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.
On behalf of our Honduran authorities, we thank staff for their commitment with the program and its implementation as well as the Executive Directors and Management for their support. The authorities have benefited from a continuous constructive dialogue with staff and welcome the achievements made so far with their support, including the technical assistance. We also thank staff for a well-written report and supplement.
Board consideration of the first reviews was postponed in May to allow time to assess the fiscal implications of the new social protection law (SPL) approved by Congress in May. Our authorities have discussed extensively with staff the provisions approved by Congress and their implications for fiscal accounts, which they are prepared to contain. As stated in the supplementary letter, our authorities will implement the provisions of the SPL gradually to keep costs within the program targets and minimize pressures on the public finances. They will also continue to improve the targeting of the social safety net and are prepared to reduce, eliminate or phase out existing tax exemptions to help cover the long-run costs of the law. Furthermore, the design of complementary specific legislation to the SPL is being worked out including provisions to strengthen governance of the Honduran Social Security Institute and reforms of the public health law.
Program performance has been a success, all performance criteria and indicative targets for end-December 2014 and end-June 2015 were met. Program implementation has benefited from both authorities’ ownership of the program and a more positive external context than the one envisaged at program approval, favoring a more positive macroeconomic performance which was strategically used by the authorities to create additional fiscal space to increase social spending and support ongoing programs aimed at reducing poverty and inequality. The authorities are no longer requesting modification of the performance criteria for end-June 2015.
The implementation of sound macroeconomic policies supported by the program has fostered investment confidence and has been recognized by credit rating agencies. Foreign direct investment increased by 4.6 percent during the first quarter of 2015 after a contraction of 20.3 percent during the same period of 2014. In July, Standard & Poor’s Ratings Services raised its long-term foreign and local currency sovereign credit ratings to B+ from B. The outlook was set as stable. Previously, in May, Moody’s had revised the outlook from stable to positive. These actions reflect the acknowledgement of recent fiscal and other reforms that improved fiscal flexibility and will stabilize the government’s debt burden in the coming years as well as of the continued commitment of the authorities towards fiscal consolidation and structural reforms implementation.
Recent Developments and Outlook
Economic activity has been robust, GDP increased by 0.8 percent during the first quarter of 2015 (4.0 percent yoy) supported mainly by manufactures (0.9 percent); communications (2.0 percent); electricity and water distribution (3.3 percent); and agriculture, livestock, forestry and fishing (0.5 percent). The Monthly Economic Activity Index keeps signaling the robustness of the economy as it increased by 3.6 percent during the first semester of 2015 (2.7 percent first semester of 2014), with a positive performance by almost all economic activities but construction and mining and quarrying with the former showing a lower contraction than in previous months.
External sector performance has also been positive. During the first quarter of 2015 exports increased by 11.2 percent relative to the same period of 2014 (-6.0 percent in 1Q2014) mainly supported by coffee exports which accounted for about 40 percent of total exports, an increase of 62.6 percent relative to 1Q2014 when coffee production was still suffering the impact of rust and lower international prices. Total imports increased by 11.1 percent during the same period (-1.9 percent in 1Q2014) while non-fuel imports increased by 22.8 percent (1.4 percent in 1Q2014). Worker remittances performance has also been robust increasing by 16.7 percent during the first quarter of 2015 (yoy) compared to 4.5 percent in the same period of 2014. International monetary reserves increased by USD67.4 million and USD356.0 million during the first quarter and first semester of 2015, respectively.
Headline inflation has continued to perform below the Central Bank’s target of 5.5 percent +/− 1 percent, supporting a reduction of the monetary policy rate three times during 2015. In August 2015 headline inflation reached 3.09 percent mainly reflecting lower fuel and food prices. The policy rate was reduced from 7.0 percent in December 2014 to 6.25 percent in July 2015, contributing to a continued declining path of market interest rates. Meanwhile, the growth of banking credit to the private sector has continued its decreasing trend reaching an annual growth rate of 9.2 percent in June 2015, mainly driven by lower growth rates of credit in foreign currency (6.6 percent in June 2015 compared to 18.4 percent in June 2014) which represents about 30 percent of total credit; credit in domestic currency reached 10.2 percent in June 2015 (9.8 percent in June 2014).
