Honduras: Fourth Reviews Under the Stand-by Arrangement and the Arrangement Under the Standby Credit Facility, Requests for Augmentation of Access, Extension and Rephasing of the Arrangements, and Waivers of Nonobservance of Performance Criteria-Press Release; Staff Report

1. Reforms are on course despite a protracted pandemic and two tropical storms; however, challenges are mounting. The authorities’ policy response mitigated the health impact of the pandemic, but the lockdowns weighed on activity. Two tropical storms struck last November damaging infrastructure and crops, and halting maquila production. Authorities have maintained macroeconomic stability and hard-won institutional gains but risks are increasing, as reconstruction needs are significant, while financing conditions are tightening. Nonetheless, this could be an opportunity to rebuild with climate-resilient infrastructure.

Abstract

1. Reforms are on course despite a protracted pandemic and two tropical storms; however, challenges are mounting. The authorities’ policy response mitigated the health impact of the pandemic, but the lockdowns weighed on activity. Two tropical storms struck last November damaging infrastructure and crops, and halting maquila production. Authorities have maintained macroeconomic stability and hard-won institutional gains but risks are increasing, as reconstruction needs are significant, while financing conditions are tightening. Nonetheless, this could be an opportunity to rebuild with climate-resilient infrastructure.

Economic and Political Context

1. Reforms are on course despite a protracted pandemic and two tropical storms; however, challenges are mounting. The authorities’ policy response mitigated the health impact of the pandemic, but the lockdowns weighed on activity. Two tropical storms struck last November damaging infrastructure and crops, and halting maquila production. Authorities have maintained macroeconomic stability and hard-won institutional gains but risks are increasing, as reconstruction needs are significant, while financing conditions are tightening. Nonetheless, this could be an opportunity to rebuild with climate-resilient infrastructure.

2. Presidential elections are scheduled for November. Final candidates were declared in May and they include Nasry “Tito” Asfura for the incumbent Partido Nacional, Xiomara Castro for Partido Libre, Yanni Rosenthal for Partido Liberal, and Salvador Nasralla for Partido Salvador de Honduras, who was the runner-up of the last election. The new administration would take office on January 27, 2022.

3. The authorities remain committed to the program and adapting it to the difficult circumstances will support reform momentum. The Fund-supported program remains broadly on track with key quantitative targets met and progress on structural reforms. To continue supporting these efforts, while recognizing the additional balance of payments needs created by the tropical storms and continued pandemic, the authorities are requesting an augmentation of access by an aggregate SDR149.88 million (60 percent of quota), augmenting the SBA by SDR99.92 million (40 percent of quota) and the SCF arrangement by SDR 49.96 million (20 percent of quota).

Recent Developments, Outlook and Risks

4. A deep contraction in 2020 with a partial recovery in 2021. A nascent recovery in mid-2020 was interrupted by two tropical storms in November which damaged crops, halted manufacturing, and damaged infrastructure. As a result, GDP contracted by 9 percent in 2020 (versus 7 percent projected at the third reviews) while the unemployment rate reached 10.9 percent. Strong remittances, import contraction, and resilient exports buffered the external position as the current account switched to a 3 percent of GDP surplus and international reserves increased by US$2.4 billion. The NFPS deficit increased to 5.5 percent of GDP on the back of emergency spending. Projected growth in 2021 remains unchanged at 4.9 percent as the negative impact from the storms and the continuing pandemic is offset by reconstruction spending and stronger U.S. growth. Inflation is expected to remain within the BCH’s target band. The current account is projected to deteriorate, driven by higher import values while exports remain constrained. The NFPS deficit is projected to reach up to 5.4 percent of GDP as reconstruction costs and continued pandemic-related spending are barely offset by recovering revenues.

Text Table 1.

Honduras: Program Scenario

(Selected Indicators, Percent of GDP Unless Otherwise Specified)

article image
Sources: Central Bank of Honduras, Ministry of Finance, and IMF staff estimates and projections.

Debt projections use the defintion from the DSA.

NIR (BCH) corresponds to reserves assets minus obligations with the IMF.

