Press Release No. 19/285

On July 1, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Honduras. At the same time, the Board approved two-year arrangements under the Stand-By Arrangement (SBA) and Standby Credit Facility (SCF) for Honduras; a press release on this was issued separately.

Supported by the Fund program during 2014-17, Honduras made great strides reducing macroeconomic imbalances and strengthening its policy framework. Confidence improved; and Honduras’s debt spreads declined steadily and translated into better financing terms for private and public investment. Nevertheless, challenges remain to reduce vulnerabilities and risks, including the still high level of poverty and informality, the deteriorating financial situation of the public electricity company (ENEE), and the continued need to strengthen the macroeconomic policy framework and improve governance.

Macroeconomic conditions in Honduras remained stable in 2018. GDP growth slowed to 3¾ percent last year due to weaker terms of trade, but remained close to potential, supported by private consumption amid strong growth in remittances. Inflation is stable around the center of the central bank´s 4±1 percent target band. Owing to lower coffee prices and higher oil prices, the current account widened to 4¼ percent of GDP; but stayed close to its historical average. Despite a higher than expected deficit in the electricity company (ENEE), the nonfinancial public sector (NFPS) posted a deficit of 0.9 percent of GDP, in line with the target in the Fiscal Responsibility Law (FRL). The financial system is stable, liquid, and well capitalized, with NPLs at historic lows.

Going forward, the authorities’ economic program aims at maintaining macroeconomic stability, while enacting economic and institutional reforms to foster inclusive growth. It is centered around three major priorities; securing the fiscal position by putting ENEE on a sustainable path while maintaining policy space for investment and social spending; strengthening monetary policy and financial institutions to buffer shocks; and implementing reforms to improve the business environment and governance, including by stepping up efforts in the fight against corruption.

In this context, while growth is projected to slow down to slightly less than 3½ percent in 2019—mainly owing to still weak terms of trade—reforms in the electricity sector, improved governance, and the continued strengthening of the macroeconomic policy framework would secure debt sustainability and support a recovery in investment; and positive confidence effects would foster GDP growth. Higher growth, public investment, and social spending would help reduce informality and narrow the gender gap. Inflation and inflation expectations are expected to converge towards the midpoint of the central bank target range, while the current account deficit is expected to remain stable at around 4 percent of GDP. The outlook is subject to downside risks, mainly from lower global growth, terms of trade shocks, tighter global financial conditions, and uncertainties associated with trade tensions and US immigration policies.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They commended Honduras’ ambitious reform efforts in the last few years that resulted in macroeconomic stability, fiscal deficit reductions, strengthened institutional and policy frameworks, and improved investor confidence. Notwithstanding these achievements, Directors noted that high poverty and inequality, corruption, weak rule of law, and widespread violence remain major challenges. Addressing these challenges will support Honduras’ pursuit of strong, sustainable, inclusive and pro‑poor growth. In this context, Directors welcomed the authorities’ economic reform program, which focuses on maintaining macroeconomic stability, while implementing reforms to foster inclusive growth and improve social conditions.

Directors commended the authorities’ commitment to fiscal prudence—institutionalized by the Fiscal Responsibility Law—while protecting investment and social spending. They called for continued efforts at revenue mobilization—including through a revision of tax exemptions—and stronger tax administration and compliance. Together with measures to control expenditure over the medium term, Directors encouraged improved transparency and governance, including for trust funds, and sound public financial management. In that context, Directors positively noted the completion of the Fiscal Transparency Evaluation and the authorities’ commitment to implement its recommendations.

Directors welcomed the authorities’ recent reforms in the electricity sector, including a tariff adjustment with subsidies to protect the very poor. Noting that reducing financial imbalances would create space for much needed infrastructure and social spending, they encouraged further efforts to improve the sector’s institutional framework and put the finances of the national electricity company (ENEE) on a sustainable path.

Directors commended the recent measures to modernize the monetary policy framework and make the exchange rate regime more flexible—notably by reducing foreign exchange surrender requirements. Moving forward, they encouraged a gradual transition to exchange rate flexibility and continued efforts in strengthening the central bank’s operational autonomy and governance with a view to gradually transition toward inflation‑targeting. Directors, thus, welcomed the authorities’ plan to submit a new Central Bank Charter to Congress by year‑end.

Directors noted that the financial system remains broadly stable, liquid, well‑capitalized, and with NPLs at historic lows. Notwithstanding these developments, they encouraged its careful monitoring given foreign exchange credit growth and encouraged the authorities to continue to address the financial situation of the non‑systemic agricultural development bank, BANADESA. Directors also appreciated the authorities’ commitment to strengthening the AML/CFT framework in line with the Financial Action Task Force of Latin America’s (GAFILAT) recommendations and called for more effective compliance.

Directors welcomed the authorities’ focus on structural reforms to improve governance and the business climate, primarily by reducing the scope for corruption and strengthening the rule of law. Noting that such reforms would help foster medium‑term inclusive growth, they welcomed programs to improve gender equality and female labor force participation rates and encouraged the authorities to strengthen these efforts.

It is expected that the next Article IV consultation with Honduras will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.