The central bank is taking actions to modernize its monetary policy and exchange rate frameworks. With support from the IMF as well as from the central bank of Mexico, Honduras is in the process of implementing a plan aimed at improving monetary policy transmission channels, including the introduction of new market instruments based on strengthened tools for market liquidity forecasts and economic liquidity management. In addition, the central bank is already working with the IMF in a plan for considering the gradual removal of foreign exchange surrender requirements.
Strong fiscal consolidation measures have continued in line with program targets. As acknowledged by the staff, the combined fiscal deficit experienced a significant reduction of 3.3 percentage points of GDP in 2014 (to 4.0 percent of GDP), 1.7 percentage points of GDP higher than the reduction envisaged in the program. As of June 2015, the combined public sector reported a surplus of 0.9 percent of GDP (adjusted program target for end-June was a deficit of 0.6 percent of GDP). The fiscal deficit of the central government was 0.2 percent of GDP (end-June adjusted program target was a deficit of 1.0 percent of GDP). These results show the strong commitment of the government with program implementation.
The authorities have made progress in developing a medium-term fiscal framework (June structural benchmark). The framework is intended to be used in the preparation of the 2016 budget, originally envisaged to be used for the 2017 budget. In addition, work is ongoing to develop a formal fiscal anchor to have a full-fledged and operational fiscal framework. Furthermore, tax administration reforms are advancing even ahead of the program schedule.
The authorities have implemented a market-friendly plan to improve the profile of domestic debt and reduce financing risks over the medium term. Four bond issues accounting for about USD 107 million with maturities in 2016-2018 have been redeemed. The new bond issue has a lower interest rate and matures in March 2022. Similar operations will continue in the following months giving the authorities more fiscal space in the coming years as about 80 percent of internal debt was scheduled to mature between 2015 and 2018. Furthermore, total public debt from the central government has remained relatively stable increasing by 1 percent during the first semester of 2015 with respect to December 2014. Total public debt represents 44.3 percent of GDP, with external debt accounting for about two thirds, mainly with multilateral organizations and at fixed interest rates.
Policy actions are ongoing to secure financial sustainability for the public-owned electricity company (ENEE) and the telecommunication company (Hondutel), particularly regarding wage bill reduction. As of June 2015, and in line with program implementation, the number of employees (“supernumarios”)1 at the ENEE and Hondutel has been reduced, allowing for a decrease in the wage bill of 45.8 percent and 23.0 percent, respectively. Furthermore, an independent regulatory agency for the electricity sector (CREE) has been appointed, it will regulate the electricity market and set tariffs based on technical criteria.
In light of recent macroeconomic developments in Honduras as well as the updated world economic outlook, the Central Bank revised its 2015-2016 monetary program in July. While projections for economic growth rates for 2015 remained unchanged at a range of 3.0 to 3.5 percent, exports and imports growth rates were reduced from 6.5 percent to 1.1 percent for the former due to lower international prices than previously expected for main export products and from 1.4 percent to -0.4 percent for the latter, mainly as a result of lower oil prices expected for the rest of the year. Current account deficit is expected to remain at 6.5 percent of GDP as previously projected. Inflation projections were also reduced for 2015 from 5.5 +/− 1 percentage point to 4.75 +/− 1 percentage point mainly due to lower oil prices. Fiscal deficits for the non financial public sector and the combined public sector are projected at 2.1 and 2.7 percent of GDP, respectively (3.9 and 4.0 percent of GDP, respectively, in 2014).
Final remarks
The authorities restate their commitment to continue program implementation and to treat the arrangements as precautionary. The authorities remain confident that the policies set forth in both the November 2014 and the May 2015 Memorandums of Economic and Financial Policies are adequate for a successful implementation of the program and to achieve the main objective of preserving macroeconomic stability while improving the conditions for sustainable and inclusive economic growth. However, the government stands ready to take other measures that may be required to ensure the program’s objectives. Also, the authorities would like to emphasize that if more favorable macroeconomic conditions than the ones currently envisaged materialize, they are committed to use the favorable winds to further advance in program implementation and to strengthen macroeconomic achievements reached so far, particularly regarding fiscal consolidation, and to enhance inclusive economic growth.
Means employees that were hired in excess so the elimination of these positions does not affect ENEE and Hondutel operations.