintaining an adequate level of international reserves. Accordingly, we will seek to keep annual inflation in the range of 5½-6 percent in 2010-11 (plus/minus one percentage point). The central bank’s monetary program for the program period is consistent with a prudent expansion of bank credit to the private sector to support the growth objectives of the government. We will control the growth of net domestic credit through active placements of central bank bills, and will not extend new credit to the public banks and to the central government. We will monitor monetary conditions and assess the appropriateness of interest rate levels throughout the program period, and will adjust our policy rate (TPM) as necessary to achieve our inflation target and protect the external position. In addition, the program envisages that net international reserves will increase by US$50 million in 2010 and by US$220 million in 2011, and establishes a ceiling for the net domestic assets of the central bank.

9. Our exchange rate policy will be transparent, predictable, and consistent with the objective of safeguarding competitiveness and strengthening the external position. The central bank will take measures to foster the development of an active interbank market and secondary markets for central bank and government paper, refine monetary instruments, and enhance policy signaling. The central bank will undertake a comprehensive reform of its operational framework for conducting monetary policy. The reform will include: (i) moving toward a system of liquidity forecasting and liquidity management on a daily basis; (ii) improving market-based repo operations for liquidity management, (iii) increasing the signaling content of the policy rate (TPM); (iv) revamping the system of primary auctions of central bank paper to allow for price discovery by market participants, and (v) simplifying the current system of reserve requirements. We are requesting assistance from the IMF to strengthen the central bank’s institutional capacity for designing and implementing these reforms, and for developing a timetable for their adoption.

10. To enhance the central bank’s ability to pursue effective monetary policy, we will develop a plan for its recapitalization and institutional strengthening by December 2011. We will request technical assistance from the IMF for this purpose.

C. Financial Sector Policies

11. Building on the progress achieved in recent years, we are fully committed to further improve our regulatory framework and supervisory practices in the financial system, and to strengthen the financial safety net, as recommended in the update to the Financial Sector Assessment Program (FSAP). In particular, we plan to: (i) issue new norms for loan classifications and reserve coverage in line with international best practices, by December 2010; (ii) approve regulations for measuring and monitoring liquidity risks in line with international best practices; (iii) strengthen the capacity for risk-based supervision, (iv) reactivate the Early Warning Committee; (v) strengthen the risk-based supervision framework for saving and loans cooperatives, (vi) review bank resolution procedures to ensure that they follow the best practices, and (vi) strengthen the deposit guarantee fund (FOSEDE) and the Capitalization Fund. We are also committed to improve access to financial services. To this effect, we expect that the Chamber of Commerce and Industry of Tegucigalpa will be able to implement, by January 2011, the “secured transactions” Law and to have in place a public registry of movable collateral. Furthermore, the CNBS will modify regulations for appraisers, extraordinary assets, bonded warehouses, and credit bureau (February 2011). We will also design and adhere to new norms to increase transparency, information disclosure, and protection to users of financial services (September 2011).

D. Poverty Reduction Policy

12. Targeting social spending to the poor. With the assistance of the multilateral banks and donors, the government plans to consolidate its anti-poverty expenditure in a conditional cash transfer program (Bono 10 mil). This program aims at covering a large share of the families living in extreme poverty and providing cash benefits conditional on periodic monitoring of child growth and use of health and education services. In particular, we plan to: (i) increase the coverage of the conditional transfer program by 150,000 additional families by end-2011; (ii) strengthen the monitoring and control mechanisms of the Bono 10 mil; and (iii) expand the provision and access to health and education services to the program’s beneficiaries. The government has committed resources equivalent to 1.6 percent of GDP to all social investment programs in 2011.

E. Reforms to Improve the Investment Climate

13. We are committed to improving the business climate in Honduras in order to increase foreign and domestic investment, in particular in infrastructure. To facilitate this, Congress approved a draft law for public-private partnerships (PPP) and is considering a draft law on investment protection and promotion. We also plan to improve the regulatory framework for creditors’ rights and insolvency proceedings. To improve the safety of transactions and facilitate commercial and administrative operations, we will make legal the use of electronic signatures.

