May 7, 2021
IMF team reaches staff-level agreement with the Honduran authorities for the completion of the fourth Review of the reform program supported by the IMF. The agreement is pending the Executive Board Approval.
The protracted pandemic and two tropical storms have hit Honduras hard, leading to a sharp economic contraction in 2020 that will only be partly reversed in 2021.
Higher IMF financing and flexibility under the Fiscal Responsibility Law (FRL) will help the authorities contain short-term risks and provide resources for much needed pandemic-related spending and reconstruction.
An International Monetary Fund (IMF) team led by Ms. Joyce Wong conducted a mission via videoconferencing on the fourth Review of Honduras’ IMF-supported program under the Stand-By Arrangement (SBA) and the Standby Credit Facility (SCF). Upon concluding the mission, Ms. Wong issued the following statement:
“We are happy to announce that the IMF team reached a staff-level agreement with the Honduran authorities on the conclusion of the fourth Review under their economic reform program supported by the SBA and SCF. The agreement is subject to approval by the IMF’s Executive Board, tentatively scheduled for June. Staff will also propose augmenting access under the SBA/SCF arrangement by SDR150 million (about US$215 million), bringing total access to SDR537 million (about US$769 million). The increase is justified in the context of balance of payments needs brought on by the tropical storms and continued pandemic. The financing will support the authorities’ reconstruction and efforts to combat COVID-19.
“The protracted pandemic and tropical storms Eta and Iota have hit Honduras hard. The economy was starting to recover in the second half of 2020, supported by a gradual reopening, supportive fiscal, monetary, and financial policies, and strong remittances. However, both Eta and Iota hit the country in November, causing floods and landslides that destroyed infrastructure and housing, damaged crops, and halted manufacturing, affecting thousands of households. As a result, real GDP contracted by 9 percent in 2020. Strong remittances, sharp import compression, and resilient exports buffered the external position. The economy is expected to recover moderately in 2021, supported by domestic reconstruction spending and strong United States growth. The pandemic and reconstruction expenditures continue to generate large fiscal needs amid tighter external financing conditions and heightened risks of market volatility.
“The Honduran authorities continue to manage an unprecedented crisis within the parameters of the Fiscal Responsibility Law (FRL). They appropriately used the flexibility built within the FRL to deploy a well-targeted fiscal response to the crisis. The Non-Financial Public Sector (NFPS) deficit widened to 5½ percent of GDP in 2020, driven mainly by lower tax revenues while expenditures to contain the humanitarian and economic effects of the crises were largely accommodated through reallocation of non-priority spending. Significant progress has been made to address implementation challenges in the initial phase of the pandemic, including through increasing transparency of emergency spending and enhancing controls over its execution. Exceptional monetary and financial measures also played a critical role to cushion the impact of the crisis.
“The tropical storms in end-2020, which compounded the impact of the pandemic, justify a new activation of the escape clause under the FRL this year. The NFPS deficit could reach up to [5.4] percent of GDP in 2021, reflecting a still-recovering revenue base and spending needs related to the continuing health emergency as well as urgent storm-related rehabilitation and reconstruction projects. The authorities are also working, in consultation with the international community, private sector, and civil society, on the adoption of a comprehensive medium-term reconstruction plan to build climate-resilient infrastructure. The authorities’ commitment to fiscal prudence over the medium term—with a projected return to the FRL deficit limit in 2023—remains instrumental to maintain confidence and access to international capital markets. Important steps in the current program to streamline tax incentives, together with continued efforts to reduce non-priority public expenditures and reform the electric sector, will be key.
“The IMF team commends the Honduran authorities for, despite the challenging environment, continuing to make progress on institutional reforms to foster higher and more inclusive growth. The authorities are protecting and strengthening social spending, while progress continues to be made on enhancing fiscal governance, revenue mobilization, monetary policy and financial regulatory and supervisory frameworks, and reforming the electricity sector. Since Honduras is one of the most vulnerable countries to the effects of climate change, authorities also envisage an acceleration of important investments on natural-disaster resilient infrastructure.
“The mission thanks the Honduran authorities and other counterparts for their candid discussions and collaborative spirit.”