5. The economy is projected to continue its recovery in 2022, before returning to its medium-term trend. With vaccinations and positive spillovers from the U.S., real GDP in 2022 is expected to grow at 4.4 percent. The medium-term growth outlook remains just below 4 percent while inflation is projected to remain at the center of BCH’s target band. As the economy recovers, the current account deficit is forecast to reach 4 percent of GDP, smaller than the level implied by fundamentals and desirable policies. The fiscal balance is projected to return to the 1 percent of GDP deficit ceiling in the FRL in 2023, supported by a recovery in revenues and the gradual unwinding of pandemic support with public debt declining over the medium-to-long term.

6. While overall risks remain tilted to the downside, positive global spillovers provide some upside (Annex I).

  • COVID-19. New variants and slow vaccinations could delay the recovery. Lockdowns and perceived inequality of access to vaccines could deepen social discontent, with severe economic and social consequences.

  • External risks. Accelerating de-globalization could undermine exports and deteriorate the external position, as would bouts in oil price volatility. Market volatility poses risks to access and costs of financing. On the upside, remittances could be stronger and U.S. aid to the region could materialize.

  • Domestic risks. An uncertain political landscape in the context of elections may complicate the passage of politically sensitive reforms and pressure public spending. Concerns about social unrest could thwart reform efforts. The increased frequency and severity of climate shocks could impact the country’s medium-term growth prospects.

Program Implementation

7. The program remains broadly on track notwithstanding multiple shocks which caused some targets to not be observed (Text Table 2).1 For end-December, the NFPS deficit target was missed by 2.4 billion Lempira (about 0.4 percent of GDP), as pandemic and end-year storm-related emergency spending was higher than expected. Continued pandemic-related liquidity shortages at ENEE, exacerbated by the storms, led to a non-observance of the domestic arrears PC by 4.4 billion Lempira (about 0.7 percent of GDP) in end-December and 7.5 billion Lempira (about 1.2 percent of GDP) in end-June. Slow uptake of the bono transporte explained smaller than programmed social spending by end-December while the end-June indicative target was missed due to a rerouting of resources into programs to address the impact of the tropical storms, which were created after the completion of the 3rd reviews and thus not included in the program definition. A late receipt of the payment order led to a delay a debt service payment to Switzerland and a temporary non-observance of the external arrears continuous PC; these have since been cleared.

Text Table 2.

Honduras: Program Implementation 1/

(Cumulative flows; millions of Lempiras, unless specified)

article image

Definitions as specified in the Technical Memorandum of Understanding.

Cumulative starting in January of the correspondent year.

Excluding subsidies from the central government.

Continuous PC.

Using the program exchange rate of L24.4316 = 1US$.

Corresponds to the budgetary central governement (Administración Central ) in the authorities’ sectorization.

8. There has been some progress on structural reforms, though challenges remain.

  • Completed: the tax code was amended to allow for electronic notification to taxpayers (structural benchmark (SB) met), and a consultant was hired to identify and value ENEE’s distribution assets (SB not met, completed with delay and SB met, respectively). The cost of operating and maintaining the electricity distribution network (COMA) study was completed (SB not met, completed with delay). A draft bill to streamline tax exemptions was submitted to Congress (¶14, SB met). Two prior actions were completed (¶13 and 24), in line with program goals of eliminating tax exemptions and improving governance.

  • In progress: The integration of the procurement portal Honducompras2 with IFMIS (SB not met) has been delayed by IT issues. The automated process to record trade in special regimes has been delayed due to coordination issues across agencies (SB not met). Both are proposed to be reset to end-September 2021.

  • Not completed: The authorities were not able to cancel the distribution trust fund (SB not met), as strategic negotiations continue with the operator of the distribution network. However, the transmission trust fund was eliminated. The transfer of control of tax exemptions to SAR remains pending in Congress (SB not met) but preparatory technical work continues at SAR. These SBs are not proposed to be reset but authorities will continue to advance reforms in these areas (see ¶13 and ¶20).

Policy Discussions

Discussions focused on the impact of the tropical storms, adapting the policy response, and sustaining reform momentum. Topics included adjustments to the fiscal stance to incorporate reconstruction spending and continued emergency measures, challenges and next steps in electricity sector reform, potential vulnerabilities in the financial sector, and advancing the governance and revenue mobilization agendas.

