Honduras: Second Reviews Under the Arrangement and the Arrangement Under the Standby Credit Facility—Informational Annex
Author: International Monetary Fund. Western Hemisphere Dept.
Publication Date:
07 Jan 2016
eISBN:
9781513509587
Language:
English
Keywords:
ISCR; CR; end-June performance criteria; Stand-By Credit Facility; growth; June; base price; outstanding balance; quarterly balance of payments; protection DPC; USD Eq; Bank supervision; Bank regulation; Tax administration core functions
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This paper discusses Honduras' Second Review Under the Stand-by Arrangement (SBA) and the Arrangement under the Standby Credit Facility (SCF). All 2015 end-June performance criteria and indicative targets were met, most with significant margins. On the structural side, June and September 2015 benchmarks were broadly observed. The revised program proposed for 2016 envisages a further strengthening of fiscal and net international reserve targets. The authorities are pressing ahead with structural reforms, including the introduction of a Fiscal Responsibility Law, an overhaul of tax administration, and reforms to the Honduran Social Security Institute. Based on performance to date and the authorities' updated intentions and commitments, the IMF staff recommends completion of the second review under the SBA/SCF arrangement.

Abstract

This paper discusses Honduras' Second Review Under the Stand-by Arrangement (SBA) and the Arrangement under the Standby Credit Facility (SCF). All 2015 end-June performance criteria and indicative targets were met, most with significant margins. On the structural side, June and September 2015 benchmarks were broadly observed. The revised program proposed for 2016 envisages a further strengthening of fiscal and net international reserve targets. The authorities are pressing ahead with structural reforms, including the introduction of a Fiscal Responsibility Law, an overhaul of tax administration, and reforms to the Honduran Social Security Institute. Based on performance to date and the authorities' updated intentions and commitments, the IMF staff recommends completion of the second review under the SBA/SCF arrangement.

Fund Relations

(As of October 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.

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

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Relations with the Inter-American Development Bank

(As of November 10, 2015)

Recent Projects and Objectives

1. On December 2014, the IADB approved its country strategy with Honduras for the period 2015–18. It focused on the following areas: (i) fiscal consolidation; (ii) sustainability and competitiveness in the energy sector; (iii) road infrastructure for regional integration; (iv) social inclusion; and (v) sustainable development in the Central District.

2. As of November 10th 2015, the portfolio of approved sovereign-guaranteed loans under execution amounted to US$790.4 million, with an undisbursed balance of US$455.2 million.

3. The existing sovereign guaranteed portfolio focuses on: (i) transport 37 percent; (ii) social protection 25 percent; (iii) modernization of the State 11 percent; and (iv) health 10 percent. In the private sector, the IADB has four non-sovereign projects under execution amounted to US$39 million, which support trade facilitation, energy efficiency and rural finance.

4. The pipeline for IADB approvals in 2015 includes five operations in the public sector for US$170 million distributed as follows: (i) two operations related to fiscal policy for US$87 million, focused on: (a) tax administration reform, and (b) a Policy-Based Loan to strengthen fiscal policy implementation; (ii) two operations in the energy sector, aimed at: (a) generation and transmission capacities, and (b) a Policy-Based Loan to support policy reforms; one operation in the transport sector for US$20 million for the improvement of road infrastructure. As of November 10th, two operations for US$50 million have been approved, and the rest of the pipeline will be approved before the end of the year.

IADB Sovereign Guaranteed Loan Portfolio in Honduras As of November 10th 2015

(In millions of US Dollars)

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IADB Non-sovereign Guaranteed Loan Portfolio in Honduras As of November 10th 2015

(In millions of US Dollars)

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IADB Disbursement of Sovereign Guaranteed Loan Portfolio in Honduras

2010-2015 (In millions of US Dollars)

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(*) projected

IADB Annual Net Flows with Sovereign Guarantee in Honduras 2010-2014

(In millions of US Dollars)

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Relations with the World Bank Group

(As of September 30, 2015)

Preparation of the World Bank Group’s (WBG) first Systematic Country Diagnostic (SCD) is underway, with expected completion by end October 2015. Building on this, a new WBG Country Partnership Framework (CPF) for the Republic of Honduras for FY2015–FY2018 is under preparation and scheduled for Board discussion in December 2015. The new CPF will continue supporting the Honduras Country Vision for 2038 (adopted in 2010) and the Administration’s “Plan para una Vida Mejor.” To do so, the CPF is organized around three strategic pillars, namely: (i) fostering inclusion; (ii) bolstering conditions for growth and enhancing competitiveness; and (iii) reducing environmental, fiscal and social vulnerabilities. Strengthening institutions and enhancing governance are critical cross-cutting themes that will underpin the strategic pillars.

The IDA17 allocation is SDR97.8 million (US$138 million), of which US$80 million has already been allocated to an additional financing and a Development Policy Credit. IDA 17 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. 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 Stand-by Credit Facility for Honduras, achieved in late 2014.

