Statement by the IMF Staff Representative September 24, 2004

Honduras’s First Review Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criteria are discussed. The authorities are taking measures to contain inflation. The inflation target has been raised to accommodate the first-round impact of the oil price increase, and measures to limit foreign borrowing and credit growth are being taken to restrain domestic liquidity in the face of high foreign exchange inflows. A cautious monetary policy is particularly important given the role of expected inflation in wage settlements.

Abstract

Honduras’s First Review Under the Poverty Reduction and Growth Facility and Request for Waiver of Performance Criteria are discussed. The authorities are taking measures to contain inflation. The inflation target has been raised to accommodate the first-round impact of the oil price increase, and measures to limit foreign borrowing and credit growth are being taken to restrain domestic liquidity in the face of high foreign exchange inflows. A cautious monetary policy is particularly important given the role of expected inflation in wage settlements.

The following information has become available since the staff report was issued. This information does not alter the thrust of the staff appraisal.

  • On September 20, the Honduran Congress passed the financial institutions law. Adoption of the law was a prior action for the first review, and a key element of the financial sector reform strategy in the program. It includes a new bank resolution framework, introduces consolidated supervision, improves risk management and governance, and strengthens the sanctions regime.

  • The government has submitted to Congress a draft budget for 2005 that is consistent with the program. Congress is expected to approve the budget by end-November.

  • The central bank took measures to contain inflation and strengthen prudential rules for foreign borrowing by banks, as discussed with the staff in August. Remunerated reserve requirements were raised by 1 percentage point effective September 18, and by another 1 percentage point from November 13. The limit to foreign borrowing by commercial banks was reduced from 3 to 2 times the level of banks’ capital.

  • Congress has ratified the elimination of constitutional immunities for public officials and members of congress. The law will take effect as of October 11, 2004, and constitutes a major enhancement of governance and transparency.