Honduras Letter of Intent and Memorandum of Economic Policies, March 10, 1999

For more information, see Honduras and the IMF

The following item is a Letter of Intent of the government of Honduras, which describes the policies that Honduras intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Honduras, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Tegucigalpa, Honduras

March 10, 1999

Mr. Michel Camdessus
Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Camdessus:

The Honduran government has developed an economic program for 1999-2001 that is designed to achieve a rapid economic recovery from the effects of Hurricane Mitch, help improve social conditions, and preserve macroeconomic stability. The details of this program are explained in the attached Memorandum of Economic Policies and Policy Framework Paper. In support of this program, we are requesting a new three-year ESAF arrangement in an amount equivalent to SDR 156.75 million (121 percent of quota).

The government of Honduras will provide the Fund with such information as the Fund may request in connection with the progress in implementing its program.

The government believes that the policies and measures set forth in these memoranda are adequate to achieve the objectives of the program, but will take any other measures necessary for this purpose. During the period of the arrangement, the government will consult with the Managing Director, on its own initiative or at the request of the Managing Director, concerning the adoption of appropriate measures. In any event, Honduras will conduct with the Fund a midterm review of the first year of the program supported by the arrangement to be completed no later than October 1999. Moreover, while Honduras has outstanding financial obligations to the Fund arising from loans under the arrangement, Honduras will consult with the Fund from time to time, at the initiative of the government or whenever the Managing Director requests consultations on Honduras' economic and financial policies.

To facilitate a wider distribution of the policy framework paper within the donor community, the government of Honduras authorizes its transmittal by the Fund staff to any international organization that may request it for the exclusive use of the organization.

Sincerely yours,

/s/	/s/
Gabriela Nuñez de Reyes Minister of Finance	Emin Barjum M. Minister of Finance President Central Bank of Honduras

Attachment

Honduras--Memorandum of Economic Policies

Since the disastrous events in late October caused by Hurricane Mitch, the government of Honduras has been focusing most of its efforts on providing food, shelter, and health care to the homeless and displaced persons, repairing essential infrastructure, and preserving public health. These needs are enormous, but our initial efforts combined with the generous assistance of donor countries and multilateral agencies are beginning to show results. Water supply and electricity have been restored to most parts of the capital and in some major cities, and the threat of serious health problems has been reduced considerably. Also, more than 6,000 kilometers of major and intermediate roads have been temporarily restored, and work has started on repairing or replacing the 63 bridges which were destroyed. In addition, most schools (which were being used as shelters) were reopened for the new school year beginning February 5, as the number of persons in shelters has fallen from 285,000 at mid-November 1998 to 28,000 at end-January 1999, and temporary housing for about 6,000 persons is under construction.

With progress under way toward addressing the immediate post-hurricane needs, the government has recently been focusing renewed attention on policies to reactivate the economy and reduce poverty over the medium term.

The objectives of the government's medium-term economic program for 1999-2001 remain broadly the same as those discussed with the Fund staff just prior to the hurricane in October 1998, except that some targets for the next three years have been modified to take into account the effects of the disaster. The key features of the program are:

a decline in real GDP by about 2-3 percent in 1999--reflecting mainly the extensive damage to the agricultural sector--followed by a recovery in the rate of growth to about 5-6 percent a year in 2000-2001. The government expects that the recovery will be based on (i) the extensive reconstruction and rehabilitation work already under way; (ii) the restoration of agricultural production; (iii) the stimulus to private sector activity associated with the forthcoming increased private sector participation in key sectors (mainly telecommunications and electricity) and recent measures to promote private investment and participation in both traditional and new sectors (such as infrastructure, mining, airports, and tourism); and (iv) policies aimed at increasing public sector saving to allow for higher public investment in the health, education, and other social sectors. In addition, achieving the targeted rates of growth in 2000-2001 will depend on improved access for Honduran exports to major markets, particularly the United States, on the same basis as that available to Mexico.

a reduction in 12-month inflation to 13-14 percent by December 1999, and to 8 percent by end-2001, by maintaining prudent fiscal and monetary policies, including limiting domestic borrowing by the public sector, and containing the growth in base money through open market operations;

maintenance of a strong external position based on exchange rate flexibility, and continued trade liberalization; and

implementation of reforms aimed at modernizing the public sector, strengthening supervision of the financial system, and improving the coverage and targeting of subsidies and social services.

