Honduras: Request for Stand-By Arrangement Informational Annex
Author:
International Monetary Fund
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Publication Date:
23 Jul 2008
eISBN:
9781451817201
Language:
English
Keywords:
ISCR; CR; staff appraisal; IMF staff representative; program; statement; debt relief; PRGF mission; FSAP update; government finance; financial system; Debt relief; Poverty reduction
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This paper discusses request from Honduras’ authorities for a Stand-By Arrangement (SBA). Honduras has had three previous Poverty Reduction and Growth Facility (PRGF) arrangements, the last of which ended in February 2007. The most recent PRGF program focused on fiscal consolidation and structural reforms. However, the program went off track owing to large wage increases granted in 2006, including a four-year agreement with teachers. The authorities are now requesting a 12-month SBA covering economic policies through December 2008. In IMF staff’s view, the authorities’ program appropriately addresses emerging imbalances.

Abstract

This paper discusses request from Honduras’ authorities for a Stand-By Arrangement (SBA). Honduras has had three previous Poverty Reduction and Growth Facility (PRGF) arrangements, the last of which ended in February 2007. The most recent PRGF program focused on fiscal consolidation and structural reforms. However, the program went off track owing to large wage increases granted in 2006, including a four-year agreement with teachers. The authorities are now requesting a 12-month SBA covering economic policies through December 2008. In IMF staff’s view, the authorities’ program appropriately addresses emerging imbalances.

Annex I. Honduras—Relations with the Fund

(As of January 31, 2008)

I. Membership Status: Joined December 27, 1945

II. General Resources Account

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III. SDR Department

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IV. Outstanding Purchases and Loans

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V. Latest Financial Arrangements

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VI. Projected Payments to Fund

(SDR million; based on existing use of resources and present holdings of SDRs):

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VII. Implementation of Enhanced HIPC Initiative: Enhanced Framework

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VIII. Implementation of MDRI Assistance

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IX. Exchange Arrangement

Honduras’ de jure exchange arrangement is a crawling band, but the de facto exchange rate regime is a conventional pegged arrangement. The exchange rate for the lempira is determined daily in foreign exchange auctions. Banks and exchange houses must sell to the central bank 100 percent of their daily net purchases of foreign exchange at the exchange rate established the previous day. Buyers of foreign exchange (banks, exchange houses, and private individuals) bid at a price that cannot differ by more than 7 percent from the base exchange rate, in either direction. The base exchange rate is adjusted every five auctions in accordance with the anticipated inflation differential between Honduras and its major trading partners, the changes in the exchange rates of currencies of trading partners of Honduras with respect to the U.S. dollar and the level of the CBH’s net international reserves. The official bid exchange rate on December 31, 2007 was L18.90 per U.S. dollar.

Honduras has accepted the obligations under Article VIII, Section 2, 3, and 4 of the Articles of Agreement, and maintains a system that is free of restrictions on the making of payments and transfers for current international transactions.

X. Article IV Consultation

The last Article IV consultation with Honduras was concluded on February 21, 2007. It is proposed that the next Article IV consultation with Honduras be held in accordance with the July 15, 2002 decision on consultation cycles.

XI. FSAP Participation and ROSCs

Fiscal ROSC conducted on February 26–March 2, 2001 (IMF Country Report No. 02/16) and updated (IMF Country Report No. 05/256).

FSAP conducted on October 14–19, 2002 and January 20–February 4, 2003.

Data ROSC data conducted on July 8–24, 2003 (IMF Country Report No. 05/230).

FSAP Update conducted on September 24 to October 9, 2007.

XII. Safeguards Assessments

Under the Fund’s safeguards assessment policy, Banco Central de Honduras (BCH) was subject to an assessment with respect to the PRGF arrangement approved in February 2004. The assessment, completed on February 11, 2004, identified certain weaknesses and made recommendations, implementation of which has been monitored by staff. Consequently the BCH has strengthened its safeguards framework through: (i) the appointment of an international audit firm, that complies with International Standards on Auditing; (ii) publication of the bank’s audited financial statements; and (iii) establishment of an Audit Committee. Several vulnerabilities remain, however, in the area of the BCH’s legal framework and its internal controls. An update assessment of the BCH safeguards framework has been recently initiated in relation to the requested new arrangement.

