Honduras Finance Profile 2012

Honduras is gradually recovering from the impact of the global slowdown and political turmoil. In 2009, real GDP declined by 2 percent, the overall public sector deficit widened from 1.7 percent of GDP in 2008 to 4.6 percent, and gross international reserves declined by about US$360 million. The fiscal deterioration was due to a strong increase in current expenditure of the central government, while the financial position of public sector enterprises and pension funds also worsened. The fiscal deficit was financed by costly short-term bonds, central bank credit, and domestic arrears. In 2010, real GDP is projected to increase by 2.4 percent, reflecting the rebound in economic activity of key trading partners and the recovery in domestic confidence. Inflation is projected to increase moderately, to below 6 percent, mostly due to rising international prices and domestic utility price adjustments.

The government’s economic program for 2010-11 seeks to restore macroeconomic stability, strengthen public finances, and protect the external position. The support from the Fund is intended to provide liquidity buffers in the context of still fragile global recovery, as well as help establish a framework for key reforms and mobilize donor assistance. The program contemplates the following policies and structural reforms, mostly in the public sector.

Fiscal policy will aim at deficit reduction and improving the composition of public expenditure. The tax reform approved in April 2010 and improvements in tax administration, combined with strict control on current spending, will enable an increase in anti-poverty programs (including bono 10 mil) and public investment. Fiscal reforms under the program will seek to restore financial viability of public sector enterprises and strengthen the financial position of public pension funds.

Monetary and financial policies will aim at keeping inflation low, strengthening international reserves and containing external current account deficits. Key financial sector reforms include upgrading the supervisory and regulatory frameworks, strengthening the financial safety net, and improving access to financial services.

The macroeconomic framework targets real GDP growth of 3.5-4.0 percent during 2011-12. Inflation would be kept at below 6 percent. The overall deficit of the public sector would be reduced to 3.7 percent of GDP in 2010 and 3.1 percent of GDP in 2011 and public debt would stabilize below 30 percent of GDP. Imports coverage of international reserves is projected to increase, and the external current account deficit is expected to remain at about 7 percent of GDP.