The government requests Fund support for its economic program under the Enhanced Structural Adjustment Facility (ESAF). This support would facilitate assistance from Paris Club creditors in the form of a deferral of all debt-service payments due during 1999-2001 and debt relief on most favorable terms, as well as disbursements from the World Bank, the IDB, and other donors to help finance the significant reconstruction needs. The government believes firmly that an ESAF-supported program, aimed at consolidating macroeconomic stability, increasing prospects for private investment, and deepening structural reforms that address constraints to growth, could play a key role in restoring confidence and accelerating the pace of economic recovery.

Fiscal policy will play a key role in the government's objectives of meeting the needs stemming from Hurricane Mitch, promoting faster rates of growth, and stabilizing the economy. To help achieve these objectives, the government has prepared a revised budget for 1999 aimed at (i) shifting spending priorities toward continued emergency relief and the reconstruction of basic infrastructure; (ii) containing the growth in nonemergency expenditure (mainly wages and nonemergency transfers); and (iii) strengthening revenue through improvements in tax administration and phased adjustments of public sector tariffs (mainly for electricity). 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 8 1/2 percent of GDP--financed mainly by concessional loans and debt relief.

The government recognizes that meeting the fiscal targets of the program will require maintaining a sound revenue administration. In April 1998, just three months into its term in office, the government raised the sales tax rate from 7 percent to 12 percent (effective June 1998) to bring the rate closer in line with those in the rest of Central America, and to offset measures that were put in place to promote higher private investment, including reductions in income tax rates and the phasing out the net assets tax and export taxes. Over the program period the Internal Revenue Office will ensure (i) the firm application of the penalties (including heavy fines, temporary closure of businesses, and imprisonment) available under the 1997 Tax Code; (ii) a broadening of the tax base by expanding the register of large taxpayers, and increasing access to third-party sources of information for cross-checking of tax returns; and (iii) a full identification of tax exemptions (except those associated with the canasta basica and the social sectors). The temporary tax deferrals introduced after Hurricane Mitch will not be extended beyond June 1999. Moreover, by September 1999, legislation will be submitted to congress aimed at further improving the income tax system and bringing it closer in line with international standards by clarifying the definition of income and costs, and simplifying the rules regarding depreciation.

On the expenditure side, the focus of the 1999 budget is to shift priorities to the needs for emergency relief and reconstruction, and maintain tight control over outlays not related to those needs. Against the background of a significant weakening in revenue associated with the slowdown in economic activity, achieving these objectives will require steps to contain the growth in wages, interest payments, and nonemergency transfers. The projected increase in the central government wage bill from 6.7 percent of GDP in 1998 to 7.6 percent of GDP in 1999 reflects commitments made by the previous administration to physicians and teachers (who comprise more than 50 percent of the civil service), and an increase for all other civil servants. To ensure control over total expenditure, the government will seek to offset any increase in the wage bill in excess of budgeted levels with cuts in spending in other areas. Regarding employment, the government, with the support of the World Bank, is undertaking a comprehensive audit of existing positions as a basis for eliminating duplication and redundant positions, and establishing a new salary structure. The study is expected to be completed in the first quarter of 1999, and implementation of its recommendations will begin in 2000.

To help switch resources to the reconstruction effort, the government will aim for a reduction in existing current transfers and subsidies from 3.3 percent of GDP a year in 1997-98 to 2.8 percent of GDP in 1999, and about 2.2 percent of GDP in 2001. These reductions will be achieved mainly by containing subsidies to electricity consumers. Also, the government will take steps to reduce gradually financial support to the electricity company to meet debt-service payments. A decision on tariff increases will be made toward the end of 1999 on the basis of an evaluation which is being carried out by the Energy Commission. During 1999 also, the government will make efforts to contain transfers to universities which totaled 0.7 percent of GDP in 1998, and to review subsidies to transportation companies with a view to ensuring that the subsidies are made only to those companies which satisfy the criteria for government support.