III. Safeguards Assessment

14. We recognize the importance of completing an updated safeguards assessment of the Central Bank of Honduras before the first review of the program. To facilitate this, we have authorized the central bank’s external auditors to provide IMF staff with all necessary information and to hold discussions directly with IMF staff. The central bank will work with IMF staff to ensure the smooth completion of the updated safeguards assessment before the first review. The central bank intends to fully implement the recommendations resulting from that assessment.

IV. Program Monitoring

15. The program with the IMF will cover the period October 2010–March 2012 and will be monitored on a quarterly basis, by quantitative performance criteria and indicative targets, and structural benchmarks. The first program review will be completed on or after February 15, 2011, the second one on or after May 15, 2011, and the third one on or after August 15, 2011. The quantitative performance criteria and indicative targets for December 2010 and March 2011 are set out in the attached table, and those for the period April 2011-March 2012 will be established in the first review of the program. Structural benchmarks are set out in Table 2. The definitions and reporting procedures are further specified in the accompanying Technical Memorandum of Understanding.

Table 1.Honduras - Proposed Performance Criteria 1/(Cumulative flows; millions of Lempiras, unless specified)
20102011
Prel.Proj.PCPCIndicative Targets
end-Jun.end-Sep.end-Dec.end- Mar.end- Jun.end- Sep.end- Dec.
QUANTITATIVE PERFORMANCE CRITERIA
Fiscal targets 2/
Deficit of the combined public sector (ceiling)3,4134,6887,4874,7154,2446,0559,700
Net domestic financing of the combined public sector (ceiling)2,0082,214-2503,868689-23922
Monetary targets
Stock of net international reserves (floor, in millions of US$)1,5981,4621,5571,6061,7511,7831,777
Stock of net domestic assets of the central bank (ceiling)-14,679-13,231-11,080-12,855-16,083-17,004-13,676
Public debt targets 2/
Contracting or guaranteeing of non-concessional external
debt (continuous ceiling, in million of US$)350350350350350
New arrears of ENEE with the private sector (continuous ceiling)000000
External payment arrears of the combined public
sector (continuous ceiling)00000
INDICATIVE TARGETS 2/
Central government current primary expenditure (ceiling)22,43314,15728,77310,82723,80036,55550,572
Social investment related spending (floor)1,5362131,1974429541,5323,477
Wage bill of the central government (ceiling)14,9008,20317,3356,71615,58023,05432,235
Memo Items 2/
Central government tax revenues 3/19,90810,92024,1469,29825,26837,55850,322
Budget support external loans (in million of US$)00190004080

Definitions as specified in the Technical Memorandum of Understanding.

Cummulative starting on July 1 for 2010 and on January 1 for 2011.

Does not constitute a Performance Criterion, Indicative Target or Structural Benchmark.

Definitions as specified in the Technical Memorandum of Understanding.

Cummulative starting on July 1 for 2010 and on January 1 for 2011.

Does not constitute a Performance Criterion, Indicative Target or Structural Benchmark.

Table 2.Honduras: Structural Benchmarks
DateRationale
A. Fiscal
Present to Congress a 2011 Budget consistent with a combined public sector deficit of 3.1 percent of GDP.Prior actionAnchoring the macroeconomic program
Improve human resources management and administrative capacity of the DEI; strengthen a Large Taxpayer Unit with adequate staff; and develop a job and pay description manual.March 2011Critical to strengthen tax revenue collections
Transfer the control over Education payroll to the Ministry of Finance.March 2011Critical to control the wage bill
Sign a contract to audit public sector arrears with the private sector.January 2011Definitely establish government obligations
Adjust electricity tariffs in line with fuel costs.ContinuousImprove the financial position of ENEE
Present a law reform proposal that allows changing the bases of defined benefits, to reduce the actuarial deficit of IMPREMA, INJUPEMP and INPREUNAHDecember 2010Strengthen the financial sustainability of pension regimes
B. Financial Sector
Issue norms for loan classifications, reserve coverage and approve regulations for measuring and monitoring liquidity risks in line with international best practices.December 2010Strengthen the stability of the financial system
C. Monetary and External
Prepare a plan to recapitalize the central bank.December 2011Strengthen the financial position and independence of the CBH
Attachment III. Technical Memorandum of Understanding

1. This memorandum sets out technical understandings between the Honduran authorities and the Fund staff for monitoring of the economic program agreed for the period October 2010–March 2012. It defines the concepts used to assess observance of quantitative performance criteria, structural benchmarks, and indicative targets specified in Tables 1 and 2 of the Memorandum of Economic and Financial Policies (MEFP). It also specifies the frequency of the data to be provided to the Fund to monitor the developments under the program.