A. Addressing Fiscal Challenges and Supporting the Recovery

Improving the Response to the Pandemic

9. Progress continues to strengthen transparency and controls of emergency-related spending. The enhanced labeling system to track emergency spending in the budget, implemented with IMF support, is now operational. The manual of emergency-related public procurement procedures was approved, introducing guidance on critical elements.2 The authorities have also started to publish emergency procurement contracts. Work is ongoing, in collaboration with development partners, to enhance internal controls in agencies involved in emergency acquisitions. The High Court of Accounts (TSC) continues to conduct and publish concurrent audits of pandemic- related spending. The TSC has completed and published two special audits of institutions executing this spending and two additional ex-post audits were also completed in August. Work on beneficial ownership information continues as well (see ¶25).

10. Execution of pandemic-related spending accelerated. In 2020, COVID-19-related spending reached 1.8 percent of GDP (10.5 billion Lempira), exceeding projections by 1.3 billion Lempira. Authorities also engaged digital technologies, distributing electronic cash vouchers to more than 70,000 households via mobile phones. As the roll-out of income support for workers in the transportation sector (bono transporte) was slower than expected, priority social spending under the program was marginally below targets in end-December and end-June by about 0.04 percent of GDP.

Supporting Reconstruction and the Recovery

11. The 2020 NFPS deficit exceeded the program target as emergency spending in response to the pandemic and tropical storms was larger than expected. The deficit widened to 5.5 percent of GDP compared to 5 percent under the program. This was driven by higher spending (2.3 billion Lempira), as revenue in nominal terms was in line with projections. In November and December, pandemic-related spending also accelerated, exceeding the annual target (see above), and immediate storm-related emergency needs added a further 1 billion Lempira in spending. Only part of this spending could be accommodated through additional reallocations (about 0.7 billion Lempira), as the needs were immediate and the fiscal year was closing. Given the temporary nature of the non-observance, the authorities are requesting a waiver of non-observance for the missed NFPS balance PC for end-December.

uA001fig01

Central Government and NFPS Balance

(Cumulative, percent of GDP)

Citation: IMF Staff Country Reports 2021, 207; 10.5089/9781513596105.002.A001

12. As reconstruction needs are significant and the health emergency continues, the authorities are pursuing a looser fiscal stance in 2021–2022, returning to the FRL target in 2023, and are requesting an augmentation of access for to address increased balance of payments needs.

  • While revenues are expected to recover somewhat in 2021—so far outturns are higher-than-expected—, they remain well below pre-pandemic levels. At the same time, pandemic spending needs (including vaccines) have been compounded by those related to tropical storms. As the health emergency continues, additional spending on goods and services of about 0.7 percent of GDP is projected, including the continuation of some of the emergency spending put in place in 2020 and 0.3 percent of GDP for vaccines.3 The authorities’ comprehensive medium-term reconstruction strategy will include climate-resilient infrastructure and dams for flood management, which are key for Honduras’ sustainable development due to its vulnerability to climate-related shocks (see Box 1 for a discussion of structural, financial, and post-disaster resilience of Honduras). In 2021, they plan to start several projects, with an estimated immediate cost of 0.6 percent of GDP (see text table 3). Thus, the 2021 baseline targets a NFPS deficit of up to 5.4 percent of GDP. The requested augmentation will cover part of the additional balance of payment needs, supplemented by increased IFI financing (an additional US$205 million). Part of the investments in new flood management infrastructure will be implemented through an existing electricity generation trust fund (see ¶25).

  • To continue supporting the reconstruction efforts and avoid an unnecessarily sharp and unrealistic adjustment in 2022, the authorities have called the escape clause of the FRL again. This allows for delaying the return to the FRL deficit target (1 percent of GDP) to 2023. In 2022, reconstruction spending is projected at 1.3 percent of GDP, consistent with a 2.3 percent of GDP NFPS deficit. This temporarily looser stance has only a small impact on the debt path. As the DSA shows (Annex II), Honduras’ risk of debt distress remains low.

  • Authorities will continue strict monitoring and publication of COVID-19 and reconstruction-related spending and procurement contracts, including continuing work on identifying the contracted companies and their beneficial owners, together with ex-post audits. To ensure accountability, the program will monitor execution of spending, relative to the authorities’ plans (see text table 3), on (i) efforts to address the continued pandemic, including support measures and vaccines, and (ii) reconstruction investments, as published on the Honduran government’s Transparency Portal for COVID-19 and the tropical storms. In addition, the TSC is in the process of signing an agreement with the ministry of finance to facilitate concurrent controls of large expenditure projects.

Text Table 3.