Annex II: Honduras—Relations with the World Bank

(As of January 23, 2008)

Partnership in Honduras’ Development Strategy

1. Honduras’ Poverty Reduction Strategy Paper (PRSP), which was completed in October 2001 and endorsed by the Boards of the World Bank and IMF, has placed poverty reduction at the center of the government’s development agenda. The main objective of the strategy is to reduce poverty by 24 percentage points over the period 2001–15. The strategy itself is structured around six pillars as follows: (i) accelerating equitable and sustainable growth to levels consistent with the income poverty reduction targets; (ii) reducing rural poverty; (iii) reducing urban poverty; (iv) enhancing investment in human capital; (v) strengthening social protection for specific vulnerable groups; and (vi) ensuring the sustainability of the strategy through governance and institutional reforms and enhanced environmental sustainability. The authorities presented a Second Annual PRSP Progress Report to the Boards of the World Bank and Fund in March 2005. The Third and the Fourth Annual PRS Progress Reports were presented to the Boards of the World Bank and IMF on July 17, 2007. A revised PRSP is currently under preparation.

2. The Government of Honduras reached the Completion Point under the Highly Indebted Poor Country (HIPC) Initiative in March 2005. Implementation of the PRSP program, a fundamental condition for reaching this Point, requires active participation of the government, civil society, and donors. In this context, the Fund and World Bank have been cooperating closely within their respective mandates—and will continue doing so—in assisting the government to implement its poverty reduction and economic growth strategy and the related reform agenda. The Fund leads the policy dialogue on macroeconomic issues (i.e., fiscal, monetary, and exchange rate policy), while the World Bank leads the policy dialogue on poverty reduction, governance, public sector management, and sectoral structural reforms (in areas including energy reform, telecommunications, social sectors, land regularization, environment, competitiveness, and judicial reform).

Bank Group Assistance Strategy

3. The World Bank’s current Country Assistance Strategy (CAS) was prepared in October 2006, and is fully aligned with the six pillars of the Honduras’ Poverty Reduction Strategy. The core goal of that CAS, based on the PRSP as the guiding framework for external assistance, focuses on removing the constraints to economic growth identified in recent Bank analytical work. However, it also contains a narrower focus on fewer priority areas and plans for the transition to Honduras’ eventual graduation from IDA borrowing.

4. As of January 22, 2008, the IDA active portfolio in Honduras consists of 16 projects for a total commitment of US$347.6 million; of which US$198 million remains to be disbursed (Honduras was declared IDA-only in September 1991). The active projects work in the following areas: (a) rural poverty and human resource development (reform of the rural access through a Health System Reform Project, support to indigenous groups through the Nuestras Raices Project and a Nutrition and Social Protection which focus on the job market for the youth); (b) transport and infrastructure (Water and Sanitation Project - PROMOSAS which supports decentralization water and sanitation services, a Rural Infrastructure Project to develop decentralized infrastructure for electricity, water, sanitation, and roads, and Barrio Ciudad that works in urban upgrading); (c) natural resource management and environment (Regional Development in the Copan Valley, a Land Administration Program, and a Forest and Rural Productivity project); (d) public sector and economic management (Judicial Branch Modernization that seeks to increase access to justice for the poor, Financial Sector Technical Assistance Credit, a Poverty Reduction Strategy Technical Assistance Credit); (e) disaster preparedness consists of a Disaster Management Credit; and (f) investment climate improvement and private sector participation (Trade Facilitation and Productivity Enhancement Credit).

5. In addition, a fast-disbursing First Programmatic Financial Sector Development Policy Credit (US$25 million) was also approved early in 2005 from the previous CAS and will support financial sector institutional development, and it is pending the disbursement of the second tranche. In the pipeline for calendar year 2008 the following operations are under preparation: budget support credit (US$20 million), the Rural Competitiveness Project (US$30million), Road Reconstruction and Improvement ($30 million), and Utility Restructuring ($30 million). Overall, the IDA expects to disburse $93.5 million in calendar year 2008, $144.1 million in 2009 and $46 million in 2010, of which $32–$34 million in 2008 would be in the form of fast-disbursing budget support.

6. In addition to the above operations, the Bank has approved a $12 million grant under the Global Environment Facility (GEF) in May 2006, for the protection of the Corazón Transboundary Biosphere Reserve Project.

7. The current CAS covers the period 2007–2010. The consultations with the new Honduran government have emphasized four strategic areas of collaboration: (i) maintaining a stable macroeconomic framework; (ii) improving the quality of education; (iii) addressing the energy crisis—including the restructuring of ENEE and attraction of new investment into the sector; and (iv) modernizing the state—with special emphasis on the professionalization of the civil service and implementation of the Transparency and Access to Information Law.