I. Program Assumptions

2. For program monitoring purposes, unless otherwise indicated, U.S. dollar denominated components of the balance sheet of the Central Bank of Honduras will be valued at the exchange rate of L18.8951/US$. Amounts denominated in other currencies will be converted for program purposes into U.S. dollar amounts using the cross-rates as of end-June 2010 published on the IMF website http://www.imf.com.

II. Fiscal Targets

3. The deficit of the combined public sector (CPS) will be measured from the financing side (i.e., “below the line”), and will correspond to the net borrowing of the CPS, from both external and domestic sources. The CPS comprises the nonfinancial public sector (NFPS) and the operating result (quasi-fiscal balance) of the central bank. The NFPS covers the central government, local governments and decentralized agencies, the social security institute (IHSS), the pension institutes (INJUPEMP, INPREMA, IPM), and the public enterprises.

4. The deficit of the central government also will be measured from the financing side. The central government includes the executive, judicial, and legislative branches, and the so-called decentralized agencies (desconcentradas).

5. The current primary expenditure of the central government is defined as total current expenditure less interest payments.

6. The central government wage bill is defined as all central government wages and salaries, including severance payments, plus employer social security and pension contributions; other remunerations (such as bonus payments) are also included in the definition.

7. Social investment spending is defined as the programs and projects of social content that are financed with domestic resources, debt relief, grants and loans. (See Table B).

8. The operating balance of the public enterprises is defined as the difference between the operating revenue (excluding interest earnings and transfers) and the operating expenditure (excluding interest payments and transfers) of the enterprises.

9. Net domestic financing of the CPS will be measured as the operating result of the central bank and the change (relative to end-June 2010) in the stocks of: (1) outstanding indebtedness of the NFPS (direct bank credit plus bank holdings of public sector bonds less deposits) to the domestic financial system (central bank, commercial banks, and other financial institutions); (2) outstanding public sector bonds held outside the financial system; (3) repatriation of deposits held abroad; and (4) outstanding suppliers’ credit and floating debt (un-cashed and undelivered checks, and unpaid invoices and orders) of the central government, and unpaid orders of the rest of the NFPS. For the purposes of the program, domestic financial system is defined as comprising all depositary institutions, according to the Monetary and Financial Statistics Manual (MFSM) definitions.

10. Discrepancies. The authorities will undertake periodic reconciliations to minimize discrepancies between above-the-line and below-the-line financing data. As needed, such reconciliations must be carried out prior to completion of the program reviews.

11. Adjustor. If tax revenues were to exceed those projected under the program for 2010 and 2011 during each year, up to 50 percent of the excess revenue will be used to amortize domestic debt (and thus reduce fiscal deficit and its domestic financing) and the residual will be allocated as counterpart to social investment projects (Paragraph 7, Table B).

III. Monetary Targets

12. Net International Reserves (NIR) of the central bank (program definition). For program purposes, the NIR of the central bank will be measured as gross international reserves that are readily available minus (i) short-term reserve liabilities (including purchases and credits from the Fund), as described in the international reserves table prepared by the central bank according to the MFSM); (ii) foreign assets that are counterpart of foreign currency deposits of financial institutions at the central bank and of any other liability of the central bank with residents that is payable in foreign currency; (iii) any conversion of short-term reserve liabilities; and (iv) the transfer to the central bank of foreign currency deposits held abroad by HONDUTEL, INJUPEMP, and IHSS, which amounted to US$73.4 million at end-June 2010. Readily available reserves also exclude those assets that are pledged or otherwise encumbered, including but not limited to reserve assets used as collateral or guarantee for a third-party external liability. NIR will be valued at program accounting exchange rates.

13. Net domestic assets (NDA) of the central bank will be measured as the difference between currency issue and NIR, both measured on the basis of end-of-period data.

