Honduras: First Reviews Under the Stand-By Arrangement and the Standby Credit Facility—Informational Annex
Author: International Monetary Fund. Western Hemisphere Dept.
Publication Date:
14 Oct 2015
eISBN:
9781513571874
Language:
English
Keywords:
ISCR; CR; government; electricity sector law; Stand-By Credit Facility; fund staff estimate; Honduras's performance; support Honduras; base price; IFC financing; quarterly balance of payments; USD Eq; Bank supervision; Bank regulation; External sector statistics
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This paper discusses Honduras' First Reviews Under the Stand-by Arrangement (SBA) and Standby Credit Facility (SCF). Program implementation for the first reviews has been strong. All 2014 performance criteria and indicative targets were met, most with significant margins. The authorities have also created fiscal space within the program to increase social spending and support efforts to reduce poverty. On the structural side, December 2014 and March 2015 benchmarks were also generally observed. The revised program proposed for 2015 envisages further strengthening fiscal and net international reserves targets. The IMF staff supports the completion of the first reviews under the SBA and the SCF Arrangements.

Abstract

This paper discusses Honduras' First Reviews Under the Stand-by Arrangement (SBA) and Standby Credit Facility (SCF). Program implementation for the first reviews has been strong. All 2014 performance criteria and indicative targets were met, most with significant margins. The authorities have also created fiscal space within the program to increase social spending and support efforts to reduce poverty. On the structural side, December 2014 and March 2015 benchmarks were also generally observed. The revised program proposed for 2015 envisages further strengthening fiscal and net international reserves targets. The IMF staff supports the completion of the first reviews under the SBA and the SCF Arrangements.

Fund Relations

(As of March 31, 2015)

Membership Status: Joined: December 27, 1945

General Resources Account:

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SDR Department:

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Outstanding Purchases and Loans:

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Latest Financial Arrangements:

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Projected Payments to Fund

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

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Exchange Rate Arrangement. Honduras’ de facto exchange arrangement has been reclassified as a crawling band, making the exchange arrangement (de jure and de facto) a crawling band since July 2011, when the BCH reactivated the crawling band arrangement that had been in operation until mid-2005. The exchange rate of the lempira is determined by foreign exchange auctions of the Central Bank of Honduras (BCH). The BCH maintains an operational band requiring all bid prices for the purchase of foreign exchange to be within a range of 7 percent above or below the base price, with such prices subject to the requirement that bids in auctions not exceed 1 percent of the average base price from auctions during the preceding seven business days. The base price is revised weekly according to a procedure established by the BCH board of directors for this purpose, which includes the following variables: (1) the differential between the domestic inflation rate and the estimated inflation rates of Honduras’s main trading partners, (2) changes in the exchange rates of these countries’ currencies vis-à-vis the U.S. dollar, and (3) the performance of official reserve assets. In this setting, the lempira has followed a slow depreciating trend against the 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.

Article IV Consultation. The last Article IV consultation with Honduras was concluded on June 9, 2014.

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). Data ROSC data conducted on July 8–24, 2003 (IMF Country Report No. 05/230). FSAP conducted on October 14–19, 2002 and January 20–February 4, 2003. FSAP Update conducted on September 24 to October 9, 2007.

Safeguards Assessments. The latest safeguards assessment for the Central Bank of Honduras (BCH) was completed on April 13, 2015. The assessment concluded that the BCH Law continues to pose a significant risk to central bank autonomy and also that the bank’s Board and audit committee do not have any independent members, which undermines these bodies’ oversight function. The assessment recommended amendments to the BCH Law to protect the bank from political interference, establish its financial autonomy, and strengthen its governance arrangements. In addition, the assessment noted that recurring operating losses since the 1990s have severely weakened the bank’s financial position and a recapitalization plan has been initiated, with the BCH expected to achieve positive equity in 2021. The assessment also recommended that the BCH adopt International Financial Reporting Standards.

Technical Assistance. Honduras has received substantial technical assistance. The table below details assistance provided since November 2012.