Regarding capital expenditure, the main aim of the government is to identify and prepare a comprehensive list of priority projects to be implemented over the period 1999-2001, but the list is not likely to be completed until prior to the Consultative Group Meeting scheduled for May 1999 in Stockholm. However, the government estimates that total capital expenditure of the nonfinancial public sector will increase from 7 1/2 percent of GDP in 1998 to about 12 percent in 1999. The increased spending will reflect the substantial reconstruction needs for roads, bridges and other public works, schools, hospitals, and community centers, and is expected to be financed by grants, concessional loans, and debt relief.

In the area of expenditure control and management, the government has been implementing the norms and procedures of SIAFI,¹ and execution of the 1999 budget will be carried out under these procedures. Also, during 1999 the ministry of finance will continue to implement the recommendations of the Fund's technical assistance experts in expenditure management, especially in the areas of consolidating all receipts and payments in a single account at the central bank, and improving the recording and monitoring of cash flows. Moreover, the government has introduced a system of close supervision and regular audits of the inflows and use of the external assistance received to date, and expected to be received over the program period. This monitoring is being coordinated by the state controller, and the government (with assistance from U.S. AID) expects to contract shortly the services of a firm of external auditors to ensure full accountability and transparency of the use of these resources.

The government's policy for the public enterprises focuses on ensuring an appropriate regulatory framework--including for tariffs, increased private sector participation in key sectors, and tight expenditure control. Tariff adjustments for electricity and telephones had been delayed in previous years, necessitating significant transfers particularly to the electricity company. Also, the rebalancing of telephone tariffs, i.e., increases in domestic telephone charges to compensate for the steady reduction in international rates will be announced at end-March 1999. In the key area of public enterprise wages, the government's guidelines call for wage increases to be limited to those projected for central government employees.

An important aspect of the government's fiscal policy is to ensure the soundness of the finances of the Social Security Scheme (IHSS) and the public sector pension funds over the medium term. In recent years, the deficit in the health and insurance fund of the IHSS has been financed by drawing down on the resources of the pension fund. The government intends therefore to separate (operationally and on an accounting basis) the pension fund from the health fund by the end of the first half of 1999. This will be followed in December by the approval of legislation that would permit a profound reform of the IHSS that would include an increase in the salary ceiling for contributions. Also, the government will take steps to increase the transparency and efficiency of the operations of the other public sector pension funds (INJUPEMP and IMPREMA). The objective is to ensure a real rate of return on physical assets equivalent to the real rate of return on government bonds, which will require a halt to the real estate development activities of the funds. Beginning in September 1999, the banking commission will review on a regular basis the loan portfolios of the funds.

The government's key monetary policy objective is to achieve a steady decline in inflation from 16 percent in 1998 to 13-14 percent in 1999, and 8 percent in 2001. This objective will be sought by maintaining firm control over the growth of base money via open market operations, and an improvement in the public sector finances beginning in 2000. In addition, steps will be taken to ensure that the credit operations of financial institutions are conducted in line with strengthened prudential guidelines and with adequate provisioning.

Under the program, broad money growth is expected to slow from 24 percent in 1998 to 14 percent in 1999, with base money expansion falling from 15 percent to 12 percent over the corresponding period. The growth in net domestic assets of the banking system is expected to be similar to that of broad money, with credit to the private sector in real terms expanding by 8 percent in 1999. The targeted path for base money will be sought mainly through the sale of central bank bonds in competitive auctions. Demand for these instruments will be stimulated by ensuring that interest rates adjust fully to the requirements of the monetary program, and by encouraging increased participation by individuals and nonbank financial institutions. Base money control via open market operations is being complemented with the establishment of limits on external borrowing by banks, closer review of loan portfolios, and tighter enforcement of capital and provisioning requirements to help maintain the rate of credit expansion to the private sector to the levels contemplated in the program. These and other steps to strengthen supervision through a process of regular on-site inspections over the financial system are described in detail in the Policy Framework Paper (PFP). During the period 2000-2001, the growth in the key monetary aggregates will be held in line with the overall objectives of the program.

