Honduras’ Economic Recovery and Ongoing Challenges
Honduras has experienced a remarkable economic recovery, but social conditions remain fragile, and there are significant risks to its near-term prospects. The ongoing drought has affected the agricultural sector and power generation, adding to the challenges faced by the country.
IMF Mission Report Highlights
The International Monetary Fund (IMF) recently conducted a mission to Honduras for the 2023 Article IV consultation. The mission, led by Ricardo Llaudes, visited Tegucigalpa from June 5 to 16. The report emphasizes the importance of careful fiscal management and supportive fiscal structural policies to create space for investment and social spending while maintaining debt sustainability. It also highlights the need for greater coherence in monetary and exchange rate policies to reduce inflationary pressures and safeguard reserves.
Reforming the Energy Sector for Inclusive Growth
The report emphasizes the need for continued progress in reforming the energy sector, including the public electricity company ENEE. Strengthening governance, transparency, and resilience to climate change are crucial for fostering stronger and more inclusive growth in Honduras.
Statement from Ricardo Llaudes
Ricardo Llaudes, the head of the IMF mission, acknowledged Honduras’ remarkable recovery from the pandemic and two tropical storms. He noted that real GDP is now above pre-pandemic levels, and inflationary pressures have been gradually easing. However, he also highlighted the moderation of the strong recovery due to lower growth in key trading partners, which has reduced demand for Honduran exports.
Challenges and Risks
The report acknowledges that social conditions in Honduras remain difficult, with high levels of poverty, unemployment, and food insecurity. It projects a slowdown in real GDP growth to around 3 percent in 2023, driven by lower remittances, a less favorable external environment, and the impact of the ongoing drought on agricultural and energy production. Inflation is expected to continue its downward trend, but the current account deficit is projected to widen. The report also highlights the significant downside risks, especially in the near term, including the severity and duration of the drought and potential economic slowdown in the United States.
Addressing Social and Structural Challenges
Honduras faces longstanding social and structural challenges, including high poverty rates and limited formal economic opportunities. The report emphasizes the need for comprehensive policies that promote economic diversification and social inclusion. Short-term policies should focus on macroeconomic stability, fiscal space for investment and social spending, sustainability of the energy sector, and reducing pressures on the foreign exchange market.
The report provides specific policy recommendations in key areas:
The report highlights the importance of careful fiscal management, increased investment in infrastructure, and well-targeted social programs. It recommends revenue mobilization efforts to broaden the tax base and strengthen revenue collection. The report also supports the ongoing tax reform debate in Congress, emphasizing the need for transparency and predictability in its implementation.
Monetary and Exchange Rate
The report emphasizes the need to strengthen monetary and exchange rate policy frameworks to anchor inflation expectations and preserve external competitiveness. It suggests extending the exchange rate band and aligning the tracking rate with projected inflation differentials with trading partners.
The report calls for significant investment in the energy sector, including generation, transmission, and distribution. It recommends accelerating the National Loss Reduction Plan, reimbursing arrears to generators, and renegotiating contracts to reduce costs.
Governance and Transparency
The report commends the authorities’ commitment to fighting corruption, improving transparency, and strengthening the AML/CFT framework. It emphasizes the need to align the AML/CFT framework with international standards and reverse measures that weaken the framework.
The report highlights the importance of climate adaptation actions to improve resilience. It supports the planned modernization of the Climate Change Law and the development of a climate change financing strategy.
The IMF mission concludes by expressing gratitude to the Honduran authorities and all counterparts for their productive discussions. It emphasizes the importance of continued collaboration to address the challenges and risks faced by Honduras and looks forward to supporting the country’s efforts.