Honduras: 2021 Expenditures (% GDP)

article image

13. The authorities have made some progress on their revenue mobilization agenda, but work remains. Congress approved the electronic notification of taxpayers, an important step towards improving tax compliance. However, the measure transferring management of tax exemptions from SEFIN to SAR remains pending in Congress. While the authorities are redoubling their efforts to engage with Congress, capacity building is continuing at SAR with IMF support. A draft bill to streamline tax exemptions was submitted to Congress with a yield of about ½ percent of GDP (SB, June 2021, met). This included the elimination of exemptions in areas such as rural tourism, special tourism zones, and renewable energy. Relatedly, congress eliminated the “most privileged regime” concession to special economic zones (ZEDEs), which could have generated new exemptions (Prior Action).

B. Monitoring the Monetary Policy Stance and Maintaining Financial Stability

14. The monetary stance remains appropriate although caution is warranted. In response to the tropical storms, the central bank cut the policy rate by 75 basis points in end-November 2020, bringing it to 3 percent, after which it has remained unchanged. The total cumulative cut since February 2020 to date is 250 bps—in line with most other CAPDR countries and the Fed—in an environment of well-anchored inflation expectations and a negative output gap. Nonetheless, the authorities remain vigilant as rising oil and food prices and recovering domestic demand could create inflationary pressures, while a renewed taper tantrum in the US could lead to capital outflows.

15. While reserve buffers are strong, Honduras remains vulnerable to external shocks. Following a significant reserve accumulation in 2020, reserve coverage is projected at about 166 percent of the ARA metric by end-2021, including the SDR allocation (about SDR228 million). Despite this, import coverage is expected to remain at end-2020 levels as the current account is projected to sharply reverse this year on the back of unfavorable terms of trade and recovering import values. New COVID-19 variants, high levels of infection, and the incoming hurricane season create further risks for economic activity and export performance. Hence, caution in protecting this buffer, including through well-anchored fiscal policy, is warranted.

16. Regulatory and supervisory measures introduced during the pandemic were extended in response to the tropical storms. The extended deadline to restructure loans of affected borrowers, without requiring changes in credit classification, ended in March 2021 and normal regulatory rules are back in place. Nearly 60 percent of loans (by value) benefited from credit moratoria in 2020. Nonetheless, risks remain contained because of Honduran banks’ strong buffers and ample liquidity in the system. The authorities are conducting regular stress tests.

17. The authorities are closely monitoring and stand ready to take actions as needed to address potential liquidity or solvency issues. The capital adequacy ratio increased by 0.4 percentage points to 14.5 percent of risk-adjusted assets in 2020, while NPLs increased by 0.8 percentage points to 3.1 percent of total loans, and loan provisions increased only marginally to 3.8 percent of total loans. These increases are in line with others in the region, although regulatory forbearance may be masking some scarring effects. Supervised financial institutions are required to establish a temporary equity reserve to cover potential credit losses resulting from the shocks and banks falling below regulatory capital requirements have to present recapitalization plans.

18. The authorities continue reforming the monetary policy framework, including for the transition to inflation targeting.

  • The new central bank law was submitted to Congress last year; the authorities expect discussion in Congress to be completed this year and are redoubling their outreach efforts to legislators.

  • Surrender requirements for banks were removed in June, which will improve the efficiency with which private sector demand for foreign exchange is met4

  • To reduce fragmentation between central bank and treasury instruments, the central bank introduced a 28-day reverse repo with government securities to manage liquidity; two successful auctions have taken place.

  • The authorities are also working with IMF TA to support the transition to a more flexible exchange rate, including developing a derivatives market. In line with IMF TA’s recommendations, the BCH adjusted intervention rules and started to intervene in the interbank foreign exchange market only when the exchange rate is on the band’s edges. In addition, to introduce more market elements into the base price that determines the exchange rate band,5 its calculation now incorporates the outcome of the last five foreign currency auctions. Staff encouraged the authorities to continue with the liberalization of FX markets and resort to foreign exchange interventions to maintain orderly market conditions. As a next step towards a more flexible exchange rate, the authorities may consider widening the exchange rate band.

  • The authorities request renewed temporary approval of the two multiple currency practices (MCPs) maintained for non-balance of payments reasons and staff supports this request6

C. Progress and Challenges in the Electricity Sector

19. Work on the institutional framework and gradual implementation of the new tariff scheme continues. With support from the World Bank, the authorities are conducting a study to estimate the value added of distribution (VAD) which is a key input into the new electricity tariff scheme. As an intermediate step, the authorities completed the study on the cost of operating and maintaining the electricity distribution network (COMA) (SB, March 2021, completed with delay).