Currently, reserve requirements (the sum of explicit requirements plus obligatory bond holdings) are a uniform 25 percent on commercial bank lempira-denominated deposits, 17 percent on deposits of savings institutions, and 15 percent on deposits in investment companies. The new administration has been taking steps to improve compliance with reserve requirements. Fines for noncompliance are being paid by financial institutions, and any excess liquidity resulting from reductions in reserve requirements that may endanger the inflation target during 1999-2001 will be absorbed through open market operations. In addition, over the period 1999-2001 reserve requirements for all types of financial intermediation instruments will be unified across institutions and currencies.

The government is committed to maintaining a flexible exchange rate system, and in March 1998 the central bank took steps to achieve this goal, including through the broadening of the exchange rate band from 5 percent on each side of the reference rate to 7 percent. During 1999 the central bank will continue to take steps to improve infrastructure, transparency, and supervision required for a shift from auctions to an interbank market as the means to determining the exchange rate in the near future. In particular, in line with the Fund staff's recommendations, the bank will begin work on improving the communication network with commercial banks in the first half of 1999, and set a timetable for reductions in foreign exchange surrender requirements.

The government is committed to liberalizing further Honduras' trade regime. Regarding exports, taxes on minerals and coffee have been abolished, and the tax on banana will be reduced from the current rate of US$0.15 per box (40 pounds) to US$0.04 by January 2000. In the coffee sector, an important objective will be to phase out the export retention scheme, and remove the obligation for producers to supply a fixed proportion (7 percent) of their crops at fixed, below-market prices for domestic consumption. These reforms will help improve returns to farmers, and reduce the volume of contraband exports to neighboring countries. Also, the government is committed to the continued lowering of import duties in line with the schedule agreed in the context of the Central American Common Market (CACM). This schedule calls for a reduction in the average tariff for consumer goods from the current rate of 18 percent to 15 percent by end-2000. In the area of trade relations, the government is continuing to pursue negotiations (jointly with El Salvador, Guatemala, and Nicaragua) on a possible free trade arrangement with Mexico, with a view toward eventual association with NAFTA.

To ensure adequate control over the contracting of new external debt, all new external loans will require the prior approval of a committee comprising representatives of the ministry of finance and the central bank. During 1999, the government will not enter into agreements for the contracting or guaranteeing of external debt on nonconcessional terms.² All arrears on debt-service payments, including arrears to the Paris Club and to commercial banks will be cleared by end-September, and no new arrears will be accumulated during the period 1999-2001. In the case of commercial bank arrears, the World Bank is providing the authorities with legal and other technical assistance associated with the negotiations.

During 1999, the government will continue to explore means of reducing the country's heavy debt burden. Regarding Paris Club creditors, in addition to the deferral that has already been agreed on all debt-service payments by Honduras over the period 1999-2001, the government will request debt reduction on the most favorable terms as soon as possible. Also, the government is working closely with the staffs of the World Bank, the Fund, and the IDB on an updated assessment of Honduras' external debt prospects and sustainability over the medium term, with a view toward assessing eligibility for assistance under the HIPC Initiative.

The structural reforms to be undertaken under the program focus mainly on privatization, modernization and increased efficiency in the public sector, and strengthening the financial system. These reforms are described in greater detail in the PFP. In the area of privatization, the main objectives will be to complete the process of transferring control of the telephone company to the strategic partner; conclude the privatization of the electricity distribution network; and permit concessions to the private sector for the management and operation of public works projects and airports. Also, the government will ensure that the framework for tariff adjustments is clearly established prior to the conclusion of the privatization process for these sectors.

Other key aspects of the reform program in the public sector include (i) a restructuring of the civil service (supported by a sectoral loan from the World Bank) aimed at reducing duplication and overlapping among institutions, reducing excess employment, and reclassifying positions and salaries to ensure that skilled staff can be attracted and retained; (ii) increasing public sector saving over the medium term (through appropriate public sector tariffs, better targeting of subsidies, improved tax administration, and expenditure management) in order to meet the significant social needs, which have become more acute in the wake of the crisis caused by the hurricane; and (iii) strengthening the social security system along the lines described above.

