Caribbean & Central America - March 2015 (ISSN 1741-4458)

Ahead of the arrival on 9 March of a mission from the International Monetary Fund (IMF) for the first evaluation of the country’s new stand-by agreement (SBA), the Honduran finance ministry reported that it had beaten last year’s fiscal deficit target.

The 2014 deficit came in at 4.5%, compared with the budgeted 5.2%. Finance Minister Wilfredo Cerrato Rodríguez says that despite the better-than-expected result the government will stick to its tough 2015 deficit target of 4.0% of GDP. The result is a boon for President Juan Orlando Hernández, who took office in January 2014 promising to restore stability to the US-facing economy. The centre-right administration inherited a record fiscal deficit of 7.9% of GDP in 2013.

Under a critical IMF credit facility totalling US$187m inked in December 2014, the Hernández government has committed to reducing the deficit to 2% of GDP by 2017. It is front-loading major public sector cuts (and tax increases) now, in the hope of an economic recovery by the next general election due in late 2017.

The immediate plan is to reduce central government spending by 10.4%, with major staff cuts last year at the state electricity and telecoms companies, Empresa Nacional de Energía Eléctrica (ENEE) and Hondutel. The Hernández government has also committed to more private participation in these long-struggling state utilities, albeit progress to date has been slow.

Efforts to improve tax collection system are faring better. The total take rose almost 18% to HNL69.8bn (US$3.32bn) in 2014, from HNL55.9bn (US$2.66bn) in 2013. The main sales tax, Impuesto sobre Ventas (ISV), was lifted to 15% from 12% last year, and revenues rose by 30% as a result. Other revenues (tax and non-tax) were either stagnant or declined slightly, however.

The left-wing opposition Libre is strongly critical of what it says is regressive taxation in support of the fiscal consolidation, however with the next general election not due until late 2017, the ruling Partido Nacional is calculating that the adjustment will have paved the way for stronger economic growth by then.

A continued gradual recovery in domestic economic activity in 2015, helped significantly by lower oil prices for this fuel-importing country, will be supportive of the government’s adjustment efforts. Inflation was 3.7% year on year in February, down sharply on 5.7% a year ago, according to the central bank (BCH).

The monthly rate of 0.7% followed deflation of 0.4% in January. Inflation in February was driven primarily by a sharp (8.3%) increase in private education fees, followed by the key food and non-alcoholic drinks sector, which posted monthly inflation of 0.5%, followed by clothing & shoes and the health sector.

Notably, the housing, water, electricity, gas and other fuels sector registered monthly deflation of 0.3% in February, on lower household electricity costs and sharp falls in kerosene and liquid natural gas prices. Likewise, while monthly inflation in the transport sector was 0.4%, on an annual basis it registered strong deflation of 4%, on the back of the sharp fall in fuel prices over the past year.

• Recovering coffee exports and tumbling fuel costs

Exports were valued at US$4.0bn in 2014, up 4.7% over 2013, according to the central bank (BCH), led by agri-industrial exports (notably coffee, palm oil and shrimp), which accounted for 49.7% of the total, followed by manufactured items (24.6% of the total), agricultural products (17.3%) and mined metals (mainly gold, 6.6%). Total imports rose 1.7% to US$9.3bn, led by increased demand for construction materials, capital goods and intermediate inputs, suggestive of recovering economic activity. Fuel imports came to US$1.97bn, down US$205m on the previous year, thanks to a 6.7% fall in the average fuel import price, according to the BCH. The still-large trade deficit of US$5.24bn was stable on the previous year.