20. Some progress was made on structural reforms, albeit with challenges. With technical support from the Inter-American Development Bank (IDB), legislation to continue the unbundling process is under discussion in Congress. With support from the Central American Bank for Economic Integration (CABEI), the authorities have staffed a dedicated unit to manage the process. With IDB support, firms have been hired to provide a valuation of ENEE’s assets (SBs, December 2020, not met, completed with delay and March 2021, met), which will feed into the firm’s financial audit; both are expected to be completed by end-2021. While ENEE repaid the last maturing bond of the distribution trust fund in December, its cancelation (SB, December 2020, not met) is linked to ongoing strategic negotiations with the operator of the distribution system. Nonetheless, the authorities were able to terminate the transmission trust fund.

21. The tropical storms intensified ENEE’s liquidity squeeze as consumers fell further behind on electricity bill payments. This prevented clearance of arrears to generators, leading to a nonobservance of the end-December and end-June PCs. Congress already approved a bond issuance covering arrears for all of 2021 and to avoid their recurrence, the authorities will strengthen the process for timely transfers to ENEE and provide treasury support in securing financing for the company. Authorities will also redouble efforts to guarantee payment by public institutions. Authorities are continuing strategic negotiations with the operator of the distribution system, which should be managed carefully to minimize fiscal costs. Against the backdrop of a complex legal process and pending its resolution—which would then permit more structural actions to reduce ENEE’s cashflow losses—the authorities are committed to closely monitor to ensure that ENEE’s liquidity situation does not deteriorate. Based on these corrective actions, the authorities are requesting waivers of non-observance for the end-December and end-June PCs on domestic arrears. Staff urged the authorities to accelerate reforms to resolve ENEE’s financial situation.

22. The authorities are revamping their loss reduction strategy, which was interrupted by the pandemic and the tropical storms. As the economy recovers, the enforcement task force, launched in January 2020 to reduce electricity theft by large consumers—which represent the bulk of non-technical losses—, will resume operations. Authorities are also planning social policies to regularize connections among socially vulnerable populations. As for technical losses, the authorities are prioritizing investments to upgrade the transmission grid, including through an IDB loan.

D. Advancing the Agenda on Governance

23. The authorities continue making progress on governance and reducing vulnerabilities to corruption. Steps have been taken to improve the transparency of public purchases, including submission of a new procurement law to Congress and measures related to COVID-19 spending (see ¶9). The new PPP regulations also put in place a more rigorous cost-benefit analysis of projects. Work is ongoing on integrating the new procurement portal Honducompras2 with IFMIS, with IMF support (SB, June 2021, not met). However, due to significant delays on the IT vendor’s side, staff proposes resetting this SB to end-September 2021. Furthermore, given systemic errors in Honducompras2, authorities have temporarily reverted to the use of Honducompras1. Authorities expect to return to Honducompras2 once these concerns and connectivity issues have been resolved.

24. Recent modifications to an existing electricity generation trust fund require adjustments to improve governance. While the changes allow for welcomed investments on flood prevention and energy generation, they could pose governance risks which will need to be well managed. The trust fund’s mandate has been limited to 14 projects, which will be subject to viability studies and approval by the ministry of finance for budget-funded ones (Prior Action). To further strengthen the trust fund’s governance, the authorities are working on regulations and operational principles to strengthen transparency and accountability and guarantee minimum governance standards.7 These are expected to be completed by end-October.

25. The authorities continue to strengthen the AML/CFT and anticorruption framework. With IMF and IDB support, the authorities issued new regulations to reform public officials’ asset declarations and submitted to Congress draft legislation to create a comprehensive beneficial ownership registry. The amendment is now awaiting discussion in Congress after a favorable opinion by the Supreme Court. The Property Institute, who will host the beneficial ownership registry, is working on a design to be rolled-out upon Congressional approval. A proposal to reform the AML law was sent to Congress in November 2020. This includes a new definition of politically exposed persons (PEPs) which, according to the CNBS, is consistent with FATF standards. In preparation for the approval of the reform (expected in 2021), staff urged the banking commission to revise its regulations and provide guidance on the application of the new definition.

