IMF Approves $202 Million Loan for Honduras

Honduran economy recovering slowly from global recession

Policy agenda aims to restore economic stability, strengthen public finances

New loan to help secure donor support

The 18-month loan will help Honduras, a country of 7.5 million people, address risks stemming from continued uncertainty in the global economic environment, provide a framework for implementing key reforms, and catalyze donor support. The government does not intend to draw on the resources made available under the new arrangement, unless the need arises.

Economy to recover gradually

Honduras was severely affected by the global slowdown and political turmoil during 2009. As a result, real GDP declined by 2 percent, the overall fiscal deficit widened, and gross international reserves declined owing to lower foreign direct investment and remittances. The fiscal deterioration was due to a sharp increase in current expenditure (mostly public sector wages) and weaker tax revenue. The financial position of public sector enterprises and pension funds also worsened.

The economic recovery is expected to be gradual and will depend on the rebound in economic activity of Honduras’ trading partners and the recovery of confidence. The IMF projects growth to reach 2½ percent in 2010, driven by a pickup in agriculture and foreign direct investment.

Fiscal stability and room for social spending

The new program aims at a gradual process of fiscal consolidation to rein in current spending and help create space for increasing anti-poverty spending and public investment. Fiscal adjustment will start in 2010 and help to stabilize the public debt-to-GDP ratio at below 30 percent of GDP.

To achieve these objectives, revenues will need to increase, supported by a full implementation of the April tax reform and a substantial strengthening of tax administration. Implementation of fiscal reforms will also be crucial to improve the composition of public expenditure and strengthen the financial...