Honduras: Staff Report for the 2018 Article IV Consultation—Informational Annex
Author: International Monetary Fund. Western Hemisphere Dept.
Publication Date:
03 Jul 2018
eISBN:
9781484366066
Language:
English
Keywords:
ISCR; CR; authority; Honduran authorities; customs authority; government transparency; base price; country vision; financial asset; outstanding balance; public finance; External sector statistics; Exchange rates; Government finance statistics
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The IMF-supported program (2014-17) succeeded in reducing Honduras' macroeconomic imbalances.

Abstract

The IMF-supported program (2014-17) succeeded in reducing Honduras' macroeconomic imbalances.

Fund Relations

(As of February 28, 2018)

Membership Status: Joined: December 27, 1945

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Outstanding Purchases and Loans: None

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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Implementation of Catastrophe Containment and Relief (CCR): Not Applicable.

Exchange Rate Arrangement. Honduras’ de jure exchange rate arrangement is crawling band since July 2011, when the Central Bank of Honduras (BCH) reactivated the crawling band arrangement that had been in operation until mid-2005. The de facto exchange arrangement is a crawling peg. The exchange rate of the lempira is determined by foreign exchange auctions of the 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.

The BCH calculates an official exchange rate (TCR) daily as the weighted average of the accepted bids submitted by participants in BCH’s foreign exchange auction. The TCR is then used the next day for (i) sales of foreign exchange by authorized dealers to the BCH, (ii) purchases of foreign exchange by authorized dealers from their clients, (iii) sales and purchases of foreign exchange between public institutions and the BCH and (iv) interbank foreign exchange market.

Honduras has accepted the obligations under Article VIII, Section 2, 3, and 4 of the Articles of Agreement, and currently maintains two multiple currency practices subject to Fund approval under Article VIII, Section 3. The two multiple currency practices arise from the absence of a mechanism to prevent the potential deviation of more than two percent at any given time among effective exchange rates for spot exchange transactions: (i) between successful bids within the foreign exchange auction; and (ii) between the official exchange rate (TCR) of the day and the exchange rates at which foreign exchange is sold at the auction on that day.

Article IV Consultation. The last Article IV consultation with Honduras was concluded on October 22, 2016.

The latest safeguards assessment for the Banco Central de 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 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. These recommendations are yet to be implemented. 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 (IFRS). While the BCH Board approved a plan to adopt IFRS for FY 2018, the implementation is significantly delayed.

FSAP, FSSR 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. FSSR conducted on June 8–9 and July 11–22, 2016.

Technical Assistance. Honduras has received substantial technical assistance. The table below details assistance provided by department since January 2015.

Technical Assistance

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Relations with the Inter-American Development Bank

(As of April 3, 2018)

A. Recent Projects and Objectives

1. On December 2014, the IDB approved its country strategy with Honduras for the period 2015–2018. 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 April 3, 2018, the portfolio of approved sovereign-guaranteed loans under execution amounted to USD653.8 million, with an undisbursed balance of USD397.6 million.

3. The existing portfolio of the IDB group focuses on public and private projects. In the public sector, the portfolio focuses on: (i) social protection (24.45 percent); (ii) transportation (36.25 percent); (iii) energy (14.67 percent); (iv) fiscal administration (5.66 percent); (v) sustainable development (6.73 percent), education (9.18 percent) and gender (3.06 percent). In the private sector, IDB Investments’s portfolio focuses on: financial institutions (92.3 percent), energy (4.3 percent) and industry (3.4 percent). In addition, the IDB has one project in execution through Multilateral Investment Fund – Loan, amounting USD1 million, to support the Competitiveness of Small, Forest Producers and Communities in Honduras.

4. The pipeline program for IDB sovereign-guaranteed approvals until April 3, 2018 includes seven operations in the public sector distributed as follow: (a) one operation for Citizen coexistence and neighborhood Program; (b) the National Power Transmission Program (c) Development of PPPs in Support of Sustainable Tourism; (d) two Programs to Support Social Protection and (e) a Decentralized Health Management Program, are expected to be approved before the end of the year.

IDB Sovereign Guaranteed Loan Portfolio in Honduras as of April 3, 2018

(In millions of U.S. Dollars)

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IDB Non-Sovereign Guaranteed Loan Outstanding in Honduras as of March 30, 2018

(In millions of U.S. Dollars)

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IDB Disbursement of Sovereign Guaranteed Loan Portfolio in Honduras 2010–17

(In millions of U.S. Dollars)

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IDB Annual Net Flows with Sovereign Guarantee in Honduras 2010–17

(In millions of U.S. Dollars)

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Relations with the World Bank Group

(As of March 25, 2018)

1. A Country Partnership Framework (CPF) for 2016–2020 was endorsed by the Board on December 2015 using inputs from the Systematic Country Diagnostic (which was prepared in October 2015). The 2016–20 CPF seeks to support Honduras in its efforts to foster social inclusion, while bolstering conditions for growth and reducing vulnerabilities to enhance the country’s resilience. The CPF is aligned with the priorities identified in the Honduras’ Country Vision for 2038 (adopted in 2010). Strengthening institutions and enhancing governance are critical cross-cutting themes that will underpin the strategic pillars.

