This paper examines Honduras’s 2005 Article IV Consultation and Second Review Under the Poverty Reduction and Growth Facility. In the period 1960–2000, output growth in Honduras ranked among the lowest in the region. During the 1990s, when growth recovered in the rest of Central America, in Honduras it only kept pace with population growth. The authorities embarked on an economic reform program that focuses on ensuring macroeconomic stability and strengthening growth prospects through the development of human capital and basic infrastructure.
The following information has become available since the staff report was issued. The information does not alter the thrust of the staff appraisal.
1. Inflation. Inflation fell slightly to 9.1 percent in February 2005 (y/y), broadly in line with the program. Prices have stabilized in recent months, after drifting up during most of last year.
2. Net international reserves rose to US$1,710 million (up by US$87 million since the start of the year), a faster increase than programmed despite higher oil prices. This reflects buoyant exports and remittances as well as private capital inflows.
3. Fiscal performance. In January 2005, tax revenue rose by 18 percent (y/y) reflecting a fairly broad-based increase of tax collections and suggesting continued strong economic activity. Public expenditures were slightly below the level envisaged for the month.
4. Minimum wage. Negotiations between the private sector and workers concluded with an increase in the minimum wage of 9–12 percent, depending on the size of the firm.
5. Gasoline prices. As of mid-March, gasoline prices were up by about 15 percent since end-2004, reflecting trends in international oil prices. As a result, public transportation tariffs were adjusted by 12–20 percent in March. The surge in prices has led to renewed social pressures, including demands for higher adjustments of the minimum wage. The authorities have resisted these demands, noting the importance of avoiding second-round effects of the oil price increase.
6. Conditionality. The prior action for the second review has been met. The authorities completed the specification of new salary scales for teachers that integrate the supplementary benefits into the overall salaries, in line with the authorities’ medium-term fiscal framework. In addition, the continuous performance criteria on the suppression of intra-year unfinanced appropriation, contracting or guaranteeing of nonconcessional external debt of the combined public sector, and accumulation of arrears on public sector external debt service have been observed through the latest data available (March 15, 2005).