8. With regard to economic and sector work, the new CAS includes two types of activities. The first set includes core diagnostic analyses, which are country-specific and address important cross-cutting issues, including a deepened understanding of poverty, growth, public expenditures, and fiduciary issues. This includes the Public Expenditure Review, an Energy Strategy Study, an FSAP update and a ROSC Study for the current fiscal year, which have all been delivered, and a Country Environmental Assessment and Institutional and Governance Assessment to be delivered. A Public Expenditure Tracking Survey is in preparation. The second group of activities are region-wide or sub-regional in scope, focusing on topics and themes relevant to several countries but including sufficient country-specificity to further Honduras’ development agenda and support the design of lending operations. This includes sector studies on energy, decentralization, disaster mitigation, financial sector, and service delivery.

IMF-World Bank Collaboration in Specific Areas

9. Fund and Bank staffs have maintained a close working relationship, especially with respect to: (i) the PRSP, its subsequent updates and joint assessments; (ii) the HIPC and Multilateral Debt Relief (MDRI) initiatives; (iii) financial sector reform; (iv) energy sector reform; (v) public expenditure monitoring; and (vi) the preparation of Debt Sustainability Analyses (DSAs). The World Bank and IMF Resident Representatives routinely consult, exchange data and information and coordinate with each other on major public policy matters, and Bank staffs have participated in the Fund’s PRGF missions.

  • Poverty Reduction Strategy Paper Progress Reports (PRSP). The Fund and Bank supported the government in the preparation of the PRSP, completed in August 2001, and continued to follow its implementation. The first Progress Report (PR) was completed in December 2003, the second PR was approved in March 2005, and the third and fourth in July 2007. The Bank and Fund collaborated in the production of Joint Staff Assessments, which accompanied the presentation of the PRSP and PRSP Progress Reports to their respective Boards.

  • HIPC and MDRI Initiatives. The Fund and Bank jointly tracked the status of floating completion point conditions established under the Enhanced HIPC Initiative. Further progress in structural and social reforms continue to be monitored, including measures in the areas of governance and transparency, social security system reform, provision of basic health services for the poor, quality of education, safety nets, and financial system reform. Also, in early 2006 the Fund and Bank completed an assessment of Honduras’ eligibility for debt relief under the MDRI, which reviewed the country’s performance since the HIPC completion point in the areas of macroeconomic management, implementation of a poverty reducing strategy and public expenditure and fiduciary management.

  • Financial Sector. The Fund and the Bank continue to assist the government in these issues through a comprehensive technical assistance program. A joint Fund-Bank FSAP update mission took place in September/October 2007 under this program. The Fund and the Bank co-managed the preparation of the 2003 Honduras Financial Sector Assessment Program (FSAP). Based on the FSAP, the government embarked on a comprehensive financial system reform that aims at strengthening the regulatory framework and ongoing supervision, enhancing the efficiency of the financial safety net, and improving mechanisms for anti-money laundering and financing of terrorism.

  • Energy Sector Reform. As previously mentioned, the Bank presented a diagnostic study of the energy sector in April 2007. This study has been the focal point for inter-agency (including the IMF) dialogue with the authorities over energy reform.

  • Public Expenditure Monitoring. The Fund and Bank are continuously monitoring the trends in public spending. The Bank is publishing a public expenditure review in January 2008 and will follow-up with a PER update in 2009. Particular attention is paid to limiting the unsustainable growth in the public sector wage bill and improving the operating balance of state enterprises.

  • Debt Sustainability Analyses. The Fund and Bank completed their first joint DSA under the new LIC-DSA framework in September 2006, providing important analytic underpinnings for the Bank’s new CAS.

Financial Relations with the World Bank Group

(In millions of U.S. dollars)

A. Active IDA Operations

(As of January 22, 2008) 1/

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B. IBRD/IDA Loan disbursements

(Calendar Year)

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Source: World Bank estimates.

Net of cancellations.

Annex III. Honduras—Relations with the Inter-American Development Bank

(As of February 28, 2008)

A. Statement of IDB Loans

(in millions of U.S. dollars)

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B. Operations (as of February 28, 2008)

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C. Net Flow of Resources

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D. IADB Loan Commitments and Disbursements

As of January 22, 2008, there were 31 projects in the Bank’s loan portfolio for US$671.3 million, with an undisbursed balance of US$460.3 million. After the Bank Debt Relief the annual allocation for 2008 is US$97.1 millions for each year. Total MDRI debt relief from IDB to Honduras was approved on February 2007 and the debt relief amount was US$1367 million (principal plus interest). A new country strategy is expected to be approved for the board in March 2008.

