The IMF's prescription for Honduras

Gradual increase in exchange rate flexibility, supported by fiscal consolidation, wage moderation, and a prudent monetary policy.

Monday, July 19, 2010

On July 12, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Honduras.

Background

Even though a benign external environment, spikes in foreign direct investment and remittances inflows, and substantial debt relief contributed to episodes of high growth in Honduras over the past decade, the country remains one of the poorest countries in Central America with limited progress in establishing conditions for sustained long-term growth. In part, these outturns may be explained by the fact that many successful economic reforms undertaken in the first half of the 2000s, which justified the completion of the Highly Indebted Poor Countries and Multilateral Debt Relief Initiative programs by the international community, were abandoned or even reversed in the latter part of the decade.

During 2009, the economy of Honduras was strongly affected by the global slowdown and a period of severe political turmoil. Real GDP fell by about 2 percent, while lower world oil and food prices contributed to a sharp decline in end-year headline inflation to 3 percent (10.8 percent in 2008). The fiscal position deteriorated significantly, and the overall public sector deficit widened from 1.7 percent of GDP in 2008 to 4.6 percent in 2009, reflecting lower tax revenues (driven by the economic slowdown) and a large increase in current expenditure (mostly public sector wages). The fiscal deficit was financed largely with costly domestic bonds, central bank credit, and accumulation of domestic arrears.

Since late 2008, monetary policy has been largely accommodative. Central bank’s policy rate and reserve requirements were lowered, and credit to the public sector expanded significantly, contributing to a loss of international reserves. As in the rest of the region, weak external demand and rising unemployment in the United States resulted in a sharp fall in exports and remittances. Imports fell even more, on account of lower ...



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