Regarding privatization, the key steps already taken by the government, and others expected to take place over the program period include (i) the commencement of the bidding process for shares in COHDETEL, with the sale scheduled to be concluded by December 1999; (ii) the contracting of legal and financial advisors in June to prepare for the privatization of electricity distribution followed by the invitation in December to bid for the purchase of shares in the new distribution companies being created; (iii) the conclusion (by September) of the bidding process for the award of concessions to manage the country's four international airports; and (iv) the design (with the support of the World Bank and the IDB) of a plan to develop the country's sea ports, including through the granting of concessions to the private sector.

In the banking system, the banking commission, with the collaboration of the central bank, has been strengthening the regulatory framework for bank supervision, and has begun to step up on-site inspection of banks on a consolidated basis with the assistance of the long-term IMF expert as well as of experts financed by the World Bank. Inspections of all banks, including an assessment of the effects of Hurricane Mitch on the loan portfolios, will continue during the program period. In this regard, the government approved recently the issue of nonnegotiable, zero-interest bonds by FONAPROVI (a second-tier bank) up to a limit of L 900 million (1.5 percent of GDP) that banks would be able to swap (up to a limit of 50 percent of each bank's capital) for loans which have become unserviceable (category five under the Basle Committee guidelines) as a result of the hurricane. The bonds will be redeemed in equal annual amounts over 10 years, and the banking commission will be responsible for verifying loans eligible for the swap.

Over the program period, steps will be intensified to ensure compliance with prudential regulations, especially those related to connected lending, capital adequacy, provisioning, off-balance sheet transactions, external borrowing, and the publication of audited financial statements. Technical assistance will be requested during 1999 to ensure the effective design and implementation of regulations on open foreign exchange positions. Also, beginning in 1999, actions will be taken to implement needed corrective actions and recommendations arising out of the findings of the ongoing inspections, and to establish contingency plans to deal with possible banking system problems. Also, finance companies which have been denied approval from the commission to continue operations have been given a timetable of up to 60 days from the date of denial of approval to prepare a liquidation plan and have ceased operations as financial intermediaries. The program will also incorporate the setting up during 1999 of a deposit insurance scheme, and improved regulation of the stock exchange, insurance companies, and pension funds.

While there has been an improvement in the quality of statistics of the financial system, the public finances, and the balance of payments, a number of weaknesses remain, and will be addressed in the course of the ESAF arrangement. In the financial system, the emphasis will be on ensuring a fuller coverage of financial institutions, reducing the volume of off-balance sheet transactions, and shortening reporting lags. In this connection, the government will implement the recommendations of an STA mission which recently provided technical assistance in addressing these issues. Also, during 1999 STA technical assistance recommendations will be implemented to correct weaknesses in national accounts estimates (particularly regarding fixed investment, inventories, and consumption) that have impeded a full analysis of overall macroeconomic indicators.

The proposed ESAF arrangement is for a total amount equivalent to SDR 156.75 million, of which the equivalent of SDR 76 million is being requested in the first year, to be disbursed in two installments of SDR 59.85 million (upon approval of the arrangement) and SDR 16.15 million (upon completion of the review in October 1999). The government also requests that the equivalent of SDR 32.30 million and SDR 48.45 million be made available during the second and third years of the arrangement, respectively.

The government's program for 1999 will cover the calendar year--with financial benchmarks for end-March, end-September, end-December, and performance criteria for end-June. In August-September 1999, in the context of the midterm review of the 1999 program, the government and the Fund staff will discuss performance criteria for end-December 1999 and the targets and policies for 2000, including the broad outlines of the budget and the monetary programs for that year.