14. Adjustor. Starting in 2011, the target floor on NIR will be adjusted downwards (the target ceiling on net domestic assets of the central bank will be adjusted upwards) by up to US$50 million by the shortfall of programmed external disbursements to the budget. In case of an excess during the program period, the target floor on NIR will be adjusted upwards (the target ceiling on domestic assets of the central bank will be adjusted downwards) by full such amount. The external disbursements contemplated in the program are to be received from the World Bank, IADB, and Taiwan, province of China, totaling US$270 million.

IV. External Targets

15. External debt. For program purposes, the definition of debt is the one set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to External Debt (Executive Board’s Decision No. 6230-(79/140), as amended by Decision No 14416-(09/91, effective December 1, 2009). This definition applies also to commitments contracted or guaranteed for which value has not been received, and to private debt for which official guarantees have been extended and which, therefore, constitute a contingent liability of the public sector. Excluded from this definition are normal import-related credits, defined as liabilities that arise from the direct extension, during the normal course of trading, of credit from a supplier to a purchaser—that is, when payment of goods and services is made at a time that differs from the time when ownership of the underlying goods or services changes. Normal import credit arrangements covered by this exclusion are self-liquidating; they contain pre-specified limits on the amounts involved and the times at which payments must be made; they do not involve the issuance of securities. For the purpose of the program, external debt is defined on the basis of residency.

16. Debt definition. The definition of debt set forth in No. 9 of the Guidelines on Performance Criteria with Respect to External Debt in Fund Arrangements reads as follows:

(a) For the purpose of this guideline, the term “debt” will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows: (i) loans, i.e., advances of money to the obligor by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans and buyers’ credits) and temporary exchanges of assets that are equivalent to fully collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements); (ii) suppliers’ credits, i.e., contracts where the supplier permits the obligor to defer payments until sometime after the date on which the goods are delivered or services are provided; and (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lesser retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair, or maintenance of the property. (b) Under the definition of debt set out in point 9(a) above, arrears, penalties, and judicially awarded damages arising from the failure to make payment under a contractual obligation that constitutes debt give rise to new debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt.

17. Definition of public debt. For the purpose of the program, public sector debt is defined as the debt of the combined public sector excluding the debt of local governments.

18. For purpose of the program, the guarantee of a debt arises from any explicit legal obligation of the central government or any other agency acting on behalf of the central government to service such a debt in the event of nonpayment by the recipient (involving payments in cash or in kind), or from any implicit legal or contractual obligation to finance partially or in full any shortfall incurred by the debtor.

19. Concessionality will be calculated using currency-specific discount rates based on the OECD commercial interest reference rates (CIRRs) and taking into account all details of the loan agreement, including maturity, grace period, payment schedule, upfront commission, and management fees. The ten-year average of CIRRs will be used as the discount rate to assess the concessionality of loans of an original maturity of at least 15 years, and a six-month average of CIRRs will be used to assess the concessionality of loans with original maturities of less than 15 years. To both the ten-year and six-month averages, the following margins will be added: 0.75 percent for repayment periods of less than 15 years; 1 percent for 15-19 years; 1.15 percent for 20-30 years; and 1.25 percent for over 30 years. The grant element of loans can be calculated using the concessionality calculator available at the IMF web site http://www.imf.org.11 For program purposes, a debt is concessional if it includes a grant element of at least 35 percent, calculated as follows: the grant element of a debt is the difference between the present value (PV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt. The PV of debt at the time of its contracting is calculated by discounting the future stream of payments of debt service due on this debt. The discount rates used for this purpose are the CIRRs published by the OECD.

20. Borrowing on nonconcessional terms. For the purposes of the program, this continuous ceiling applies to the contracting or guaranteeing of nonconcessional external debt by the CPS or any other agencies on its behalf.12 Debt denominated in currencies other than the U.S. dollar shall be converted to the U.S. dollars using program assumptions on bilateral exchange rates. The continuous ceiling applies not only to debt as defined above, but also to commitments contracted or guaranteed for which value has not been received. This ceiling will be adjusted downwards by the amount of programmed disbursements that change into concessional resources.

