Press Release No. 99/11

Press Release: IMF Approves Three-Year Arrangement Under the ESAF for Honduras

March 26, 1999

The International Monetary Fund (IMF) has approved a three-year arrangement under the Enhanced Structural Adjustment Facility (ESAF)¹ for Honduras in an amount equivalent to SDR 156.75 million (about US$215 million) to support the government’s economic program for 1999-2001. The first annual loan, equivalent to SDR 76 million (about US$104 million), will be available in two semiannual installments, the first of which, equivalent to SDR 59.85 million (about US$82 million), will be available on April 12, 1999.

Background

In the first half of the 1990s, the Honduran authorities implemented IMF-supported programs aimed at achieving sustained economic growth and alleviating poverty. Fiscal imbalances were reduced, and progress was made in reforming the tax system, allowing greater autonomy for the central bank, and liberalizing interest rates and the exchange and trade systems. However, real GDP growth averaged less than 4 percent a year, inflation stood at 26 percent at the end of 1996, and the external position remained weak.

Economic performance improved in 1997 and continued to strengthen during the first nine months of 1998. Real GDP growth accelerated to 5 percent in 1997 and to an estimated 5½ percent in the 12 months ended in September 1998. Fiscal performance also improved during January-September 1998, with a narrowing of the central government deficit to about 2 percent of GDP from 3 percent of GDP in calendar year 1997.

In late October 1998, however, hurricane Mitch struck Honduras and caused a disaster of unprecedented proportions, which lead to great human suffering and virtually crippled the economy. Estimates of the damage to the economy indicate that direct losses of inventories and fixed assets amounted to about 50 percent of annual GDP. For calendar year 1998 as a whole, the key economic effects of the hurricane included a slowdown in real GDP growth to an estimated 3 percent, an increase in unemployment, a pickup in the 12-month rate of inflation to 15½ percent, and a widening of the central government’s and balance of payments deficits.

Medium-Term Strategy and the 1999 Program

The main objectives of the authorities’ economic program are to achieve a rapid, sustained recovery and address the considerable social needs, which have become more pressing as a result of the hurricane. The main targets are a recovery in the rate of real GDP to about 5-6 percent a year by 2000-01 following an expected decline in real GDP by 2-3 percent in 1999, -mainly reflecting the extensive damage to the agricultural sector, a reduction in the 12-month inflation rate to 13-14 percent by December 1999 and to 8 percent by end-2001, and the maintenance of an international reserve position equivalent to 3½-4 months of imports.

The government is preparing a revised budget for 1999 aimed at shifting spending priorities toward emergency relief and reconstruction, containing the growth in nonemergency expenditures, and strengthening revenue through improvements in tax administration. However, in view of the large size of the emergency relief and reconstruction needs, the program contemplates a marked widening of the combined public sector deficit in 1999 to about 8½ percent of GDP that is expected to be financed almost entirely by concessional loans and debt relief.

Prior to the hurricane, indications were that the Honduran external debt indicators did not reach the thresholds required for eligibility under the Heavily Indebted Poor Countries (HIPC) Initiative.² In the wake of the hurricane, the staffs of the IMF, World Bank, and Inter-American Development Bank have begun work on a comprehensive reassessment of the country’s debt situation and prospects for debt relief in the context of the initiative.

Structural Reforms

The authorities have maintained their commitment to reforms aimed at stimulating private investment and economic growth, increasing public sector savings to meet the significant social needs over the medium term, and strengthening the financial system. In the public sector, the program’s main objectives are to complete the process of transferring control of the telephone company to a private partner, conclude the privatization of the electricity distribution network, and grant concessions to the private sector for the management and operation of public works and airports. Also, to raise the efficiency of the public sector, the authorities are undertaking a reform program aimed at restructuring the civil service though the elimination of duplication and overlapping among institutions, and the reclassification of positions and salaries to ensure that skilled staff can be attracted and retained.

In the financial sector, the government has started to identify and address weaknesses in the legal and institutional framework for bank supervision. Also, over the period of the ESAF arrangement, the authorities will take steps to implement the recommendations of the banking commission resulting from the ongoing on-site inspection of banks.

Addressing the Social Needs

The government’s social sector policies focus on tackling poverty through faster economic growth, and improving the delivery and targeting of basic health, education, and social safety net services, with priority given to disease prevention, neonatal and child care, and minimum nutritional support. The program also contemplates the creation of a fund to finance the repair of low-income houses.

The Challenge Ahead

The Honduran authorities’ efforts to implement sound policies in the past few years and their determination to continue to pursue these policies in the face of enormous difficulties presented by the hurricane provide evidence of their commitment to the program. Much of the program’s success depends, however, on a continuous flow of external assistance and debt relief.

Honduras is an original member of the IMF’ its quota³ is SDR 129.5 million (about US$177 million), and its outstanding use of IMF credit currently totals SDR 78.7 million (about US$108 million).