26. There have been important steps to improve the business environment. Authorities submitted draft legislation to Congress requiring regulatory agencies to streamline and publicize requirements for obtaining permits and other administrative procedures (Ley de Simplificación Administrativa) and prepared a plan to implement the use of electronic signatures. Regulations have been issued for the latter and digital government more broadly.

Program Issues

27. The authorities are requesting an augmentation of access. The storms caused sizable economic damage, estimated by ECLAC at 7.5 percent of GDP. In 2021, the damages will continue weighing on exports, especially agriculture, while reconstruction spending and demand rebound will fuel imports. Risks to export dynamics will also come from new COVID-19 variants and the intensity of the upcoming hurricane season. Furthermore, higher oil prices, unfavorable terms of trade and rebounding imports will further deteriorate the current account. With an increasingly uncertain outlook in global financial markets and mounting risks of rising financing costs, prior plans for a sovereign bond issuance look unlikely. An aggregate augmentation of the Fund financing by SDR149.88 million (60 percent of quota)—SDR99.92 million (40 percent of quota) under the SBA and SDR49.96 million (20 percent of quota) under the SCF—would support the authorities’ efforts to address the continued pandemic through emergency spending and vaccine purchases, and reconstruction needs, all of which, together with higher oil prices, are expected to give rise to additional balance of payments needs. The proposed augmentation will be partly backloaded into the fifth review as execution gathers momentum in the later part of the year. The authorities plan to use the additional Fund financing for budget support, given significant fiscal financing needs. With the augmentation, reserves at the end of the program would be above the ARA metric, bolstered by the general allocation of SDRs (¶15).

28. The authorities request the extension of the SBA and SCF arrangements by two months to January 14, 2022 and a rephasing of the last availability date. This would allow for a time buffer for any technical delays in disbursement following the board meeting for the last review, which is expected to take place before mid-December. The availability date of the last disbursement is requested to be changed to October 1, 2021.

29. Financing assurances and capacity to repay. The program remains fully financed. Risks to the program stem from the proximity of the presidential elections and continued impact from the pandemic on incomes and policy implementation, such as slower-than-envisaged progress on the structural and governance agenda. Authorities, however, remain steadfastly committed to advancing reforms and there is broad-based social support for the IMF-supported program. Honduras is also assessed as having a low risk of debt distress (DSA, Annex II), and strong capacity to repay the Fund. Outstanding Fund credit, including the proposed augmentation, will peak at SDR 537.1 million (215 percent of quota) in 2021, equivalent to 2.9 percent of projected GDP or 8.5 percent of gross international reserves. Total debt service to the Fund will peak at 2.2 percent of gross international reserves in 2025.

30. Safeguards assessment. The authorities have continued to implement the recommendations of the 2019 safeguards assessment. In addition to the submission of the amendments on the central bank law to Congress to strengthen governance and autonomy, the authorities have hired a consulting firm to assist in the adoption of International Financial Reporting Standards (IFRS) and are taking steps to align the internal audit function with international leading practices, including engaging an expert to assist the audit committee. Staff continues to monitor developments in these areas.

Staff Appraisal

31. The program is broadly on track and macroeconomic stability remains entrenched even in the face of multiple shocks. Multiple shocks led to some program targets to be missed such as the NFPS balance PC in end-December, ENEE’s domestic arrears PCs in both end-December and end-June, the continuous PC on non-accumulation of arrears, and the social spending IT in both end-December and end-June. Progress continues on structural reforms on fiscal, governance, and electricity sector issues, albeit slowed by the pandemic and tropical storms. Despite these challenges and the election year, prospects for achieving key program objectives and reforms remain good albeit subject to risks to the outlook.

32. Navigating a complex environment will require steadfast commitment to macroeconomic stability while remaining flexible and vigilant. To maintain reform momentum and preserve hard-won gains, it will be paramount to persevere with procurement reforms and the revenue mobilization agenda, while advancing electricity sector reforms. Monetary policy should remain geared towards maintaining price stability and preserving international reserves. Efforts should continue on strengthening the monetary policy framework and supporting the transition towards a more flexible exchange rate with foreign exchange intervention aimed at preventing disorderly market conditions. The recent incorporation of market elements into the base price and the removal of surrender requirements for banks are important measures. Outreach should continue with Congress to pass the new central bank law.