2. The combined World Bank Group active portfolio in Honduras (IDA, IFC, MIGA plus trust funds), equals US$1.02 billion. The IDA18 allocation is SDR243.4 million (US$340 million), which will be allocated within the next three years, with Government expressing interest towards projects in agricultural competitiveness, water and sanitation, social protection.

3. The active portfolio is made up of 5 projects, totaling US$193.95 million (US$163.95 million in IDA commitments, plus US$30 million from the Global Agriculture and Food Security Program – GAFSP), of which approximately US$67 million are undisbursed. Project disbursements (excluding budget support) dropped from US$70.1 million in FY14 to US$40.7 million in FY15 and stabilized around US$30 million in FY16-FY17, consistent with Government’s fiscal consolidation objectives.

4. The World Bank’s current activities are supporting Honduras efforts to strengthen social protection, enhance rural competitiveness and citizen security, and improve disaster risk management. Please see details under sections A and B.

5. 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’s current portfolio stands at US$505.5 million, mostly in financial sector, infrastructure, and commercial real estate.

6. MIGA has US$327.01 million in gross exposure through three projects in the transport and energy sectors. MIGA has 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 sector, 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

7. The active IDA portfolio is made of 5 projects totaling US$193.95 million (US$163.95 million in IDA funding and US$30 million from the GAFSP), of which approximately US$67 million is undisbursed.

8. 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. Responding to Government’s request, an Additional Financing of US$25.0 million was approved by the Board to expand the model to other areas and to incorporate new clusters. The closing date of this Project is November 30, 2020.

9. Corredor Seco Food Security Project. The PDO of the Project is to enhance food and nutritional security of vulnerable households in Selected Areas of the Corredor Seco. Project will increase household availability of quality food and revenues of poor and extremely poor rural residents in 25 municipalities as a basis for improving nutrition and in the long-term for reducing child stunting. Project will also improve nutrition and nutritional practices especially for children and women in selected municipalities. Project is implemented with US$30 million of GAFSP (trust fund) resources.

10. 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 9 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, 2018.

11. Safer Municipalities. The PDO 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.

12. Disaster Risk Management. The PDO 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.

Recently Closed Projects:

13. Honduras Water and Sanitation Sector Modernization Project (PROMOSAS), closed December 2016. The PDO of PROMOSAS was 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.

14. Second Land Administration, closed January 2017. The PDO of the Project was to provide improved, decentralized land administration services, including better access to and more accurate information on property records and transactions.

15. First Fiscal Sustainability and Enhanced Competitiveness DPF, closed March 2017, to support the Government’s efforts in (i) strengthening institutional arrangements to support fiscal sustainability; and (ii) enhancing the regulatory framework to promote competitiveness.

B. Non-Lending Activities

16. 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: “Honduras – Unlocking Economic Potential for Greater Opportunities : Systematic Country Diagnostic” (2015), “Honduras Economic Diagnostic for National Action (DNA)” (2015); a Guidance for Enhanced Regulatory Capacity for Improved Governance in Extractive Industries (2016); a regional study on the Fiscal and Welfare Impacts of Electricity Subsidies in Central America (2017); a “Technical and Economic Analysis of the Penetration of Wind and Solar Energy in the Honduran Electricity Grid” (2017). The current ongoing analytical and advisory services include: support to the development of the Education Sector Plan, Jobs Diagnostic; the regional study Women in Central America: An Overview of Progress and Challenges and a study on the migration and remittances. The Bank is also providing technical assistance in the area of public finances, contingent liabilities, energy sector reform as well as transparency and accountability through the Global Partnership for Social Accountability grant provided by the USAID.

C. Financial Relations

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Statistical Issues

(As of March 27, 2018)

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Table of Common Indicators Required for Surveillance

(As of April 23, 2018)

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Any reserve assets that are pledged or 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 discount 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.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D); weekly (W); monthly (M); quarterly (Q); annually (A); irregular (I); and not available (NA).

These columns should only be included for countries for which Data ROSC (or a Substantive Update) has been published.

This reflects the assessment provided in the data ROSC or the Substantive Update (published on …, and based on the findings of the mission that took place during…) for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O); largely observed (LO); largely not observed (LNO); not observed (NO); and not available (NA).

Same as footnote 7, except referring to international standards concerning (respectively) source data, assessment of source data, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.

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.

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Cover IMF Staff Country Reports
Honduras: 2018 Article IV Consultation – Press Release; Staff Report and Statement by the Executive Director for Honduras
Author: International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2018: Issue 206
Publisher:
International Monetary Fund
ISBN:
9781484366066
ISSN:
1934-7685
Pages:
81
DOI:
https://doi.org/10.5089/9781484366066.002