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Reforms and debt relief set stage for accelerated poverty reduction in Honduras

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
April 2005
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On the basis of strong, recent efforts to boost growth and reduce poverty, Honduras has just reached the completion point in the enhanced Heavily Indebted Poor Countries (HIPC) Initiative. This achievement will allow for a significant and permanent reduction of the country’s external debt. In late 2003, the Honduran authorities embarked on an economic program that has sparked a rebound in growth, bolstered its external position, and brought its fiscal deficit under control, while permitting increased public spending on the poorest. Today, with good prospects for a sustained recovery, Honduras is well positioned to make significant gains in reducing poverty.

Honduras’s economic prospects have brightened markedly in recent years following more than a decade of weak growth and virtually stagnant GDP per capita. Natural disasters and a deterioration in the country’s terms of trade bear some of the blame, but institutional and policy weaknesses also took a toll.

To reverse these trends, the authorities in late 2003 embarked on an economic program that aimed to revive growth and accelerate poverty reduction by ensuring macroeconomic stability, improving the environment for private sector investment, strengthening human capital development and basic infrastructure, and further advancing trade integration. That program, supported by IMF’s Poverty Reduction and Growth Facility (PRGF), as well as program loans from the World Bank and the Inter-American Development Bank—is already delivering favorable results. Growth rose close to 5 percent last year; inflation stabilized after drifting up in 2004 as a result of rising oil prices; and the fiscal accounts improved significantly. In an important break with its past, Honduras also managed to control its wage bill successfully, which permitted a significant reduction in the fiscal deficit while leaving room for increased anti-poverty spending and public investment.

Design and ownership of the economic program benefited from extensive public consultations. Wide segments of the society accepted and supported the program as a viable means of boosting growth, reducing poverty, and obtaining debt relief. This broad national consensus also helped sustain momentum during the implementation phase when a surge in oil prices renewed social pressures.

Looking forward, the next challenge for Honduras will be to protect the core elements of the economic program in the lead up to presidential, congressional, and municipal elections in November. Traditionally, maintaining fiscal discipline in the pre-election period has been difficult, but Honduras’s political leadership has already indicated its commitment to prudent policies, and the authorities are intensifying their efforts to promote policy continuity during the political transition and beyond.

The reform agenda

In their efforts to stimulate growth and tackle poverty, the Honduran authorities have relied on a range of macroeconomic policies and structural reforms, and on intensified and more effective social programs. Among the key fiscal measures implemented in 2004 were a new framework for public sector wages and a range of tax-related measures designed to strengthen revenue, bolster the legal framework through changes in the tax code, and create tax courts. In the monetary area, the Honduran central bank is modernizing its policy instruments with technical assistance from the IMF. Substantial progress has also been made to ensure the health of its financial sector through an improved regulatory framework and supervisory regime.

On the trade front, the Honduran legislature, with broad support from the main political parties, recently ratified the Central American Free Trade Agreement (CAFTA). The authorities view CAFTA, which grants permanent access to the U.S. market (the main market for Honduran exports), as essential in maintaining the economy’s competitiveness and helping offset the impact of the recent expiration of quotas on textiles.

Focus on poverty reduction

Poverty reduction is a core objective of the authorities’ program. Although Honduras’s poverty rate has fallen somewhat in recent years, it remains very high. Nearly two-thirds of its citizens live in poverty, with an estimated 45 percent in extreme poverty (down from 49 percent in 2000).

To make faster progress in reducing poverty, the government has, in addition to boosting growth and promoting macroeconomic stability, focused on raising poverty-reducing expenditures and improving governance and transparency. To achieve these goals, the authorities have embarked on a participatory anticorruption strategy, and reformed the social security system, and are in the process of strengthening basic health services for the poor, improving the quality of education through a greater emphasis on community participation, and increasing the efficiency and targeting of safety nets. Spending on poverty-reducing measures rose by almost 1 percent of GDP in 2004 (to 8.4 percent of GDP from 7.5 percent in 2003). While the effects of such measures typically take time to be reflected in lower poverty rates, the expectation is that social indicators will improve significantly in the years to come, provided the policy framework is maintained and economic growth remains high.

HIPC debt relief lends critical support

Reaching the completion point under the Enhanced HIPC Initiative, observed Markus Rodlauer, Senior Advisor in the IMF’s Western Hemisphere Department, “represents a milestone in Honduras’s journey to achieving rapid and sustainable growth and reducing poverty.” Commending the authorities for their efforts to build strong domestic ownership of their economic program, he said “the challenge now is to persevere in the implementation of sound policies and ensure that Honduras’s potential for sustained higher growth and further social progress is realized.”

Reaching the completion point under the HIPC Initiative sets the stage for a significant and permanent reduction in the country’s external debt—a reduction estimated at more than $1.0 billion in nominal terms or $556 million in terms of net present value. In approving this decision, the international community has recognized the progress that Honduras has already made but also signaled its expectation that the country will continue to implement and further strengthen its economic and social policy framework. Experience worldwide has clearly shown that the benefits of debt reduction accrue over time and for only those countries that help themselves by persisting with prudent economic reforms and policies.

Looking forward

Despite considerable progress, Honduras still faces formidable challenges in its road to lasting prosperity for all of its citizens, and the economy remains vulnerable on several fronts. While public finances have improved substantially, they require further strengthening, including by making the current framework for wage policy permanent across the public sector. Reform of the country’s financial sector is continuing. Rigorous implementation will be required to achieve the desired strengthening of the sector and to foster the new credit flows needed to sustain rapid growth. Similarly, persistent efforts will be needed to eliminate the remaining barriers to private investment.

Reaching the completion point under the Enhanced HIPC Initiative, “represents a milestone in Honduras’s journey to achieving rapid and sustainable growth and reducing poverty.”

—Markus Rodlauer

And, as mentioned earlier, a more immediate challenge will be to keep the economic program on track through the upcoming election period. If this critical test can be met, it will go a long way toward convincing investors, at home and abroad, that progress is here to stay and that Honduras will provide a stable environment for investment and growth. Given the good prospects for a sustained recovery and the political leadership’s commitment to policy continuity, Honduras is well positioned to make significant gains in fighting poverty in the years to come.

Growth is recovering

Improved policies and a favorable external environment have helped boost output

(annual percent change)

Citation: 34, 7; 10.5089/9781451938456.023.A013

1Projection

Data: Central Bank of Honduras and IMF staff projections.

Good policies have paid off

Higher growth and fiscal discipline have laid the foundation for increased spending on poverty reduction.

PreliminaryEstimatesProjections
200320042005
Real GDP growth (percent)3.54.64.2
Inflation (eop, in percent)6.89.26.9
(percent of GDP)
Combined public sector savings0.53.34.4
Anti-poverty spending7.58.48.7
Combined public sector balance-5.1-3.0-2.5
Central government balance-6.0-3.5-3.0
External current account balance-4.2-5.2-2.5
Gross international reserves13.74.84.9

Months of imports.

Data: Central Bank of Honduras and IMF staff projections.

Months of imports.

Data: Central Bank of Honduras and IMF staff projections.

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