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Relations with the World Bank Group

(As of March 31, 2015)

The World Bank Group’s Board discussed the current joint IDA/IFC Country Partnership Strategy (CPS) for the Republic of Honduras for FY2012–FY2014 on December 6, 2011. The CPS provides the strategic areas in which the World Bank Group (WBG) support can best assist Honduras in achieving sustainable development and poverty reduction for the period. The CPS was designed to continue supporting the Honduras Country Vision and National Plan adopted in 2010. The strategic objectives of the CPS are to: (i) improve citizen security; (ii) expand opportunities and reduce vulnerabilities (social, economic, and climate); and (iii) enhance good governance. On May 8, 2013 the World Bank Group’s Board considered the Progress Report, assessing implementation of the CPS at mid-term. While the CPS remained relevant, the WBG extended the CPS by 12 months to allow more time to achieve CPS outcomes and work with the incoming administration on the next partnership strategy. IDA 16 resources were focused on poverty reduction, including delivering services in poor communities and strengthening the Government’s social protection program; improving public sector performance and improving citizen security. In line with their regional strategy, the IFC program has continued its focus on the financial sector, infrastructure, agribusiness, public private partnerships, investment climate and competitiveness. The investment lending program has materialized largely as expected, and reflects strong continuity with the existing portfolio. Portfolio implementation improved, including a notable increase in disbursement rates during 2012 and 2013. At the request of the Government of Honduras, the WBG mobilized resources from the IDA 17 round to help the new administration with its fiscal consolidation program, including a US$55 million Fiscal Sustainability and Enhanced Social Protection Development Policy Credit in line with the Government efforts to seek a SDR 77.7 million Stand-by Arrangement and a SDR 51.8 million Standby Credit Facility for Honduras, achieved late 2014.

Under the current strategy, the Bank’s activities help Honduras adopt a balanced and comprehensive approach to reducing violence, combining the traditional focus on control and punishment with a new emphasis on prevention contributing to the achievement of improvements in citizen security and to strengthening evidence-based decision-making at both national and local levels. A large number of CPS outcomes and targets are clustered under the Expand opportunities and reduce vulnerabilities strategic objective. Fiscal consolidation was achieved during the first year of the CPS, a better investment climate (especially transport/logistics for trade), strengthened education quality and social protection and better disaster risk management. With respect to reducing the fiscal burden of the state-owned Electricity Company (ENEE), progress has been made in laying the policy and institutional groundwork for future improvements and the authorities have taken measures to reduce subsidies and adjust electricity tariffs, although ENEE’s loses continue to represent a fiscal burden. Planned outcomes with respect to education quality improvement have been largely achieved and targets aimed at improving coverage and governance of Honduras´ National Conditioned Cash Transfer Social Protection Program (Bono Vida Mejor, formerly Bono 10,000) have been achieved. Ongoing activities are supporting public sector financial management practices, increased participation of Small Micro Entrepreneurs increase access to agriculture markets, land titling, and improved logistics in transport.

The ongoing program is supported with IDA lending in the order of SDR 109.5 million approximately US$171 million over FY12-14 (which coincides with the IDA 16 cycle) and similar SDR amount over the FY 15-18, to coincide with the IDA 17 cycle. Complementary, IFC has committed US$638.9 million to support private sector-led growth, out of which US$535.7million is IFC’s own account and the remaining US$103.3million mobilized from other lenders. IFC financing has contributed to foster access to finance for approximately 30,000 micro, small and medium enterprises (MSMEs) and expanded or improved access to electricity for approximately 140,000 people. Furthermore, IFC has 10 advisory service programs for private sector and the Government in amount of US$3.1million aimed at building capacity of financial intermediaries, supporting development of PPPs, improving investment climate conditions in Honduras and training small and medium business to become more productive and sustainable.

IFC is actively supporting the electricity sector through the financing of renewable energy projects and also advising one of the local trustees commissioned by the GoH in the preparation of the PPP for distribution of electricity.

Complementary, MIGA is increasing its support to the electricity and infrastructure sectors through guarantees totaling US$462 million.

A. Projects

The active IDA portfolio is made of 10 projects totaling close to US$425 million in IDA funding, of which approximately US$101 million are undisbursed. The portfolio is rather mature, and by early 2016, only five projects will remain in the portfolio.