21. Excluded from the non-concessional external debt continuous ceiling are: (i) debts classified as international reserve liabilities of the Central Bank, (ii) debts to restructure, refinance, or prepay existing debts, (iii) use of Fund resources (iv) short-term import financing (with a maturity of less than one year), and (v) central bank instruments placed in the domestic market held by nonresidents.

22. Stock of external debt arrears. For the purpose of the program continuous ceiling, external debt service arrears are defined as overdue debt service arising in respect of obligations incurred directly or guaranteed by the public sector, except on debt subject to rescheduling or restructuring, as indicated by the respective creditors. The CPS will accumulate no external debt arrears during the program period.

V. Energy Sector

23. Arrears of ENEE are defined as overdue payments (capital and interest) of ENEE to private and public entities. During the program period, no new arrears to the private sector will be accumulated, excluding technical delays stemming from the payment process. Technical delays are defined as the maximum period allowed for the payment of suppliers’ and/or contractors’ invoices to ENEE without incurring arrears, in line with the law on public contracts (Decree 74-2001). This period extends up to 45 days, starting from the submission of appropriate documents for payment.

VI. Monitoring and Reporting Requirements

24. The information required to monitor the compliance with quantitative and structural benchmarks specified in the MEFP will be supplied to the Fund at least monthly (electronically, to the extent possible) and within 45 days of the end of the previous month (unless otherwise noted) according to the following sources:

25. The ceilings on the deficit of the central government and of the CPS will be monitored below-the-line on the basis of the monthly reports Financiamiento de la Administratión Central and Financiamiento del Sector Público Combinado, respectively, prepared by the central bank, which contain:

  • Net external financing of the central government and the NFPS, respectively, with detailed information on disbursements, amortizations, exceptional financing, zero coupon bonds, and accumulation of arrears. This information will be prepared by the central bank and reconciled with the Ministry of Finance.

  • Net domestic financing of the central government and the NFPS, respectively, with detailed information on: (1) net domestic financing from the central bank and the rest of the financial system to the central government and the NFPS, as contained in the Panorama Financiero monthly report; (2) net placement of bonds (including stabilization bonds) by the central government and the NFPS outside the financial system, as reported by the central bank with data from the Public Credit Directorate of the Ministry of Finance; (3) change in foreign currency deposits held abroad by the central government and the NFPS; and (4) change in the outstanding stock of suppliers’ credit and floating debt of the central government, as reported by the Treasury, and the rest of the NFPS as reported by the central bank. To monitor the net domestic financing to the CPS, the central bank will provide the Fund with detailed data on a cash basis on the operating revenue and expenditure of the central bank.

26. The ceilings on the wage bill of the central government will be monitored monthly on the basis of the Ministry of Finance report:Información institucional por objeto de gasto-servicios personales y aportes patronales.

27. To complement the monitoring of fiscal performance, a breakdown of tax revenue by type of tax will also be provided monthly.

28. Social investment (Table B) will be monitored quarterly on the basis of financial reports provided by the Ministry of Finance.

29. The floor on NIR and the ceiling on NDA of the central bank will be monitored on the basis of information produced by the central bank, in accordance with the new presentation of the MFSM. This information will be provided within two weeks of the end of the previous month.

30. The ceilings on the contracting of nonconcessional external debt and on the nonaccumulation of external payments arrears will be monitored with information provided by the Ministry of Finance. The accounting of non-reschedulable external debt-service arrears by creditor (if any), with detailed explanations, will be transmitted by the Ministry of Finance on a monthly basis within four weeks of the end of each month. Moreover, a loan-by loan accounting of all new loans contracted or guaranteed by the public sector, including detailed information on the amounts, currencies, and terms and conditions, as well as relevant supporting materials, will be transmitted by the central bank on a quarterly basis within four weeks of the end of each quarter.

31. Implementation of structural measures in the program will be monitored monthly based on information provided by the central bank, the Ministry of Finance, and the Banking and Securities Commission.

