News Brief No. 01/100

News Brief: IMF Completes in Principle Honduras Third Review Under PRGF

October 5, 2001

The Executive Board of the International Monetary Fund (IMF) today completed in principle the third review under the three-year Poverty Reduction and Growth Facility (PRGF)¹ arrangement for Honduras, and endorsed the government's economic program for 2001-2002. The Board also approved in principle the extension of the commitment period of the PRGF arrangement for Honduras to December 31, 2002, from March 25, 2002.

A final decision by the IMF Executive Board is pending discussion of the Honduras's Poverty Reduction Strategy Paper by the World Bank Executive Board, which is scheduled for October 11, 2001. The final IMF decision will provide Honduras with loans totaling SDR 64.6 million (about US$ 83 million), of which SDR 16.15 million (about US$ 21 million) will be made available immediately.

The three-year PRGF arrangement for Honduras, was approved on March 26, 1999 (see Press Release 99/11) for an amount equivalent to about SDR 156.8 million (about US$ 202 million), of which SDR 92.2 million (about US$ 119 million) have been disbursed.

In commenting on the Executive Board's decision, Eduardo Aninat, Deputy Managing Director and Acting Chairman, said:

"Honduras is to be commended for its efforts to maintain macroeconomic discipline in spite of difficult economic conditions associated with the economic slowdown in the United States, the collapse in world coffee prices, and the drought affecting most of Central America. Fiscal and credit policies have remained tight so far in 2001 and several structural measures were approved in mid-year, including a limited deposit insurance to be adopted in September 2002 and a higher ceiling on contributions to the social security system, which will strengthen its financial position. However, the steady real appreciation of the currency since 1996 poses a risk to a further broadening of the export base.

"The comprehensive poverty reduction strategy completed by the authorities in August 2001 was developed in the context of a widely participatory process and provides a solid basis for Fund concessional assistance. The strategy aims to reduce the overall rate of poverty from 66 percent of the population to 42 percent in 2015. In addition to higher poverty-related spending, strong growth in per capita income over the medium- and long-term supported by sound macroeconomic policies and sustained structural adjustment will be needed to achieve these targets.

"The authorities' economic program for the remainder of 2001 and 2002 is consistent with the poverty reduction strategy. The program envisages tight macroeconomic policies designed to promote strong economic growth and slow inflation while keeping the international reserve cushion at a comfortable level. It will be important that the authorities proceed as planned to modify exchange rate policy so as to avoid an additional real appreciation of the currency and put structural reforms back on track in the areas of financial supervision, civil service, and public enterprises. Progress in these areas will be crucial to improve productivity of the economy and to avoid potential fiscal pressures.

"On the basis of the economic program envisaged by the authorities, the Executive Board has decided in principle to grant waivers for the nonobservance of two structural performance criteria on the conclusion of the bidding for Hondutel by June 2000 (which was concluded in October 2000), and the enactment of a law on civil service reform by October 2000 (which will be submitted to congress in December 2001). The Executive Board has also decided in principle to provide interim assistance to Honduras under the enhanced HIPC Initiative," Aninat said.

¹ On November 22, 1999, the IMF's concessional facility for low-income countries, the Enhanced Structural Adjustment Facility (ESAF), was renamed the Poverty Reduction and Growth Facility (PRGF), and its purposes were redefined. It is intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a poverty reduction strategy paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. PRGF loans carry an interest rate of 0.5 percent a year, and are repayable over 10 years with a 5½-year grace period on principal payments.