Honduras Rural Competitive Project (COMRURAL). The Project Development Objective of COMRURAL is to contribute to increased productivity and competitiveness among organized rural small-scale producers through their participation in productive alliances.

Honduras Water and Sanitation Sector Modernization Project (PROMOSAS). The PDO of PROMOSAS is to support the Recipient to improve: (a) the sustainability, efficiency, and reliability of its WSS services in Eligible Municipalities; (b) the performance of its national WSS sector institutions in the exercise of their respective roles in accordance with the WSS Sector Framework Law; and (c) its capacity to respond promptly and effectively to an Eligible Emergency.

Power Sector Efficiency Enhancement Project (PROMEF). The PDO is to improve ENEE’s operational and financial performance, thus contributing to the sustainability of the power sector in Honduras.

Second Land Administration Project. Provide improved, decentralized land administration services, including better access to and more accurate information on property records and transactions.

Roads Rehabilitation and Improvement. Improve the quality of road network and of road management in support of the government’s growth and competitiveness goals through: (i) Improved governance and enhanced road management capacity in INSEP (former SOPTRAVI) and the Road Fund; (ii) Improvement in selected road corridors; and (iii) Extension in the scope of the maintenance of the unpaved road network; and (iv) improvement of the Recipient capacity to respond promptly and effectively to an eligible emergency

Improving Public Sector Performance. To strengthen the management of public finances and to establish a more efficient, effective and transparent public procurement system through: (i) upgrading the public financial management system; (ii) upgrading the e-procurement platform; (iii) enhancing the internal control systems over personnel expenditures; and (iv) building capacity of the Central Administration.

Social Protection. To: (a) improve the institutional capacity of Recipient’s institutions to manage the Conditional Cash Transfer (CCT) Program, by strengthening transparent mechanisms and instruments for targeting Program beneficiaries, monitoring compliance with Program co-responsibilities, and making payments to Program beneficiaries; (b) provide income support to Eligible Beneficiaries; (c) increase the use of preventive health services and school attendance in grades 1 to 6 among Program beneficiaries in rural areas; and (d) improve the Recipient’s capacity to respond promptly and effectively to an Eligible Emergency.

Safer Municipalities. Support Honduras (i) to improve the capacities of national and local actors in violence prevention, (ii) to ensure urban municipalities are addressing crime and violence risk factors, and (iii) to respond promptly and effectively to an eligible emergency.

Disaster Risk Management. Support Honduras to: (a) continue strengthening its capacity for integrated disaster risk management at the municipal and national level; and (b) improve its capacity to respond promptly and effectively to an eligible emergency.

Rural Infrastructure. The objectives of the Project are: (a) to improve the access, quality and sustainability of infrastructure services (roads, water, sanitation and electricity) for the rural poor in the Recipient’s territory; (b) to develop capacities and an enabling environment within the Recipient for locally-driven infrastructure service provision and planning; and (c) to improve the Recipient’s capacity to respond promptly and effectively to an Eligible Emergency.

B. Non-Lending Activities

Economic and Sector Work. Honduras benefits from a comprehensive series of completed, ongoing and planned analytical and advisory activities to support the CPS’ pillars. Recently completed economic and sector work includes: a “Honduras Public Expenditure Review: Towards Restoring Fiscal Consolidation” (2013); a poverty and inequality report titled “Centroamérica en el Nuevo Milenio: Seis Historias Diferentes de Pobreza y Desigualdad” (2013) with a chapter on Honduras; a series of Policy and Sectoral Notes titled “Towards Fiscal Stability and Sustainable Development for a Better Life” (2014); a “Honduras Gender Assessment” (2014); a “Debt Management and Performance Assessment” (2014); and a “Honduras Current Account Assessment” (2014).

C. Financial Relations

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Statistical Issues

(As of March 2015)

Assessment of Data Adequacy for Surveillance

General: Data provision is broadly adequate for surveillance, although it has some shortcomings. Data on the banking system, the public finances, trade, and external debt broadly satisfy minimum criteria required for surveillance and program monitoring purposes. However, timely and comprehensive data on public enterprises’ financial operations, widening the coverage of financial institutions, improving estimate of arrears and floating debt of public entities, enhancing reporting of government guarantees and fiscal contingent liabilities, and a consistent and reliable method to estimates of private capital flows would strengthen surveillance work.