33. A temporarily looser fiscal stance in 2021–2022 will appropriately balance between addressing significant reconstruction needs and the continued health emergency, while maintaining fiscal sustainability. The new triggering of the escape clause under the FRL—thereby delaying the return to the FRL deficit target (1 percent of GDP) to 2023—will help support reconstruction efforts and avoid an unnecessarily sharp and unrealistic adjustment in 2022. This temporary looser fiscal stance has only a small impact on the debt path and Honduras’ risk of debt distress remains low.

34. Measures to provide liquidity and support the prudent provision of credit will help protect financial stability. Close monitoring of the impact of the pandemic and the tropical storms on banks’ balance sheets will help trigger early responses if needed. The requirement for supervised institutions to establish equity reserves is a welcome development. The authorities should stand ready to take actions as needed to address potential solvency issues and continue to enhance crisis preparedness.

35. Accelerating electricity sector reforms will be key to ensure a sustainable fiscal position and improved business environment. Staff welcomes progress in the implementation of the tariff scheme and steps towards the unbundling of the company. Further efforts are needed to improve governance in ENEE and strengthen its financial situation, including to avoid recurrence of arrears. Restarting the loss reduction strategy will be important to strengthen ENEE’s financial position and create broader fiscal space for social and infrastructure spending.

36. Better institutions hinge on improving governance and stepping up the fight against corruption. Staff welcomes steps towards the creation of a comprehensive beneficial ownership registry and implementation of new regulations on public officials’ asset declaration, and urges their prompt completion. Implementing the new procurement portal and streamlining administrative procedures should be key next steps. Continued institutional strengthening through redoubled efforts to engage Congress for an urgent passage of the draft laws submitted during the program, including the draft legislation on beneficial ownership, will be essential to shield recent progress from pressures to regress and ensure policy continuity.

37. Staff supports the authorities’ request for renewed temporary approval of the two multiple currency practices subject to Fund jurisdiction under Article VIII, Section 3. The MCPs are maintained for non-balance of payments reasons. They do not materially impede the member’s balance of payments adjustment, harm the interests of other members, or discriminate among members, and they are temporary. The authorities’ ongoing FX market liberalization should ultimately eliminate these measures. Staff, therefore, recommends approval for their retention for one year or the conclusion of the next Article IV consultation, whichever is earlier.

38. Staff recommends completion of the fourth reviews under the SBA and SCF arrangements and supports the requests for augmentation, extension, rephasing, and four waivers of nonobservance for performance criteria. Staff supports the authorities’ request for waivers of non-observance for the end-December PC on the NFPS balance and the continuous PC on non-accumulation of arrears, based on the temporary nature of the non-observance; and for the end-December and end-June PCs on ENEE’s domestic arrears, based on corrective actions. Capacity to repay the Fund remains strong and the proposed augmentation of access would address additional balance of payments needs and support the authorities’ efforts to address the continued pandemic through emergency spending and vaccine purchases, and reconstruction spending needs.

Enhancing Honduras’ Resilience to Natural Disasters

Honduras is highly exposed to weather-related disasters. Between 1980 and 2020, average annual loss from droughts, hurricanes, and flooding reached 2.3 percent of GDP. The most significant event was Hurricane Mitch in 1998, which killed 14,600 people and inflicted economic losses of about 60 percent of GDP1. Honduras is at high risk of major natural disasters (IMF 2019) and remains far from the frontier in the adaptive capacity index, which measures economic, infrastructural, technological, institutional capacity, and awareness of climate change. Disasters can start a vicious cycle as lower growth and post-disaster spending increase public debt, shrink fiscal space, which in turn, elevates poverty which then fosters out-migration and lost human capital. A three-pillar approach (IMF 2019) can enhance structural, financial, and post-disaster resilience.

uA001fig02

Total damages

(percent of GDP)

Citation: IMF Staff Country Reports 2021, 207; 10.5089/9781513596105.002.A001

Sources: EM-DAT, IMF staff estimates.Note: only disasters with total damages above 1 percent of GDP are shown.