The program for 1999 will incorporate prior actions related to the approval of an increase in domestic telephone tariffs to offset reductions in international tariffs, the entry into force of prudential norms relating to risk-weighted capital, connected lending, and external indebtedness, and approval of the sale of shares in COHDETEL, as well as of private sector participation in the construction and operation of roads. Quantitative performance criteria for end-June have been set on the net international reserve position of the central bank, reserve money, domestic financing of the nonfinancial public sector, and arrears on external payments. Also, during the program period the government will not contract or guarantee external debt on nonconcessional terms. The program will also include quantitative benchmarks on core social spending. In addition, structural performance criteria and benchmarks have been set in 1999 for further progress in privatization (including the initiation of the bidding process for shares in COHDETEL and the selection of a strategic partner, and the start of the bidding process for the electricity distribution companies), further improvements in bank supervision (including completion of inspection of a specified number of banks), and reforms to the social security system. Full details of the program's performance criteria, benchmarks, and targets are set out in the attached Tables 1-6.

The government will continue to cooperate with the Fund in an effort to strengthen Honduras' balance of payments situation and maintain economic stabilization. The government does not intend to impose new or intensify existing restrictions on payments and transfers for current international transactions, introduce new or intensify existing trade restrictions for balance of payments purposes, or enter into bilateral payments agreements incorporating restrictive practices with other Fund members.

¹This refers to the Integrated System of Financial Administration which has been introduced into a number of countries under the auspices of the World Bank.
²In the case of mixed credits from bilateral donors, the weighted average terms of each operation will be concessional.

Table 1. Honduras: Structural Measures Under the ESAF-Supported Program

Policy Measures	Timetable

I. Public sector finances
Approve 1999 fiscal plan consistent with objective set out in paragraphs 5-9.	April 99
Complete institutional strengthening of the DEI and the customs office and ensure full application of the tax code.	end-Dec. 99
Approval by HONDUTEL board of increase in domestic telephone tariffs to compensate for ongoing reduction in international tariffs.¹	Mar. 99 (done)
Approve tariff increase for electricity.²	Dec. 99
Limit wage bill of the central government to 7 l/2 percent of GDP, or adopt measures to compensate for any increase in the wage bill in excess of this level.	end-Dec. 99
Maintain in nominal terms the annualized value of subsidies for electricity consumption at L 280 million.	Jan.-Dec. 99
Contract the services of a firm of external auditors to ensure full accountability and transparency of the use of external resources received to help the relief and reconstruction efforts.²	June 99
II. Privatization
Approve decree authorizing sale of part of the shares in COHDETEL to the private sector.¹	end-Oct. 98 (done)
Invite bids for shares in COHDETEL³	end-June 99
Conclude bidding process and select strategic partner.²	end-Dec. 99
Contract investment bank to advise on privatization of electricity distribution.	June 99
Invite bids for shares in electricity distribution companies.²	end-Dec. 99
Approve legislation to permit private sector participation in construction and operation of roads.¹	Nov. 98 (done)
Invite bids for the concession of the airport system to the private sector.	June 99
Submit to congress legislation to reform the water and sanitation sector.	July 99
III. Financial system reform
Implement regulations on banks' connected lending, risk-weighted capital, external indebtedness, and open foreign exchange positions.¹	Mar. 99 (done)
Complete examination of all banks' post-hurricane loan portfolios.	end-Sept . 99
Complete CAMEL-based examination of 14 banks.⁴	end-Dec. 99
Finalize (with the assistance of the MAE expert) a manual on supervision and bank examination.	Dec. 99
Issue regulations governing the operations of the stock exchange and insurance companies.	June 99
Submit to congress, with World Bank assistance, legislation setting up a deposit insurance scheme and a resolution trust corporation.	end-Dec. 99
IV. Social security/pension reform
Separate financial accounts of the pension and health funds of the government social security institute.³	end-June 99
Submit legislation to congress aimed at reforming IHSS, including through raising the salary ceiling for social security contributions.²	end-Dec. 99
Approve legislation to regulate private pension funds.	Dec. 99
V. External policies
Ensure full flexibility of exchange rate within the band.	Continuous
Commence phasing out of restrictive practices in the coffee sector.²	end-Dec. 99
Avoid contracting or guaranteeing of nonconcessional external debt.	Continuous
¹ Refers to measures to be implemented prior to the Fund's consideration of the request for the ESAF arrangement. ²Refers to structural benchmarks. ³Refers to structural performance criteria. ⁴CAMEL refers to examinations based on an assessment of capital, assets, management, earnings, liquidity.

