Caribbean & Central America - September 2023

On 11 August the International Monetary Fund (IMF) announced an US$830m arrangement with Honduras following a staff visit to the country from 5-16 June.

The staff-level agreement for a 36-month arrangement under the IMF’s Extended Fund Facility (EFF) and Extended Credit Facility (ECF) aims to support Honduras’ economic reform policies but is subject to the approval of the IMF’s executive board. In a press release announcing the arrangement, the IMF highlighted the fact that “the Honduran economy has remained remarkably resilient to several shocks, both domestic and external, including the [Covid-19] pandemic, weather events (tropical storms and droughts), the impact of the war in Ukraine, and the global economic slowdown, which has impacted especially the country’s export sector”.

Despite this resilience, the country “continues to face long-standing social and structural challenges, including high vulnerability to climate change,” it adds. “Addressing these challenges will require steadfast implementation of policies and structural reforms that promote economic diversification and social inclusion,” according to the IMF.

The organisation goes on to highlight four key pillars in the reform programme. First, the aim is to preserve macroeconomic stability and debt sustainability while creating fiscal space for investment and social spending. In addition, opportunities for spending will be generated by improving public financial management, through measures such as strengthening tax and customs administration and improving budget transparency. Here the IMF underlines the “far-reaching tax reform” which is currently being considered in congress, which will support infrastructure investment and the construction of a social safety net by reducing exonerations from income tax.

The third pillar is to strengthen the monetary framework, develop the local debt market, and safeguard financial stability. Honduran authorities will resume issuing treasury bonds and mobilise domestic savings through a medium-term debt strategy. Finally, the IMF will support efforts to improve governance and transparency, fight corruption, and enhance economic resilience. Key initiatives under this pillar include strengthening the Anti-Money Laundering framework, the repeal of the Secrecy Law, which was passed in January 2014 and restricted access to public information, in March 2022, and the repeal of Decree 116-2019, which allowed budgetary resources to be allocated through the Departmental Fund without proper scrutiny.

While the agreement is good news for President Xiomara Castro, the economic panorama remains complicated. An IMF report published 16 June expects Honduras’s GDP growth to decline to around 3% in 2023 driven by lower remittances, a less supportive external environment, and drought, which is affecting agriculture and energy generation. The current account deficit is expected to widen to 5% of GDP after narrowing to 3.4% in 2022, and the IMF emphasises that “social conditions remain fragile, and downside risks to the near-term outlook are significant”.

Other developments

Other developments highlighted by the IMF include plans for a nationwide company registry which includes information on beneficial ownership, and an electronic asset declaration system for public sector workers. The IMF also underlines the importance of efforts to safeguard the sustainability of the energy sector, which is a major priority for President Xiomara Castro.