Press Release No. 04/29

Press Release: IMF Approves In Principle Three-Year US$107.6 Million Poverty Reduction and Growth Facility Arrangement for Honduras and Grants Additional Interim Assistance Under the Enhanced HIPC Initiative

February 18, 2004

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a PRSP. This is intended to ensure that PRGF-supported programs are consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent and are repayable over 10 years with a 5 ½-year grace period on principal payments.

Following the Executive Board's discussion on Honduras, Agustín Carstens, Deputy Managing Director and Acting Chairman, said:

"Honduras' new three-year PRGF-supported economic program has been developed through a process of social consultation and collaboration, in recognition that broad public support for the program is crucial to its success. In line with the PRSP, the overriding objectives of the program are to alleviate poverty and move the economy to a path of higher economic growth and lower inflation.

"To achieve these objectives, the authorities are committed to pursuing prudent macroeconomic policies and stepping up the implementation of structural reforms. Measures crucial to achieve the fiscal objectives of the program have already been taken. The program is based on private sector-led growth, with the public sector playing a supportive role by reallocating resources toward infrastructure and the social sectors and developing more transparent institutions. It envisages, among other things, a strengthening of the public finances, a far-reaching financial system reform, and improvements in governance. Particularly important will be the reform of the public sector wage policy framework, which is essential to control the wage bill, and other measures to ensure that the fiscal targets for 2004 are achieved.

"Notwithstanding its strengths, Honduras' program faces important challenges—in particular, the approaching presidential elections, the limited implementation capacity, the vulnerability to external shocks, and the fragility of the financial system. The medium-term program addresses these challenges by establishing a clear framework for the sustained implementation of prudent macroeconomic policies and structural reforms. It will be important for the success of the program to deepen the broad political and social consensus that has underpinned the poverty reduction strategy. This is most likely to be achieved by further strengthening transparency and governance in public sector operations and by extending the national consultation process," Mr. Carstens stated.

Background

During the period 1998-2002, Honduras' macroeconomic performance was particularly affected by adverse external shocks, and social conditions remained depressed. In 2003, despite some improvement in macroeconomic indicators, economic and financial conditions remained difficult. Growth picked up moderately to slightly more than 3 percent, led by construction, tourism, and the re-export industry. Inflation slowed slightly to 6¾ percent, despite higher world oil prices. The external position weakened further. The current account deficit widened to an estimated 5¼ percent of GDP, reflecting higher oil prices and buoyant imports related to investment in the leading sectors. The debt burden remained heavy, with total public debt amounting to 72 percent of GDP at the end of 2003, and the combined public sector deficit widened to 4½ percent of GDP in 2003.

Program summary

The main objectives of Honduras' 2004-2006 economic program are to reduce poverty by reactivating the poverty-reduction strategy, and to strengthen growth by reversing the financial deterioration, implementing important structural reforms, supporting investment, and fostering trade liberalization.

Under the program, annual growth is expected to raise gradually from an estimated 3.2 percent in 2003 to 4½ percent in 2006-2008. The main pillars of the authorities' growth strategy are: a revival of private investment as key sectors are opened to private participation; complementary public investment in infrastructure; participation in regional free trade agreements, notably CAFTA; regulatory and other reforms to meet the goals of the National Competitiveness Plan; and governance, judicial, and political reforms.

Fiscal adjustment under the program is designed to lower the deficit to a level that can be financed by projected concessional external support and, with HIPC debt relief, is expected to achieve medium-term fiscal sustainability. The combined public sector deficit is targeted to decline from an estimated 4½ percent of GDP in 2003 to 1¾ percent of GDP in 2006.

Spending will be reoriented to achieve a recovery of public investment. The PRSP envisages an increase of 0.6 percent of GDP in anti-poverty spending in 2004, and equivalent increases in 2005 and 2006.

Monetary and exchange rate policies will aim at gradually reducing inflation to the level of Honduras' main trading partners, within the context of the existing crawling band exchange rate arrangement.

On the structural reform agenda, the authorities see the financial reform as urgent to address the fragilities of the banking system, and see governance reforms as a vital element in responding to current social concerns and uncertainties about the future. In the financial sector, the government has begun a comprehensive reform program, designed to strengthen central bank functions, prudential regulations and supervision; improve the financial safety net; and fight financial crime. On governance, the government has already begun political and judicial reforms and is working to enhance fiscal transparency.

Honduras is an original member of the IMF. Its quota is SDR 129.5 million (about US$195.8 million), and its outstanding use of IMF credit currently totals SDR 114.40 million (about US$172.9 million).