Table A:Data to be Reported to the IMF
ItemPeriodicity
I. Fiscal Data
Net external financing (detailed information on disbursements, amortizations, exceptional financing, zero coupon bond, and accumulation of arrears).Monthly, within 45 days of the end of each month.
Net domestic financing of the central government and the NFPS detailed information on: (1) net domestic financing from the central bank and the rest of the financial system to the central government and the NFPS, (2) net placement of bonds by the central government and the NFPS outside the financial system, (3) change in foreign currency deposits held abroad by the central government and the NFPS; and (4) change in the outstanding stock of suppliers’ credit and floating debt of the central government, as reported by the Treasury, and the rest of the NFPS as reported by the central bank.Monthly, within 45 days of the end of each month.
Monitoring of net domestic financing to the CPS will require that the central bank provide the Fund with detailed data on a cash basis on the operating revenue and expenditure of the central bank.Monthly, within 45 days of the end of each month.
Wage bill of the central government.Monthly, within 45 days of the end of each month.
Breakdown of tax revenue by type of tax.Monthly, within 45 days of the end of each month.
Social investmentQuarterly, within three weeks of the end of each quarter.
Detailed information on:



Revenues and expenditures of the central government.



Revenues and expenditures of the NFPS, including the operating balance of public enterprises.
Monthly, within 45 days of the end of each month.



Quarterly, within 45 days of the end of each quarter.
II. Monetary Data
Detailed information on the Central Bank balance sheet, including Net International Reserves and Net Domestic Assets.Monthly, within 2 weeks of the end of each month.
Detailed information on domestic liabilities of the central bank payable in foreign currency, including change in foreign currency deposits of public enterprises in the central bank.Monthly, within 2 weeks of the end of each month.
III. External Debt
Loan-by loan accounting of all new loans contracted or guaranteed by the public sector, including detailed information on the amounts, currencies, and terms and conditions, as well as relevant supporting materials.Quarterly basis within four weeks of the end of each quarter.
The accounting of arrears on external debt-service by creditor (if any), with detailed explanations.Monthly, within four weeks of the end of each month.
IV. Additional Data
Balance of Payments statistics.Quarterly, within 3 months of the end of each quarter.
Table B.Social Investment Expenditure
Description
Bono Diez Mil
Bono Diez Mil
Other social investment expenditures
Honduran Social Investment Fund (FHIS)

Community Education Program (PROHECO)

Family allowances program (PRAF)

Healthy schools program (Free school meals)

Free tuition

Social work scholarships

Transportation education bond

Social aid to persons

Patronatos Aldeas y Caseríos

Academic excellence scholarships

Various scholarships

Other scholarships and programs

Key tax measures of the April reform included the elimination of the zero VAT rate, widening of the base and increasing of rates of several taxes, establishing an income tax on dividends and housing rent, and increasing taxes on “sin” goods.

The decline in the interest income of the combined public sector is due to the projected increase in the share of central government bonds in the investment portfolio of public pension funds.

In 2009, public enterprises, as a whole, recorded an operating surplus of 1.3 percent of GDP, largely as a result of the lagged impact of electricity tariffs increase in 2008 (which were not reduced following the decline in oil prices).

In 2010, public pension funds are expected to record operating surpluses but will have deficits in actuarial terms.

The DSA update has been prepared jointly by the IMF and World Bank staff.

A maquila or maquiladora is a manufacturing plant that imports and assembles duty-free components for export. Maquila exports represent 50 percent of total exports and are mainly related to textiles and confections.

The consolidated public sector includes the central government, local governments, decentralized agencies, social security institutions, the central bank, and public enterprises.

Honduras is classified as a low-capacity, low-vulnerability country, and is allowed to have untied non-concessional financing.

Lending from CABEI is on non-concessional terms. However, recently CABEI lending to Honduras for some projects (e.g. infrastructure) was combined with concessional lending from the other institutions (e.g. World Bank and IADB) in order to reach of concessionality of 35 percent. For the purpose of this DSA update, however, the US$280 million lending has been considered non-concessional.

Based on the recent update, the three-year average of the Honduras’ CPIA index (between 2007 and 2009) is 3.69. In this context, the debt burden thresholds correspond to the ones associated with a medium policy performance (a rating above 3.75 corresponds to strong performance). The latter represents a deterioration compared to the previous average (2006-2008), which was 3.8 and was associated with a strong policy performance.

This includes short-term external debt (with an original maturity of up to and including one year) and non-concessional medium- and long-term debt with original maturities of more than one year.

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