Honduras’s request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries is discussed. The social consultation has allowed the government to implement a vital reform of public sector wage policy. A reduction in the pressure of the civil service wage bill is the key for restoring the sustainability of the public finances. An ambitious financial sector reform is designed to address bank fragilities; and far-reaching transparency and anti-corruption measures aim to improve governance.

Abstract

Honduras’s request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries is discussed. The social consultation has allowed the government to implement a vital reform of public sector wage policy. A reduction in the pressure of the civil service wage bill is the key for restoring the sustainability of the public finances. An ambitious financial sector reform is designed to address bank fragilities; and far-reaching transparency and anti-corruption measures aim to improve governance.

1. We would like to inform the Board of information that has become available since the staff report was issued. This information does not alter the thrust of the staff appraisal:

  • Recent developments have been broadly in line with the program. Preliminary data indicate that growth was 3.2 percent in 2003, somewhat higher than reported in the staff report. The combined public sector deficit for 2003 was consistent with the staff report, as were tax revenue and the government wage bill.

  • To respond to concerns about the impact of the fuel tax on the most vulnerable sectors, the authorities have reversed tax increases in kerosene and LPG. The expected revenue yield from the measure remains in line with the program, because the increase in gasoline and diesel taxes was somewhat larger than envisaged.

  • Around US$35 million of the December gain in international reserves was reversed in January. However, projections remain consistent with meeting the end-March target on net international reserves.

  • The authorities have already taken steps toward financial reform. They have presented to congress a financial law to introduce consolidated supervision. They also issued regulations on capital adequacy, loan classification, and provisioning, which will become effective soon. These are key steps toward compliance with end-June performance criteria.

2. Financial support for the program is materializing as envisaged:

  • On February 11, the IDB approved policy-based loans for US$55 million, with disbursements starting this month. The assistance will support Honduras in its effort to implement its poverty-reduction strategy and financial reform.

  • In April, Paris Club creditors will meet to consider Honduras' request for debt rescheduling, and the World Bank is expected to consider a policy-based loan (US$45 million) during the second quarter of 2004. These actions will ensure the financial viability of the program, as they will fill the external financing gap for 2004.

  • Finally, the authorities have scheduled a Consultative Group meeting with donors in June, 2004.

Honduras: Request for a Three-Year Arrangement Under the Poverty Reduction and Growth Facility and Interim Assistance Under the Enhanced Initiative for Heavily Indebted Poor Countries—Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Honduras
Author: International Monetary Fund