National accounts: The Central Bank of Honduras (BCH) compiles the national accounts estimates following the System of National Accounts 1993 (1993 SNA), rev. 4. The base year is 2000. The BCH has published quarterly GDP data that are fully consistent with the new annual series. The BCH annually provides the Honduran Institute of Tourism (ITH) with basic detailed data of the input-output matrix in order to develop the Tourism Satellite Account in the framework of national accounts (expected to be published during the second semester). The BCH is working in adopting the national account framework 2008 SNA, supported by TA from an independent consultant and CAPTAC-DR.

Price statistics: 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 National Survey on Household Income and Expenditure of 1998–1999. The BCH also revised the producer price index by expanding its coverage and updating its base and classification, in the context of the revision of the national accounts; preliminary estimations of this index were made and its release is expected soon. This index includes goods for processing activities (maquila), trade and transport margins, making it difficult to use it in the compilation of national accounts at constant prices.

Government finance statistics: 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 WHD, along with below-the-line data for central administration and nonfinancial public sector, which are provided by the BCH. Issue related to the recording of debt relief hinders the quality of below-the-line data. Currently, the SEFIN and the BCH are participating in the GFS harmonization project for Central America, Panama, and Dominican Republic. Under this project, country participants will elaborate and publish comparable GFS across countries to permit a comparative analysis of fiscal developments and facilitate the regional policy dialogue. The components of the projects are: (i) compilation and dissemination of GFS sub-annual and annual using the GFSM 2001 framework, and (ii) preparation of a detailed migration plan for gradual adoption of the full GFSM 2001 framework. A mechanism to collect data systematically of arrears and floating debt of public entities, particularly public enterprises are needed.

Monetary statistics: Monetary and financial statistics (MFS) are reported on a regular monthly basis to STA using the standardized report forms (SRFs) for the central bank, other depository corporations, and other financial corporations. The cross sectoral data consistency between MFS and other data sets is the major issue that should be addressed by the authorities. The authorities report nine out of 12 core financial soundness indicators and three of the encouraged set.

Balance of Payments: In line with STA recommendations, Honduras disseminates a monthly Data Template on International Reserves and Foreign Currency Liquidity, quarterly Balance of Payments (BOP), and quarterly International Investment Position (IIP) on the Fund’s website. Currently Honduras compiles and disseminates Coordinated Direct Investment Survey (CDIS) data, while the BCH is working towards compiling the Coordinated Portfolio Investment Survey (CPIS). The BCH are on time with its working program to compile public and private external debt data on an accrual basis. The work plan of the BCH on external sector statistics include: (a) improving the coverage of external debt figures; (b) achieving consistency between gross external debt by sectors and IIP statistics, and; (c) expanding coverage of outward direct investment. The process of automatic reporting of import and export forms of the free trade areas has been completed. Currently, the BCH, with support from CAPTAC, are in the process of implementing the BPM6 and the System of National Accounts 2008.

Data Standards and Quality: Honduras has participated in the General Data Dissemination System (GDDS) since September 29, 2005 and its metadata are posted on the Data Standards Bulletin Board (DSBB). A Report on the Observance of Standards and Codes—Data Module, Response by the Authorities, and Detailed Assessments Using the Data Quality Assessment Framework was published on the IMF website in July 2005.

Honduras: Table of Common Indicators Required for Surveillance

(As of April 10, 2015)

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Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Irregular (I); Not Available (NA).

Any reserve assets that are pledged of otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

Both market-based and officially-determined, including discounts rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

1

Formerly PRGF.

2

World Bank Board, July 6, 2000.

3

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.

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Cover IMF Staff Country Reports
Honduras: First Reviews Under the Stand-By Arrangement and Standby Credit Facility-Press Release; Staff Report; Informational Annex; Staff Supplement; and Statement by the Executive Director for Honduras
Author: International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2015: Issue 283
Publisher:
International Monetary Fund
ISBN:
9781513571874
ISSN:
1934-7685
Pages:
84
DOI:
https://doi.org/10.5089/9781513571874.002