At the end of the reporting period, IDA’s active portfolio consists of 9 Projects of total commitments of US$354 million, of which US$102 million is undisbursed (as of September 15, 2015). The portfolio was consolidated from 14 to 9 projects with increasingly larger grant or credit amounts. Project disbursements (excluding budget support) increased steadily from US$62.6 million in FY12, to US$87.1 million in FY13. Gains in disbursements during the first two years of the previous Country Partnership Strategy period were reversed by the Government’s fiscal measures to contain the deficit. As a result, disbursements dropped to US$68.1 million in FY14 and US$36.2 million in FY15.

The World Bank’s current activities are helping Honduras efforts to achieve fiscal consolidation, improve the 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. Furthermore, the World Bank’s activities are contributing to 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. Targets aimed at improving coverage and management of Honduras’ National Conditional Cash Transfer Social Protection Program (Bono Vida Mejor, formerly Bono 10,000) have been achieved. Ongoing activities are also supporting public sector financial management practices, increased access of small and medium enterprises to agriculture markets, land titling, and improved logistics in transport.

In line with its regional strategy, IFC’s investment activities focus on renewable energy generation, strengthening and broadening the financial sector, and supporting competitive agribusiness and commercial sectors. Furthermore, IFC has played a catalytic role in PPP development, improving access to finance for SMEs, streamlining administrative processes for business regulation and regional trade, and facilitation of international trade. IFC investments, for instance, include four large scale renewable energy projects with an aggregate capacity of 210.5MW (accounting for about 15 percent of the country’s installed capacity), financing to 7 out of the 16 banks of the local banking system and investments on commercial real estate, services and agribusiness sectors. Total committed portfolio in Honduras for FY15 is US$639.7 million, including mobilization (US$496.1 million in non-trade; US$68.1 million in trade finance; and US$75.5 million from IFC’s Asset Management Company). This represents a substantial increase compared to FY11 results of US$193.4 million and is IFC’s second largest portfolio in Central America. Since 2012 IFC financing has contributed to improving access to finance for approximately 18,000 micro, small and medium enterprises (MSMEs) and is supporting key agri-commodities, such as palm oil and sugar reaching 2,500 farmers and contributing to nearly 7,500 direct jobs, out of which 1,600 (21 percent) are women. IFC is currently considering opportunities in commercial property development, construction materials, infrastructure, logistics and health coverage.

MIGA has US$326.9 million in gross exposure through three projects in the transport and energy sectors. MIGA has recently provided guarantees of US$187.9 million for the construction and operation of a toll road which will improve the connectivity between Honduras’ second largest city and the coast. In energy, MIGA granted US$82.4 million in guarantees for a 24MW expansion of the existing 102MW Cerro de Hula wind farm, and an investment of US$56.7 million in guarantees in three photovoltaic projects supporting 80 MW solar power.

A. Projects

The active IDA portfolio is made of 9 projects (8 investment operations plus one US$55 million budget support operation) totaling US$354 million in IDA funding, of which approximately US$102 million is undisbursed. The portfolio is rather mature, and by early 2016, only five projects will remain in the portfolio.

Honduras Rural Competitive Project. The Project Development Objective (PDO) is to contribute to increased productivity and competitiveness among organized rural small-scale producers through their participation in productive alliances. The closing date of this Project is November 30, 2015, however it is expected to be extended with an additional financing.

Honduras Water and Sanitation Sector Modernization Project. The PDO is to support the Recipient to improve: (a) the sustainability, efficiency, and reliability of Honduras’s water supply and sanitation (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. The closing date of this Project is December 31, 2016.

Second Land Administration Project. The PDO is to provide the population in the Project Area with improved, decentralized land administration services, including better access to and more accurate information on property records and transactions. The closing date of this Project is January 30, 2017.

Improving Public Sector Performance. The PDO is 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. The closing date of this Project is December 31, 2015.

Social Protection. The PDOs of this Project are 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. The closing date of this Project is December 31, 2017.

Safer Municipalities. The PDOs of this Project are to 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. The closing date of this Project is August 31, 2018.

Disaster Risk Management. The PDOs of this Project are to 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. The closing date of this Project is April 30, 2019.

Rural Infrastructure. The PDOs 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. The closing date of this Project is June 30, 2016.

Recently closed projects:

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

Roads Rehabilitation and Improvement. The PDO was to 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

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 CPF 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); a “Honduras Current Account Assessment” (2014); and a “Honduras Economic Diagnostic for National Action (DNA)” (2015).

C. Financial Relations

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Statistical Issues

(As of October 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 November 5, 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: Second Reviews Under the Stand-By Arrangement and the Arrangement Under the Standby Credit Facility-Press Release; and Staff Report
Author: International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2016: Issue 004
Publisher:
International Monetary Fund
ISBN:
9781513509587
ISSN:
1934-7685
Pages:
96
DOI:
https://doi.org/10.5089/9781513509587.002