Press Release No. 95/8

Press Release: IMF Approves Second Annual Loan for Honduras Under the ESAF

January 31, 1995

Background

Honduras is one of the poorest countries in the Western Hemisphere with an annual per capita income of US$590 and an estimated 70 percent of the population living below the poverty level. Since the 1980s, the country's economy has been adversely affected by a combination of external and internal factors, which have caused inflationary and balance of payments pressures, and a large build up of external debt.

Stabilization and structural reforms began in 1990 with the aim of achieving sustainable economic growth. These included public utility tariff adjustments, deregulation of the economy, tax increases, cuts in current expenditure, and a large devaluation. Structural reforms focused on improving efficiency and encouraging private investment by opening the economy to competition. A marked improvement of the economic situation in 1991 was followed by an IMF-supported medium-term economic program for the period 1992-95, under which further progress was made in the structural area, although financial imbalances widened sharply preceding the 1993 presidential elections.

To deal with these problems, the new administration developed a comprehensive economic program for 1994-97 that aims at restoring macroeconomic stability and intensifying structural reforms, with increasing emphasis on the social sectors.

Medium-Term Strategy and the 1995-97 Program

The authorities' main objectives are to achieve export-oriented economic growth of at least 4.5 percent a year during 1995-1997; to lower inflation from 30 percent in 1994 to 12 percent in 1995, and around 5 percent in 1997; and to increase national savings relative to GDP from 15 percent in 1993 to 19.5 percent in 1997. The Government also envisages increasing gross international reserves to 3-3.5 months of imports by 1997 and reducing the external public debt.

The main element of the authorities' plan is fiscal consolidation, which calls for a reduction of the underlying fiscal deficit (excluding the revenue from higher coffee export prices) to 4 percent of GDP in 1995 and to 1.5 percent by 1997. To achieve these objectives, the authorities have reduced generalized subsidies, increased utility rates, and adopted a number of tax revenue measures.

Structural Reforms

The Government is committed to carrying out fundamental reform of the public sector in order to increase its efficiency and accountability, and to ensure the sustainability of the fiscal effort. Central government expenditure will be rationalized, and major enterprises and services will be privatized, including airports and those enterprises in the electric power and telecommunications sectors. Resource allocation and the country's growth prospects will be improved by structural reforms of the agricultural, energy, financial, and transportation sectors, to be supported by IDB and the World Bank program loans.

Addressing Social Costs

The Government attaches the highest priority to poverty alleviation, and its strategy focuses on promoting sustained economic growth, particularly in agriculture, and on increasing the efficiency and equity of social expenditure. Its social safety net policies, largely funded from abroad through concessional assistance, provide short-term employment, and finance small-scale social and economic infrastructure, social services, and informal sector projects. These policies also provide nutritional assistance for the most vulnerable groups of the population.

The Challenge Ahead

The implementation of the program should restore macroeconomic balance and create the basis for sustained economic growth. The achievement of those objectives, however, requires strict adherence to the program. Furthermore, given the country's large external debt obligations, Honduras' efforts will need to be supplemented by substantial external assistance.

Honduras is an original member of the IMF, its quota²is SDR 95.0 million (about US$140 million), and its outstanding use of IMF credit currently totals SDR 75 million (about US$111 million).