Caribbean & Central America - December 2024

On 18 October the International Monetary Fund (IMF) released a statement praising the recent actions of the Honduran government led by President Xiomara Castro following a visit to the country.

IMF staff carried out a visit to Tegucigalpa from 7-18 October, meeting with officials from the central bank (BCH) and the government, and announced a staff level agreement on policies and reforms to complete the first and second reviews of the country’s programme.

“The Honduran economy remains broadly resilient despite a still-challenging global environment and the impact of the El Niño climate shock,” reads the statement. “Robust growth has continued this year—projected close to 4 percent—and inflation has stabilized between 4½ and 5 percent.” The IMF also said that international reserves are adequate, despite recent declines due to factors such as a severe drought earlier this year, which meant fewer agricultural exports and more energy imports. 

Looking ahead, the Fund said that Honduran officials had agreed to implement “prudent” macroeconomic policies focused on five key pillars. The first is budgetary discipline to maintain debt sustainability. Good tax revenues and better management mean that Honduras has outperformed its targets this year, and the IMF is pleased that the government is taking further measures to improve its fiscal position, including updating public procurement processes. The second pillar is increased social spending targeting society’s most vulnerable, involving more monetary transfers under the Red Solidaria programme, which aims to improve access to basic services; the completion of a survey to find those living in extreme poverty in urban areas; and the introduction of a new information system to monitor social programmes.

The third involves the use of monetary and exchange rate policies to maintain low inflation and good levels of international reserves, while the fourth pillar involves continued work to strengthen the energy sector. This is a key priority for President Castro, who has enacted a wide-ranging energy reform, and the IMF said it “was encouraged by the recent downward trend in electricity losses by the public power company ENEE”.

Nonetheless, it highlights the need for further reforms to improve the financial health of the company, as well as other structural reforms. Lastly the IMF highlighted discussions around fighting corruption, including a new asset declaration system for public officials and the formation of a National Observatory of Transparency and Anticorruption. On the other hand, Castro has failed to advance a campaign promise to form a United Nations-backed anti-corruption commission, and her family has also been credibly linked to taking illicit donations from drug traffickers [SSR-24-10].

Following the IMF visit, Honduras officials travelled to Washington to meet counterparts from the IMF and World Bank (WB) with the aim of securing US$500m in funding before the end of 2024. At the meetings, which took place from 21-25 October, Honduras requested US$200m from the IMF, US$150m from the WB, and US$25.6m from the Inter-American Development Bank (IDB), as well as around US$130m from other multilateral organisations, according to a statement from the finance ministry. The money would be used to fund the “social and productive investment programme” of President Castro, adds the statement.

Honduras was also discussed during an IMF press briefing on 25 October, where Rodrigo Valdés, director of the Fund’s Western Hemisphere Department, expressed support for Castro’s Ley de Justicia Tributaria, Castro’s controversial tax reform that is currently in congress. Valdés applauded efforts to consolidate 15 corporate income tax special regimes, as well as reducing tax exemptions that are currently worth around 7% of GDP. He said that introducing the law “would yield about 1 percent of GDP in revenues in the medium run.”

But while the IMF is satisfied with the proposed tax reform and the government’s other economic policies, Castro is facing a tough time governing the country. There is significant opposition to reform from the private sector, and US officials have also voiced disquiet at her energy reforms.

Corruption scandal

The corruption scandal involving members of President Xiomara Castro’s family, around alleged funding links with a drug trafficking organisation [SSR-24-10], has also affected her government and increased the chances of an opposition victory in general elections scheduled for 2025. These issues may distract the government from the economic programme that the International Monetary Fund (IMF) is keen for it to implement.