Table 2. Honduras: Ceilings on the Net Domestic Financing of the Nonfinancial Public Sector¹ (In millions of lempiras)

Period	Ceilings

Cumulative change from December 31, 1998²
March 31, 1999 (benchmark)	50
June 30, 1999 (performance criterion)	175
September 30, 1999 (benchmark)	250
December 31, 1999 (benchmark)	400
¹ Domestic financing to the nonfinancial public sector (NFPS) comprises all domestic sources of financing, thus net domestic financing of the NFPS is defined as the sum of net credit (direct credit less deposits plus net bond placements by the NFPS) from the domestic financial system, net bond placements by the NFPS outside the financial system, suppliers' credit and increases in floating debt (checks issued but not yet cashed) of the NFPS. These ceilings will be adjusted downward (unlimited)/upward (by a maximum equivalent to US$50 million) in the event of higher/lower net external financing to the public sector than assumed in the program. The cumulative net external financing assumed in the program is US$185 million through June 1999, US$265 million through September, and US$425 million through December.

Table 3. Honduras: Ceilings on Reserve Money of the Central Bank¹ (In millions of lempiras)

Period	Ceilings²

March 31, 1999 (benchmark)	8,960
June 30, 1999 (performance criterion)	9,185
September 30, 1999 (benchmark)	8,795
December 31, 1999 (benchmark)	10,365
¹Measured as the sum of currency issued, commercial banks' deposits (excluding FONAPROVI) at the Central Bank (CBH), plus financial institutions' obligatory holdings of government, and CBH bonds. ²The ceilings will be increased (decreased) to offset fully any increase (decrease) in required reserve ratios beyond the levels referred to in paragraph 15.

Table 4. Honduras: Floors for the Net International Reserves of the Central Bank¹ (In millions of U.S. dollars)

Period	Floor

Cumulative change from December 31, 1998²
March 31, 1999 (benchmark)	30
June 30, 1999 (performance criterion)	45
September 30, 1999 (benchmark)	33
December 31, 1999 (benchmark)	45
¹ Defined as the gross foreign reserves minus short-term foreign liabilities of the Central Bank of Honduras (CBH) and its liabilities to the Fund. The benchmarks exclude any conversion of short-term foreign liabilities into medium-term foreign liabilities and all foreign assets stemming from commercial banks' foreign currency deposits at the CBH. ²These floors will be adjusted downward/upward (by a maximum equivalent to US$50 million) in the event of lower/higher net external financing to the public sector than assumed in the program. The cumulative net external financing assumed in the program is US$185 million through June 1999, US$265 million through September, and US$425 million through December.

Table 5. Honduras: Ceiling on Nonconcessional External Loans of the Nonfinancial Public Sector¹ (In millions of lempiras)

	Ceilings
	Medium and Long Term²	Short Term³

Cumulative change from December 31, 1998
March 31, 1999 (benchmark)	0	0
June 30, 1999 (performance criterion)	0	0
September 30, 1999 (benchmark)	0	0
December 31, 1999 (benchmark)	0	0
¹Defined as loans contracted or guaranteed with a grant element (NPV relative to face of less than 35 percent, based on the currency- and maturity-specific Commercial Reference Rates (CIRR), published monthly by the OECD. ²Defined as debt with a maturity of more than one year. ³Defined as debt with a maturity of one year or less, excluding import-related credits as well as short-term borrowing by the Central Bank of Honduras for reserve management purposes up to a maximum of US$50 million.

Table 6. Honduras: Ceilings on the Stock of Arrears on External Debt Service Payments of the Public Sector¹ (In millions of lempiras)

	Ceilings

Stock as at December 31, 1998	136
March 31, 1999 (benchmark)	136
June 30, 1999 (performance criterion)	36
September 30, 1999 (benchmark)	0
December 31, 1999 (benchmark)	0
¹Defined as debt-service arrears on public- and publicly-guaranteed external debt.