Annex IV. Honduras—Statistical Issues

Introduction

1. Data on the public finances, balance of payments, and external debt broadly satisfy minimum criteria required for surveillance and program monitoring purposes. However, a consistent and reliable method is needed for deriving estimates of private capital flows. Honduras participates in the General Data Dissemination System (GDDS). A Report on the Observance of Standards and Codes—Data Module, Response by the Authorities, and Detailed Assessments Using the Data Quality Assessment Framework were published on the IMF website in July 2005.

Real Sector and Prices

2. The Central Bank of Honduras (BCH) recently released a revised set of national accounts estimates for 2000–06 consistent with System of National Accounts 1993, rev. 4. The base year was revised to 2000 with the new GDP estimates about 20 percent higher than the old series. Preparatory work is underway to produce quarterly estimates fully consistent with the new annual series following a STA quarterly national accounts technical assistance mission in February 2008. The BCH is also developing social accounting and input-output matrices.

3. The BCH prepares and publishes (since April 2000) the consumer price index (CPI), with reference period December 1999 = 100. The selection of products included in the CPI basket and corresponding weights are based on the expenditure data reported by households in the 1998–99 National Survey on Household Income and Expenditure.

Monetary Accounts

4. The BCH is currently participating in the Regional Project for the Harmonization of Monetary and Financial Statistics (MFS) in Central America and the Dominican Republic. New MFS have been compiled using improved data sources (particularly for the allocation of counterpart sectors to financial instruments in the balance sheets of banks and other depository corporations) and the framework of the standardized report forms (SRFs). Follow-up work will continue, in the context of the regional project, aiming at producing regionally harmonized monetary and financial statistics.

5. In addition to the work on SRFs, a mission in June 2007 assisted the authorities in establishing an integrated monetary database from which alternative and consistent presentations of MFS can be derived to meet the data needs of the authorities, WHD, and STA.

Balance of Payments

6. In November 2007, the BCH disseminated for the first time balance of payments and international investment position (IIP) statistics in broad conformity with the fifth edition of the IMF Balance of Payment Manual(BPM5). Balance of payments data (annual for 2000-2006 and quarterly for 2004–2007Q3) and IIP data (2004–2006) are available at the BCH website. The BCH has not yet reported these new data to STA for inclusion in Fund’s publications. Honduras is one of the fourteen low-income countries (LICs) that agreed to participate in the joint IMF-World Bank Project to extend the Quarterly External Debt Statistics (QEDS) database to GDDS participants launched in February 2008. To this end, the BCH reported quarterly data on public and publicly-guaranteed external debt to the World Bank from 2002 Q4 onwards.

Government Finance

7. The Ministry of Finance (SEFIN) compiles and disseminates government finance statistics (GFS) covering central administration, central government, general government, and nonfinancial public sectors. The above-the-line data of these sectors are reported to the Western Hemisphere Department (WHD). The BCH compiles below-the-line data for central administration and nonfinancial public sector and reports these data to the WHD.

8. The SEFIN has reported GFS data (budgetary central government) to STA for publication in the 2007 Government Finance Statistics Yearbook (GFSY). No data were reported for International Financial Statistics(IFS).

9. A GFS pilot study mission (October 2006) found that the authorities have taken steps to implement the GFSM 2001 framework. These steps include adjustments to the current methodology incorporating some definitions and concepts of the GFSM 2001, and introduction of a GFS module in the Integrated Financial System (SIAFI). However, there remain revenue and expenditure classification issues regarding alignment with international practices. The mission also found that the broader institutional coverage of the financing data does not allow proper reconciliation with the above-the-line data.

1

World Bank Board, July 6, 2000.

2

The Multilateral Debt Relief Initiative (MDRI) provides 100 percent debt relief to eligible member countries that are qualified for the assistance. Grant assistance from the MDRI Trust and HIPC resources provide debt relief to cover the full stock of debt owed to the Fund as of end-2004 that remains outstanding at the time the member qualifies for such debt relief.

3

It does not include HIPC.

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Cover IMF Staff Country Reports
Honduras: Request for Stand-By Arrangement-Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Honduras
Author:
International Monetary Fund
Volume/Issue:
Volume 2008: Issue 241
Publisher:
International Monetary Fund
ISBN:
9781451817201
ISSN:
1934-7685
Pages:
78
DOI:
https://doi.org/10.5089/9781451817201.002