Investment in structural resilience will help Honduras contain the damage from natural disasters and speed up recovery. Investments in resilient infrastructure include strengthening riverbeds and building dams to avoid flooding, while “soft” resilience measures include developing early warning systems and improving land use planning. With support of the World Bank, Honduras has provided access to basic hydrometeorological information for 4.5 million people. In 2019, with support of GOAL, Honduras introduced the early warning for drought emergency response. The country is also promoting better land use. With public capital expenditures averaging 3.2 percent of GDP over the last 10 years and low risk of debt distress, Honduras has some fiscal space to invest in structural resilience. However, competing needs and weak execution capacity require cautious prioritization of projects to ensure that cost-benefit tradeoffs are clear.

uA001fig03

Adaptive capacity index vs adaptive frontier

Citation: IMF Staff Country Reports 2021, 207; 10.5089/9781513596105.002.A001

Source: IMF staff calculations based on 2015–18 data from the EU commission, the United Nations University Institute for Environment and Human Security, the University of Notre Dame, and the IMF World Economic Outlook database.

Honduras can improve its financial resilience. The government is in discussion with the IDB on a contingent credit facility instrument which would entitle the country to access up to US$400 million against a natural disasters. The authorities and the World Bank are considering a contingent Development Policy Operation with a Deferred Drawdown Option (CAT DDO). The Honduran authorities are also reconsidering their participation in CCRIF, which provides parametric insurance products and insures against rainfall, hurricanes, and seismic activity. Honduras could explore introducing a natural disaster clause in future bond issuances. Such a clause was introduced, for example, in the 2018 restructuring of domestic debt by Barbados.

Post-disaster resilience requires adjustments. Lack of necessary infrastructure often hampers the ability to reach the affected people during a weather event. Honduras, given its relatively vulnerable road and bridge systems, often faces situations where aid is constrained by physical access. According to the National Disaster Preparedness Baseline Assessment (PDC 2018), Honduras also needs to strengthen its procurement system to be able to quickly and transparently respond to a natural disaster.

1 While the EM-DAT estimates damages from tropical storm Eta in 2020 at 21.1 percent of GDP, the CEPAL assessed damages at 7.5 percent of GDP. At least 124 people died due to Eta and Iota in 2020.
Figure 1.
Figure 1.

Honduras: Real Sector Developments

Citation: IMF Staff Country Reports 2021, 207; 10.5089/9781513596105.002.A001

Sources: Johns Hopkins University CSSE, Google COVID-19 Mobility Reports, Central Bank of Honduras and IMF staff estimates.
Figure 2.
Figure 2.

Honduras: External Sector Developments

Citation: IMF Staff Country Reports 2021, 207; 10.5089/9781513596105.002.A001

Sources: Central Bank of Honduras, Haver Analytics, and IMF staff estimates and projections.
Figure 3.
Figure 3.

Honduras: Monetary Sector Developments

Citation: IMF Staff Country Reports 2021, 207; 10.5089/9781513596105.002.A001

Sources: Central Bank of Honduras and IMF staff estimates and projections.
Figure 4.
Figure 4.

Honduras: Financial Sector Developments

Citation: IMF Staff Country Reports 2021, 207; 10.5089/9781513596105.002.A001

Sources: Central Bank of Honduras and IMF staff estimates and projections.
Figure 5.
Figure 5.

Honduras: Public Finances

Citation: IMF Staff Country Reports 2021, 207; 10.5089/9781513596105.002.A001

Sources: Ministry of Finance and IMF staff estimates and projections.
Table 1.

Honduras: Selected Economic Indicators

article image
Sources: Central Bank of Honduras, Ministry of Finance, and IMF staff estimates and projections.

Debt projections use the defintion from the DSA.

NIR (BCH) corresponds to reserves assets minus obligations with the IMF.

Based on following year’s imports of goods and services, excluding maquila.

Table 2.

Honduras: Statement of Operations of the Central Government

(In millions of Lempiras)

article image
Sources: Honduran authorities, IMF staff estimates and projections.

As recommended by the GFSM-2014, since 2019 debt service commissions are reported as goods and services (previously included in the interest bill).

Includes debt forgiveness, accumulation, rescheduling, payment and/or forgiveness of arrears.

Reflects Fund purchases by the central bank to finance the budget

Offsets the HIPC/MDRI debt relief accounted as grants.

Table 3.

Honduras: Statement of Operations of the Central Government

(In percent of GDP)

article image
Sources: Honduran authorities, IMF staff estimates and projections.

As recommended by the GFSM-2014, since 2019 debt service commissions are reported as goods and services (previously included in the interest bill).

Includes debt forgiveness, accumulation, rescheduling, payment and/or forgiveness of arrears.

Reflects Fund purchases by the central bank to finance the budget

Offsets the HIPC/MDRI debt relief accounted as grants.