- Honduras' economic recovery has been remarkable, but social conditions remain fragile, and downside risks to the near-term outlook are significant, especially due to the ongoing drought, which is impacting the agricultural sector and energy generation.
- Careful fiscal management and supportive fiscal structural policies remain essential to create space for much-needed investment and social spending while preserving debt sustainability. Enhanced consistency of monetary and exchange rate policies should support disinflation, reduce exchange rate pressures, and safeguard reserves.
- Continued progress in reforming the energy sector, including the public electricity company ENEE, strengthening governance and transparency, and enhancing resilience to climate change is essential to foster more robust and inclusive growth.
Tegucigalpa, Honduras: An International Monetary Fund (IMF) mission led by Mr. Ricardo Llaudes visited Tegucigalpa during June 5-16 for the 2023 Article IV consultation with Honduras.
At the conclusion of the mission, Mr. Llaudes issued the following statement:
"Honduras' recovery from the pandemic and two tropical storms has been remarkable. Real GDP is now above pre-pandemic levels and inflation pressures have been gradually easing. The strong recovery began moderating at the end of 2022 driven by lower growth in key trading partners that have lowered demand for Honduran exports. The current account deficit narrowed to 3.4 percent of GDP in 2022 on the back of strong remittances and exports. In this context, gross international reserves remain at comfortable levels. The authorities' decisive response to the external shocks, including through support for small farmers and ramping up their targeted social assistance programs, including Red Solidaria, was critical to protect the most vulnerable. Nonetheless, social conditions remain challenging, with high levels of poverty, unemployment, and food insecurity.
"Amid lower global activity and ongoing pressures in the energy sector, real GDP growth is projected to decline to around 3 percent in 2023, driven by lower remittances, a less supportive external environment, and the impact of the drought, which is already affecting agricultural and energy production. Inflation is expected to continue its downward trend, supported by a normalization in food prices, while the current account deficit is expected to widen to close to 5 percent of GDP due to slower remittances growth and adverse global price developments. Global and domestic uncertainty remain high and substantial downside risks remain, particularly in the short run. The ongoing drought could be more severe and protracted than expected, which would have a pronounced impact on agricultural output, the provision of energy, and social conditions. A sharper U.S. economic slowdown, particularly in the U.S. labor market, and a further tightening in global financing conditions would impact remittances and domestic activity.
"Honduras continues to face long-standing social and structural challenges, remaining one of the poorest and most unequal countries in the Western Hemisphere—around ¼ of the population is at high risk of food insecurity. Structural bottlenecks, especially in the energy sector, and limited formal economic opportunities stifle investment and fuel migration. Moreover, Honduras remains one of the world's most vulnerable countries to climate disasters, with sizeable adaptation investment needs. Addressing these challenges will take time and require a comprehensive approach that promotes economic diversification and social inclusion.
"Near-term polices should aim at anchoring macroeconomic stability while creating fiscal space for accommodating an expansion in investment and social spending, ensuring the sustainability of the energy sector, and supporting the ongoing disinflation process and reducing pressures in the foreign exchange (FX) market:
- Careful fiscal management will remain essential to tackle Honduras' social and structural challenges while preserving debt sustainability. Spending should be reoriented towards greater investment in infrastructure (dams, roads, hospitals, and schools) and well-targeted social programs, such as the flagship program Red Solidaria. Continued revenue mobilization efforts to broaden the tax base and strengthen the efficiency of revenue collection will support these efforts. In this context, a far-reaching tax reform, currently being debated in Congress, would reduce the extensive exonerations to the income tax while safeguarding Honduras' competitiveness. If adopted, it will be crucial that implementation of the reform proceeds in a transparent and predictable manner, as would be set out in corresponding regulations. The IMF stands ready to support these efforts.
- Amid the severe impact of the ongoing drought, which has curtailed energy generation and led to scheduled blackouts, swift and decisive measures are critical to ensure the sustainability of the energy sector and limit the impact on economic activity and the most vulnerable. Prompt identification of new energy sources will be essential to meet increasing domestic demand and limit the fiscal and balance of payments impact. Moreover, it will be important that ENEE successfully reintegrates distribution activities, given that the outsourcing contract to a private company is ending.
- Strengthened consistency between monetary and exchange rate policies will support the domestic and external stability of the Lempira in the context of Honduras' crawling band regime. Monetary policy implementation by the Central Bank of Honduras (BCH) should be data driven, proactively adjusting the BCH's policy instruments, especially the Tasa de Politica Monetaria (TPM), in line with interest rate developments in trading partners. Similarly, the BCH should ensure that the rate of crawl of the Lempira reflects economic fundamentals and relative prices with trading partners.
"Over the medium term, actions should build on the authorities' ongoing efforts to further enhance policy frameworks, reform the energy sector, and strengthen governance and transparency:
- Fiscal policy. The elimination of trust funds has been a key step to strengthen spending transparency and accountability. Further enhancing budget credibility and implementation— including the introduction of a fiscal responsibility law, strengthening the Treasury Single Account, improvements to public financial management, and modernizing the public procurement framework—will also support fiscal management. Further progress is required in diversifying the sources of financing and developing local debt markets, including by restarting issuances of government bonds in the domestic market. Central Bank financing of the government should be avoided.
- Monetary and exchange rate. Strengthening the frameworks for monetary and foreign exchange policies is essential to anchor inflation expectations, preserve external competitiveness, and create the necessary conditions to enable a gradual return towards a market-based allocation of FX. To support the implementation of the crawling band regime, consideration should be given to widening the exchange rate band and letting the rate of crawl reflect projected inflation differentials with trading partners.
- Energy sector. Implementation of a wide-ranging strategy is needed to address the challenging conditions in the energy sector. Critically, significant investment in the energy sector will be required in all areas—generation, transmission, and distribution—after years of neglect. Implementation of the National Loss Reduction Plan (PNRP) to reduce technical and non-technical losses should be accelerated, the process of repaying arrears to generators should continue, and the renegotiation of contracts with generators to lower costs should be finalized.
- Governance and transparency. The authorities' steadfast commitment to fight corruption, improve transparency, and strengthen the AML/CFT framework is welcome. Important measures have been taken, including the creation of a Ministry of Transparency and the expected establishment of an anti-corruption commission with UN support. The AML/CFT framework should be aligned with international standards, including by promptly reversing the measures introduced by Decree 93-2021 that considerably weakened the framework.
- Climate resilience. Swift and decisive climate adaption actions are essential to improve resilience—extreme climate events in Honduras have generated average annual losses equivalent to 6.3 percent of GDP during 1960-2022. The planned modernization of the Law on Climate Change and the development of a strategy for climate change financing in line with Honduras' Nationally Determined Contribution should help to build resilience.
"The mission held discussions with Finance Minister Rixi Moncada, Central Bank President Rebeca Santos, National Bank and Insurance Commission President Marcio Sierra, Tax Administration Service Minister Director Marlon Ochoa, and other senior officials, representatives of the private sector, labor unions, civil society, and the international community.
"The IMF team would like to thank the Honduran authorities and all counterparts for the candid, productive, and transparent discussions. Their kind hospitality and trust are greatly appreciated. The IMF team looks forward to continuing close discussions with the Honduran authorities."
